The long-awaited battle between Air Products & Chemicals and Airgas is over. ...
The end came courtesy of Delaware Court of Chancery Judge William Chandler, who, in this opinion, upheld Airgas’s poison pill, making Air Products’ $5.9 billion hostile bid all but an impossibility. Click here for the story, from the WSJ’s Gina Chon; here for the Bloomberg story; here for commentary from Stephen Davidoff at the NYT.
Minutes after the judge’s ruling, Air Products dropped its effort to buy Airgas, taking a parting shot at Airgas’s board, saying that it was “thoroughly entrenched in its position.” ...
Chancellor Chandler, in his ruling Tuesday, said the “power to defeat an inadequate hostile tender offer ultimately lies with the board of directors.” As a result, he said the Airgas poison pill was a reasonable response to Air Products’ offer, which Airgas has continually described as being inadequate.
The Davidoff link is especially worth following.
The Chancellor clarified that poison pills act as potent anti-takeover drugs with the potential to be abused and that he was not endorsing a “just say never” concept. Rather, he was endorsing Delaware’s long understood respect for reasonably exercised managerial discretion, so long as boards are found to be acting in good faith and in accordance with their fiduciary duties after rigorous judicial fact-finding and enhanced scrutiny of their defensive actions.
Directors of a company do owe fiduciary duties to all of the shareholders, short-term as well as long-term, the court emphasized, but at the same time a board cannot be forced into Revlon mode any time a hostile bidder makes a tender offer that is at a premium to market value. ...The board believed in good faith that the offer price was inadequate by no small margin. Thus, the court found that the board was responding to a legitimately articulated threat, a conclusion bolstered by the fact that the three of the bidder’s nominees on the target company board wholeheartedly joined in the board’s determination to keep the pill in place.
The maintenance of the board’s defensive measures fell within a range of reasonableness. Chancellor Chandler noted that the board is not cramming down a management-sponsored alternative. Rather, the board is maintaining the status quo, running the company for the long-term, and consistently showing improved financial results each passing quarter. The board’s actions do not forever preclude this bidder or any bidder from acquiring the company or getting around the defensive measures if the price is right. In the meantime, the board is preventing a change of control from occurring at an inadequate price, concluded the court, a course of action clearly recognized under Delaware law.
The poison pill decision was being closely watched in the clubby world of deal makers. The poison pill — a tactic that floods the market with shares in the event of unwanted buyout overtures — has been a common corporate defense for decades. Courts in Delaware generally had upheld the authority of boards to decide whether a sale is in the best interests of shareholders. A court ruling against the Airgas poison pill threatened to send a shudder through corporate board rooms.
“I find that the Airgas board has met its burden … to articulate a legally cognizable threat (the allegedly inadequate price of Air Products’ offer, coupled with the fact that the 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,” Chancellor William Chandler wrote in his opinion.
In passing, the court also says a thing or two about Chancellor Allen's much overlooked 1989 TW Services decision and the ongoing debate about director primacy v. shareholder primacy between the Marty Lipton's (the board!) and the Lucian Bebchuck's (the shareholders!) of this world.
It may cost a small wood, half of your toner and the rest of the week to print and comprehend this product of judicial activity, but it will be well worth it.
One reason this decision bugs me is that I suspect a good number of people who don't like insider trading restrictions would be supportive of this decision. To me, it's the same question: What does the shareholder want for his or her shares? Period.
So Chancellor Chandler, in deciding Airgas, preserved the board’s power to decide when to sell the company. If a company’s shareholders don’t like it, they need to replace the board. If shareholders generally don’t like it they need to change the Delaware statute.
In upholding the board’s power, and confirming what most astute observers knew the law likely was, despite very strong facts the other way (no “coercion” or other obvious reason why the pill was needed), the court preserved the stability of Delaware law.
The court emphatically concluded that it was not validating the "just say no" approach to tender offers. But in fact it was. Moreover, the pill emphasized what had become clear in Selectica and Yucaipa that pills can remain in place as long as the insurgents had a chance to win a proxy fight. Moreover, the chance to win a proxy fight really meant the chance to win a contest over two years. The court in Airgas was locked into the reasoning by the Supreme Court in Selectica that held that poison pills were not to be given a more searching review even when the company had in place a staggered board.
More from Jay Brown:
What Airgas makes clear is that a poison pill can remain in place indefinitely as long as there is a possibility of a successful proxy contest. Moreover, the presence of a staggered board does not change the analysis. Thus, effectively, there has to be the possibility of a successful proxy contest over a two year period. Putative acquirors must now be prepared to pay all of the costs associated with making an acquisition (lining up the financing, paying the advisors, devoting management time to the matter), then pay the costs of a proxy contest to win one-third of the board.
They then must spend a year in almost constant conflict with incumbent management of the target (not to mention bringing and defending against a likely bevy of lawsuits) before incurring the expenses of yet another proxy contest. If they lose the second contest, all of the prior effort and expense will be for naught. The "for naught" will be even more likely if the company, for example, lowers the threshold of the poison pill to 5% (as in Selectica) in order to prevent the bidder from actually negotiating with other shareholders.
