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).)

Background

The Airgas board of directors is divided into three classes, each consisting of three directors coming up for election every third year. The classified board structure is established in a provision of Airgas' charter, which provides that “[a]t 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” [emphasis added]. A supermajority vote of Airgas stockholders is required to remove any director mid-term “without cause.”

In late 2009, Air Products expressed an interest in acquiring Airgas. Over the next several months, Air Products made numerous offers, raising its bid price each time. The Airgas board rejected each of these offers, labeling them “as grossly undervaluing the company.” Eventually, Air Products took its offer directly to Airgas stockholders by launching an all-cash hostile tender offer. In seeming support of this assessment, the market price of Airgas stock exceeded Air Products' various bids throughout this period.

Because of the barrier imposed by Airgas' stockholder rights plan, Air Products realized that the success of its tender offer might depend on its ability to gain control of Airgas' classified board. To that end, Air Products initiated a proxy contest in connection with Airgas' 2010 annual meeting of stockholders. At this meeting, held on Sept. 15, Air Products proposed three nominees to run in opposition to the board's three-person slate, together with its proposed bylaw amendment fixing Airgas' 2011 annual meeting for Jan. 18, 2011 ' nine months earlier than usual. Although Institutional Shareholder Services (“ISS”) supported Air Products' board nominees, it recommended a vote against the bylaw amendment because “[p]ulling the next annual meeting ahead by nine months would significantly impair the defensive value of the classified board, limiting the board's ability to negotiate the highest offer for shareholders.” Airgas stockholders elected Air Products' three nominees at the annual meeting, and (despite ISS' recommendation to the contrary) approved the bylaw amendment by a vote of 51.9% of the shares actually voted (although only 45.8% of the shares entitled to vote). Shortly thereafter, both parties sought
declaratory judgments from the Court of Chancery as to the validity of the bylaw amendment.

The Parties' Arguments

The dispute between the parties focused on the meaning of the term “annual” in the Airgas charter provision establishing its classified board. Airgas argued that the charter provision should be interpreted with reference to the corporation's past practice, in which every Airgas director elected since the company's IPO has served a term approximately three years in length. Specifically, since 1986 every Airgas annual meeting has been held between July 28 and Sept. 15. Moreover, the shortest period of time between any two annual meetings has been 11 months/26 days, while the longest has been 12 months/28 days. In light of this history, Airgas argued, Air Products' bylaw amendment would inappropriately force directors elected in August 2008 to stand for election in January 2011, a term of less than two-and-a-half years. Airgas also argued that the charter's use of the term “annual” means that annual meetings must be separated by “approximately one year (365 days).”

In response, Air Products pointed out that the Airgas charter neither requires that directors' terms be three years in length, nor specifies that annual meetings be separated by any particular period of time. Rather, the charter requires only that the term of each Airgas director expire at the annual meeting “held in the third year following the year of their election.” Based on this literal reading of Airgas' charter, Air Products claimed that its bylaw amendment was consistent with the Airgas charter because the terms of directors elected in August 2008 will in fact expire at the annual meeting held in the third year (2011) following the year of their election; the meeting simply will take place nine months earlier than usual. Had Airgas “wished to prescribe a more specific time period for its directors' terms,” Air Products urged, “it could have done so.”

The Court of Chancery's Analysis

The Court of Chancery began its analysis by noting that “corporate charters and by-laws are contracts among the shareholders of a corporation and the general rules of contract interpretation are held to apply.” Accordingly, when interpreting a corporation's charter, the “common or ordinary meaning” of the language controls. Further, when any ambiguity exists, “doubt is resolved in favor of the stockholders' electoral rights.”

Turning to Airgas' charter, the Court of Chancery acknowledged that the provision governing the terms of directors “is not crystal clear on its face.” The charter states that the term of each director will expire at the “annual meeting” held in the “third year” following the year of his or her election, but does not specify “when during the year the annual meeting will be held,” or define what is meant by an “annual” meeting (i.e., whether “annual” means separated by approximately 12 months, or occurring once a year). Similarly, the phrase “full term” does not express any “more or less precise length of time for which a director must hold office.”

