On February 15, 2011, the Delaware Court of Chancery issued its
opinion in Air Products and Chemicals, Inc. v. Airgas,
Inc. et al.1 upholding the use of Airgas's
shareholder rights plan (or "poison pill") in the closely
watched contest for control of Airgas, Inc. In a ruling described
by the Chancellor as being constrained by Delaware precedent, the
Court upheld the Airgas board's decision not to redeem the pill
even though the offer had been outstanding for over a year and all
parties agreed that the stockholders had the information reasonably
necessary to make an informed decision on whether to accept the
tender offer. Air Products makes clear that until such
time, if any, as the Delaware Supreme Court rules otherwise,
Delaware corporate boards will have the right to "just say
no" (although not to "just say never") to an
inadequate tender offer if the determination is made in good faith,
after reasonable investigation and in reliance on the advice of
outside financial and legal advisors.
The Airgas board had, on a number of occasions, unanimously rejected the offers made by Air Products, including its "best and final" offer of $70 per share. After a proxy contest at the September 2010 annual meeting, three independent Air Products nominees were elected to the Airgas board. All three new directors, who promised to take a "fresh look" at the offer (but not necessarily to vote in favor of accepting the offer), also concluded, following a number of board meetings and based on the advice of outside advisors, that the offer of $70 per share was indeed inadequate.
The Court reviewed the Airgas board's actions under the standard set out over 25 years ago in Unocal Corp v. Mesa Petroleum Co.2 The Chancellor held that the Airgas board acted reasonably and in good faith in perceiving that the "clearly inadequate" tender offer posed a threat to the company. The Court noted that "[t]he presence of a majority of outside independent directors coupled with a showing of reliance on advice by legal and financial advisers 'constitutes a prima facie showing of good faith and reasonable investigation.'"3 The Airgas board had consulted with three financial advisors (two hired by Airgas's board initially and the third at the request of the Air Products nominees) to confirm its valuation of the company based on management's long-term plan and, as noted above, the newly elected Air Product nominees reinforced the validity of the board's position by unanimously voting to retain the pill.
In determining that the Air Products offer posed a cognizable threat to the company, the Court noted that while the offer itself was not structurally coercive, a large percentage (almost half) of the Airgas stockholders were merger arbitrageurs who had acquired the stock at a low price when Air Products first announced its interest in acquiring Airgas, and therefore stood to make a significant return on their investment even on a "low ball" bid. Based on this, the Court found sufficient evidence that a majority of stockholders might be willing to accept the Air Products offer regardless of the Airgas board's view that the price was inadequate. Moreover, the Court would not second guess the Airgas board's reasonable, good faith decision not to put the company up for sale at that particular time. According to the Court, a significant aspect of the threat was that if the Airgas board were ordered to redeem the rights plan, it could be forced into "Revlon mode" to maximize shareholder value in the short term by putting the company up for sale, even after having determined that this was not in the best interests of the company and its stockholders.
The Court also held that Airgas's defenses were reasonable in light of the threat posed and that those defenses were neither preclusive nor coercive. Based on the Delaware Supreme Court's decision in Versata Enterprises Inc. v. Selectica, Inc.,4 the Court confirmed that Airgas's defensive measures - the combination of a staggered board and a sustained pill - were not preclusive or coercive. Even if these defensive measures significantly delayed Air Products from obtaining control of the Airgas board, the measures were not preclusive so long as obtaining control of Airgas at some point in the future was "realistically attainable" for Air Products.
The Chancellor noted that because a predetermined time limit would take away a poison pill's effectiveness, a reasonable board need not redeem its pill within a specified period of time. Although the Airgas board's choices were limited to a low bid or no bid at all (given that Air Products had credibly made its final offer), under Delaware law a board may opt for the latter as long as the company had not "put itself up for sale."5
The Court concluded that "the power to defeat an inadequate hostile tender offer ultimately lies with the board of directors." Still, the Airgas board's purposes in implementing the defensive measures - sustaining an established long-term strategic plan and not putting up the company for sale prematurely - marked a key difference between a reasonable response ("just say no") and an impermissible one ("just say never"). The Court noted Airgas's detailed five-year plan, substantial investments and consistently improving financial results in finding that the Airgas board acted reasonably in simply maintaining the status quo in the face of an inadequate offer. Citing Delaware Supreme Court precedent, the Court stated that boards "are not obligated to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy."
Although bound by precedent to rule in favor of the Airgas directors, the Chancellor made clear in the decision that he believed, from a personal point of view, that the Airgas stockholders knew what they needed to know to make an informed decision and that Airgas's pill had served its legitimate purpose.6
The Chancellor's personal views aside, the Air Products ruling delivered a win to the pro-board camp in the continuing debate about the proper allocation of decision power between directors and stockholders in takeover contests. If an independent board, acting reasonably and in good faith, determines that the company is not for sale, then the board has the discretion to "just say no" for so long as the board believes that the price is inadequate.
1 C.A. No. 5249-CC (Del. Ch. Feb. 15, 2011).
2 493 A.2d 946 (Del. 1985).
3 Id. at 102-3 (citing Selectica, Inc. v. Versata Enters., Inc., 2010 WL 703062, at 12 (Del. Ch. Feb 26, 2010)).
4 5 A.3d 586 (Del. 2010).
5 The Court found that, on the facts, Airgas had not "put itself up for sale," but that if it had, the more stringent Revlon scrutiny would apply. Air Products, slip op. at 79-83, 91-92. See also, Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986); Paramount, 571 A.2d 1140.
6 For a related perspective, see Lucian Bebchuk, An Antidote for the Corporate Poison Pill, WALL ST. J., February 24, 2011, at A13. Professor Bebchuk argues that "investors still have recourse - because a poison pill is powerful only so long as the directors supporting it remain in place." According to some in the pro-shareholder choice camp, the proper response to the Airgas opinion is to accelerate the increasing trend of de-classification of corporate boards. Indeed, the strategy and outcome of the Airgas takeover battle would likely have been different had the Airgas board not been classified.
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