Corporate Governance

Airgas, Inc. v. Air Products: Staggered Boards Staggered (A Prediction)(Part 7)

By J Robert Brown Jr.

The Supreme Court in Delaware issued an opinion today reversing the Chancery Court's decision in Airgas.  This post had been scheduled for Friday but was written last week.  In it we predicted this very result.  We will have more to say about this in subsquent posts. 

We are discussing Airgas, Inc. v. Air Products, a recent decision out of the Delaware Chancery involving staggered boards.  This case is on appeal.  It will likely be reversed. 

Despite the accuracy of the reasoning, it puts public companies with staggered boards in a bind.  To prevent what happened in this case, they will need to amend their staggered board provision.  Assuming it is in the articles, this will require approval of shareholders.  Given the dislike by many shareholders of staggered board provisions, putting the matter to a vote will likely result in a contentious exchange and, at least in some cases, a defeat of the amendment. 

Of course, many companies will likely ignore the possible concern.  With most public companies having their annual meeting during the first six months of the year, any attempt by shareholders to adopt a bylaw that would reschedule the meeting for shortly after the next calendar year still results in a delay of six to eight months.  The risk of an Air Products type bylaw may not be particularly serious.

For the smaller number of companies with annual meetings towards the end of the calendar year, the problem may be more acute.  To the extent that the company has a controlling shareholder (a more likely possibility for smaller public companies), there will be no need to change the staggered board provision.  The controlling shareholder will already have the voting power to block any Air Products style bylaw (and frankly to win any election for directors, whenever the meeting is held).

So, for companies with staggered boards that have meetings late in the calendar year and do not have controlling shareholders, there will likely be pressure to change the staggered board provision.  This will at least in some cases result in contentious exchanges between management and shareholders. 

The Supreme Court has an easy way out.  It can affirm all of the legal analysis in Airgas but find that the actual language of the bylaw/charter for the staggered board contemplated a three fiscal rather than calendar year period.  And with an easy way out, its this Blog's opinion that the Court will take it. 

Full post as published by The Race to the Bottom on November 23, 2010 (boomark / email).