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Chancery Upholds Poison Pill of Airgas; and Air Products Walks Away

By Francis G.X. Pileggi

Air Products and Chemicals, Inc. v. Airgas, Inc., C.A. No. 5249 (Del. Ch. Feb. 15, 2011), read Delaware Court of Chancery opinion here.  This much-anticipated 158-page opinion upheld the use of the poison pill by Airgas to rebuff the efforts of Air Products to acquire it for the last year or so. Kevin F. Brady plans to provide a fuller summary of this epic decision, but for the meantime, the shortest summary is the one provided by the Court in the introduction to the opinion as follows:

This case poses the following fundamental question: Can a board of
directors, acting in good faith and with a reasonable factual basis for its
decision, when faced with a structurally non-coercive, all-cash, fully
financed tender offer directed to the stockholders of the corporation, keep a
poison pill in place so as to prevent the stockholders from making their own
decision about whether they want to tender their shares—even after the
incumbent board has lost one election contest, a full year has gone by since
the offer was first made public, and the stockholders are fully informed as to
the target board's views on the inadequacy of the offer? If so, does that
effectively mean that a board can 'just say never' to a hostile tender offer?
The answer to the latter question is 'no.' A board cannot 'just say
no' to a tender offer. Under Delaware law, it must first pass through two
prongs of exacting judicial scrutiny by a judge who will evaluate the actions
taken by, and the motives of, the board. Only a board of directors found to
be acting in good faith, after reasonable investigation and reliance on the
advice of outside advisors, which articulates and convinces the Court that a
hostile tender offer poses a legitimate threat to the corporate enterprise, may
address that perceived threat by blocking the tender offer and forcing the
bidder to elect a board majority that supports its bid.

In essence, this case brings to the fore one of the most basic questions
animating all of corporate law, which relates to the allocation of power
between directors and stockholders. That is, 'when, if ever, will a board's
duty to ‘the corporation and its shareholders' require [the board] to abandon
concerns for ‘long term' values (and other constituencies) and enter a current
share value maximizing mode?'[1]  More to the point, in the context of a
hostile tender offer, who gets to decide when and if the corporation is for
sale?

Since the Shareholder Rights Plan (more commonly known as the
'poison pill') was first conceived and throughout the development of
Delaware corporate takeover jurisprudence during the twenty-five-plus years
that followed, the debate over who ultimately decides whether a tender offer
is adequate and should be accepted—the shareholders of the corporation or
its board of directors—has raged on. Starting with Moran v. Household
International, Inc.[2] in 1985, when the Delaware Supreme Court first upheld
the adoption of the poison pill as a valid takeover defense, through the
hostile takeover years of the 1980s, and in several recent decisions of the

Court of Chancery and the Delaware Supreme Court,[3]  this fundamental
question has engaged practitioners, academics, and members of the
judiciary, but it has yet to be confronted head on.

For the reasons much more fully described in the remainder of this
Opinion, I conclude that, as Delaware law currently stands, the answer must
be that the power to defeat an inadequate hostile tender offer ultimately lies
with the board of directors. As such, I find that the Airgas board has met its
burden under Unocal to articulate a legally cognizable threat (the allegedly
inadequate price of Air Products' offer, coupled with the fact that a majority
of Airgas's stockholders would likely tender into that inadequate offer) and
has taken defensive measures that fall within a range of reasonable responses
proportionate to that threat. I thus rule in favor of defendants. Air Products'
and the Shareholder Plaintiffs' requests for relief are denied, and all claims
asserted against defendants are dismissed with prejudice.[4]

---------------

1. TW Servs., Inc. v. SWT Acquisition Corp., 1989 WL 20290, at *8 (Del. Ch. Mar. 2,1989).
2. 490 A.2d 1059 (Del. 1985).
3. See, e.g.,Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310, 351 n.229 (Del.Ch.2010); eBay Domestic Holdings, Inc. v. Newmark, 2010 WL 3516473 (Del. Ch. Sept. 9, 2010); Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586 (Del. 2010).
4. Defendants have also asked the Court to order Air Products to pay the witness fees and expenses incurred by defendants in connection with the expert report and testimony of David E. Gordon in defense against Count I of Air Products' Amended Complaint, alleging breach of fiduciary duties in connection with Peter McCausland's January 5, 2010 exercise of Airgas stock options. That request is denied. The parties shall bear all of their own fees and expenses.

Supplement: Prof. Steven Davidoff reports here that in light of this decision, Air Products has decided not to appeal and not to go forward with its hostile bid for Airgas.

Full post as published by Delaware Corporate and Commercial Litigation Blog on February 15, 2011 (boomark / email).