In this dispute arising from a pitched takeover battle by Air Products and Chemicals, Inc. for control of Airgas, Inc., the Court of Chancery held that a bylaw amendment proposed by Air Products, which would cause Airgas’s 2011 annual meeting to be held only four months after its 2010 annual meeting, was validly adopted and did not contravene either Delaware law or Airgas’s charter.
Air Products, a stockholder of Airgas, has been attempting to acquire Airgas for the past year. Each of its bids has been rejected by the Airgas board. At the time of its 2010 annual meeting, Airgas had a nine-member staggered board of three equal classes, with one class (three members) up for reelection each year. Since going public in 1986, Airgas’s annual meetings have taken place between late July and mid-September of each year, almost always occurring the first week of August.
After the Airgas board rejected several bids, Air Products made an all-cash tender offer to acquire 100% of Airgas’s shares. In furtherance of its strategy to buy the company, Air Products launched a proxy contest to gain control of Airgas’s board. Air Products nominated three candidates for election at Airgas’s 2010 annual meeting, and proposed three amendments to Airgas’s bylaws, only one of which was addressed in this opinion. The amendment at issue provided, in pertinent part, that “[t]he annual meeting of stockholders to be held in 2011 … shall be held on January 18, 2011 … and each subsequent annual meeting of stockholders shall be held in January.” The bylaw amendment was adopted by a majority vote of Airgas’s shareholders at the 2010 annual meeting, and Air Products’ nominees were elected to the board.
Airgas filed suit asserting that the bylaw amendment was invalid for three reasons: (1) it was not approved by a supermajority vote of 67% of the outstanding shares, as allegedly required by Airgas’s charter; (2) it violated Airgas’s charter; and (3) it violated Sections 141(d), 141(k) and 211 of the Delaware General Corporation Law (“DGCL”). Essential to the Court’s resolution of all three issues was its conclusion that the operative provisions of Airgas’s bylaws and charter in dispute here contain language that may fairly be read to have more than one meaning, and that any ambiguity in terms must be viewed in the light most favorable to the stockholder franchise.
In asserting that the bylaw amendment required a supermajority vote, Airgas relied upon a provision in its charter providing that no provision inconsistent with Article III of Airgas’s bylaws may be adopted without the affirmative vote of at least 67% of the outstanding shares. Article III of Airgas’s bylaws, entitled “Directors,” addresses the number of directors and their election and terms of office and establishes a staggered board. Airgas asserted that the bylaw amendment was inconsistent with the provision in Article III providing that directors would be elected “for a term expiring at the annual meeting of stockholders to be held in the third year following the year of their election.” The Court rejected that argument, holding that the bylaw amendment replaced Article II, Section 1 of Airgas’s bylaws, which governed the holding of the company’s annual meeting, and was not inconsistent with Article III’s definition of a “full term” for each class of directors, because the phrase “year” was ambiguous and should therefore be construed in favor of the stockholder franchise.
The Court of Chancery similarly concluded that the bylaw amendment was not inconsistent with Article 5, Section 1 of Airgas’s charter, which contained language substantially identical to that contained in Article III of the bylaws. The Court held that the terms “annual” and “year” were not clearly defined in the charter and that, “under the ‘rule of construction in favor of franchise rights,’” those terms must be construed against the board. The Court therefore held that under the language of the charter, the term “annual” in this context meant “occurring once a year,” and that the term “year” could be construed to allow Airgas’s annual meeting cycle to run on a calendar year basis, rather than only on a fiscal year, as Airgas contended.
Finally, the Court concluded that the bylaw amendment was not inconsistent with Delaware law. Airgas contended that the bylaw amendment violated Sections 141(d) and 141(k)(1) 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 approximately one year later), and therefore it would defeat the purpose of classified boards by shortening the length of the directors’ terms in office by seven months without properly removing them for cause. In support of that argument, Airgas relied upon 8 Del. C. 211(b) and (c), asserting that the “policy thrust” of 211 is that corporations should hold annual meetings of stockholders. Looking to both the plain language and the policy behind Section 211, the Court held that Section 211 simply requires that annual meetings be held once a year, every year, but contains no requirement that consecutive annual meetings be held any length of time apart, other than providing that the time between meetings should not exceed thirteen months. The Court further held that the bylaw amendment does not conflict with Section 141(d), because it does not change the meaning of a “full term” on a classified board, and does not conflict with Section 141(k) because the directors up for election at the 2011 annual meeting were not being removed, since their term expires at the annual meeting, whatever date it is held.
The full opinion is available here.