M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Friday, May 20, 2011

Steele on Airgas

Delaware Chief Justice Myron Steele is interviewed by The Metropolitan Corporate Counsel.  Among other topics, Chief Justice Steele addressed Chancellor Chandler's decision in Airgas as well as the earlier Supreme Court opinion:

Editor: Why has the Delaware Supreme Court decision in Airgas, Inc. v. Air Products and Chemicals, Inc . received much attention?

Steele: There are two reasons. First, one of the three chancellor opinions suggested a difference of opinion between the Court of Chancery and the Supreme Court on the fundamental issues in the case. Judicial disagreement always draws attention.

Second, Airgas teed up a core issue, particularly among academics, institutional shareholders and organizations like the National Association of Corporate Directors (NACD). Specifically, is Delaware still a director primacy state, or have we moved toward the trendier shareholder democracy regime?

Airgas focuses on the relative authority of the board and the shareholder base when they may be at odds over a hostile acquisition. Who should prevail and under what circumstances, and who has the last word on whether an acquirer's offer is sufficient?

We all know the board has fiduciary duties to act in the best interest of the corporation and its shareholders. The Delaware statute authorized Airgas to have a staggered board. As a potential acquirer, Air Products sought to unseat staggered board members, and, in fact, elected three of its own in a proxy contest.

The question then centered on how quickly Air Products could force an election for the next three of the "three-three-three" staggered board by passing a bylaw that alters the annual meeting schedule. Under dispute was whether a 51 percent shareholder vote could override a concurring opinion - by both the board and Institutional Shareholder Services (ISS) - that the offer was too low.

Air Products responded by passing a bylaw that rescheduled the annual meeting within months of the election of its own three-member slate - meaning that, potentially, well within one year, Air Products could elect six out of the nine board members. From there, Air Products' majority would pull the poison pill that in conjunction with the staggered board thwarted, or at least slowed, their takeover attempt.

The Airgas parties asked  the court to determine the extent of board authority to frustrate a premium-to-market acquisition, particularly when many shareholders wanted to accept the premium. Under what circumstances should the law allow the board's exercise of its fiduciary duty to frustrate a shareholder vote on the tender offer?

From a lawyer's point of view, this case is a dream. You interpret the bylaw, determine if it is consistent with the charter, determine whether the charter is consistent with the Delaware code and then find an ambiguity. Both the Court of Chancery and the Supreme Court concluded that the language is ambiguous.

The Chancellor found that ambiguity should be resolved in favor of the shareholders through a policy default mechanism. The Supreme Court disagreed, maintaining that a charter is a contract and that a decision must be rendered in the same way as with language disputes among parties to a contract.

We affirmed the need to look at both the extrinsic evidence and the demonstrated history of the parties' conduct. Instead of saying the annual meeting could be held at any time during the next year, we maintained that, in order for the staggered board to be effective, the only rational interpretation of "annual" means nearly 12 months. Otherwise, the directors would not have served a full three-year term if they could be eliminated during the first month of the next calendar year.

Here, the annual meeting, during which the three Air Products members were elected, was held on September 15, and their own new bylaw provided that the next annual meeting would be January 15 - just two weeks into the following calendar year.

All courts agreed that the language was ambiguous, but the Chancellor maintained that resolution must default in favor of the shareholders. If upheld, this decision would allow an annual meeting within four months, frustrate the staggered board, enable the pill to be pulled and make the offer available for a shareholder vote. At bottom, this is a reasonable position with which we simply disagreed.

We looked at communications from the company through its proxies to its shareholders and the SEC. Consistently, for the last ten years, the board met annually in the July-August time frame. In this case, while the meeting occurred slightly later - on September 15 - it remained within the spirit of a charter that mandated a staggered board and annual meetings (approximately 12 months apart). We couldn't justify a four-month time frame interpretation in light of company history.

Interestingly, the three Air Products board members elected on the Air Products case voted with the Airgas board majority to reject the tender offer. It seems, once they got involved, they agreed that the offer was too low, which frustrated those who wanted a shareholder vote. Our final view is consistent with the idea that directors run the company, and, in order to carry out their fiduciary duty, they have to act in the best interest of the entire diverse shareholder base.

When directors conscientiously believe that an offer is too low, it would be inconsistent with their fiduciary duty to disappear and let the shareholders decide. Mom and Pop shareholders might take an overly simplistic view that 70 dollars was enough for stock the board thought to be worth 78 dollars, or they might simply adopt the board's long-term strategy. On the other hand, institutional shareholders have to satisfy the people for whom they act as fiduciaries in the short term and who have not necessarily aligned with the long-term interest of the corporation.

Airgas attracted so much attention because it involved a fundamental, philosophical difference between the view that the board has to exercise its fiduciary duty for the entire shareholder base and the view that boards should step out of the picture and let the shareholders vote.

After our finding, the Chancellor's ultimate decision was consistent with ours, but his language was very critical of our opinion and took the opposite philosophical view. While there's nothing wrong with reasonable people disagreeing, we think the way to solve this problem is either to amend an individual corporate charter, eliminating the staggered board, or to ban staggered boards through state legislation. Both are options.

Because I believe that a charter is a contract between the shareholders, management and the board, my only job was to interpret the contract - not to make Olympian determinations about what is in the best interest of corporate America.



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