Airgas, Inc. v. Air Products and Chemicals, Inc.

• Citation: 8 A.3d 1182
• Decision Date: 23 November 2010
• Docket Number: No. 649, 2010.,649, 2010.
• Parties: AIRGAS, INC., James Hovey, Paula Sneed, David Stout, Lee Thomas, John Van Roden, and Ellen Wolf, Plaintiffs and Counter-claim-Defendants Below, Appellants, v. AIR PRODUCTS AND CHEMICALS, INC., Defendant and Counter-claim-Plaintiff Below, Appellee.
• Court: United States State Supreme Court of Delaware

8 A.3d 1182

AIRGAS, INC., James Hovey, Paula Sneed, David Stout, Lee Thomas, John Van Roden, and Ellen Wolf, Plaintiffs and Counter-claim-Defendants Below, Appellants,

v.AIR PRODUCTS AND CHEMICALS, INC., Defendant and Counter-claim-Plaintiff Below, Appellee.

No. 649, 2010.

Supreme Court of Delaware.

Submitted: Nov. 17, 2010.

Decided: Nov. 23, 2010.

Court Below: Court of Chancery of the State of Delaware, C.A. No. 5817.

Upon appeal from the Court of Chancery. REVERSED.

Donald J. Wolfe, Jr., Esquire, Kevin R. Shannon, Esquire, Berton W. Ashman, Jr., Esquire, and Ryan W. Browning, Esquire of Potter Anderson & Corroon LLP, Wilmington, DE; Of Counsel: Theodore N. Mirvis, Esquire (argued), Marc Wolinsky, Esquire, George T. Conway III, Esquire, Garrett B. Moritz, Esquire, Meredith L. Turner, Esquire, and Jonathon R. La Chapelle, Esquire of Wachtell, Lipton, Rosen & Katz, New York, NY, for appellants.

Kenneth J. Nachbar, Esquire, Jon E. Abramczyk, Esquire, William M. Lafferty, Esquire, John P. DiTomo, Esquire, John A. Eakins, Esquire, and Ryan D. Stottmann, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, DE; Of Counsel: David R. Marriott, Esquire, and Gary A. Bornstein, Esquire (argued) of Cravath, Swaine & Moore LLP, New York, NY, for appellee.

Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS, and RIDGELY, Justices, constituting the Court en Banc.

RIDGELY, Justice:

Air Products and Chemicals, Inc. ("Air Products") and Airgas, Inc. ("Airgas") are competitors in the industrial gas business. Air Products has launched a public tender offer to acquire 100% of Airgas's shares. The Airgas board of directors has received and rejected several bids from Air Products, including its latest offer that valued Airgas at $5.5 billion, because the board determined that each offer undervalued the company. During this entire attempted takeover period, the market price of Airgas stock exceeded Air Products' offers.

To facilitate its takeover attempt, Air Products engaged in a proxy contest at the last annual meeting of Airgas stockholders. Airgas has a staggered board with nine directors, and three were up for election at that meeting. A staggered board, which Delaware law has permitted since 1899, enhances the bargaining power of a target's board and makes it more difficult for an acquirer, like Air Products, to gain control of its target without the consent of the board.

At Airgas's last annual meeting held on September 15, 2010, Air Products nominated three directors to Airgas's board, and the Airgas shareholders elected them. Air Products also proposed a bylaw (the "January Bylaw") that would schedule Airgas's next annual meeting for January 2011, just four months after the 2010 annual meeting. The January Bylaw, which was approved by only 45.8% of the shares entitled to vote, effectively reduced the full term of the incumbent directors by eight months.

Airgas brought this action in the Court of Chancery, claiming that the January Bylaw is invalid because it is inconsistent with title 8, section 141 of the Delaware Code and the Airgas corporate charter provision that creates a staggered board. Airgas's charter requires an affirmative vote of the holders of at least 67% of the voting power of all shares to alter, amend, or repeal the staggered board provision, or to adopt any bylaw inconsistent with that provision. The Court of Chancery upheld the January Bylaw on the following basis: Airgas's charter provides that directorsserve terms that expire at "the annual meeting of stockholders held in the third year following the year of their election." There is no inconsistency between Airgas's charter provision and the January Bylaw, because the January meeting would occur "in the third year after the directors' election," which (the Court of Chancery found) was all that the Airgas charter requires.

