Corporate Governance

Airgas Reversed

By J Robert Brown Jr.

We have been following Airgas v. Air Products, a Chancery Court decision that had given shareholders a rare victory.  The case, however, was (predictably) reversed by the Supreme Court. 

The case turned on the provision in the staggered board provision that gave directors a term that expired "at the annual meeting of stockholders held in the third year following the year of their election."  The only issue was whether year meant calendar year or had to mean something like 365 days.  The resolution mattered since shareholders passed a bylaw that would schedule the next annual meeting for January 2011, three calendar years for the directors elected in 2008 but not three durational years.  

The Court conceded that the language was ambiguous.  Moreover, the decision noted that in the case of ambiguity any doubt had to be "resolved in favor of stockholders' electoral rights."  Yet the decision then engaged in a fact finding exercise to conclude that the term meant a durational year because the "intent of the parties" resolved the ambiguity.

The basis for the determination of the intent of the parties?  That companies with similar provisions typically stated in their proxy statements that the staggered board provision provides for three year terms. 

• Of the eighty-nine Fortune 500 Delaware corporations that have staggered boards, fifty-eight corporations use the Annual Meeting Term Alternative. More important, forty-six of those fifty-eight Delaware corporations, or 79%, expressly represent in their proxy statements that their staggered-board directors serve three year terms. 
• Ninety-nine of the Fortune 500 Delaware corporations have de-staggered their boards over the last decade. Of those ninety nine corporations, sixty-four used the Annual Meeting Term Alternative, and an overwhelming majority -- sixty-two, or 97% -- represented in their proxy
  statements that their directors served three year terms.

In other words, the Court was making a factual determination about a common understanding.  The Court did so despite the fact that 31 of the 89 companies used other, presumably less ambiguous langauge in their articles.  

Moreover, even had Airgas intended a three year term computed on durational time periods (a high likelihood, notwithstanding the absence of any evidence cited by the Court in this case), it doesn't change the fact that the language was ambiguous and susceptible to two reasonable interpretations.  What the lower court did was apply the interpretation that comported most with promoting the shareholder franchise.  The Supreme Court did not.  

Full post as published by The Race to the Bottom on November 23, 2010 (boomark / email).