As Posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation.
Chancellor Chandler’s decision in Air Products and Chemicals Inc. v. Airgas, Inc. (Del. Ch., CA No. 5249-CC, 2/15/11) upholding the board’s maintenance of the company’s shareholder rights plan in the face of an unfriendly cash tender offer the board determined was inadequate has justifiably received a great deal of attention and analysis. Despite his reluctance, I believe the Chancellor got it right. By permitting the Airgas board to keep the rights plan in place under the facts of that case, he upheld the foundational director-centric model for governance of Delaware corporations and recognized the importance of long-term value creation as a critical focus for Delaware corporate enterprises.
The Delaware General Corporation Law clearly establishes the central role of directors in change-of-control transactions by requiring board approval for a merger (§ 251) or sale of assets (§ 271). This legislative policy is appropriately recognized when the change-of-control transaction is in the form of a tender or exchange offer. Treating like transactions alike finds support in the unified standard for review of change-of-control transactions promoted by Vice Chancellors Strine and Laster. This approach makes complete sense and, in my judgment, extends to recognition of the important role directors play in protecting the interests of the corporation and all its shareholders in a change-of-control transaction, whether it be in the form of a merger, sale of assets or share exchange. Recognition of the role of directors also dovetails with the responsibility imposed upon them to act reasonably and maximize value in these types of transactions, as required under Revlon.
The question posed by Airgas is often framed in terms of whether the directors should be able to prevent the shareholders from deciding to sell their shares when there is an all cash, fully disclosed, non-coercive offer that has been pending for a significant period of time. While it is clear that ordinarily shareholders should be free to decide whether and on what terms to sell their shares, a change-of-control transaction involves a group decision that affects all shareholders, not just those wishing to sell. Thus, in my view, the better question is what role the directors have to play in a change-of-control transaction, regardless of its form, to protect the interests of all shareholders. I believe the right answer, as reflected in Airgas, is that they have a central role if the importance of long-term value creation in the interests of the corporation and all its shareholders is to be recognized. Experience tells us that share accumulation by investors, such as arbitrageurs, with a short-term horizon occurs upon announcement of a proposed change-of-control transaction, and that these investors often are happy to sell at a small gain at the expense of the long-term interests of other shareholders. Left unchecked, these investors can control the outcome. It is the board, subject to enhanced judicial scrutiny, that can provide the essential check.
The Airgas decision did not validate the ability of boards to “just say no” or “just say never” but rather confirmed the ability of a board, acting in good faith and with proper process, to reasonably and on an informed basis determine that there is a threat to the corporation in the form of a materially inadequate price. This determination is subject to judicial review under an enhanced scrutiny standard without the deference afforded by the business judgment rule. The Airgas board was able to meet this standard in this particular circumstance. Another board (and for that matter, the Airgas board on another occasion) might not.