On October 8, 2010, the Court of Chancery of Delaware issued an important opinion, Airgas, Inc. v. Air Products & Chemicals, Inc. (Del. Ch. Oct. 8, 2010), with significant implications for public corporations with staggered boards. The decision arose out of the ongoing takeover battle by Air Products for control of Airgas, Inc. At Airgas's 2010 annual meeting, held last September 15, Air Products successfully obtained all three board seats that were up for election on Airgas's nine-member staggered board. In addition, holders of 45.8% of the shares entitled to vote at the annual meeting approved a bylaw amendment, proposed by Air Products, which would cause Airgas's annual meeting to be held each year in the month of January as opposed to August, when Airgas's annual meetings had historically been held. Adoption of the proposed bylaw means that Airgas's 2011 annual meeting will take place barely four months after Airgas's 2010 annual meeting was held, and Air Products will have the opportunity to replace a majority of Airgas's staggered board in the space of four months. Airgas filed suit and moved to declare the bylaw amendment invalid.
The Court determined that the annual meeting bylaw amendment was properly adopted at the September 15, 2010 annual meeting, that it does not conflict with Airgas's charter, and that it is valid under Delaware law.
- Bylaw Amendment Was Properly Adopted. Airgas argued that the bylaw was not properly adopted at the 2010 annual meeting because Airgas's charter requires that any stockholder proposal to adopt any alteration, amendment, repeal of, or any provision inconsistent with, Article III of Airgas's Bylaws be approved by 67% of the shares entitled to vote generally in the election of Directors. Such Article III addresses, among other things, the number of directors and their election and terms of office and reads, in part: "At 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 claimed that the proposed bylaw amendment impermissibly shortened the terms of directors, and thereby was inconsistent with Article III of the Bylaws. The Court disagreed and noted that the proposed bylaw amendment did not conflict with directors' "full term" as defined by Article III of the Bylaws. Although the proposed bylaw would specify when during the "year" the annual meeting will be held, it did not contradict the plain meaning of Article III: the class of Airgas directors who were elected in 2008 will have their terms expire in 2011 -- the "third year" following the "year" of their election (2008). We believe the Court would have reached a different conclusion if Article III had contained clear language stating that the directors had to serve "three-year terms."
- Bylaw Did Not Conflict with Airgas's Charter. The Court also held that the annual meeting date bylaw did not conflict with Airgas's charter. Airgas argued that the bylaw conflicted with Article 5, Section 1 of Airgas's charter which, similar to Article III of the Bylaws, states:
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 stockholders held in the third year following the year of their election.
At issue was how "annual," "year," and "full term" should be defined with respect to the Airgas charter. Airgas argued that because Airgas's annual meetings have historically taken place at around the same time each year (in August) and thus every class of directors elected at a given annual meeting has historically served three-year terms, "annual" must mean separated by approximately one year and a "full term" of a class of directors is approximately three years. The Court disagreed and concluded that because "annual" and "year" were ambiguous terms that lacked a clear definition in the charter, they had to be viewed in the light most favorable to the stockholder franchise. The Court found that the common meaning of "annual" is "occurring once a year." Accordingly, there was no requirement that the 2011 annual meeting occur approximately one year after the prior annual meeting. The Court also found that the Airgas charter and bylaws did not define a precise term length for its directors; they only stated that the term of any class of directors expires at the annual meeting in the third year following their year of election. Because 2011 is three "years" after 2008, the terms of directors who were elected in 2008 would properly expire at the annual meeting that took place in 2011. Accordingly, the bylaw establishing the January 2011 annual meeting would not violate the Airgas charter.
The Court noted that Airgas could have defined "annual meeting" in its charter or bylaws to require a minimum durational interval between meetings (i.e. "annual meetings must be held no less than nine months apart"). It could also have said that directors shall serve "three-year terms." Had it done any of those things, then a bylaw shortening such an explicitly defined "full term" would have conflicted with its explicit provisions and thereby would have been invalid under Airgas's charter.
- Proposed Bylaw Amendment Did Not Violate Delaware Law. Finally, the Court held that the annual meeting date bylaw was valid under Delaware law. Among other things, the Court noted that while under Delaware law annual meetings cannot be separated by greater than thirteen months, there is no Delaware statutory requirement that there be a durational minimum amount of time between annual elections or annual meetings, unless it is so specified in the company's bylaws or charter.
Airgas has announced that it intends to appeal the Court's ruling.
The Airgas decision has significant implications for public companies that have staggered boards. Such companies should review the language in their organizational documents, particularly their charter, to assess whether they contain clear and precise language regarding the length of directors' terms, the time that must elapse between annual meetings, the extent to which the company's board may have sole power to set the annual meeting date, and/or the scope of any provision requiring a supermajority shareholder vote to amend the company's bylaws. Public companies and their advisors should be mindful of the potential consequences of failing to have such language in the company's charter (as opposed to the bylaws) when assessing the company's takeover preparedness.