November 29, 2010
On November 23, 2010, in Airgas, Inc. v. Air Products & Chemicals, Inc., — A.3d —-, 2010 WL 4734305 (Del. Nov. 23, 2010), the Delaware Supreme Court reversed last month’s decision of the Court of Chancery, Airgas, Inc. v. Air Products & Chemicals, Inc., No. 5817-CC, 2010 WL 3960599 (Del. Ch. Oct. 8, 2010), regarding the scheduling of Airgas’s annual meeting and its potential effect on Airgas’s staggered board. The Supreme Court’s decision invalidates an amendment to Airgas’s bylaws backed by Air Products and holds that the "Annual Meeting Term Alternative" adopted by Airgas to define the length of its directors’ terms provides for a three-year term for each director.
The Supreme Court’s decision is a product of the ongoing takeover battle by Air Products for control of Airgas. On February 11, 2010, Air Products launched a tender offer to acquire all of the shares of Airgas. The Airgas board rejected that initial bid and has spurned all subsequent bids from Air Products as inadequate, even as Air Products has increased its offer price. Air Products began a proxy fight, which culminated at Airgas’s annual meeting on September 15, 2010 in the election of three Air Products-nominated directors to Airgas’s staggered board. Additionally, 45.8% of the shares entitled to vote at the annual meeting approved a bylaw amendment (the "January Bylaw"), proposed by Air Products, which moved Airgas’s annual meeting–traditionally held in August–to January, starting in 2011. Adoption of the proposed bylaw meant that Airgas’s 2011 annual meeting would take place barely four months after its 2010 annual meeting. The accelerated 2011 annual meeting also meant that another slate of Airgas directors would be up for election, approximately eight months before their term normally would have expired. This presented Air Products with the opportunity to replace a majority of Airgas’s staggered board in the span of only four months.
Airgas filed suit and moved to declare the bylaw invalid. Below, the Court of Chancery determined that the January Bylaw was properly adopted at the 2010 annual meeting, that it did not conflict with Airgas’s charter, and that it was valid under Delaware law. Reviewing the decision of the Court of Chancery de novo, the Delaware Supreme Court unanimously reversed.
While reversing the Court of Chancery on the merits, the Supreme Court did agree with the lower court that the language in the Airgas charter defining the terms of directors is ambiguous. The Supreme Court thus turned to extrinsic evidence to determine the duration of director terms, which the Airgas charter provided would expire at "the annual meeting of stockholders held in the third year following the year of election."
The Supreme Court began its analysis by contrasting what it called the "Annual Meeting Term" alternative for directors’ terms, like that of Airgas, to the "Defined Term" alternative, which usually provides that each class of director will serve for a "term of three years." The contrast between these two alternatives framed the issue in this case: "whether the Airgas Charter requires that each class of directors serves three year terms or whether it provides for a term that can expire at whatever time the annual meeting is scheduled in the third year following election." After reviewing Delaware case law precedent, industry practice and understanding regarding similar charter language, model forms of charter provisions concerning directors’ terms, and academic and other commentary, the Supreme Court determined that the "Annual Meeting Term" language "has been understood to mean that the Airgas directors serve three year terms." Indeed, the Supreme Court faulted the Court of Chancery for failing to give proper weight to "uncontroverted extrinsic evidence that establishes . . . that the Annual Meeting Term Alternative and the Defined Term Alternative language mean the same thing: that each class of directors serves three year terms."
The Supreme Court also relied on longstanding precedent from the Court of Chancery, Essential Enterprises v. Automatic Steel Products, Inc., 159 A.2d 288 (Del. Ch. 1960), to support its conclusion. The Supreme Court reasoned that in substance, like the bylaw in Essential Enterprises, the January Bylaw here "has the effect of prematurely removing Airgas’s directors who would otherwise serve an additional eight months on Airgas’s board." As the Supreme Court concluded that the January Bylaw effectively cut short the three year term of incumbent directors in violation of Airgas’s charter, the Court held that the bylaw amounted to a de facto removal of those directors without the necessary affirmative vote of 67% of shares entitled to vote, as required by the Airgas charter. The Supreme Court held that this deficiency provided an independent basis to declare the bylaw invalid.
 The Supreme Court did recognize that "Delaware corporations have some latitude in setting the date for an annual meeting," and that "a director’s term may properly end at an annual meeting even though that director only served approximately three years rather than exactly three years." In this case, though, the Supreme Court concluded that a twenty-eight month term–as shortened by the January Bylaw–did not approximate three years.
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