a recent decision, the Delaware Court of Chancery held that it was permissible
for the stockholders of a company to amend the company’s bylaws to schedule the
date of the next annual stockholder meeting four months after the prior annual
meeting, thereby allowing the stockholders to elect new directors to a class of
the company’s staggered board within a shorter than usual timeframe.
decision, Airgas, Inc. v. Air Products and Chemicals, Inc., arises from Air
Products’ unsolicited attempt to acquire Airgas. At the Airgas 2010 annual
stockholder meeting, held on September 15, 2010, Air Products’ three nominees
were elected to serve on Airgas’ nine-member staggered board and 51.9% of the
shares present voted in favor of a bylaw amendment proposed by Air Products to
hold the annual meetings of stockholders in January even though the company’s
annual meetings had, since 1986, taken place between July and September, and
almost always in the first week of August. The stockholders also approved a
bylaw amendment proposed by Air Products requiring stockholder approval for
adopting new bylaws or bylaw amendments.
this case of first impression in Delaware, the key issue was whether the bylaw
moving the annual meeting to January violated Airgas’ certificate of
incorporation and Delaware law.
Court first noted that certificates of incorporation are to be interpreted as
contracts. In addition, if the language is ambiguous (which the Court defined
as language reasonably having more than one interpretation), the court will
look to the “common or ordinary meaning” of the language. Finally, when
interpreting organizational document language that could restrict stockholder
electoral rights, the court will resolve the issue in favor of the stockholders
in order to protect the “stockholder franchise” and “construe the ambiguous
terms against the board”.
specific language under scrutiny in Airgas’ certificate of incorporation stated
that at the annual meeting “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.” The issue here was the interpretation of the words “annual”
and “year”. The Court, looking at the common dictionary definition of “annual”
and interpreting the words in favor of the stockholder franchise, decided that
“annual” in this case meant “occurring once a year”, as opposed to the alternate
definition “covering the period of a year.” Following the same approach, the
Court construed the meaning of “year” as a “365 day period beginning at any point”.
Therefore, the Court concluded that there was no requirement that an annual
meeting occur one year (12 months) after the previous annual meeting. As such,
the period from January 1, 2011 to December 31, 2011 would be the third 365-day
period after 2008 and a bylaw amendment setting the annual stockholder meeting
in January 2011 would be consistent with Airgas’ certificate of incorporation.
Court also examined whether the proposed bylaw would violate Delaware law. In
deciding that Delaware law was not violated, the Court held that the only
notable time restriction with respect to holding annual stockholder meetings is
that they cannot be separated by more than 13 months. The Court explained that
the purpose of this rule was to protect stockholders from insurgent directors
attempting to delay meetings for entrenchment, disenfranchisement, or other
improper purposes and that Delaware law does not prohibit shortening the amount
of time between annual meetings, unless such change is for an inequitable
purpose (which, the Court held, was not the case here).
it is unclear how the Chancery Court’s decision may be applied beyond the facts
of this case (Airgas is also appealing the ruling and oral argument is
scheduled to occur on November 3, 2010 before the Delaware Supreme Court), this
case serves as a reminder of the importance of using unambiguous terms in
organizational documents and the Court’s leaning to construe ambiguous terms
against the board. This decision is of even greater importance for companies
that might become the subject of an unsolicited takeover at which point clarifying
such ambiguities may no longer be legally or practically possible.