Law School Case Brief
Airgas, Inc. v. Air Prods. & Chems., Inc. - 8 A.3d 1182 (Del. 2010)
Corporate charters and bylaws are contracts among a corporation's shareholders; therefore, rules of contract interpretation apply. If charter or bylaw provisions are unclear, any doubt is resolved in favor of the stockholders' electoral rights. Words and phrases used in a bylaw are to be given their commonly accepted meaning unless the context clearly requires a different one or unless legal phrases having a special meaning are used. Where extrinsic evidence resolves any ambiguity, effect must be given to the intent of the parties as revealed by the language of the certificate and the circumstances surrounding its creation and adoption.
Air Products and Chemicals, Inc. (Air Product") and Airgas, Inc. (Airgas) are competitors in the industrial gas business. Air Products launched a public tender offer to acquire 100% of Airgas's shares, from which the Airgas board of directors received and rejected several bids, including its latest offer that valued Airgas at $5.5 billion, because the board determined that each offer undervalued Airgas. During this entire attempted takeover period, the market price of Airgas stock exceeded all of Air Products' offers.
To facilitate its takeover attempt, Air Products engaged in a proxy contest at the last annual meeting of Airgas stockholders. Airgas has a staggered board with nine directors, and three were up for election at that meeting. A staggered board, which Delaware law has permitted since 1899, enhances the bargaining power of a target's board and makes it more difficult for an acquirer, like Air Products, to gain control of its target without the consent of the board. At Airgas's last annual meeting in 2010, Air Products nominated three directors to Airgas's board, and the Airgas shareholders elected them. Air Products also proposed a bylaw (the "January Bylaw") that would schedule Airgas's next annual meeting for January 2011, just four months after the 2010 annual meeting. The January Bylaw, which was approved by only 45.8% of the shares entitled to vote, effectively reduced the full term of the incumbent directors by eight months.
Plaintiff Airgas sought a declaratory judgment in the Court of Chancery, claiming that the January Bylaw was valid but defendant Air Products claimed that the bylaw was inconsistent with Del. Code Ann. tit. 8, § 141 and the Airgas corporate charter provision that creates a staggered board. Airgas's charter requires an affirmative vote of the holders of at least 67% of the voting power of all shares to alter, amend, or repeal the staggered board provision, or to adopt any bylaw inconsistent with that provision. The Court of Chancery upheld the January Bylaw on the following basis: Airgas's charter provides that directors serve terms that expire at "the annual meeting of stockholders held in the third year following the year of their election." There is no inconsistency between Airgas's charter provision and the January Bylaw, because the January meeting would occur "in the third year after the directors' election," which (the Court of Chancery found) was all that the Airgas charter requires. Air Products appealed.
Was the January Bylaw, which effectively reduced the full term of the incumbent directors by eight months, valid?
The Supreme Court of Delaware reversed, holding that the bylaw was invalid because (1) Air Products consistently held its annual meetings to enable directors to serve three year terms, and (2) it prematurely terminated directors' terms, conferred by charter and Del. Code Ann. tit. 8, § 141, by eight months. The context of the annual meeting term alternative in the charter, concerning the length of directors' terms, while facially ambiguous, required an interpretation that three year directors' terms were intended because (1) prior interpretation of the annual meeting term alternative provided that directors served such terms, and (2) relevant practice and understanding concerning similar charter language supported a construction that the annual meeting term alternative was intended to provide that each class of directors served three year terms. The bylaw was invalid because it amounted to a de facto removal without cause of directors without the affirmative vote of 67 percent of all shares entitled to vote, as the charter required.
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