With deference to the rule of construction noted above, and finding “no direct precedent on point,” the Court of Chancery declined to read the charter “to require a minimum durational interval between [annual] meetings” when the charter itself fails to do so. Rather, the Court of Chancery found no problem with “[s]uccessors to the 2008 class ' [being] elected in the 'third year following the year of their election' which is 2011,” regardless of the actual date during 2011 on which such election occurs. Accordingly, the Court of Chancery concluded that the bylaw amendment did not violate the plain meaning of Airgas' charter. Clearly, the Court of Chancery found it persuasive that Airgas could have included more specific requirements in its charter had it wished to do so. The Court of Chancery applied a similar analysis in concluding that Air Products' bylaw amendment did not violate the provisions of the DGCL governing classified boards and annual meetings.

The DE Supreme Court's Analysis

The Delaware Supreme Court agreed with one of the basic tenets of the Court of Chancery's analysis: “our rules of contract interpretation apply” to corporate charter documents and, when any ambiguity exists, “we resolve any doubt in favor of the stockholders' electoral rights.” However, unlike the Court of Chancery, the Supreme Court emphasized the importance of considering extrinsic evidence “[i]f there is more than one reasonable interpretation of a disputed contract term,” with particular focus on “the intent of the parties as revealed by the language of the certificate and the circumstances surrounding its creation and adoption.”

Although the Supreme Court also agreed with the Court of Chancery that the charter language establishing Airgas' classified board is “facially ambiguous,” it noted that “our precedents, and the common understanding of that language enable us to interpret that provision definitively.” In this regard, the Supreme Court cited two typical formulations employed by Delaware corporations when establishing a classified board of directors:

• Annual Meeting Term Alternative ' the variation employed by Airgas ' provides that “each class of directors serves until the 'third succeeding annual meeting following the year of their election.'”
• Defined Term Alternative “unambiguously provides in the charter itself that each class of directors serves for three year terms.”

From the Supreme Court's point of view, the “central issue presented on this appeal” is whether Airgas' use of the Annual Meeting Term Alternative permits a term in office for a class of directors “that can expire at whatever time the annual meeting is scheduled in the third year following election.” In addressing this issue, the Supreme Court rejected the Court of Chancery's focus on the difference in the language between these two alternatives, stating that “[t]he Court of Chancery adopted the latter view without giving any weight to the uncontroverted evidence bearing on the intended meaning of the Airgas Charter.” For its part, the Supreme Court found “overwhelming extrinsic evidence that under the Annual Meeting Term Alternative adopted by Airgas, a term of three years was intended.”

In support of this conclusion, the Supreme Court cited a number of sources, including Delaware legal precedent, corporate practice, and model forms and commentary. Perhaps most revealing was the Supreme Court's survey of Delaware corporate charters, which revealed that of the 89 Fortune 500 companies incorporated in Delaware with classified boards, 58 use the Annual Meeting Term Alternative, and 46 of those 58 (or 79%) “expressly represent in their proxy statements that their staggered-board directors serve three year terms.” The Supreme Court also noted a similar pattern in proxy statement disclosures of Delaware companies that “'de-staggered' their boards.” And perhaps to the chagrin of Air Products, the Supreme Court observed that “Air Products itself uses the Annual Meeting Term Alternative in its charter, and represents in its proxy statement that: 'Our Board is divided into three classes for purposes of election, with three-year terms of office ending in successive years.'”

Thus, the Supreme Court found that the Court of Chancery's reliance on “the different wording of the Annual Meeting Term Alternative and the Defined Term Alternative ' failed to give proper effect to the overwhelming and uncontroverted extrinsic evidence 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.” From the Supreme Court's point of view, “under any construction of 'annual' within the intended meaning of the Airgas Charter ' four months does not qualify.” Under this interpretation, the Supreme Court found Air Products' bylaw amendment to be “invalid not only because it impermissibly shortens the directors' three year staggered terms” as contemplated by Airgas' charter, “but also because it amount[s] to a de facto removal without cause of those directors ' .”

