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Airgas, Inc. v. Air Products and Chemicals, Inc.: Delaware Supreme Court Reverses Chancery Court Ruling on Terms of Directors Serving on Classified Boards

November 23, 2010

In Airgas, Inc. v. Air Products and Chemicals, Inc., the Delaware Supreme Court reversed the ruling of the Delaware Chancery Court upholding the validity of a stockholder-proposed bylaw accelerating Airgas’s annual meeting by approximately eight months. As noted in our previous update, the bylaw, which was adopted in the context of Air Products’ takeover battle with Airgas, would have given Air Products, whose nominees had been elected to the open directorships at Airgas’s 2010 annual meeting, the opportunity to elect additional directors to Airgas’s classified board just four months later (and, conceivably, to obtain control of a majority of Airgas’s board without waiting for a full two-year meeting cycle to run). The Chancery Court upheld the bylaw, finding it was not inconsistent with the classified board provision in Airgas’s charter, which provided that directors’ terms would expire at “the annual meeting of stockholders held in the third year following the year of their election.” Like the Chancery Court, the Supreme Court found the language of Airgas’s charter defining the duration of the directors’ terms to be ambiguous. Looking to extrinsic evidence to construe that provision, the Supreme Court found that the language “has been understood to mean that the Airgas directors serve three year terms.” Accordingly, the Supreme Court held that the bylaw was invalid because it “prematurely terminate[d]” the three-year terms of Airgas’s directors provided by statute and Airgas’s charter.

While the Supreme Court noted that neither Section 141(d) of the General Corporation Law of the State of Delaware nor Airgas’s charter “requires that the three year terms be measured with mathematical precision,” it could “safely conclude” that the four-month period that would have resulted from the annual meeting bylaw did not “qualify under any construction of ‘annual’” within the meaning of Section 141(d) or Airgas’s charter. The consequence of the bylaw, according to the Supreme Court, was to “so extremely truncate[] the directors’ term” as to frustrate the purpose behind Airgas’s classified board provision—i.e., to prevent the removal of directors without cause. Thus, the annual meeting bylaw was invalid “not only because it impermissibly shorten[ed] the directors’ three year staggered terms, but also because it amounted to a de facto removal without cause” without the super-majority vote required by Airgas’s charter.