In Air Products & Chemicals, Inc. v. Airgas, Inc., C.A. No. 5249-CC (Del. Ch. February 1 5, 2011), Chancellor Chandler of the Delaware Court of Chancery, upheld the unanimous decision by the directors of Airgas, Inc. to maintain in effect Airgas' poison pill1 to block the consummation of Air Products & Chemicals, Inc's unsolicited $70 per share offer to acquire all outstanding shares of Airgas' common stock.2 Chancellor Chandler's decisionthe latest in a string of rights plan litigations decided by the Chancery Court and the Delaware Supreme Court3 during the past yearwas much anticipated because it is the latest post-trial ruling on a target board's use of the "just say no" defense in response to an unsolicited tender offer.

Background of the Case

The narrow issue presented was whether "price inadequacy" alone could justify the board's continued refusal to redeem the poison pill in the twilight of an approximately one-year takeover battle involving (i) Airgas' all-cash, fully financed, premium-priced, structurally non-coercive tender offer, (ii) the absence of a "white knight" or any alternative strategic or financial transaction sponsored by Airgas' board, and (iii) Airgas' publication of comprehensive forecast, growth strategy, cost savings plan and earnings guidance information supporting the board's view of Airgas' intrinsic value, prospects and sale value.4 More broadly, the Chancery Court was tasked with answering whether there is a time in a corporate control contest when a target board is required to redeem a poison pill (and enable stockholders to tender their shares for purchase by a hostile bidder) because there no longer exists a legally cognizable threat justifying the continued maintenance of the rights plan.

Notably, there was no specific challenge to the reasonableness of management's assumptions for achieving Airgas' five-year projections (although the Chancery Court observed that reasonable minds could differ as to management's optimism); Airgas (and three of Airgas' newly elected directors, collectively) engaged three, well-recognized financial advisors, each of which delivered "inadequacy opinions" to the Board throughout the course of the takeover battle (including the $70 per share price ultimately denominated by Air Products as its "best and final" offer); and (other than the Unocal5 presumption of director conflict when a target company implements defensive measures in response to unsolicited offers), there were no specific allegations challenging the independence and disinterestedness of Airgas' directors. On the contrary, the Chancery Court assigned considerable weight to the fact that, just several months earlier, Air Products won a short-slate election contest to seat its three director-nominees on Airgas' classified Board and that each of them concluded that Air Product's $70 per share tender offer price was inadequate and Airgas should remain resolute in its takeover defense (and keep the poison pill in place).6

Ultimately, Chancellor Chandler concluded that although he personally believed Airgas' poison pill had "served its legitimate purpose," he was constrained by Delaware Supreme Court precedent to rule that pure price inadequacy (as determined by Airgas' board) constituted a legitimate threat to Airgas and that the continued use of the poison pill to thwart an inadequately priced offer was non-preclusive and non-coercive, and a reasonable response to such threat under the circumstances. Accordingly, he denied plaintiffs' request for an order to redeem Airgas' poison pill. Chancellor Chandler was careful to emphasize, however, that his ruling should not be read to suggest that a board can "just say no" indefinitely in all cases or that it can "just say never." Because Air Products withdrew its tender offer shortly after the decision was issued, there will be no appeal to the Delaware Supreme Court and the "just say no" defense (at least in this most recent factual context presented to the Chancery Court) is alive and well, unless and until the Delaware Supreme Court weighs in.  

The Judicial Review Standard

Doctrinally, this case involved application of the (now) well-familiar Unocal/Unitrin7 test to specifically determine whether: (i) after reasonable investigation and inquiry, the board in good faith determined there was a legitimate threat to Airgas' corporate policy and effectiveness, (ii) continued use of the rights plan was being used to "cram down" management's strategic or financial alternative to Air Product's hostile bid or render "realistically unattainable" a successful proxy fight by Air Products to obtain control of Airgas' classified Board and terminate Airgas' rights plan, and (iii) Airgas' continued use of the poison pill otherwise fell within a range of reasonable responses to Air Product's undervalued offer.

In view of the (oft-cited) "omnipresent specter" of self-interest inherent in director actions taken in response to an unsolicited change-in-control (i.e., Unocal's presumption in such context of entrenchment motives and other influences and biases extrinsic to the corporate merits of a director's decisions), for more than 25 years Unocal/Unitrin has been Delaware's (intermediate) judicial review standard in takeover defense cases, including rights plan maintenance/redemption cases. Accordingly, Airgas' directors had the burden to demonstrate satisfaction of the Unocal/Unitrin standard before being entitled to the substantive protection of the business judgment rule.