Conclusion

The Delaware Supreme Court's ruling in Airgas restores order to the world of classified boards of directors in Delaware. The Supreme Court differed sharply with the Court of Chancery in concluding, as most practitioners would likely agree, that corporations employing a classified board intend for their directors to serve full three-year terms. While some have argued that a strict construction of the Airgas charter does not support the Supreme Court's reading, particularly in light of the Airgas stockholders' vote in favor of Air Products' bylaw amendment, one may speculate that the Supreme Court was influenced by the large number of corporations using the Annual Meeting Term Alternative who have stated in their SEC disclosure documents that their directors serve three-year terms.

Of course, the Airgas ruling might have had greater impact several years ago when many, if not most, public corporations utilized classified boards as a key element of their takeover defenses. In recent years, under pressure from institutional investors and corporate governance activists, many of these corporations have returned to annual elections of the full board. It also has become nearly impossible for corporations without classified boards to garner sufficient stockholder support to add such a structure to their corporate charters. As a result, if the Court of Chancery's ruling had survived appeal, it would have been difficult for any corporation utilizing the Annual Meeting Term Alternative to convince its stockholders to approve clarifying charter amendments, contrary to the Court of Chancery's statement that “this is not the end of the world for staggered boards; it is an easy fix if it needs fixing.” Perhaps the Supreme Court took this reality into account as well.

In any event, the Delaware Supreme Court has provided something of a firewall for the remaining classified boards. Moreover, one can imagine the Supreme Court's analysis being cited in future cases challenging takeover defenses where the language utilized is less than clear, but the intent behind adoption of the provision is readily apparent. In this regard, the two 2008 cases in which the Court of Chancery and the Seventh Circuit Court of Appeals (applying Delaware law), respectively, allowed stockholder proposals to proceed even though submitted after the date specified in less-than-ideally drafted advance notice bylaws come to mind (see Jana Master Fund, Ltd. v. CNET Networks, Inc., C.A. No. 3447-CC (Del. Ch. March 13, 2008), and The HA2003 Liquidating Trust v. Credit Suisse Securities (USA) LLC, 517 F.3d 454 (7th Cir. 2008)). This is not to say, of course, that careful and precise drafting is not the better course. As the Court of Chancery's (now overturned) ruling in Airgas demonstrates, blind reliance on precedent language and ambiguous drafting can sometimes lead to surprising results.

Post-Script

The Delaware Supreme Court's decision striking down the Air Products bylaw amendment has not deterred Air Products from its pursuit of Airgas. Having been stymied in its effort to take control of the Airgas board, Air Products has asked the Court of Chancery to strike down Airgas' stockholder rights plan, which would have the effect of neutralizing its “just-say-no” defense. It will be interesting to see how the Court of Chancery responds to this effort, particularly in light of the Airgas stockholders' apparent support for the bylaw amendment at the 2010 annual meeting, and recent Delaware decisions reaffirming the use by boards of directors of stockholder rights plans in appropriate circumstances (see Yucaipa American Alliance Fund II, L.P. v. Riggio, C.A. No. 5465-VCS (Del. Ch. Aug. 11, 2010), upholding the adoption by Barnes & Noble of a stockholder rights plan in the face of an open market stock accumulation plan by Yucaipa; and Versata Enterprises, Inc. & Trilogy, Inc. v. Selectica, Inc., C.A. No. 4241 (Del. Oct. 4, 2010 (en banc), upholding the adoption by the Selectica board of directors of a stockholder rights plan with a 5% triggering threshold aimed at protecting the company's net operating loss carryforwards for U.S. federal income tax purposes).

Robert S. Reder, a member of this newsletter's Board of Editors, is a New York-based partner in the Global Corporate Group of Milbank, Tweed, Hadley & McCloy LLP. The author gratefully acknowledges the assistance of Nicholas A. Venditto, a New York-based associate in that group, in the preparation of this article.

