The recent decision by the Delaware Court of Chancery in Air Products and Chemicals, Inc. v. Airgas, Inc., C.A. No. 5249 (Del. Ch. Feb. 15, 2011), has generated copious commentary from many sectors, some of which has been compiled here. We are fortunate to be able to add to the learned analysis of this epic decision by posting the following expert perspective of the Airgas ruling by Professor Paul L. Regan, a nationally-recognized expert on Delaware corporate law. He is an Associate Professor of Law and Acting Director of the Institute of Delaware Corporate and Business Law at the Widener University School of Law.
The Chancellor’s decision on the poison pill in the Airgas case is in. And what have we learned? For starters, it seems for now there will be no renaissance for Interco – the Court of Chancery’s famous, or perhaps infamous, 1988 decision ordering the directors of Interco Incorporated to dismantle the company’s poison pill to allow an all-cash, all shares tender offer to proceed. In that exciting era of hostile tender offers, there was a notion hanging in the air — after the Delaware Supreme Court in Moran had upheld the basic validity of poison pills but otherwise left it to the Court of Chancery to assess the reasonableness of a board’s refusal to remove a pill in response to a specific offer — that a board’s power to use of a poison pill might in some sense be time limited.
With front-loaded structurally coercive tender offers as passé as Members Only jackets, the thinking among many in the run-up to the Interco case was that a board confronted with a structurally non-coercive, all-cash, all-shares tender offer could only use the pill for a season, as such, to compel the bidder to improve its price to a level that the shareholders might reasonably prefer. Interco so ruled and the clamor among corporate practitioners and commentators was immediate and spirited. (Full disclosure: this writer worked on the Interco case as a litigator at Skadden, Arps, Slate, Meagher & Flom, the firm representing the bidder.) Many seasoned corporate handicappers prophesized a swift and decisive reversal by the Supremes, but the bidder stunned observers by pulling the offer, leaving the Chancellor with the last word. About one year later in the Time-Warner case, the Delaware Supreme Court made a point of criticizing the Court of Chancery’s analysis in Interco and unequivocally emphasized the board’s central role as corporate managers who are charged with the role of determining whether change of control transactions should proceed.
Airgas offered the possibility of a fresh look at Interco’s time-limiting principle for poison pills. Air Products’ all-cash, all-shares offer had been pending for a year during which the Airgas board had made extensive disclosure to the stockholders. Air Products had won a proxy contest along the way, but with Airgas having a staggered board, it won only a minority of seats and even those nominees turned state’s evidence by joining the rest of the board in rejecting the Air Products bid. The epic battle also appeared to have reached its end stage, as Air Products had successively increased its bid to an announced “ final” price of $70 per share, a substantial premium over the unaffected market price but well south of a price that the Airgas board, with the advice of financial advisors, concluded would be adequate.
Unfortunately for Air Products, at the end of the day the target board does not have to win the valuation argument mathematically by showing that their $78 valuation conclusion is inherently correct and that the bidder’s at $70 is wrong. The board need only show, albeit in a setting of enhanced judicial scrutiny, that they acted reasonably. In this context, this means they only need to show that in good faith and after a reasonable investigation (i.e., after receiving the valuation opinion of an investment banker) they concluded that the $70 tender offer was for an inadequate price. With a board centric model of corporate governance, that’s pretty much game, set and match. The reasonably perceived threat of inadequate price justifies as substantively reasonable the board’s defensive response of refusing to remove the pill.
In Airgas Chancellor Chandler thoughtfully explored the development of Interco’s time-limiting principle for target boards wielding the extraordinary power of the poison pill. But in the end the Chancellor adhered to the dictum in Time-Warner by which the Supreme Court rejected the analysis of Interco. Until the Supreme Court weighs in further on the subject, the dictum of Time-Warner remains the lore, if not the law, of the land. That level of Supreme clarity will have to wait until another day and another takeover because after losing this key litigation battle, Air Products immediately announced it was withdrawing its offer and ending its year-long fight to acquire Airgas. Game over – thanks for playing.