Price Inadequacy and the Threat of Substantive Coercion

The Chancery Court initially addressed (under the first prong of Unocal) whether Airgas' directors " articulated a legitimate threat to corporate policy and effectiveness." This entailed a process-centric analysis that required Airgas' directors to demonstrate good faith and reasonable investigation (i.e., requisite due diligence). Satisfaction of the directors' evidentiary burden was materially enhanced by the fact that Airgas' board was composed of a majority of outside, independent directors, including Air Product's three newly elected nominees.

Chancellor Chandler identified three categorical "threats" that have been articulated over the years by the Delaware courts when reviewing defensive responses to takeover threats that touch upon issues of control. Namely, (i) "structural coercion," (ii) "opportunity loss" and (iii) "substantive coercion." Structural coercion was not relevant in this case because Air Product's unsolicited bid was not a "front-end loaded" (i.e., a two-tiered, partially financed, prorated) offer designed to induce stockholders into tendering their shares under the duress of receiving less valuable or uncertain second-step merger consideration. Similarly, there was no threat of opportunity loss because Airgas' board did not propose or endorse any alternative strategic or financial transaction during the takeover battle. Instead, Airgas' board was committed to executing management's fiveyear business plan that was adopted prior to the commencement, and was not modified during the pendency, of Air Product's offer-a "stay the course" strategy. Therefore, there was no threat that Airgas' stockholders would be deprived "of the opportunity to select a superior alternative offered by target management." There also were no specific allegations of material disclosure misstatements or omissions that prevented Airgas' stockholders from making a voluntary tender offer decision.

The third category — "substantive coercion" — is addressed in more than 31 pages of the Chancery Court's 153- page decision (considerable portions of which are dicta). Tracing the progression over the years of Chancery Court and Delaware Supreme Court rights plan cases where "substantive coercion" has been identified, interpreted and applied,8 Chancellor Chandler observed that substantive coercion involves the risk that tendering stockholders might tender their shares into an unsolicited, undervalued offer in mistaken disbelief (or unaware) of the board's view of the target company's intrinsic value relative to the tender offer price.

Chancellor Chandler offered his personal view that price inadequacy should not, in itself, constitute a Unocal threat where all material information regarding the board's views of the company's true value are published (as in Airgas' Solicitation/Recommendation Statements on Schedule 14D-9 and in its periodic reports) and made known over a durationally significant period such that stockholders could make their own fully informed tender offer decision. He further noted that, in his view, substantive coercion becomes more dubious where adequate disclosure has been made over a reasonable time frame and management fails to substantively negotiate with the hostile bidder, search for a "white knight" or sponsor any alternative financial or strategic transaction. Accordingly, he suggested that there must be a time in the lifespan of a hostile bid where the deterrent purpose of a poison pill-to buy time as a protective shield for the target's stockholders-comes to an end, so that the stockholders have the exclusive ability to determine their own economic fate.9

With respect to Air Product's successful 2010 proxy fight and the reliability of management's five-year projections, Chancellor Chandler stated: "[T]he fact that Air Product's own three nominees fully support the rest of the Airgas board's view on value, in my opinion, makes it even less likely that stockholders will disbelieve the board and tender into an inadequate offer." Next, distinguishing the (generally) voluntary nature of an unsolicited tender offer (contrasted with a merger effected pursuant to Section 251 of the DGCL, which requires both board approval and stockholder adoption of the merger agreement), he questioned why "if stockholders are presumed competent to buy stock in the first place . . . they [are] not presumed competent to decide when to sell [their shares] in a tender offer after an adequate time for deliberation has been afforded them?"

Chancellor Chandler also observed that to the extent stockholders with long-term ownership or investment horizons need protection from short-term, event-driven investors (who, irrespective of a target's intrinsic value, nonetheless may be motivated to tender for immediate gain), such possibility should not constitute substantive coercion under the first prong of Unocal. To this last point, he noted the lack of any discussion in Airgas' board meeting minutes that stockholders might tender into Air Product's offer in mistaken disbelief (or in ignorance) of the board's views as to price inadequacy. Instead, he pointed to Airgas' arguments in the litigation regarding the concern that merger arbs and hedge funds would support Air Product's $70 bid price and coerce the remaining Airgas stockholders into tendering their shares and implied that these short-term investors and market speculators quite likely purchased their positions from longer-term stockholders who already decided to cash out.

Personal views notwithstanding, Chancellor Chandler applied the law as it exists today in Delaware (as announced by the Delaware Supreme Court in Paramount10 and Unitrin) and confirmed that price inadequacy, without more, if determined by an independent and well-informed board acting in good faith after reasonable investigation and after consultation with competent professional advisors (including, in this case, the receipt of "inadequacy opinions" from not one, not two, but three, prominent financial advisory firms), is a legally cognizable threat under Unocal .

Coerciveness, Preclusiveness and Proportionality

Having found the existence of a threat, the Chancery Court turned to the second prong of Unocal/Unitrin to address whether the board's continued use of Airgas' rights plan was "draconian" (i.e., coercive or preclusive) and, if not, whether such continued use was proportionate to the threat of substantive coercion.

