Delaware Corporate Law Update

Updates on Delaware Corporate Law by Evan O. Williford, Esq., Delaware Corporate Litigation Attorney.

Chancery Refuses to Pull Airgas Poison Pill

On Tuesday the Court of Chancery issued a post-trial opinion ending the takeover battle of Air Products and Chemicals, Inc. for Airgas, Inc. (available here).  The Court refused to invalidate a poison pill which had already given Airgas “more time than any litigated poison pill in Delaware history” (emphasis in opinion).  In summary, while the Court expressed its personal disagreement with defensive measures being justified solely by the risk that stockholders might mistakenly disagree with a board’s view of a company’s value (a concept known as “substantive coercion”), it held itself bound by Delaware Supreme Court precedent to hold otherwise.  Air Products has stated that it will not appeal the opinion.  The opinion emphasizes the difficulty of persuading the Court of Chancery to pull a pill so long as a proxy fight to replace the target’s board is a realistic option for the bidder.

A summary of this lengthy and nuanced opinion follows below.

Air Products had made its “final” tender offer to Airgas’s stockholders of $70 per share in cash and fully financed.  The Airgas board, including three directors Air Products itself had nominated, refused to redeem its poison pill.  It did so not to proceed with any other alternative  transaction, but to continue its pre-existing business plan under the belief that Airgas executing this plan was worth substantially more, at least $78 per share.

Chancellor William B. Chandler III expressed his “personal view” that the pill had “served its legitimate purpose”.  The Court applied the customary Unocal test for defensive measures under the circumstances.  The Chancellor agreed “theoretically” with previous Chancery opinions that “the risk that the stockholders will mistakenly accept an underpriced offer because they disbelieve management’s representation of intrinsic value” did not justify a defensive measure once enough time had passed for the board to be able to tell its side of the story effectively.  But the Court held it was bound by Supreme Court precedent, including Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1990), to hold otherwise.

The Court held that the board had conducted a good faith, reasonable investigation in rejecting the bid.  All but one were independent directors.  Airgas procured advice from three financial advisors.  And Air Products’ own nominees had, in the end, agreed with Airgas that the offer was inadequate.

The Court noted that almost half the stockholder base was now arbitrageurs (or “arbs”).  Because of this, it found “sufficient evidence that a majority of stockholders might be willing to tender their shares regardless of whether the price is adequate or not”.  The Court cited an example of one arb who had endorsed a deal when the offer was only $65.50, stating that the arb seemed ready “to see a deal done at any price” above his purchase price.  Airgas’s CEO testified that he had initially tried to convince the arbs of Airgas’s real long-term value but gave up after he became convinced that the arbs did not care.  Air Products’ own expert testified that large numbers of the arbs would tender their shares regardless of long-term value.  The Court called this a “new facet of substantive coercion,” different from the risk recognized in Paramount.

Other than getting the Court to pull the pill or walking away, Air Products had principally two options.  It could have called for a special meeting at which a supermajority (67%) vote could replace the board, or wait eight months for the next annual meeting of Airgas’s staggered board.  At the latter meeting, should its nominees prevail, it would have elected a majority of the Airgas board (although Air Products’s first three nominees had “changed sides” so to speak).

The Court held that the latter at least was a realistic possibility for Air Products.  The Court recognized that at some point, it could be argued, delay could mean denial for typically time-sensitive tender offers, and that no tender offeror had ever persisted through two annual meetings.  Nevertheless, the Court again held itself bound by Supreme Court caselaw to hold this to be a realistic option for Air Products, thus rendering the defensive measures, including the poison pill, not “preclusive” or “coercive” under the Unocal analysis.

The Court discussed a hypothetical scenario, called the “Effective Staggered Board” (or “ESB”) previously posed by Vice Chancellor Leo E. Strine, Jr., in which a poison pill was “plausibl[y]…preclusive”.   In the ESB, a bidder wins a first proxy contest as to a staggered board but is forced by the incumbent majority to suffer the economic risks of maintaining its bid for another year before the second contest.  The Court noted that Airgas was not this case given that, for one, Air Products’ own nominees had changed sides.

The Court states that a board “cannot ‘just say no’” to a tender offer.  Given the Court’s recognition of a broad view of substantive coercion, however, acquirers are limited in their options when a board does finally say no.  Such a board is subject largely to a process-based review – whether it was “acting in good faith, after reasonable investigation and [at least in this case] reliance on the advice of outside advisors”.  So long as a proxy contest is a realistic possibility for an acquirer, it will be difficult to persuade a Delaware court to redeem a pill, even one in place as long as this one. 

Filed under: Court of Chancery, Poison Pill, Unocal

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Delaware Corporate Law Update solely reflect the views of Evan Williford of The Williford Firm, LLP. Its purpose is to provide general information concerning Delaware law; no representation is made about the accuracy of any information contained herein, and it may or may not be updated to reflect subsequent relevant events. This website is not intended to provide legal advice. It does not form any attorney-client relationship and it is not a substitute for one.