Corporate Governance

Airgas, Inc. v. Air Products: Staggered Boards Staggered (A Possible Improvement in Majority Vote Provisions)(Part 5)

By J Robert Brown Jr.

The discussion below is based upon the Chancery Court decision in Airgas, Inc. v. Air Products.  The Supreme Court has reversed the decision.  The Supreme Court's opinion is here.  

The case turned on the validity of a bylaw rescheduling the next annual meeting.  At the same meeting where the bylaw passed, two other bylaws were also adopted (overwhelmingly), with one in particular of note in the context of majority vote provisions. 

The bylaw addresses a problem that comes up in the context of proxy contests, particularly where the company has a staggered board.  When incumbents lose, it results in the defeat of only one third of the existing board.  Management continues to retain control and has the power to expand the size of the board (assuming its consistent with the range ordinarily set out in the articles).  The new vacancies can be filled with the very directors who just lost the proxy contest.   

Air Products submitted (and shareholders adopted) a bylaw that would prevent this from occurring.  The provision provides:

• 'Section 11. Eligibility Requirements. Notwithstanding anything in these By-Laws to the contrary, any person who was nominated by the Board for election as a director at any annual meeting of stockholders and was not elected to the Board by the Corporation's stockholders at such annual meeting shall be ineligible to serve on the Board (whether to fill any newly created directorship resulting from any increase in the number of Directors or any vacancy on the Board resulting from death, resignation, disqualification, removal or other cause) until after the third annual meeting of stockholders following such annual meeting; provided, however, that if the Chief Executive Officer of the Corporation is so nominated for election but not elected, he or she shall be eligible to serve on the Board (but in no event as Chairman) only if such service is approved by the affirmative vote of a majority of the Directors then serving on the Board who meet the applicable independence requirements of the New York Stock Exchange (such Directors, the 'Independent Directors'), and the Board shall select another Director to serve as Chairman. In making such decision, the Independent Directors shall retain and consult with nationally recognized legal and financial advisors that have not represented and are not representing the Corporation in any other capacity. Neither the stockholders nor the Board shall amend, alter or repeal this Section 11, or adopt any provision inconsistent with or germane to the subject matter of this Section 11, without the approval of the affirmative vote of the holders of at least a majority of the voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class.'

The provision left open the possibility that the CEO could in fact be elected to the board, even if just defeated.

The bylaw also has some use in the majority vote context.  Majority vote provisions, as we have noted, typically required defeated directors to resign, with the board having the discretion to accept or reject the resignation.  Even assuming the resignation is accepted, nothing prevents the board from reappointing the losing director to the vacancy.  Indeed, the RMBCA provides that bylaws may require directors not receiving a majority to step down after 90 days but note in the comment that the defeated director can be appointed to the vacancy that he or she created.

This type of provision could be written to prevent the reappointment of a director who resigns or is required to step down after failing to receive the requisite majority support.  This would prevent reappointment in RMBCA jurisdiction and would prevent reappointment in Delaware if a letter of resignation was accepted.  It does not cure the problems with majority vote provisions but it does enhance the ability of shareholders to use the power to remove directors from the board. 

Full post as published by The Race to the Bottom on November 24, 2010 (boomark / email).