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).)

Background

The Airgas board of directors is divided into three classes, each consisting of three directors coming up for election every third year. The classified board structure is established in a provision of Airgas' charter, which provides that “[a]t 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” [emphasis added]. A supermajority vote of Airgas stockholders is required to remove any director mid-term “without cause.”

In late 2009, Air Products expressed an interest in acquiring Airgas. Over the next several months, Air Products made numerous offers, raising its bid price each time. The Airgas board rejected each of these offers, labeling them “as grossly undervaluing the company.” Eventually, Air Products took its offer directly to Airgas stockholders by launching an all-cash hostile tender offer. In seeming support of this assessment, the market price of Airgas stock exceeded Air Products' various bids throughout this period.

Because of the barrier imposed by Airgas' stockholder rights plan, Air Products realized that the success of its tender offer might depend on its ability to gain control of Airgas' classified board. To that end, Air Products initiated a proxy contest in connection with Airgas' 2010 annual meeting of stockholders. At this meeting, held on Sept. 15, Air Products proposed three nominees to run in opposition to the board's three-person slate, together with its proposed bylaw amendment fixing Airgas' 2011 annual meeting for Jan. 18, 2011 ' nine months earlier than usual. Although Institutional Shareholder Services (“ISS”) supported Air Products' board nominees, it recommended a vote against the bylaw amendment because “[p]ulling the next annual meeting ahead by nine months would significantly impair the defensive value of the classified board, limiting the board's ability to negotiate the highest offer for shareholders.” Airgas stockholders elected Air Products' three nominees at the annual meeting, and (despite ISS' recommendation to the contrary) approved the bylaw amendment by a vote of 51.9% of the shares actually voted (although only 45.8% of the shares entitled to vote). Shortly thereafter, both parties sought
declaratory judgments from the Court of Chancery as to the validity of the bylaw amendment.

The Parties' Arguments

The dispute between the parties focused on the meaning of the term “annual” in the Airgas charter provision establishing its classified board. Airgas argued that the charter provision should be interpreted with reference to the corporation's past practice, in which every Airgas director elected since the company's IPO has served a term approximately three years in length. Specifically, since 1986 every Airgas annual meeting has been held between July 28 and Sept. 15. Moreover, the shortest period of time between any two annual meetings has been 11 months/26 days, while the longest has been 12 months/28 days. In light of this history, Airgas argued, Air Products' bylaw amendment would inappropriately force directors elected in August 2008 to stand for election in January 2011, a term of less than two-and-a-half years. Airgas also argued that the charter's use of the term “annual” means that annual meetings must be separated by “approximately one year (365 days).”

In response, Air Products pointed out that the Airgas charter neither requires that directors' terms be three years in length, nor specifies that annual meetings be separated by any particular period of time. Rather, the charter requires only that the term of each Airgas director expire at the annual meeting “held in the third year following the year of their election.” Based on this literal reading of Airgas' charter, Air Products claimed that its bylaw amendment was consistent with the Airgas charter because the terms of directors elected in August 2008 will in fact expire at the annual meeting held in the third year (2011) following the year of their election; the meeting simply will take place nine months earlier than usual. Had Airgas “wished to prescribe a more specific time period for its directors' terms,” Air Products urged, “it could have done so.”

The Court of Chancery's Analysis

The Court of Chancery began its analysis by noting that “corporate charters and by-laws are contracts among the shareholders of a corporation and the general rules of contract interpretation are held to apply.” Accordingly, when interpreting a corporation's charter, the “common or ordinary meaning” of the language controls. Further, when any ambiguity exists, “doubt is resolved in favor of the stockholders' electoral rights.”

Turning to Airgas' charter, the Court of Chancery acknowledged that the provision governing the terms of directors “is not crystal clear on its face.” The charter states that the term of each director will expire at the “annual meeting” held in the “third year” following the year of his or her election, but does not specify “when during the year the annual meeting will be held,” or define what is meant by an “annual” meeting (i.e., whether “annual” means separated by approximately 12 months, or occurring once a year). Similarly, the phrase “full term” does not express any “more or less precise length of time for which a director must hold office.”

