I'll quote the invaluable Francis 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 (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]
Although Chandler's opinion fails to cite yours truly, I am nevertheless left feeling vindicated.
First, as I predicted, Chandler upheld the poison pill as a concept.
Second, the case finally gives us a clear statement of Delaware law to the effect that: "A board cannot “just say no” to a tender offer." I have argued for years that Delaware law did not allow a board to just say no.
Third, Chandler's conclusion that "the answer must be that the power to defeat an inadequate hostile tender offer ultimately lies with the board of directors" is consistent with the argument I have made over and over. Most notably in my article Unocal at Twenty: Director Primacy in Corporate Takeovers, in which I argued that:
In Unocal Corp. v. Mesa Petroleum Co., the Delaware Supreme Court made clear that the board of directors of a target corporation is not a passive instrumentality in the face of an unsolicited tender offer or other takeover bid. To the contrary, so long as the target board's actions are neither coercive nor preclusive, the target's board remains the defender of the metaphorical medieval corporate bastion and the protector of the corporation's shareholders.
Unocal is almost universally condemned in the academic corporate law literature. Building on his director primacy model of corporate governance and law, however, Bainbridge offers a defense of Unocal in this article. Bainbridge argues that Unocal strikes an appropriate balance between two competing but equally legitimate goals of corporate law: on the one hand, because the power to review differs only in degree and not in kind from the power to decide, the discretionary authority of the board of directors must be insulated from shareholder and judicial oversight in order to promote efficient corporate decision making; on the other hand, because directors are obligated to maximize shareholder wealth, there must be mechanisms to ensure director accountability. The Unocal framework provides courts with a mechanism for filtering out cases in which directors have abused their authority from those in which directors have not.
I am still slogging through the 150+ page opinion (there's no way we'll ever be able to edit it down for the casebook!), but I am definitely feeling vindicated.