Because there was no alternative transaction endorsed by management (and the board's basis for "just saying no" was its belief that execution of management's five-year business plan was a better long-term bet than recommending the acceptance of $70 in cash today), there was no management coercion. Coercion in this context (not to be confused with structural coercion and substantive coercion when determining the existence of a threat under the first prong of Unocal) has been construed to mean a target-sponsored transaction that is being "crammed down" on the stockholders. Because Airgas repeatedly published its intention to maintain the status quo throughout the year-long takeover battle with Air Products, there was no management-sponsored alternative transaction being foisted upon Airgas' stockholders.

Next, the Chancery Court noted that to establish (in a poison pill redemption case) that the continued use of the poison pill is "preclusive," such use has to make "realistically unattainable" the bidder's ability to win an election contest. Air Products had two basic choices going forward: (i) win another short-slate proxy contest with respect to the directors up for election at Airgas' 2011 annual meeting (which would require obtaining votes from the holders of a simple majority of Airgas' outstanding common stock) or (ii) as permitted under Airgas' certificate of incorporation, solicit the holders of 33% of Airgas' common stock to call a special meeting to remove the entire Airgas board with a supermajority vote of the non- affiliate holders of 67% of Airgas' outstanding common stock (which would translate into having to obtain removal votes from the holders of almost 86% of all outstanding shares).

Informed by the Delaware Supreme Court's recent Selectica decision, the Chancery Court stated that a rights plan combined with a classified board is not preclusive just because two election cycles must lapse before a bidder can obtain board control and redeem the poison pill, and that the financial hardship and commercial risks occasioned by such delay (tangible as they may be) are not synonymous with preclusiveness. Accordingly, after reviewing the evidentiary record (including the testimony proffered by the litigants' respective proxy advisory firm experts), Chancellor Chandler could not conclude that Airgas' poison pill prevented Air Products from having a "real world shot" at obtaining the requisite stockholder votes to change the composition of Airgas' board and redeem the poison pill-even if that meant waiting until Airgas convened its 2011 annual meeting.11

Having determined that Airgas continued use of the rights plan was neither coercive nor preclusive, the Court lastly considered the "proportionality" requirement under the second prong of Unocal to determine whether such continued use fell within a range of reasonable defense measures employed by Airgas' board (or, in other words, whether keeping the poison pill in place and "just saying no" was a proportionate response to the threat of price inadequacy identified by Airgas' board).

Repeating aspects of his analyses in earlier portions of his opinion, Chancellor Chandler emphasized that Airgas' board was composed of a majority of outside, independent directors acting in good faith in consultation with numerous professional advisors, and underscored that Air Product's hand-picked director-nominees were convinced that Air Product's $70 offer price was inadequate "by no small margin" (i.e., at least $8 per share). Citing Paramount, he noted that Airgas was not in Revlon mode12 and there was no basis to conclude that management's preexisting "stay the course" strategy was unsustainable. Accordingly, Airgas' directors had no fiduciary obligation to redeem the poison pill, especially where Air Products or another bidder could seek to acquire Airgas by offering the right price at the right time in the future. Although the raison d'etre of maintaining in effect the rights plan was for Airgas' board to retain exclusive authority regarding the outcome of Air Product's offer, such usage was reasonable under the circumstances and the Airgas directors, by just saying no, acted consistent with their fiduciary duties.

Irrespective of the policy debate regarding the proper allocation of decisional authority in a corporate control contest between directors and the stockholders who elect such directors to oversee the day-to-day business and affairs of a Delaware company, the Chancery Court clearly was duty bound to hold that if a Delaware company has not put itself in "Revlon mode," directors are not obliged, as a fiduciary matter, to abandon management's long-term business plan and seek to obtain maximum current value for stockholders just because the company has been put in play by a hostile suitor.

It is well-established that Delaware directors are the exclusive architects and overseers of the timetable for and methods of selling corporate control and that Revlon's enhanced current value maximizing obligations cannot be animated unilaterally by an unsolicited suitor.13 There are, of course, a broad range of real-time/real world considerations that make the analysis not just a simple academic exercise but, as a general matter, the directors' business judgment (in the absence of a clear evidentiary showing of director and management bad faith, disloyalty or gross negligence) cannot be supplanted, post hoc, with a Delaware court's commercial point of view.

The Upshot of Airgas

The Airgas case is one of the most important Delaware rights plan decisions in years. It reaffirms that a poison pill, together with a classified board (where the target's directors can be removed only "for cause" (or where they can be removed "without cause" in accordance with specific anti-DGCL default provisions in the target's certificate of incorporation such as Airgas' supermajority stockholder vote requirement), indisputably is the most potent antitakeover combination that can be implemented. Of course, only the poison pill can be adopted unilaterally by directors.

