The Delaware chancery court recently issued two opinions that are important to the boards of public companies involved in takeover bids.
Air Products & Chemicals v. Airgas Inc.1
On February 15, 2011, the Delaware chancery court, ruling that “the power to defeat an inadequate hostile tender offer ultimately lies with the board of directors,” found that the Airgas board of directors had no duty to redeem its poison pill to allow shareholders to determine whether to accept Air Products’ $70 per share takeover bid. Chancellor Chandler found that the Airgas board acted in good faith and fulfilled its fiduciary duties when it determined that $70 per share was inadequate consideration, despite the fact that Airgas stock has been trading in the low $60’s, the merger arbitrageurs (who represent a majority of Airgas shareholders) had been pushing for a sale, and the Airgas board did not produce a better deal in the one year the takeover fight had been ongoing. After the court’s ruling, Air Products withdrew its bid. The lesson of this case is that “a board cannot be forced into Revlon [the sale of the company] mode any time a hostile bidder makes a tender offer that is at a premium to market value.” If the board of directors of a target company is careful to observe its fiduciary duties and believes in good faith that the hostile bidder’s price is inadequate, it is not obligated to redeem its pill even after a prolonged period of time has failed to produce a better offer. The court stated that the “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)” will continue to be upheld.
In re Del Monte Foods Company Shareholders Litigation2
On February 14, 2011, the Delaware chancery court sharply criticized the investment bankers hired to represent Del Monte in the sale of the company, ruling that the bankers “secretly and selfishly manipulated the sale process” to boost their fees. In particular, the court stated that the bankers (1) engaged in unauthorized efforts to put Del Monte in play; (2) advised two bidders to team up in violation of confidentiality agreements and then delayed in telling Del Monte that they had done so; (3) without getting Del Monte’s permission, asked the eventual winning bidder if the investment bank could supply financing for its bid while negotiations with the bidder over price were ongoing; and (4) notwithstanding this financial interest in seeing this bid prevail, ran a “go-shop” market check process to see if a better bid was available. The court noted that the Del Monte board of directors breached its fiduciary duties “by failing to provide the serious oversight that would have checked the investment bankers’ misconduct” and enjoined the vote on the transaction and the enforcement of deal protection measures for 20 days to provide Del Monte stockholders the “the opportunity to receive a pre-vote topping bid in a process free of taint from [the bank’s] improper activities.”
The court’s opinion emphasizes that “the buck stops with the board,” namely, that boards are responsible for the actions of their bankers, even if those actions are unauthorized. Although the facts and circumstances of each transaction are different, this case underscores the need for boards of directors considering a takeover offer to stay involved in the process and give their bankers clear instructions regarding what the bankers should be doing – and not doing – during the sale process. Companies considering the retention of a banker should, with the assistance of experienced legal counsel, inquire of the prospective banker candidates, prior to engagement and throughout the process, whether they have any relationship with any prospective or actual buyer that might be viewed, with the benefit of hindsight, as compromising the banker’s independence. The decision also emphasizes the need for bankers to keep their clients apprised of what they are doing on their behalf to avoid surprises and misunderstandings.