November 30, 2010

Delaware Supreme Court Invalidates Airgas Bylaw Amendment

Here is news from Davis Polk:

Court rules that bylaw amendment to conduct annual meeting in January 2011 would prematurely terminate Airgas directors’ terms and is therefore invalid.

In a practical ruling that explicitly acknowledges the relevance of “[p]ractice and understanding in the real world,” the Delaware Supreme Court last Tuesday invalidated a bylaw amendment adopted by the stockholders of Airgas, Inc. at its September 2010 annual meeting that would have accelerated the date of Airgas’s next annual meeting to January 2011.

The Supreme Court ruling is a setback for Air Products and Chemicals, a hostile bidder that at the Airgas annual meeting in September elected its slate of three directors to the Airgas board and sought to circumvent the defensive structure of the Airgas classified board by proposing this bylaw amendment so that it would have the opportunity to elect three more directors to the board just four months later in January.
The Supreme Court’s reversal of the earlier Chancery Court ruling upholding the bylaw should allay concerns that the lower court decision weakened the defenses of other companies with classified boards.

Expiration of director’s term “in the third year following the year of their election” means director is elected “for a three-year term.”

In language that is fairly typical of the charters of most companies with classified board structures, the relevant section of the Airgas charter provides that:

at each annual meeting of the stockholders of the Corporation, the successors to the class of Directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of the stockholders held in the third year following the year of their election. (emphasis added)

Although the Supreme Court found that this provision was facially ambiguous as to whether directors are required to serve three year terms or whether their terms may expire at whatever time the annual meeting is scheduled in the third year following election, it relied on the “overwhelming extrinsic evidence” that established that the Airgas charter was intended to provide that each class of directors serve a three year term. The Court cited “historical understanding,” industry practice, the commentary to the ABA model charter provision, and Delaware cases involving such charter language that all reflected the understanding that directors of staggered boards serve a three year term.

The court noted that neither Delaware code nor the Airgas charter requires that a director’s three year term be measured with “mathematical precision,” but did not define exactly what deviation would still satisfy the three year durational requirement. The Court concluded that the four month duration presented by the bylaw amendment did not qualify as “annual” under any construction of the term, and held that the bylaw amendment therefore impermissibly shortened the relevant Airgas directors’ terms and amounted to a de facto removal of those directors without cause without the 67% supermajority vote required by Airgas’s charter.

We are posting memos regarding this decision in our “Antitakeover” Practice Area.