Monday, June 20, 2011

Delaware Chancery Court Interprets Airgas to Allow Nominal Truncation of Director’s Term

The Delaware Chancery Court ruled that holding an annual meeting within six months of the last annual meeting did not run afoul of the Supreme Court’s 2010 Airgas ruling invalidating a bylaw advancing an annual meeting with the effect of so truncating the directors’ term as to constitute a de facto removal, since directors seeking election at the 2011 meeting were last considered at a 2008 vote of the shareholders and their terms will only be nominally shortened if they are not elected at the upcoming meeting. In declining to decide the parameters of an approximate term of three years, the Delaware Supreme Court observed in Airgas, Inc. v. Air Products and Chemicals, Inc. that a director’s term may properly end at an annual meeting even though that director only served approximately three years rather than exactly three years. Thus, Vice Chancellor Noble concluded that truncating a director’s three-year term by a few days appears to be permitted under the Airgas ruling. Goggin v. Vermillion, Inc., Del. Chan. Ct, June 3, 2011, CA No. 6465-VCN.

The court also rejected the contention that the company used a poison pill to chill intra-shareholder dialogue and bully its shareholders. Noting that Delaware courts have repeatedly approved of the adoption of a rights plan, the Vice Chancellor said that the poison pill dates back to 2002 and was authorized seemingly without a threat to the Company. It is triggered by an acquiring person who, along with affiliates and associates, as those terms are defined by SEC Rule 12b-2, becomes a beneficial owner of 15% or more of the company’s common stock.

Rather than seek rescission of the pill, the shareholder took issue with its use, specifically pointing to a letter from the company’s outside counsel inquiring as to interactions with other company shareholders. The court said that the letter appears to be a valid investigation on behalf of the board into activities it believed could implicate the pill. Had it not conducted any inquiry, noted the court, the board may have faced accusations that it had breached its fiduciary duties.

More broadly, the court said found no indication of any improper action undertaken or contemplated by the board or the company related to the pill. There was little evidence of the board using the pill as a defensive device against the company’s shareholders. This independent board’s use of the pill would likely fall within the range of reasonableness based on what appears to be the directors’ good faith effort to use the pill to promote stockholder value. Importantly, the poison pill did not disenfranchise stockholders in the sense of preventing them from freely voting and does not prevent a stockholder from soliciting revocable proxies.