Opinion ID: 2442278
Heading Depth: 1
Heading Rank: 14

Heading: Essential Enterprises v. Automatic Steel Products, Inc. [28]

Text: This same understanding has long been embedded in Delaware case law addressing issues similar to those presented in this case. Fifty years ago, Chancellor Seitz considered in Essential Enterprises whether a bylaw that authorized the removal of directors by a majority stockholder vote was inconsistent with a charter provision that provided for staggered, three-year terms for the corporation's directors. Although the charter provided that each class of directors shall be elected to hold office for the term of three years, [29] Chancellor Seitz found that the charter reflected the underlying intent of DGCL Section 141(d), and explained: While the conflict considered is between the by-law and the certificate, the empowering statute is also involved since the certificate provision is formulated basically in the words of the statute. [30] Holding that the bylaw that authorized the removal of directors by a majority stockholder vote was inconsistent with the charter provision that authorized staggered three year terms for the corporation's directors, Chancellor Seitz concluded: Clearly the `full term' visualized by the statute is a period of three yearsnot up to three years; [31] and the bylaw would frustrate the plan and purpose behind the provision for staggered terms.... [32] Air Products contends that Essential Enterprises and this case are distinguishable in two ways. First, Air Products argues that Essential Enterprises was a director removal case, whereas this case is an annual meeting case. In form, the January Bylaw addresses the date of Airgas's annual meeting. But in substance, the January Bylaw, like the bylaw in Essential Enterprises, has the effect of prematurely removing Airgas's directors who would otherwise serve an additional eight months on Airgas's board. In that significant respect this case is indistinguishable from Essential Enterprises. Second, Air Products argues that Essential Enterprises is distinguishable because the charter in that case explicitly stated that each class of directors shall be elected to hold office for the term of three years, whereas the Annual Meeting Term Alternative does not. While that is true, our preceding discussion demonstrates that the Annual Meeting Term Alternative was intended, and has been commonly understood, to provide for three year terms. In its opinion, the Court of Chancery distinguished Essential Enterprises as follows: [ Essential Enterprises explained] that DGCL Section 141(d) says that `directors shall be chosen for a full term.' The certificate implements this. ... The charter in Essential Enterprises explicitly called for three-year terms; Airgas's charter does not. Thus, the full term specified by the charter in Essential Enterprises was three years. The full term visualized by the statute based on Airgas's charter is until the annual meeting of stockholders held in the third year following the year of their election. [33] Thus, the Court of Chancery heavily relied on the different wording of the Annual Meeting Term Alternative and the Defined Term Alternative to arrive at its conclusion that different wording equates to different meaning. But in doing that the Court of Chancery erred, because it failed to give proper effect to the overwhelming and uncontroverted extrinsic evidence that establishes, and persuades us, that the Annual Meeting Term Alternative and the Defined Term Alternative language mean the same thing: that each class of directors serves three year terms. No party to this case has argued that DGCL Section 141(d) or the Airgas Charter requires that the three year terms be measured with mathematical precision. [34] Nor is it necessary for us to define with exactitude the parameters of what deviation from 365 days (multiplied by 3) satisfies the Airgas Charter three year durational requirement. In this specific case, we may safely conclude that under any construction of annual within the intended meaning of the Airgas Charter or title 8, section 141(d) of the Delaware Code, four months does not qualify. In substance, the January Bylaw so extremely truncates the directors' term as to constitute a de facto removal that is inconsistent with the Airgas Charter. The consequence of the January Bylaw is similar to the bylaw at issue in Essential Enterprises. It serves to frustrate the plan and purpose behind the provision for [Airgas's] staggered terms and [] it is incompatible with the pertinent language of the statute and the [Charter]. [35] Accordingly, the January Bylaw is invalid not only because it impermissibly shortens the directors' three year staggered terms as provided by Article 5, Section 1 of the Airgas Charter, but also because it amounted to a de facto removal without cause of those directors without the affirmative vote of 67% of the voting power of all shares entitled to vote, as Article 5, Section 3 of the Charter required.