Corporate Governance

Delaware's Top Five Worst Shareholder Decisions for 2010 (#1: Airgas v. Air Products)

By J Robert Brown Jr.

Airgas v. Air Products, 2010 Del. LEXIS 585 (Del. Nov. 17, 2010), represents the worst shareholder decision in 2010.  We did a series on this case back in November.

The case itself is not particularly profound from a legal perspective.  Airgas had a staggered board.  Insurgent shareholders at an annual meeting held in September elected one third of the board and succeeded in having a bylaw adopted that would advance the next annual meeting to January.  The effect was to hasten the meeting at which the next class of directors would be up for election, shortening the time it would take the insurgents to gain control by approximately eight months.  

The decision turned upon the meaning of language in both the company's articles/bylaws and in the statute.  The trial court found that the reference to "annual meeting" in the relevant bylaw/article provision was ambiguous, that it could refer either to calendar years or to durational years (365 days).  Noting that uncertainties were to be interpreted in a manner that promoted the shareholder franchise, the trial court concluded that calendar year was an appropriate interpretation and upheld the provision calling for the January meeting. 

The Supreme Court reversed.  The Court conceded that the term "annual meeting" was ambiguous but rather than relying on the adage about protecting the shareholder franchise found a source of "intent" that allowed for elimination of the ambiguity in a manner that worked against shareholders.  The source was not the parties themselves but essentially the view of anyone writing a staggered board bylaw or charter provision. 

In some respects, the case was nothing more than a predictably management friendly decision of the type often issued by the courts in Delaware, hardly worthy of a number one ranking for 2010.  The outcome was made more predictable by the managerial headache potentially caused by the lower court's decision.  By finding the term "annual meeting" ambiguous and susceptible to a "calendar" year interpretation, the lower court essentially put companies with similar ambiguous language in a position of having to rewrite the provision.  To the extent the language appeared in the articles, companies would need to submit any revision to shareholders, providing a renewed opportunity for opposition to, and criticism of, staggered board provisions.  

The real importance of the decision was the message sent to the Chancery Court.  The Chancery Court decision was written by Chancellor Chandler, a well respected and rarely reversed member of the Chancery Court.  His decision was thoughtful and well reasoned.  When he concluded that the relevant provision was ambiguous, he implemented a shareholder friendly approach by favoring the interpretation that promoted the shareholder franchise.

By reversing, the Delaware Supreme Court reminded the Chancery Court that deviations from the management friendly approach to decision making confronted a meaningful risk of reversal.  That the decision had been by a widely respected jurist made no difference.  In other words, as the battle over corporate governance continues, the Delaware courts will speak with in a single management friendly voice.  To the extent the lower courts forget this, the Supreme Court stands ready to reverse. 

Full post as published by The Race to the Bottom on January 07, 2011 (boomark / email).