A much-anticipated post-trial decision of the Delaware Court of Chancery in Air Products and Chemicals Inc. v. Airgas, Inc., C.A. No. 5249-CC (Del. Ch. Feb. 15, 2011) clearly reaffirmed that the power to defeat an inadequate hostile tender offer ultimately lies with the board of directors. This ruling ended Air Products’s yearlong hostile takeover bid for Airgas. In his detailed opinion, Chancellor William B. Chandler, III upheld the Airgas board’s ability to use the poison pill to prevent its stockholders from accepting Air Products’s best and final offer of $5.9 billion, an offer the Airgas board believed to be inadequate.
The decision addresses, in Chancellor Chandler’s 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 confirmed that a board of directors, acting in good faith and with a reasonable factual basis for its decision, when faced with a structurally non-coercive, all-cash, fully financed tender offer directed to the stockholders of the corporation, may keep a poison pill in place to prevent the stockholders from making their own decision about whether they want to tender their shares—even after the incumbent board has lost one election contest, a full year has gone by since the offer was first made public, and the stockholders are fully informed about the target board’s views on the inadequacy of the offer. The court confirmed that this does not mean that a board can “just say never” to a hostile tender offer. The relevant paragraph of the opinion reads:
“As this case demonstrates, in order to have any effectiveness, pills do not – and cannot – have a set expiration date. To be clear, though, this case does not endorse ‘just say never.’ What it does endorse is 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 (after rigorous fact-finding and enhanced scrutiny of their defensive actions). The Airgas board serves as a quintessential example.”
Chancellor Chandler reiterates that a corporate board’s decision not to redeem a poison pill in the face of a hostile bid must withstand the exacting two-prong judicial scrutiny established by Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985). First, the board must show it had reasonable grounds to believe a danger to corporate policy and effectiveness existed (i.e., the board must articulate a legally cognizable threat). In doing so, the board must demonstrate good faith and conduct a reasonable investigation. Second, a board’s actions taken in response to a threat must be “reasonable in relation to the threat posed.”
The court applying the standard of review of Unocal and its progeny concluded that the Airgas board had satisfied its high burden under Unocal and that Delaware courts will not substitute their business judgment for that of a board. The court found that the Airgas board was independent and acting in good faith, after reasonable investigation and upon reliance of the advice of outside advisors in evaluating a perceived threat of a hostile tender offer. The Airgas board was comprised of a majority of independent directors (three of whom had been appointed by Air Products following last year’s annual meeting) who received three independent financial advisor opinions in unanimously reaching its conclusion that the Air Products offer was inadequate. Chancellor Chandler also explained that the Air Products offer constituted a legally cognizable threat under Delaware law (even though the offer was not structurally coercive or posed a threat of opportunity loss, since no other offer was on the table) because the offer was determined to be inadequate.
Chancellor Chandler also concluded that the Airgas board’s response to the offer was a reasonable response to that threat and thus satisfied the second prong of Unocal. Relying on a recent Delaware Supreme Court case that evaluated a poison pill, the court first found that the decision not to redeem the poison pill – even taking into account that Airgas had a classified board – did not render a successful proxy context for control of Airgas “realistically unattainable” but rather only delayed a bidder from gaining control. Although the hostile takeover had been ongoing for nearly a year, Air Products could gain control of the Airgas board at its next annual meeting, which would be held in eight months. The Airgas board’s decision to pursue long-term objectives and not pull its defensive measures was thus deemed by the court to be a reasonable and proportionate response to the threat posed by Air Products’s inadequate offer. The court reaffirmed that “directors 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.”
The court in this ruling confirmed that it was for the Airgas board to determine whether to sell the company or run the company for the long term and obtain a higher value at a later point in time. Chancellor Chandler made clear that a board cannot be forced into Revlon mode (which would require the board to switch their role from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders) at any time a hostile bidder makes a tender offer that is at a premium to market. The use of a poison pill is a valid corporate defense to a legitimate threat posed by a hostile bidder, provided that the target company board satisfies the standards set forth in Unocal. Thus, the opinion reaffirms a host of Delaware court precedent that it is the board’s right to manage the company, including determining the right value and time for sale of the company under Delaware law, even if the stockholders of the corporation think otherwise.