In this post-trial opinion bringing to close a year-long public battle for the control of Airgas, Inc. (“Airgas” or the “Company”), the Delaware Court of Chancery has held that a board of directors may, in full compliance with its fiduciary duties as reviewed by the courts under Unocal and its progeny, maintain defenses in the face of a structurally non-coercive all-cash, fully financed hostile tender offer it deems to be inadequate, even after “a full year has gone by . . . and the stockholders are fully informed as to the target board’s views on the inadequacy of the offer.”
Chancellor Chandler’s decision addresses, in his words, “one of the most basic questions animating all of corporate law” — the proper allocation of power between directors and stockholders in the context of a hostile tender offer, or “who gets to decide when and if the corporation is for sale?” The Court held that, in this case, where the board has acted in good faith, after reasonable investigation and reliance upon outside advisors, and determined that the offer was inadequate and, therefore, posed a legitimate threat to the corporate enterprise, that power resides with the board.
The battle for control of Airgas began in mid-October 2009, when Air Products and Chemicals, Inc. (“Air Products”) — like Airgas, a company based in southeastern Pennsylvania and involved in the production and supply of industrial gases — privately approached the Company to propose a potential acquisition or combination. Airgas rejected that initial approach, and several more from Air Products during the ensuing months, on the basis that the timing was wrong for a sale of the Company and the prices offered by Air Products were inadequate. In February 2010, Air Products took its offer public, launching a tender offer for all outstanding Airgas shares at $60 per share. Upon review of the offer and the advice of its investment bankers, Goldman Sachs and Bank of America Merrill Lynch, the Airgas board rejected the offer as “grossly inadequate” and recommended against tendering. Over the course of the next seven months, Air Products raised its offer twice, ultimately to $65.50, each time meeting with the Airgas board’s rejection of the offer as grossly inadequate.
At the same time it went public with its offer, Air Products filed litigation in the Court of Chancery alleging the breach of fiduciary duties by the Airgas board for failure to redeem the Company’s pre-existing anti-takeover protections. Class action suits filed on behalf of Airgas shareholders, seeking similar relief, followed.
The anti-takeover protections that Air Products and the class plaintiffs sought to remove included, among other things, a shareholder rights plan or “poison pill” triggered upon acquisition of 15% of the Company’s stock. At the time of Air Products’ initial offer, Airgas also had a nine-member staggered board, with only one of three classes up for election each year. In conjunction with its plan of acquisition, Air Products sought and obtained the election of three independent nominees to the Airgas board in connection with the Company’s September 2010 annual meeting, ousting, among others, Airgas’s CEO and founder Peter McCausland. Shortly after the September meeting, the board acted to expand its size to 10 and reappointed McCausland as a director.
The case progressed to trial in October 2010, during which the parties’ dispute focused on the reasonableness of the Airgas board’s determination that the $65.50 offer was inadequate from a financial point of view. At that time, Air Products had conceded that $65.50 did not represent its best and final offer price.
In connection with the September 2010 annual meeting, Air Products also had proposed a series of bylaw amendments, including one that would require Airgas to hold its 2011 meeting in January, thereby allowing Air Products to propose and elect a second slate of directors and possibly obtain majority representation on the board only four months after the 2010 meeting. The amendment was approved by the shareholders but struck down as invalid in an action brought by Airgas and appealed to the Delaware Supreme Court, which, in a November 2010 opinion, held the amendment to be an improper attempt to shorten the time between annual meetings and remove directors up for election in 2011 prior to the expiration of their terms (the “Bylaw Decision,” summarized here). In early December 2010, the Court of Chancery requested supplemental briefing from the parties regarding the effect of the Bylaw Decision on the case still pending before it. The Court also inquired, among other things, whether the $65.50 offer was the price at which the Court should evaluate the Airgas board’s determination that the offer was a threat to the Company and whether the board’s refusal to lift the Company’s defensive measures was reasonable and permissible under Delaware law. In response, Air Products raised its offer to $70 per share, announcing that the increased offer was its “best and final.”
The Airgas board (which by then included the three Air Products nominees), after receiving the advice of a third independent banker hired at the insistence of the three nominees, unanimously rejected the offer as “clearly inadequate,” asserting that the value of the Company in a sale was at least $78 per share. The case went back to trial in January 2011, to expand the record to include facts relating to the $70 offer and the Airgas board’s response.