We conclude, as did the Court of Chancery, that the Airgas charter language defining the duration of directors' terms is ambiguous. We therefore look to extrinsic evidence to interpret the intent of the charter language which provides that directors' terms expire at "the annual meeting of stockholders held in the third year following the year of their election." We find that the language has been understood to mean that the Airgas directors serve three year terms. We hold that because the January Bylaw prematurely terminates the Airgas directors' terms, conferred by the charter and the statute, by eight months, the January Bylaw is invalid. Accordingly, we reverse.

FACTS AND PROCEDURAL HISTORY

The Charter, the Bylaws, and the Staggered Board of Airgas

Section 141(d) of the Delaware General Corporation Law ("DGCL"), which allows corporations to implement a staggered board of directors, relevantly provides:

The directors of any corporation organized under this chapter may, by the certificate of incorporation or by an initial bylaw, or by a bylaw adopted by a vote of the stockholders, be divided into 1, 2 or 3 classes; the term of office of those of the first class to expire at the first annual meeting held after such classification becomes effective; of the second class 1 year thereafter; of the third class 2 years thereafter; and at each annual election held after such classification becomes effective, directors shall be chosen for a full term, as the case may be, to succeed those whose terms expire.... ¹

Ever since Airgas became a public corporation in 1986, it has had a three class staggered board by virtue of Article 5, Section 1 of its charter (the "Airgas Charter" or the "Charter"), which relevantly provides:

Number, Election and Term of Directors.... The Directors ... shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible as shall be provided in the manner specified in the By-laws, one class to hold office initially for a term expiring at the annual meeting of stockholders to be held in 1987, another class to hold office initially for a term expiring at the annual meeting of stockholders to be held in 1988, and another class to hold office initially for a term expiring at the annual meeting of stockholders to be held in 1989, with the members of each class to hold office until their successors are elected and qualified. At each annual meeting of the stockholders of the Corporation, the successors to the class of Directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election.

Similarly, Article III, Section 1 of Airgas's bylaws (the "Bylaws"), which implements Article 5, Section 1 of the Charter, relevantly provides:

Number, Election and Terms.... The Directors ... shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, one class to hold office initially for a term expiring at the annual meeting of stockholders to be held in 1987, another class to hold office initially for a term expiring at the annual meeting of stockholders to be held in 1988, and a third class to hold office initially for a term expiring at the annual meeting of stockholders to be held in 1989, with the members of each class to hold office until their successors are elected and qualified. At each annual meeting of the stockholders, the successors or the class of Directors whose term expires at the meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in third year following the year of their election....

Article 5, Section 6 of the Charter requires a supermajority vote to enact a bylaw that is inconsistent with Article III of the Bylaws. Specifically, that Charter provision states:

By-Law Amendments. The Board of Directors shall have power to make, alter, amend and repeal the By-Laws (except so far as the By-laws adopted by the stockholders shall otherwise provide.) Any By-Laws made by the Directors under the powers conferred hereby may be altered, amended or repealed by the Directors or by the stockholders. Notwithstanding the foregoing and anything contained in this certificate of incorporation to the contrary, Article III of the By-Laws shall not be altered, amended or repealed and no provision inconsistent therewith shall be adopted without the affirmative vote of the holders of least 67% of the voting power of all the shares of the Corporation entitled to vote generally in the election of Directors, voting together as a single class.

Article 5, Section 3 of the Charter requires a supermajority vote to remove an Airgas director without cause. Specifically, that provision states:

Removal of Directors.... [A]ny Director may be removed from office without cause only by the affirmative vote of the holders of 67% of the combined voting power of the then outstanding shares of stock entitled to vote generally in the election of Directors, voting together as a single class.

Airgas has consistently held its annual meetings to enable the staggered directors to serve three year terms. Since it "went public" in 1986, Airgas has held its annual meeting no earlier than July 28 and no later than September 15 of each calendar year. Because Airgas's fiscal year ends on March 31, Airgas traditionally has held its annual meeting in late summer or early fall, to afford Airgas the necessary time to evaluate its fiscal year performance and prepare its annual report.² Airgas always has held its annual meetings approximately twelve months apart. It has never held consecutive annual meetings sooner than eleven months, twenty-six days apart, or longer than twelve months, twenty-eight days since the prior annual meeting.

Air Products' Takeover Attempt

On February 11, 2010, Air Products commenced a tender offer for Airgasshares at a purchase price of $60 per share cash. On July 8, 2010, Air Products raised its offer price to $63.50...