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Sunday, December 5, 2010

On a Staggered Board? Then Airgas is for you.

Possible Director Question for Management: If you are on a staggered board, ask if any fine tuning of the Certificate/Articles of Incorporation/Organization ("Certificate") and By-Laws is necessary in light of the Delaware Supreme Court's recent decision in the Airgas case {Airgas, Inc. v. Air products and Chemicals, Inc., No. 649, 2010 (Del. Nov. 23, 2010)}.



Staggered Board General Background for the Erudite Director: Staggered Boards have been permitted by Delaware since 1899. They are intended to provide continuity of board oversight and to enhance the bargaining power of a target's board by making in more difficult for a would be predator to gain control of the target without the board's permission. The "dark side" of staggered boards is that they may be used or perceived as tools of entrenchment, and expose their directors and management to criticism from proxy advisor firms and from gadflies and government/union pension fund shareholders. Staggered board are normally created under the terms of the Certificate and of the By-Laws. Typically, both instruments also require a super-majority vote (e.g. 2/3) to amend the staggered board. Reinforcement may also be furthered by including appropriate notice and/or written consent standards.



The Air Products Staggered Board was created by Certificate and By-Law language that proved to be vague when tested in actual circumstances. Although considered "standard" when created, the language was sufficiently lacking in clarity that the Delaware Chancery Court interpreted it to mean that the 3 year terms for the directors were only 3 terms (which could be less than a year in length so long as the began and ended at any time during a calendar year). This vagueness was exploited by Airgas, which had been engaged in a hostile takeover of Air Products and had launched a proxy contest when the Air Products Board declined the Airgas offers -- all of which had been at prices less than the market price. In the proxy contest, Airgas successfully ousted all Air Products directors in the class standing for re-election, and the Air Products stockholders also passed an Airgas sponsored by-law amendment accelerating the date for the next Air Products annual meeting by 8 months -- to January 2011 -- for the purpose of ousting the next class as soon as possible. The Chancery Court validated these actions, but the Delaware Supreme Court reversed.



The Dilemma & the Answer: Typically some flexibility for the annual meeting date is built into the by-laws, but having too much flexibility can undermine the protection intended to have been created by staggering the board. The solution is for the board to discuss, with counsel, where that unique board wants to come out on the matter and then be sure the language is drafted with more precision to achieve that outcome. For example, the Delaware Supreme Court noted that litigation could have been avoided if the language had stated that the annual meeting be held "as closely as practicable in the same month of each year."

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