Airgas, Inc. v. Air Products and Chemicals, Inc., C.A. No. 5817 (Del. Nov. 23, 2010) (Justice Ridgely)
In this en banc opinion, the Delaware Supreme Court reversed a decision of the Court of Chancery that construed a staggered board provision in the certificate of incorporation of Airgas, Inc. The Supreme Court interpreted the language of the staggered board provision, which stated that directors’ terms would expire “at the annual meeting of stockholders held in the third year following the year of their election,” to mean that such terms could not be reduced significantly by scheduling a purported annual meeting to be held only four months after the prior annual meeting. Specifically, the Supreme Court invalidated a bylaw, proposed by defendant Air Products and Chemicals, Inc., and purportedly adopted by the stockholders of Airgas, Inc., that would require Airgas to hold its 2011 annual meeting four months after the 2010 annual meeting. The Court held that the bylaw (i) conflicted with the staggered board provision in Airgas’s certificate of incorporation by impermissibly shortening directors’ terms by eight months, and (ii) amounted to a de facto removal without cause of the directors without first obtaining the supermajority stockholder vote required by the certificate of incorporation.
The Supreme Court agreed with the Court of Chancery’s conclusion that the language in the staggered board provision of Airgas’s certificate of incorporation, which defined the duration of the directors’ terms, was ambiguous. Therefore, the Supreme Court examined extrinsic evidence to interpret the intent of the charter provision. Unlike the Court of Chancery, the Supreme Court found “overwhelming evidence” that the drafters of the Airgas charter intended to provide for three-year terms and held that the charter language had a special meaning under Delaware law that clearly required this interpretation. In reaching this conclusion, the Court examined Airgas’s history with respect to holding annual meetings and noted that, since Airgas became a public corporation in 1986, it had always held its meetings approximately 12 months apart and had never held an annual meeting without having new fiscal year results to report.
The Court stated that its examination of general practice in the industry revealed an understanding that language similar to the Airgas charter provision meant that directors would serve three-year terms. Although not controlling, the Court found the following evidence persuasive: (i) several opinions issued by the Delaware Supreme Court, the Court of Chancery, and the United States District Court for the District of Delaware (applying Delaware law) involved similar charter language, and, while not directly on point, each regarded such language as creating a staggered board with classes of directors who would serve three-year terms; (ii) 79% of Fortune 500 Delaware corporations with similar staggered board provisions (including Air Products) consistently represented in their proxy statements that their boards of directors serve three-year terms; (iii) similar charter language appears in the ABA’s Public Company Organizational Documents: Model Forms and Commentary model charter provision for a staggered board and has been interpreted to provide for three-year terms; and (iv) historical commentary with respect to the Delaware General Corporation Law’s (the “DGCL”) authorization of staggered terms reflected that, as early as 1917, commentators have understood that the provision authorizing staggered boards contemplates three-year terms.
The Supreme Court next addressed the distinctions drawn by the Court of Chancery between this case and Essential Enterprises v. Automatic Steel Products, Inc., 159 A.2d 288 (Del. Ch. 1960). In Essential Enterprises, the trial court had held that a bylaw authorizing removal of directors by a majority stockholder vote was inconsistent with a certificate of incorporation provision that provided for a staggered board with three-year director terms because Section 141(d) of the DGCL stated that directors would be elected for a “full term,” which the court had interpreted as a “period of three years – not up to three years.” In its decision in Airgas, the Court of Chancery distinguished Essential Enterprises because the certificate of incorporation at issue in Essential Enterprises expressly provided for three-year terms whereas the Airgas charter did not. The Supreme Court found that this distinction “failed to give proper effect to the overwhelming and uncontroverted extrinsic evidence that establishes, and persuades us, that [the language in the Airgas charter and the language in the charter at issue in Essential Enterprises] mean the same thing: that each class of directors serves three year terms.” The Supreme Court also rejected the Court of Chancery’s attempt to distinguish Essential Enterprises as a director “removal” case, noting that the Airgas bylaw “has the effect of prematurely removing Airgas’s directors who would otherwise serve an additional eight months on Airgas’s board.”
Finally, the Supreme Court recognized that a director’s term may properly end at an annual meeting even though the director served only approximately three years. The Court declined to decide the exact parameters of the length of time a director must serve to meet the three-year requirement because twenty-eight months, the length of time resulting from the bylaw provision at issue here, did not constitute approximately three years.