On October 8, 2010, Chancellor William B. Chandler III
issued an important decision in a case of first impression in Delaware in the
takeover battle between Airgas Inc. and Air Products and Chemicals, Inc., on
the issue of when the next annual Airgas shareholders meeting could be held.
Chancellor Chandler decided that the bylaw: (i) was valid under Delaware law;
(ii) was properly adopted; and (iii) did not conflict with Airgas's charter.
The ramification of the Chancellor's decision is to move up the Airgas 2011
annual meeting to January 2011 (which is only four months after the Airgas
September 2010 Annual meeting) and thus shorten the terms of one-third of the
directors of the nine-member classified Airgas board. Read opinion here.
As an interesting but not surprising side note, like many
expedited corporate disputes in Delaware, the parties asked the Court to issue
a ruling by October 15, 2010 in order to allow them enough time to prepare for
a January meeting if the Court allowed the amendment. Chancellor Chandler
accommodated the parties' request and issued a 40-page written decision on the
same day it was submitted to the Court. Prior rulings in this hotly
contested litigation have been highlighted here.
This summary was prepared by Kevin F. Brady of Connolly
Bove Lodge & Hutz LLP.
Background of the Bylaw Amendment
Since October 2009, Air Products, a stockholder of
Airgas, has been attempting to acquire Airgas with no success. Each offer was
rejected by the Airgas board as grossly undervaluing the company. Air Products'
most recent proposal is an all-cash tender offer to acquire 100% of Airgas's
shares for $65.50 per share. In connection with its proposal, Air Products
launched a proxy contest to gain control of Airgas's board.
At the time of the Airgas September 2010 shareholders'
meeting, Airgas had a nine-member staggered board of three equal classes with
one class (three members) up for reelection each year. Air Products nominated
three candidates for election at the 2010 annual meeting and proposed three
amendments to Airgas's bylaws. The one amendment at issue in this decision
stated that: "The annual meeting of stockholders to be held in 2011 (the '2011
Annual Meeting') shall be held on January 18, 2011 at 10:00 a.m., and each
subsequent annual meeting of stockholders shall be held in January." With
respect to the three board seats up for election, Air Products successfully
obtained all three board seats.
Standard of Review
The issue before the Court with respect to the amendment
to the bylaw regarding the annual meeting was whether the term "annual" means
"separated by approximately twelve months" or "occurring once a year." Since
this was a matter of first impression in Delaware, there was no precedent for
the Court to analyze, so the Court turned to the language of Airgas's charter
and bylaw provisions. The Court noted that in interpreting charter provisions:
[c]ourts must give effect to the intent of the parties as
revealed by the language of the certificate and the circumstances surrounding
its creation and adoption, and the 'common or ordinary meaning' of that
language is what controls.... [w]hen presented with any ambiguity in interpreting
bylaws, 'doubt is resolved in favor of the stockholders' electoral rights.
Similarly, when the issue before the Court involves the interpretation of a
statute, under the well-settled rules of statutory construction, 'the court
must determine whether the provision in question is ambiguous....[and in] the case
of any ambiguity, [u]ndefined words in a statute must be given their ordinary,
common meaning,' and '[t]he established preference of our law is of course to
give to [] statutory language a literal reading, if that is possible'.
Majority or Supermajority Vote Requirement?
Under Article 5, Section 6 of Airgas's charter, "[a]ny
Bylaws made by the Directors . . . may be altered, amended or repealed by the
Directors or by the stockholders." Under the bylaws, "any such alteration,
amendment, or repeal may be effected 'at any regular meeting of the
stockholders ...by a majority vote....'" However, if the bylaw "alter[s], amend[s],
or repeal[s]" Article III of the bylaws, or is "inconsistent therewith," it
would have required a supermajority vote. Article III states that, among other
things, "[a]t each annual meeting of stockholders, the successors or the class
of Directors whose term expires at the meeting shall be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third
year following the year of their election."
Airgas argued that a supermajority vote was required because the bylaw was
inconsistent with Article III in that it allowed a director election to take
place at an "annual meeting" which "impermissibly shorten[s] the terms" of
those directors. Air Products argued that the proposed bylaw replaced Article
II, Section 1 of Airgas' bylaws which dealt with annual meeting of stockholders
and thus only required a majority vote.
Court Construes Ambiguous Terms
The Court noted that on its face, the Air Products' bylaw
proposal regarding the annual meeting was an amendment to and restatement of
Article II of Airgas's bylaws. It moves the annual meeting date to January of
each year. Moreover, it did not conflict with that class of directors' "full
term" as defined by Article III of the bylaws because directors are elected
"for a term expiring at the annual meeting of stockholders held in the third
year following the year of their election." Airgas argued that the annual meeting
date bylaw conflicts with the terms of Airgas's charter, namely, Article 5,
Section 1, which is the charter provision establishing Airgas's staggered
board. Airgas's charter contains nearly identical language to Article III of
Airgas's bylaws establishing the terms of Airgas's staggered board. Airgas
argued that the class of directors elected at the August 2008 annual meeting
was elected to serve a "full term on the Airgas Board of Directors" which,
under Airgas's charter and bylaws, means that their terms will expire at
Airgas's 2011 "annual meeting." Moreover, according to Airgas, each annual
meeting must be separated by "approximately one year" (or 365 days) and the
next annual meeting must take place "around" August or September 2011. A "full
term" of a class of directors is, according to Airgas, approximately three
years.
