Academic

Time is a key resource in hostile takeovers. Bidders want to move fast, and targets want to slow them down. A potent obstacle raised by many targets is the combination of a poison pill and a staggered board of directors. The poison pill deters the bidder from acquiring a controlling stake in the target, so most hostile deals proceed only after the pill has been redeemed by the target board of directors. Thus, bidders typically look to gain control over the target board of directors by waging a proxy contest.

The staggered board -- which provides for the election of one-third of the directors at each annual meeting of stockholders -- ensures that the bidder would need to win two proxy contests to gain control of the target board of directors. Many bidders are simply not willing to wait two election cycles or to make that sort of investment.

Enter Air Products.

In attempting to acquire Airgas, Air Products waged a successful proxy contest in September, placing three of its nominee directors on the Airgas board, which has a total of ten directors and is "classified" (i.e., staggered) in accord with DGCL 141(d).

Air Products also claims to have adopted a new bylaw requiring a January 2011 meeting of stockholders, in spite of a recommendation "against" the proposed bylaw by various proxy advisory firms. Airgas admits that "more than a majority of the shares represented and voted at the meeting" endorsed the bylaw, but contends that the bylaw is not effective, as approval required 67% of the outstanding shares and Airgas did not receive that level of support. That bylaw has prompted litigation in the Delaware Court of Chancery, with a trial before Chancellor Chandler set to begin Monday.

The strongest claim for Airgas appears to be that the bylaw was not approved by the requisite number of votes. The Airgas Charter provides that Article III of the Airgas Bylaws cannot be amended "without the affirmative vote of the holders of at least 67% of the voting power of all the shares of the Corporation entitled to vote generally in the election of Directors, voting together as a single class." Article III of the Airgas Bylaws is entitled "Directors," and it includes a provision regarding the setting of the date for the general meeting of stockholders. So what am I missing? I haven't seen anything from Air Products about this -- other than this unhelpful press release -- but this looks like a pretty straightforward win for Airgas.

If the bylaw survives this argument, Airgas has a secondary challenge, which seems to be the focus of most of the press in this case. Airgas is claiming that the January meeting is unlawful because "it will be in the same fiscal year as it was at its 2010 annual meeting." Thus, the "Bylaw is invalid because it conflicts with both the Delaware General Corporation Law and the Airgas Charter, both of which provide that directors are elected to a term extending three annual meetings to be held approximately one year apart." The big shortcoming of this argument is that neither the DGCL nor the Airgas Charter says what Airgas claims.

DGCL 141(d) provides that directors on a classified board are elected for a "full term," but it doesn't specify a term of three calendar years, just three annual meetings. And it doesn't require that the meetings be held approximately one year apart. Neither does DGCL 211, which regulates the timing of annual meetings. That section provides, "an annual meeting of stockholders shall be held for the election of directors on a date and at a time designated by or in the manner provided in the bylaws."

The Airgas Charter doesn't help the cause much, either: "At each annual meeting of 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." The Airgas complaint places heavy emphasis on the references to "years" in the DGCL and "third year" in the Airgas Charter, but everyone agrees that "years" in this context is not an exact measure, so Airgas is required to argue that the "common understanding" of Delaware corporations is that a three-year term means "approximately" three calendar years. Elsewhere in the complaint, Airgas observes that the January meeting would "be in the same fiscal year as it was at its 2010 annual meeting," but neither the statute nor the Airgas Charter makes reference to the fiscal year as the relevant year.

While the textual arguments for the invalidity of the bylaw are not strong, Airgas seems poised to make the policy claim that the proposed January meeting would unlawfully shorten the terms of certain Airgas directors. Thus, if the Court of Chancery approved the new bylaw, hostile bidders would have a template for undermining staggered boards. I do not find this argument persuasive. Delaware law does not stake out a firm position on the time between annual meetings (unless that time is too long). The timing of annual meetings is left to the bylaws, which usually may be amended by the board of directors or the stockholders, and I suspect that the Delaware courts would be happy to enforce whatever the bylaws tell them. If a company wanted to make this tactic less available to hostile bidders, it could create a supermajority requirement for amending the bylaws ... and this is precisely what Airgas did.