Tuesday, July 01, 2008
An Anheuser-Busch Puzzle: When is a Classified Board No Longer Classified?
The potentially hostile takeover battle between Belgian brewing giant InBev and American brewing giant Anheuser-Busch is heating up. Last Friday A-B rejected InBev's offer of $65 a share, while at the same time initiating a new plan of cost-cutting and value creation designed to placate shareholders. The rejection has prompted the typical shareholder suits, alleging that the A-B directors may be "entrenching themselves and causing the company to take unreasonable and disproportionate defensive measures." However, another suit filed by InBev seeks to illuminate a much more unusual -- and, in my view, puzzling -- question of Delaware corporate law.
In its suit (complaint downloadable here), InBev seeks a declaratory judgment as to the ability of A-B shareholders to remove the A-B directors without cause through a written consent. Delaware Code Title 8, Section 141(k) provides:
Any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors . . . .
However, there is an exception for classified boards:
(1) Unless the certificate of incorporation otherwise provides, in the case of a corporation whose board is classified as provided in subsection (d) of this section, shareholders may effect such removal only for cause . . . .
In most cases, the determination of whether shareholders can remove directors is straightforward: if the board is classified, they need cause; if not classified, there is no need for cause. The A-B board, however, is in a period of transition. In 2007, the Board and shareholders amended the A-B charter to declassify the board. Thus, beginning with the 2007 shareholders meeting, directors would be changed over from classified three-year terms to annual elections.
As of now, eight of the thirteen directors have been changed over from classified to annually elected. The remaining five will be elected to one-year terms at the 2009 shareholders meeting. However, as of now they are serving out their last classified term of three years. So -- are they still classified or not? In its complaint, InBev says that the 2007 amendment rendered all of the directors unclassified, as of the time of the amendment. But it appears that A-B -- despite some confusion -- will maintain that those five are still classified. And if the five are still classified, then they could only be removed for cause. More importantly, these five would choose eight replacement directors if the eight non-classified board members were removed through a written consent.
I don't see an easy answer to this question. On the one hand, the 2007 amendment did seemingly render the board no longer classified. On the other, the five directors are still serving out a three-year term -- a classified term. I haven't done a great deal of research on this, but it doesn't seem like there's clear precedent on the point.
It may be this legal issue will have little importance to this deal; as Deal Journal points out, the possibility of director removal through shareholder consent seems remote. But this particular legal issue raises an interesting question of statutory interpretation, suffused with policy issues surrounding the pros and cons of classified boards. Perhaps one of the fine chancellors will get a chance to grapple with it.
UPDATE: In my initial post, I neglected to reference this post by the Deal Professor on the subject. As he notes: "I am not aware of any Delaware case law on this. But the Delaware courts are rather protective of the shareholder franchise. They have also repeatedly endorsed the validity of the staggered board. The two principles here clearly collide and, to my knowledge, there is no direct case law on the topic."
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Stupid question from a non-corporate law specialist: Classified as what? Does "classified" just mean "not annually elected"?
Posted by: Bruce Boyden | Jul 2, 2008 12:08:05 PM
That's the terminology used by the statute; I'm not familiar with the origin. You also see the term "staggered board" used, which I think is more descriptive.
Posted by: Matt Bodie | Jul 3, 2008 12:48:46 AM