Airgas, Inc. v. Air Products & Chemicals, Inc.
2010 WL 4734305, 2010 Del. LEXIS 585, 8 A.3d 1182 (2010)
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Rule of Law:
A corporate bylaw is invalid if it is inconsistent with the corporation's charter. When a charter provision establishing director terms for a staggered board is ambiguous, courts will look to extrinsic evidence, such as industry practice and legal commentary, to determine its meaning; if that evidence shows an intent to create three-year terms, a bylaw that substantially shortens those terms is invalid.
Facts:
- Air Products and Chemicals, Inc. ('Air Products') and Airgas, Inc. ('Airgas') are competitors in the industrial gas business.
- Airgas has a staggered board of directors, established by its corporate charter, where directors are divided into three classes with one class elected each year.
- The Airgas charter specifies that directors serve for a term 'expiring at the annual meeting of stockholders held in the third year following the year of their election.'
- For over two decades, Airgas consistently held its annual meetings in the late summer or early fall, resulting in director terms of approximately three years.
- Air Products launched a hostile tender offer to acquire Airgas, which the Airgas board repeatedly rejected.
- To facilitate its takeover, Air Products initiated a proxy contest at the September 15, 2010 Airgas annual meeting.
- At that meeting, Airgas shareholders elected three directors nominated by Air Products and also approved a bylaw proposed by Air Products (the 'January Bylaw').
- The January Bylaw scheduled the next annual meeting for January 2011, just four months after the 2010 meeting, which would shorten the terms of incumbent directors by eight months.
Procedural Posture:
- Airgas, Inc. filed an action in the Delaware Court of Chancery seeking a declaratory judgment that the 'January Bylaw' adopted by its shareholders was invalid.
- Air Products and Chemicals, Inc. filed a counterclaim seeking a declaratory judgment that the bylaw was valid.
- The Court of Chancery (trial court) entered a final judgment in favor of Air Products, holding that the January Bylaw was valid and did not conflict with the Airgas charter.
- Airgas, as appellant, appealed the Court of Chancery's decision to the Delaware Supreme Court.
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Issue:
Does a shareholder-adopted bylaw that accelerates a corporation's annual meeting date, thereby shortening the terms of incumbent directors on a staggered board by eight months, conflict with a corporate charter provision stating 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'?
Opinions:
Majority - Ridgely, Justice
Yes. A shareholder bylaw that significantly shortens the terms of directors on a staggered board is invalid because it conflicts with the corporate charter, which, despite ambiguous language, is commonly understood to create three-year terms. Although the charter language referring to the 'annual meeting... held in the third year' is ambiguous on its face, the court must look to extrinsic evidence to determine its intended meaning. Overwhelming extrinsic evidence—including Delaware case law, widespread corporate practice (including Air Products' own charter), model forms, and legal commentary—demonstrates a common understanding that such language creates three-year director terms. A bylaw that shortens these terms by eight months is not a minor adjustment but a substantial truncation that frustrates the purpose of a staggered board. Such a significant shortening of terms constitutes a de facto removal of directors, which is inconsistent with the Airgas charter's provisions requiring a 67% supermajority vote for director removal without cause. Therefore, the January Bylaw is invalid because it is inconsistent with the charter.
Analysis:
This decision reinforces the strength of a staggered board as a corporate defense mechanism against hostile takeovers. It clarifies that courts will not permit acquirers to exploit ambiguous charter language through shareholder bylaws to accelerate board control. By looking to extrinsic evidence to interpret the common 'Annual Meeting Term Alternative' language, the court established that this phrase is functionally equivalent to an explicit 'three-year term,' preventing its circumvention. This ruling signals that actions which amount to a 'de facto' removal of directors by substantially shortening their terms will be invalidated if they do not comply with the charter's formal removal provisions.
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