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DE Supreme Court Rejects Stockholder-Proposed Bylaw Amendment
A board of directors of a Delaware corporation seeking to combat manipulative takeover tactics or to deter unwanted acquirers has a variety of legal tools at its disposal. For instance, the Delaware General Corporation Law (“DGCL”) permits a corporation to implement a classified, or “staggered,” board of directors. A classified board is divided into three classes, with each serving three-year terms, but only one of which stands for election in any given year. Unless the corporation's charter provides otherwise, members of a classified board may be removed from office only “for cause” by vote of the stockholders (often, by a supermajority vote). By forcing insurgent stockholders to wait two annual meeting cycles before gaining majority representation on a board of directors, a classified structure aids a corporate board's use of a stockholder rights plan (“poison pill”) to pursue a “just-say-no” defense against an unwanted takeover attempt. Hostile bidders, the theory goes, do not have the patience to wait 12 or more months to gain majority control of a board of directors in order to complete a takeover. Clever lawyers, of course, are constantly seeking ways around classified boards and other takeover defenses.
Just such an attack on a classified board structure arose in connection with the highly publicized takeover battle being waged by Air Products and Chemicals, Inc. for control of Airgas, Inc. In Oct. 2010, the Delaware Court of Chancery ruled in Airgas, Inc. v. Air Products and Chemicals, Inc. (C.A. No. 5817-CC (Del. Ch. Oct. 8, 2010)) ' a “case of apparent first impression” ' that a bylaw amendment sponsored by Air Products and approved by Airgas stockholders was effective to accelerate the date of Airgas' annual stockholders meeting by several months. The bylaw amendment was proposed by Air Products to further its
aggressive takeover battle for Airgas. Air Products hoped that accelerating Airgas' 2011 annual meeting would give it the opportunity to stage an “end around” Airgas' classified board structure by gaining control of two classes of directors in the space of just a few months. The Court of Chancery, based on its reading of Airgas' charter and the relevant provisions of the DGCL, upheld the validity of this bylaw amendment.
While agreeing with the Court of Chancery that “the Airgas charter language defining the duration of directors' terms is ambiguous,” on appeal, the Delaware Supreme Court focused on “extrinsic evidence” in concluding that “the language has been understood to mean that the Airgas directors serve three year terms.” On this basis, the Supreme Court reversed the Court of Chancery's ruling, declaring that the bylaw amendment “prematurely terminates the Airgas directors' terms ' by eight months” and is, therefore, “invalid.” (Airgas, Inc. v. Air Products and Chemicals, Inc., C.A. No. 5817 (Del. Sup. Ct. November 23, 2010).)
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