Corporate Governance

Airgas, Inc. v. Air Products: Staggered Boards Staggered (The Holding)(Part 2)

By J Robert Brown Jr.

We are discussing Airgas, Inc. v. Air Products, a recent decision out of the Delaware Chancery involving staggered boards. 

The legal issue was whether a bylaw scheduling the next annual meeting for three months after the prior annual meeting violated the Company's staggered board provision and/or the Delaware statute.  Airgas had in place both a bylaw and article provision that mandated a staggered board.  Airgas asserted that the change in the annual meeting conflicted with the requirement that directors 'hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election.' 

The court viewed the language as ambiguous and relied on the interpretation that favored 'the shareholder franchise.'  Because the directors at issue had been elected in calendar 2008 and would be subject to election in calendar 2011 (albeit in January), the court concluded that the bylaw was not inconsistent with the staggered board provision. 

As for a challenge under the Delaware statute, Airgas asserted that the bylaw violated the staggered board provision, Section 141(k), which provided that directors would be elected at annual meetings and for a full term.  The analysis shifted to Section 211(c) which provided that '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 by the bylaws.'  The provision contains only one express timing requirement:  Annual meetings cannot be separated by more than 13 months. 

• "Annual meeting' [as the term is used in Section 211] is not defined.  Corporations are free to draft their governing documents to specify when their annual meetings shall take place.  They can do this explicitly in the bylaws.  They can also define the term of their staggered board in their charter or bylaws, should they decide to have a classified board.  To the extent they do not unambiguously make these terms clear in their governing documents, though, the default rules in Delaware do not require a 'year,' or 'twelve months' or any set amount of time from one annual meeting to the next.

As for the argument that 'annual' meetings could be held only days apart, the court conceded the possibility but noted that there were 'practical constraints,' not the least of which was the need to file proxy materials.  Id. at n. 63. 

Moreover, there was always equity.  'If, once in office, the insurgents engage in musical meeting games advancing or delaying meetings for entrenchment, disenfranchisement, or other improper purposes, this Court's broad equitable powers would have bite, as would the thirteen month limit under Section 211(c).  Equity stands ready to thwart misuse or abuse by directors or by insurgents.'

The decision and its interpretation of "annual" is reasonable.  Moreover, in the long run, it accedes greater discretion to management since the board, rather than shareholders, usually sets the date for the annual meeting.  Moreover, to the extent "annual" must mean fiscal or calendar, most efforts to shorten the time period between meetings wouldn't be all that effective.  Public companies usually have their meetings in the first half of the year.  While a bylaw could require that the meeting be early in the next calendar year, it would still provide six-eight months between meetings in most cases.

Full post as published by The Race to the Bottom on November 19, 2010 (boomark / email).