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 (153 pages of which is text), 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.
Read more Delaware business
litigation case summaries and commentary on Delaware
Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X.
Pileggi, of Fox Rothschild LLP
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