With deference to the rule of construction noted above, and finding “no direct precedent on point,” the Court of Chancery declined to read the charter “to require a minimum durational interval between [annual] meetings” when the charter itself fails to do so. Rather, the Court of Chancery found no problem with “[s]uccessors to the 2008 class ' [being] elected in the 'third year following the year of their election' which is 2011,” regardless of the actual date during 2011 on which such election occurs. Accordingly, the Court of Chancery concluded that the bylaw amendment did not violate the plain meaning of Airgas' charter. Clearly, the Court of Chancery found it persuasive that Airgas could have included more specific requirements in its charter had it wished to do so. The Court of Chancery applied a similar analysis in concluding that Air Products' bylaw amendment did not violate the provisions of the DGCL governing classified boards and annual meetings.

The DE Supreme Court's Analysis

The Delaware Supreme Court agreed with one of the basic tenets of the Court of Chancery's analysis: “our rules of contract interpretation apply” to corporate charter documents and, when any ambiguity exists, “we resolve any doubt in favor of the stockholders' electoral rights.” However, unlike the Court of Chancery, the Supreme Court emphasized the importance of considering extrinsic evidence “[i]f there is more than one reasonable interpretation of a disputed contract term,” with particular focus on “the intent of the parties as revealed by the language of the certificate and the circumstances surrounding its creation and adoption.”

Although the Supreme Court also agreed with the Court of Chancery that the charter language establishing Airgas' classified board is “facially ambiguous,” it noted that “our precedents, and the common understanding of that language enable us to interpret that provision definitively.” In this regard, the Supreme Court cited two typical formulations employed by Delaware corporations when establishing a classified board of directors:

• Annual Meeting Term Alternative ' the variation employed by Airgas ' provides that “each class of directors serves until the 'third succeeding annual meeting following the year of their election.'”
• Defined Term Alternative “unambiguously provides in the charter itself that each class of directors serves for three year terms.”

From the Supreme Court's point of view, the “central issue presented on this appeal” is whether Airgas' use of the Annual Meeting Term Alternative permits a term in office for a class of directors “that can expire at whatever time the annual meeting is scheduled in the third year following election.” In addressing this issue, the Supreme Court rejected the Court of Chancery's focus on the difference in the language between these two alternatives, stating that “[t]he Court of Chancery adopted the latter view without giving any weight to the uncontroverted evidence bearing on the intended meaning of the Airgas Charter.” For its part, the Supreme Court found “overwhelming extrinsic evidence that under the Annual Meeting Term Alternative adopted by Airgas, a term of three years was intended.”

In support of this conclusion, the Supreme Court cited a number of sources, including Delaware legal precedent, corporate practice, and model forms and commentary. Perhaps most revealing was the Supreme Court's survey of Delaware corporate charters, which revealed that of the 89 Fortune 500 companies incorporated in Delaware with classified boards, 58 use the Annual Meeting Term Alternative, and 46 of those 58 (or 79%) “expressly represent in their proxy statements that their staggered-board directors serve three year terms.” The Supreme Court also noted a similar pattern in proxy statement disclosures of Delaware companies that “'de-staggered' their boards.” And perhaps to the chagrin of Air Products, the Supreme Court observed that “Air Products itself uses the Annual Meeting Term Alternative in its charter, and represents in its proxy statement that: 'Our Board is divided into three classes for purposes of election, with three-year terms of office ending in successive years.'”

Thus, the Supreme Court found that the Court of Chancery's reliance on “the different wording of the Annual Meeting Term Alternative and the Defined Term Alternative ' failed to give proper effect to the overwhelming and uncontroverted extrinsic evidence 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.” From the Supreme Court's point of view, “under any construction of 'annual' within the intended meaning of the Airgas Charter ' four months does not qualify.” Under this interpretation, the Supreme Court found Air Products' bylaw amendment to be “invalid not only because it impermissibly shortens the directors' three year staggered terms” as contemplated by Airgas' charter, “but also because it amount[s] to a de facto removal without cause of those directors ' .”

