Coauthored by Stephen B. Brauerman
In a rare reversal, the Supreme Court of Delaware overturned the Court of Chancery’s October 8, 2010 decision concerning the validity of a bylaw amendment adopted in the midst of a takeover battle in Airgas, Inc., et. al. v. Air Products and Chemicals, Inc., No. 649, 2010 (Del. Nov. 23, 2010). Faced with an issue of first impression, the Court of Chancery considered whether a bylaw amendment proposed by Air Products and Chemicals, Inc. (“Air Products”) at the September 15, 2010 annual meeting of Airgas, Inc. (“Airgas”) that would schedule subsequent Airgas annual meetings in January and would result in holding annual meetings fewer than twelve months apart (the “January Bylaw”) violates Delaware law.
Air Products proposed the January Bylaw in the midst of its hostile takeover of Airgas. A majority of the stockholders (approximately 45.8% of the shares entitled to vote in the election or 51.9% of all shares actually voted) voted in favor of the January Bylaw. As a result, Airgas’ 2011 annual meeting is scheduled for January 18, 2011, only four months after its 2010 annual meeting. Because the Airgas charter and bylaws provide that the terms of its classified directors expire at the annual meeting in the third year following their election, the January Bylaw shortens the tenure of a director serving on Airgas’s classified board by scheduling the annual meeting to take place earlier in the year.
The Court of Chancery found that “(1) Air Products’ proposed bylaw amends Article II of Airgas’s bylaws and is not ‘inconsistent’ with Article III and, thus, a majority vote was sufficient to validly adopt the bylaw at the September 15, 2010 annual meeting, (2) the bylaw does not conflict with the terms of Airgas’s charter, and (3) the bylaw is valid under Delaware law.” Airgas, Inc., et al. v. Air Products and Chemicals, Inc., C.A. No. 5817-CC, slip op. at 41 (Del. Ch. Oct. 8, 2010). It noted that “Delaware law prescribes no minimum amount of time that must elapse between annual stockholder meetings.” (Id. at 39.) Rather, Section 211 of the Delaware General Corporation Law sets the maximum amount of time that may elapse between annual stockholder meetings, giving “companies flexibility to schedule annual meetings based on the particularized needs and circumstances of the corporation.” (Id.) Chancellor Chandler stated that “[i]f Airgas (or any other Delaware corporation) desires a ‘North Star’ – an invariable, determinate and fixed term of office – for its directors, it must craft its charter or bylaws to specify that a director’s term shall be for a defined period of time (e.g. a three year term, or a term not less than 35 months, or some other durationally defined minimum). The Court of Chancery is not charged with the duty to reform the actual words used in charters or bylaws so as to make them conform to expectations, purposes, or intentions.” (Id. at 40-41.)
The Supreme Court reversed the Court of Chancery and held that the January Bylaw is invalid because it “prematurely terminates the Airgas directors’ terms, conferred by the charter and the statute, by eight months.” Airgas, Inc., et. al. v. Air Products and Chemicals, Inc., No. 649, 2010, slip op. at 3-4 (Del. Nov. 23, 2010). Though agreeing with the Court of Chancery that “relevant Charter language is ambiguous,” the Supreme Court found that “there is overwhelming extrinsic evidence that under the Annual Meeting Term Alternative1 adopted by Airgas, a term of three years was intended.” Id. at 13. Noting that while the DGCL does not require that three year terms be measured with precision, “the January Bylaw truncates the directors’ term as to constitute a de facto removal that is inconsistent with the Airgas Charter.” Id. at 22.
A copy of the opinion may be found here.
1 The Annual Meeting Term Alternative is one of two forms of language that corporations typically use to implement a staggered board. Pursuant to this alternative, the corporation provides that the class of directors serves, for example, “until the third succeeding annual meeting following the year of their election.” Id. at 11.