With that backdrop, the primary issue before the Court was whether the Airgas board members, in maintaining the Company’s defenses and thereby effectively preventing the shareholders from accepting the $70 offer, had breached their fiduciary duties, thus warranting the injunctive relief sought by Air Products and the shareholder plaintiffs. Stating that whenever a board chooses to maintain defensive measures in the face of a tender offer (even when the board is independent) the theoretical specter of disloyalty exists, the Court reviewed the board’s actions under the standard of enhanced judicial scrutiny set forth in the Delaware Supreme Court’s 1985 decision in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985). Under Unocal, the target board must satisfy two requirements. First, the board must show it had reasonable grounds to believe a danger to corporate policy and effectiveness existed. In particular, the board must demonstrate it undertook a good faith and reasonable investigation and, through that process, identified a legally cognizable threat. Second, the board must show that its actions were “reasonable in relation to the threat posed.” Under this second prong, the board’s actions, first, must not be draconian (i.e., preclusive or coercive) and, second, must be “within a range of reasonable responses to the threat posed.”
After a lengthy discussion of Unocal‘s application in the poison pill context over the past 25 years, the Court applied the Unocal analysis to the particular facts of this case. Considering the first prong, the Court determined that the Airgas board easily satisfied the requirement of undertaking an investigative process in good faith, as the board was composed of a majority of outside independent directors and relied on the advice of three independent financial advisors and legal counsel. Further, the Court explained that, while it was not structurally coercive and did not pose a threat of opportunity loss (as there was no alternative offer on the table), Air Products’ offer did constitute a legally cognizable threat under Delaware law, even if, as the Court found, a majority of Airgas shareholders would likely tender into the offer: it was inadequate.
Evaluating the Airgas board’s response to the offer under the second prong of Unocal, the Court determined that Airgas’s defensive measures were proportionate to the perceived threat. First, in light of the Delaware Supreme Court’s holding in Versata Enterprises, Inc. v. Selectica, 5 A.3d 586, 604 (Del. 2010) — that the combination of a classified board and poison pill is not in and of itself preclusive, as the combination may only delay, not prevent, a hostile acquirer from obtaining control of the board — the Court reasoned that Airgas’s defensive measures would not be deemed preclusive so long as Air Products’ obtaining control of the Airgas board “at some point in the future is realistically attainable.” The Court found that, considering the current composition of Airgas’s stockholders (and that a majority of the voting shares would likely tender into Air Products’ $70 offer), Air Products could realistically obtain control at Airgas’s next annual meeting, roughly eight months away.
Second, the Court compared the reasonableness of maintaining the Company’s defensive measures in relation to the threat posed. The Court found “the record demonstrate[d] that Airgas’s board, composed of a majority of outside, independent directors, acting in good faith and with numerous outside advisors[,] concluded that Air Products’ offer clearly undervalues Airgas in a sale transaction.” In reaching this conclusion, the Court gave great weight to the fact that the three Air Products nominees on the Airgas board joined in the determination that the offer was “clearly inadequate” and failed to account for the full intrinsic value of Airgas or adequately compare to the value it could obtain as a standalone entity adhering to its long-term corporate plan. Also significant in the Court’s estimation, Air Products’ directors testified at trial that, under similar circumstances, they would defend Air Products from any offer they deemed, as a fiduciary matter, to be inadequate. Based on these findings, the Court determined that it “cannot conclude that there is ‘clearly no basis’ for the Airgas board’s belief in the sustainability of its long-term plan.” The Court thus reaffirmed the Supreme Court’s “powerful dictum” in Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140, 1154 (Del. 1990), that “[d]irectors are not obligated to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy.” Significantly, the Court noted that, in this case, the Airgas board was “simply maintaining the status quo, running the company for the long-term, and consistently showing improved financial results each passing quarter.” Its actions, meanwhile, did not “forever” preclude Air Products or any bidder from acquiring Airgas; they simply prevented a change of control from occurring at an inadequate price. The Court thus found the Airgas board’s response reasonable and proportionate.
Having held that the Airgas board met its burden under both prongs of the Unocal review, the Court dismissed all claims against the Company and its directors with prejudice. Although careful to note its decision does not stand for the proposition that a board of directors can “just say never” or even, without satisfying the standards under Unocal, “just say no” to a tender offer, the Court reaffirmed “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 ([and only] after rigorous judicial factfinding and enhanced scrutiny of their defensive actions).”
The full opinion is available here.