Conclusion

The Delaware Supreme Court's ruling in Airgas restores order to the world of classified boards of directors in Delaware. The Supreme Court differed sharply with the Court of Chancery in concluding, as most practitioners would likely agree, that corporations employing a classified board intend for their directors to serve full three-year terms. While some have argued that a strict construction of the Airgas charter does not support the Supreme Court's reading, particularly in light of the Airgas stockholders' vote in favor of Air Products' bylaw amendment, one may speculate that the Supreme Court was influenced by the large number of corporations using the Annual Meeting Term Alternative who have stated in their SEC disclosure documents that their directors serve three-year terms.

Of course, the Airgas ruling might have had greater impact several years ago when many, if not most, public corporations utilized classified boards as a key element of their takeover defenses. In recent years, under pressure from institutional investors and corporate governance activists, many of these corporations have returned to annual elections of the full board. It also has become nearly impossible for corporations without classified boards to garner sufficient stockholder support to add such a structure to their corporate charters. As a result, if the Court of Chancery's ruling had survived appeal, it would have been difficult for any corporation utilizing the Annual Meeting Term Alternative to convince its stockholders to approve clarifying charter amendments, contrary to the Court of Chancery's statement that “this is not the end of the world for staggered boards; it is an easy fix if it needs fixing.” Perhaps the Supreme Court took this reality into account as well.

In any event, the Delaware Supreme Court has provided something of a firewall for the remaining classified boards. Moreover, one can imagine the Supreme Court's analysis being cited in future cases challenging takeover defenses where the language utilized is less than clear, but the intent behind adoption of the provision is readily apparent. In this regard, the two 2008 cases in which the Court of Chancery and the Seventh Circuit Court of Appeals (applying Delaware law), respectively, allowed stockholder proposals to proceed even though submitted after the date specified in less-than-ideally drafted advance notice bylaws come to mind (see Jana Master Fund, Ltd. v. CNET Networks, Inc., C.A. No. 3447-CC (Del. Ch. March 13, 2008), and The HA2003 Liquidating Trust v. Credit Suisse Securities (USA) LLC, 517 F.3d 454 (7th Cir. 2008)). This is not to say, of course, that careful and precise drafting is not the better course. As the Court of Chancery's (now overturned) ruling in Airgas demonstrates, blind reliance on precedent language and ambiguous drafting can sometimes lead to surprising results.

Post-Script

The Delaware Supreme Court's decision striking down the Air Products bylaw amendment has not deterred Air Products from its pursuit of Airgas. Having been stymied in its effort to take control of the Airgas board, Air Products has asked the Court of Chancery to strike down Airgas' stockholder rights plan, which would have the effect of neutralizing its “just-say-no” defense. It will be interesting to see how the Court of Chancery responds to this effort, particularly in light of the Airgas stockholders' apparent support for the bylaw amendment at the 2010 annual meeting, and recent Delaware decisions reaffirming the use by boards of directors of stockholder rights plans in appropriate circumstances (see Yucaipa American Alliance Fund II, L.P. v. Riggio, C.A. No. 5465-VCS (Del. Ch. Aug. 11, 2010), upholding the adoption by Barnes & Noble of a stockholder rights plan in the face of an open market stock accumulation plan by Yucaipa; and Versata Enterprises, Inc. & Trilogy, Inc. v. Selectica, Inc., C.A. No. 4241 (Del. Oct. 4, 2010 (en banc), upholding the adoption by the Selectica board of directors of a stockholder rights plan with a 5% triggering threshold aimed at protecting the company's net operating loss carryforwards for U.S. federal income tax purposes).

Robert S. Reder, a member of this newsletter's Board of Editors, is a New York-based partner in the Global Corporate Group of Milbank, Tweed, Hadley & McCloy LLP. The author gratefully acknowledges the assistance of Nicholas A. Venditto, a New York-based associate in that group, in the preparation of this article.