Biotech Values

[DewDiligence]

Delaware-law machinations in the APD-ARG hostile takeover
could be germane to a biotech buyout some day. Here’s the
latest from the NYT’s DealBook blog.

http://dealbook.blogs.nytimes.com/2010/10/08/air-products-wins-round-in-battle-with-airgas

›Air Products Wins Round in Battle With Airgas

October 8, 2010, 7:04 pm
By Steven M. Davidoff

Despite some last-minute chatter in arbitrage circles that Airgas had turned the corner and a very good presentation by Ted Mirvis of Wachtell, Lipton, Rosen & Katz, Air Products and Chemicals won an important decision in Delaware Chancery Court late Friday in its takeover quest for Airgas. Chancellor William B. Chandler III ruled that a new corporate bylaw that would move up the Airgas annual shareholders meeting to January was valid under Delaware law.

One effect of this ruling will be to shorten the terms of some directors on Airgas’s staggered board. Chalk up this victory to Air Products’ legal team at Cravath, Swaine & Moore.

The basis for this opinion was just what I previously thought. The Airgas charter and bylaws are ambiguous and therefore that ambiguity should be interpreted in favor of the Airgas shareholders.

Chancellor Chandler stated that:

The charter and bylaws are ambiguous as to whether directors’ terms run in accordance with a calendar year or a fiscal year. Therefore, under the “rule of construction in favor of franchise rights,” I cannot read the word “fiscal” into the charter, and must instead construe the ambiguous terms against the board, which leads to my conclusion that Airgas’s annual meeting cycle can validly run on a calendar year basis and still be consistent with the charter.

Since “annual” can mean during the year rather than one year later, Airgas loses.

…The net result of this opinion is twofold. First, Airgas will now have to hold its annual meeting on Jan. 15. This is a true blow to Airgas and its chief executive, Peter McCausland, who reportedly had privately described the outcome of the case as a “no-brainer” in Airgas’s favor. No doubt this will not only hurt his credibility, but also put Airgas on the defensive.

Second, this opinion blows a hole in the defenses of many companies with staggered boards [which many biotech companies have]. They will have to amend their charters or otherwise live with the fact that a staggered board can be weakened by forcing the subsequent annual meeting to occur much sooner than people thought. But here, Chancellor Chandler has an answer in his well-written opinion:

This [ruling] will not diminish the effectiveness of staggered boards. The common sense, ordinary language reading that an “annual meeting” must happen once every year comports with the clear terms of our statute, its policy rationale and our common law decisions. If corporate charters and bylaws have been written in a non-specific, open-ended fashion, it is not for this Court to twist their plain words to achieve a purported intent of the drafters. The solution is for drafters to employ clear and simple language to provide clarity and avoid ambiguity. This could easily be accomplished by corporate planners and draftsmen through such simple language as: “The annual shareholder meeting shall be held as closely as practicable in the same month of each year so as to ensure that the terms of office of directors shall approximate a complete year in length.”

In short, this is not the end of the world for staggered boards; it is an easy fix if it needs fixing.

Whether or not you agree with this outcome, once again Delaware has shown the superiority of its judges through its quick adjudication.‹