New Delaware Supreme Court Decision Preserves Purpose of Staggered Board of Directors

 – Posted by Arthur Owens In a decision issued on November 23, 2010, the Delaware Supreme Court invalidated a bylaw amendment that would have had the effect of moving up the date of the Airgas Inc. annual meeting, thereby shortening the terms of three members of its nine-member board of directors. The disputed bylaw amendment arose out of an attempted takeover of Airgas by Air Products and Chemicals, Inc. The Delaware Supreme Court's decision reversed the Court of Chancery's October 8, 2010 decision which had upheld the validity of the bylaw amendment. The Delaware Supreme Court concluded that the bylaw amendment was invalid because it conflicted with provisions in the Delaware General Corporation Law and the Airgas charter. The Delaware statute authorized a staggered board and specified that such directors were to be chosen for a "full term." The Airgas charter required a supermajority vote to enact a bylaw inconsistent with the staggered board arrangement or to remove a director without cause. The bylaw amendment had been adopted by a majority vote that fell short of this supermajority requirement. Of course, the bylaw amendment would be invalid if it was inconsistent with either the statute or the charter. Therefore, the issue became whether the term to which these directors had been elected could effectively be shortened by adoption of a bylaw by a simple majority that had the effect of moving the date of the next annual meeting to a substantially earlier date. This would depend on whether these directors had been elected to a three-year term or merely to a term that would expire at whatever time the annual meeting is held in the third year following their election. Concluding that the wording of the statute and the Airgas charter was ambiguous, the Delaware Supreme Court determined that a three-year term was intended. The Delaware Supreme Court's decision preserves the purpose of staggering the membership of the board of directors. The Iowa Supreme Court may follow the same approach. At a minimum, the existence of this new decision will tend to discourage efforts to "work around" staggered boards of directors. Although Iowa law is not identical with Delaware law, there is enough similarity to make the new decision relevant, if not controlling authority, for Iowa corporations that have staggered boards and such supermajority requirements. The Iowa Business Corporation Act (the "IBCA") permits staggered membership of boards of directors. Iowa Code Section 490.806 provides as follows: The articles of incorporation may provide for staggering the terms of directors by dividing the total number of directors into two or three groups, with each group containing one-half or one-third of the total, as near as may be. In that event, the terms of directors in the first group expire at the first annual shareholders' meeting after their election, the terms of the second group expire at the second annual shareholders' meeting after their election, and the terms of the third group, if any, expire at the third annual shareholders' meeting after their election. At each annual shareholders' meeting held thereafter, directors shall be chosen for a term of two years or three years, as the case may be, to succeed those whose terms expire. The IBCA also restricts the removal of directors. Iowa Code Section 490.808(4) provides as follows: A director may be removed by the shareholders only at a meeting called for the purpose of removing the director and after notice stating that the purpose, or one of the purposes, of the meeting is removal of the director. A director shall not be removed pursuant to written consents under Section 490.704 unless written consents are obtained from the holders of all the outstanding shares of the corporation entitled to vote on the removal of the director. If you have questions, please contact Howard Hagen at 515-246-4543 or hhagen@dickinsonlaw.com or Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

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