Power to Decide Whether to Sell Company Ultimately Lies with the Board; Court Refuses to Second-Guess Director Decisions Made in Good Faith
In a much-anticipated decision issued last night in Air Products v. Airgas, Chancellor Chandler declined to compel the board of directors of Airgas, Inc. to redeem the Company’s poison pill. In an extensive opinion, Chancellor Chandler upheld the Board’s ability to use the poison pill to block shareholders from accepting a “best and final,” $5.9 billion bid by Air Products and Chemicals, Inc., which the Board believed was financially inadequate. Shortly after the decision was released, Air Products withdrew its offer for the Company.
Chancellor Chandler made clear that his decision should not be read as an endorsement of a “just say never” defense and reiterated that a board’s decision not to redeem a poison pill in the face of a hostile bid must withstand the exacting judicial scrutiny established by Unocal. Chancellor Chandler described his analysis as “constrained by Delaware Supreme Court precedent.” The Court concluded that the Airgas Board had satisfied its high burden under Unocal and that the Court was not permitted to substitute its business judgment for that of the Airgas Board. The decision clarifies that, when a board makes an informed and reasoned judgment, a Court of Chancery will not second-guess the board’s judgment whether to sell the company or (in this case) adhere to the company’s long-term strategy that it believes will yield better value than the tender offer. The underlying principle animating the Court’s decision is that “as Delaware law currently stands . . . the power to defeat an inadequate hostile tender offer ultimately lies with the board of directors.”
The post-trial opinion comes after a prolonged bidding process which began in late 2009 and included, among other things, a tender offer bid by Air Products of $60 per share in early 2010 that was extended and raised multiple times to a “best and final” offer of $70 per share, a proxy contest that resulted in the election of three Air Products nominees to the staggered Airgas Board last September, expedited litigation regarding the ability of Air Products to move up the 2011 Airgas annual meeting to January, and a full trial over the Board’s refusal to redeem the Company’s poison pill.
At the outset of his opinion, Chancellor Chandler confirmed that his decision required an application of the Unocal standard of review, which requires that a target board demonstrate that, after a reasonable investigation, it identified a legally cognizable threat to corporate policy and effectiveness and that the actions taken in response were reasonable and proportionate to the threat posed.
With respect to the first prong of Unocal, Chancellor Chandler examined whether the Airgas Board had objective grounds to find the existence of a “threat” to the corporate enterprise. The Board identified this threat as the alleged inadequacy of the price coupled with the risk that a majority of the Company’s shareholders (which the Chancellor viewed as being predominantly focused on the “short-term” prospects of the Company) would tender into the offer “regardless of whether the price is adequate or not.” This would result in ceding control of the Company to Air Products despite the Board’s view that the shareholders would be better off in the long term if the Board maintained the status quo. Chancellor Chandler expressed his personal skepticism that price inadequacy within the context of a non-discriminatory, all-cash, all-shares, fully financed offer can pose a legally cognizable threat. However, the Court concluded that controlling Delaware precedent establishes price inadequacy as a form of substantive coercion that constitutes a legally cognizable threat. Applyling this to the facts before him, Chancellor Chandler had no difficulty finding that the Board acted in good faith and with reasonable investigation, noting that it was composed of a majority of outside independent directors, including the three directors nominated by Air Products, and that the Board relied on three outside financial advisors in reaching its conclusions.
Turning to the second prong of Unocal, the Court concluded that the Board’s defenses were a reasonable and proportionate response to the perceived threat and were neither coercive nor preclusive, even though the Board’s combination of a rights plan with a staggered board would significantly delay Air Products’ ability to wage an effective proxy contest (likely for two years). Chancellor Chandler reasoned that Air Products could win a simple majority in a proxy contest, particularly in light of the fact that Air Products already had run one successful slate of insurgents. This conclusion rendered the determination of whether Air Products could realistically obtain a supermajority of shares to remove Airgas’ board (an argument relied upon by Airgas during trial as a means to circumvent the pill) unnecessary to the determination of preclusiveness. In finding that the Airgas Board’s response was within the range of reasonableness, Chancellor Chandler was heavily persuaded by the fact that once Air Products’ own nominees were elected to the Airgas Board and evaluated the bid themselves, they ultimately concluded that the offer did not adequately reflect the value of the Company and that it was their fiduciary responsibility to “protect the pill.”
Chancellor Chandler’s opinion acknowledges that a board’s opinion of the company’s intrinsic value will at times diverge from the opinion of the shareholders who own the company, but recognizes that Delaware law provides, and indeed requires, that directors be given the right to manage the company, including the selection of a time frame for achievement of the company’s goals. The opinion concludes with a decisive nod to the deference that Delaware law requires of director decisions:
“As this case demonstrates, in order to have any effectiveness, pills do not – and can not – have a set expiration date. To be clear, though, this case does not endorse ‘just say never.’ What it does endorse is 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 fact-finding and enhanced scrutiny of their defensive actions). The Airgas board serves as a quintessential example.”
Click here for a copy of Air Products & Chemicals, Inc. v. Airgas, Inc., C.A. No. 5249-CC (Del. Ch. Feb. 15, 2011).
Click here to view Davis Polk’s analysis of the Delaware Supreme Court’s decision invalidating the Airgas bylaw amendment. The Court ruled that the bylaw amendment to conduct an annual meeting in January 2011 would prematurely terminate Airgas directors' terms and is therefore invalid.