Despite the trend over the past decade of Fortune 500 and S&P 500 companies to allow their rights plans to expire (whether or not with a "pill-on-the-shelf" replacement) and to declassify their boards (each, partly in response to the significant influence of the major proxy advisory firms, such as ISS, and partly in response to direct pressure exerted on companies by activist stockholders, pension fiduciaries, hedge funds and corporate governance reformists), Airgas makes clear that Delaware directors have wide latitude to just say later-much later-so long as they are well-informed, act in good faith, are disinterested and independent, and rely to the extent appropriate on the advice of competent legal and financial experts and other consultants.

Some Take Aways

Process Always Matters — Establishing the Record

Chancellor Chandler noted the absence of any discussion in Airgas' board minutes of the threat of price inadequacy. It is vitally important, in any board decisional process (and certainly when considering the adoption, maintenance, amendment or redemption of a stockholder rights plan) to reflect in the minutes the core information and matters reviewed and considered by the board in the course of its deliberations. Because "preclusiveness" in a pill redemption case is interpreted under Unocal/Unitrin as preventing a real world shot at winning a proxy fight, the board should carefully consider, analyze and document with counsel and the company's outside proxy solicitation firm the likelihood of a successful campaign to unseat a majority of the directors and redeem the poison pill. Of course, this may require two consecutive annual elections in the case of a classified target board.

‘Just Say No’ is Here to Stay (and Likely for a Long While)

Only the Board can put itself in "Revlon mode." A hostile suitor cannot unilaterally impose on the Board an obligation to forego management's deliberately conceived long-term business strategy in favor of a control premium payable today. The Airgas decision, in accordance with Unitrin and Paramount, makes clear that independent and disinterested Delaware directors acting in good faith, in consultation with expert advisors, can reject an all-cash, all-shares, non-structurally coercive, fully financed and properly disclosed tender offer, solely on the basis of price inadequacy; albeit not forever and not with absolute impunity. Delaware directors are not required to transfer, and cannot abdicate, to stockholders their decisional authority under Section 141 of the DGCL.14

It's Up to the Delaware Supreme Court

Chancellor Chandler was duty bound to follow Delaware Supreme Court precedent despite the academic debate on whether there is a point in time when a rights plan outlives its intended purpose (e.g., among others, to buy time for the board to publish all financial and other information necessary for stockholders to fully understand the intrinsic value, prospects and sale value of the target company, and to identify, study and propose, if available, bona fide transaction alternatives to the unsolicited offer). The question remains: Is there a scenario where a target board's continued maintenance of a rights plan ever could be deemed "preclusive" under Unocal/Unitrin if such maintenance is not preclusive even after the bidder successfully wages one proxy fight but must win at least two to obtain control of a classified board?

Moreover, query whether it would have made any difference if (i) Airgas experienced four consecutive quarters of poor financial and operating performance, (ii) only one financial advisor issued the "inadequacy opinions," (iii) Air Product's director-nominees believed in good faith that $70 per share was the best price reasonably attainable for Airgas or that it was a blockbuster price relative to their view of Airgas' intrinsic value and prospects, (iv) a substantial majority of Airgas' outstanding shares already had been tendered into the tender offer, (v) the poison pill was adopted in direct response to the hostile offer (and not preexisting), (vi) there was evidence that Airgas' stockholder base was composed of a substantial number of long-term holders (unrealistic as that may be in the case of a year-long takeover battle), or (vi) the expert testimony of Air Product's proxy advisory firm demonstrated that the likelihood of winning a second consecutive proxy fight was more theoretical than real.

There could be a "next time" when the facts warrant redemption of a poison pill that has run its course, although, in the case of a classified board, this could require a bidder to keep its tender offer open for an unprecedented two-year period-something difficult to anticipate in the near future because the Airgas case already involves the longest poison pill case in history.

Proxy Fight Messaging Matters

Chancellor Chandler's decision highlights the importance of campaign platforms and fight letter messaging when waging an election contest. In its discussion of "proportionality" (i.e., the second prong of Unocal), he specifically noted that Air Product's director-nominees campaigned on the promise that, if elected, they "would consider without any bias [Air Product's offer]" and would "be willing to be outspoken in the [Airgas] boardroom about their views." Because all three nominees were, in fact, elected at Airgas' 2010 annual meeting (which presumably included the votes of merger arbitrageurs and other event- driven investors) and Air Product's nominees "changed teams" and joined Airgas' incumbent directors in unanimously recommending the rejection of Air Products $70 offer price, this suggested to Chancellor Chandler that Airgas' stockholder base was not automatically predisposed to tendering but choosing not to do so solely because of Airgas' poison pill and not because of price. Although these are inferences, it lent further credibility to the reasonableness of the Airgas board's "just say no" defense.