The Court noted, however, that the words "annual" and
"year" were not defined in Airgas's charter. In addition, the phrase "full
term" did specify a 36-month term, an approximately three-year term, or any
other more or less precise length of time for which a director must hold
office. A "full term" on the Airgas board is only defined in the charter as
expiring "at the annual meeting of stockholders held in the third year
following the year of their election." The Court noted that had Airgas "wished
to prescribe a more specific time period for its directors' terms, it could
have done so." Because Airgas did not specify a particular term length, Air
Products argued that moving the annual meeting to January did not conflict with
any provision of Airgas's charter.
What Does "Annual" Mean?
The lack of a clear definition of terms in the charter
led the Court to look at the ambiguous terms in the light most favorable to the
stockholder franchise. What is meant by the "annual" meeting? Plaintiffs
contend that "annual" must mean separated by approximately twelve months, while
defendant argues that "annual" means once a year.
On the question of how to define a "year", since Airgas's
charter and bylaws did not define a "year," the Court looked to the dictionary
definition, which is a period of about 365 days. But then the Court asked when
does that period start to run? Is it fiscal or calendar? Since the Court found
that the Charter and bylaws were ambiguous as to whether a director's term runs
in accordance with a calendar year or fiscal year, it noted that:
[U]nder the "rule of construction in favor of franchise
rights," I cannot read the word "fiscal" into the charter, and must instead
construe the ambiguous terms against the board, which leads to my conclusion
that Airgas's annual meeting cycle can validly run on a calendar year basis and
still be consistent with the charter. Similarly, Airgas could have defined
those terms but it didn't.
The Airgas charter and bylaws state that "the successor
shall take the place of any director whose term has expired 'in the third year'
following the year of election." As such, a January 18, 2011 annual meeting
would be the "2011 annual meeting." 2011 is the third "year" after 2008.
Successors to the 2008 class can be elected in the "third year following the
year of their election" which is 2011. As a result, the Court found that the
bylaw did not violate Airgas's charter as written.
Bylaw is Valid Under Delaware Law
Airgas argued that the Air Products bylaw violates
Sections 141(d), 141(k)(1) and 211 of the DGCL because it would require Airgas
to hold an annual meeting that is not really "annual" (i.e. it would take place
only four months after the previous "annual" meeting as opposed to a year
later), and therefore it would defeat the purpose of classified boards by
shortening the Airgas directors' terms of office by seven months without
properly removing them for cause. Thus, Airgas argued, the class of directors up
for re-election at the 2011 annual meeting will not have served their "full
term" on the board.
Ironically, in support of their respective arguments,
both parties pointed to the identical language in Section 211(b) (which
provides that "an annual meeting of stockholders shall be held for the election
of directors on a date and at a time designated by or in the manner provided by
the bylaws") and Section 211(c) (which provides that annual meetings cannot be
separated by greater than thirteen months"). Airgas argued that the "policy
thrust" of Section 211 is "that corporations should hold annual meetings of
stockholders." Air Products argued that there is "[n]othing in the statutes or
in Airgas's charter establish[ing] a minimum interval between a company's annual
meetings.
Improper Removal of Director
Airgas also argued that by "cutting short the 'full term'
of the directors' up for election at the 2011 annual meeting, the bylaw
constituted an improper removal under Section 141(k)(1), as it is both without
cause and without 67% of the vote of Airgas's stockholders as required for
removal under Airgas's charter." Air Products argued that there was no removal
problem "because the Airgas directors are not being 'removed.'" The Court
agreed with Air Products finding that there was no removal problem in that the
"'full term' of these directors expires at the 'annual meeting' to be held in
2011". The Court noted that while Section 211(c) explicitly prohibits holding
the annual meeting later than thirteen months after the last annual meeting,
the statute does not explicitly prohibit the annual meeting interval from being
shortened by any amount of time. Having found that the bylaw did not conflict
with the plain meaning of "annual meeting" under Section 211, the Court
concluded that the bylaw did not conflict with Section 141(d), as it does not
change the meaning of a "full term" on a classified board. As the Court noted,
"[t]he "full term" visualized by the statute based on Airgas's charter is until
"the annual meeting of stockholders held in the third year following the year
of their election."
Is This an End to Staggered Boards? Stay
Tuned
The Court answered this question in the negative stating:
[P]laintiffs suggest that the common practice and
understanding of staggered boards is that a "full term" is three years, and a
conclusion that two "annual meetings" can be held in a four-month period would
"destabilize the staggered boards of Delaware companies." This is not the case
- it will not diminish the effectiveness of staggered boards. The common sense,
ordinary language reading that an "annual meeting" must happen once every year
comports with the clear terms of our statute, its policy rationale and our
common law decisions. If corporate charters and bylaws have been written in a
non-specific, open-ended fashion, it is not for this Court to twist their plain
words to achieve a purported intent of the drafters. The solution is for
drafters to employ clear and simple language to provide clarity and avoid
ambiguity. This could easily be accomplished by corporate planners and
draftsmen through such simple language as: "The annual shareholder meeting
shall be held as closely as practicable in the same month of each year so as to
ensure that the terms of office of directors shall approximate a complete year
in length." In short, this is not the end of the world for staggered boards; it
is an easy fix if it needs fixing.
We may not have heard the last word on this issue. On
October 11, 2010, Airgas announced its intention to appeal the Chancellor's
ruling and on October 12, 2010, the Delaware Supreme Court granted Airgas's
motion for expedited scheduling of the appeal. Oral argument before the
Delaware Supreme Court is scheduled for Wednesday November 3, 2010 at 10:00
a.m.
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