Delaware Court Upholds Stockholder-Proposed bylaw- amendment facilitates insurgent’s ability to gain control of classified board in furtherance of its takeover bid
A corporation seeking 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 with three classes serving three year terms, only one of which must stand for election each year. By forcing insurgent stockholders to wait two election cycles before taking control of its board, a classified board structure can aid a corporation in pursuing a just say no defense against an unwanted takeover attempt. A recent decision of the Delaware Court of Chancery, however, facilitated a hostile bidder’s clever strategy to stage an ìend around on a classified board structure. In Airgas v. Air Products and Chemicals, a case of apparent first impression, the Delaware Court of Chancery was asked to determine whether a stockholder-adopted bylaw amendment that purported to accelerate the date of a corporation’s annual meeting was valid under the corporation’s charter and Delaware law.
The bylaw amendment, proposed by stockholder Air Products and Chemicals, Inc. to further its heated takeover battle for Airgas, Inc., sought to fix the date of Airgas’ 2011 annual meeting to January 2011 (nine months earlier than the annual meeting customarily would have been held) to allow Air Products to gain control of two classes of Airgas’ classified board in the space of just a few months. At issue was whether the bylaw amendment impermissibly shortened the terms of Airgas’ classified directors. The Court, upon reviewing the plain meaning of Airgas’ charter and the relevant provisions of the DGCL, determined that the bylaw amendment was valid. At first blush, decision appears to deal a serious blow to classified boards. Following the Court of Chancery’s decision, the efficacy of a classified board as a takeover defense can be undermined by accelerating the date of a corporation’s next annual meeting. However, it is important to recognize that Delaware corporations remain free to draft around the Airgas decision.
As the Court of Chancery noted in its decision, Airgas could have defined ‘annual meeting’ elsewhere in its charter or bylaws to require a minimum durational interval between meetingsî or ìcould have said that directors shall serve ‘three-year terms.’In the absence of such clear language, however, the Court of Chancery declined to reform the actual words used in charters or bylaws so as to make them conform to expectations, purposes or intentions. In short, if a corporation with a classified board wants its directors to serve three full years, its charter and bylaws must expressly reflect that intent. In light of Airgas, therefore, Delaware corporations with classified boards are well-advised to review the specific language used in their governing instruments. In the current environment, however, a corporation will likely be hard-pressed to convince stockholders to support a charter amendment that addresses a weakness in its classified board structure.
To read the full corporate governance client alert, click here: http://links.cecollect.com/310/1115/Milbank_Client_Alert_Airgas.pdf
