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February 23, 2011

In Air Products and Chemicals, Inc. v. Airgas, Inc. (February 15, 2011), the Delaware Chancery Court upheld Airgas’ continued use of its poison pill to block a hostile tender offer by Air Products. This important decision by Chancellor Chandler addresses the much-debated question: Can a board retain a poison pill in the face of a premium-priced, all-cash, non-coercive tender offer even after the board has had sufficient time to explore alternatives and all relevant information has been made available to the company’s stockholders and the market?

The Court answered yes. Feeling constrained by the Delaware Supreme Court’s decisions in Paramount1 and Unitrin,2 the Court held that the Airgas Board did not breach its fiduciary duties by refusing to redeem or waive the poison pill because it acted in good faith and in reliance on expert advice that the premium offer was inadequate, even though the offer was likely favored by a majority of the Airgas stockholders.


The Airgas case was a culmination of a 16-month effort by Air Products to acquire Airgas. After its private proposals were rebuffed, in February 2010, Air Products launched an all-cash, all-shares tender offer at $60 per Airgas share. Air Products ultimately raised its price to $70, which represented a 61% premium to the trading price of Airgas shares prior to the announcement of Air Products’ initial offer. In connection with its tender offer, Air Products launched and won a proxy contest to elect all three of its nominees to the nine-member Airgas staggered board at the 2010 annual meeting. Its three nominees were independent of Air Products and campaigned on the basis of taking an unbiased, “fresh look” at Air Products’ offer, rather than lobbying the board to accept the Air Products offer or to redeem the poison pill. Air Products also won stockholder approval for various bylaw amendments that would move up the Airgas 2011 annual meeting to enable Air Products to more quickly gain control of the staggered board.3 Once Air Products’ nominees were elected to the Airgas Board, they hired a third investment banker, and ultimately agreed with the other board members that $70 was inadequate. The Airgas Board maintained that the company was worth at least $78 a share, which was supported by the analysis of its three financial advisors.

Court’s Analysis

Applying the Unocal4 enhanced judicial scrutiny standard, the Court found that:

  • The Airgas Board was not conflicted (nine of ten of the directors were independent) and had thoroughly considered the advice of their financial advisors that the Air Products offer was inadequate. The Court noted that the projections underlying those opinions were prepared using reasonable assumptions and not “tweaked” to achieve a result.
  • The risk that stockholders might tender into an offer at what the board believed in good faith was an inadequate price was a “threat” recognized by the Delaware Supreme Court in Paramount and Unitrin.5 The Court, and even Airgas, acknowledged that the shareholder base had enough information to make an informed decision whether to tender and that a majority of the stockholders would likely choose to tender. Over the year that the tender offer was outstanding, both sides had fully publicized their positions. Even though Chancellor Chandler’s personal view was that “there seems to be no threat here,” he said he was bound by Supreme Court precedent to find that an inadequate price constituted a threat.6
  • Even coupled with Airgas’ staggered board, Airgas’ use of the poison pill was proportional to the threat raised and not preclusive (although from a practical perspective it was7). Stockholders could remove the pill by electing similarly minded new directors at two successive annual meetings. The Court noted that in fact all three of Air Products’ nominees were elected to the board at the most recent stockholder meeting.
  • A board “cannot be forced into Revlon mode any time a hostile bidder makes a tender offer that is at premium to market value.” The Court emphasized that unless there is no clear basis for its belief, the board, and not the stockholders, decides when to abandon pursuit of the corporate strategy for a sale of the company. Chancellor Chandler appears to put forth the proposition that redeeming the poison pill is the functional equivalent of selling the company. The opinion also did not discuss the impact of Section 203 of the Delaware General Corporation Law, Delaware’s statutory antitakeover law, and the board’s unilateral power, acting in good faith, to waive or decline to waive those protection provisions.8

Implications of Airgas

The supremacy of a staggered board. In Delaware, the combination of a staggered board and the ability to retain a pill in place simply because a board believes and is reasonably advised that an offer is “inadequate” will as a practical matter mean that a hostile bid is a high cost/low probability option. Airgas affirms that the “substantive coercion” of inadequate price, regardless of how well the stockholder base is informed or the desires of the stockholders, is a sufficient threat for a board to employ and retain a poison pill. This decision in essence eliminates the specter that if a board refuses to sell the company in the face of a high premium bid, stockholders have a meaningful chance of recourse from the courts. Airgas will significantly impair hostile takeover activity unless the Delaware Supreme Court acts, or stockholders continue their efforts to eliminate staggered boards.

Process matters. In reaching its decision, the Court reviewed the well-documented deliberation process of the Airgas Board. The board had no conflicts and nine of its ten members were non-management and independent. Three of the directors were nominated by Air Products who, after hiring a third investment banker, agreed with the other board members’ position with respect to the offer and the pill. The Court also noted that Airgas’ projections (upon which each of the three investment bankers relied) were prepared in good faith using reasonable assumptions.

Campaign platforms. The Court noted that the Air Products nominees ran on a platform of giving a fresh look to the Air Products’ offer, as opposed to a direct platform of redeeming the pill and supporting the Air Products proposal. The Court therefore concluded that the fact all of the Air Products nominees were elected in a proxy contest did not necessarily indicate it was the clear will of the stockholders to support Air Product’s acquisition offer.

Stockholder composition. The Court acknowledged that it appeared that a majority of the Airgas stockholders were willing to tender into the offer. However, the Court noted that this majority was comprised of arbitrageurs who were willing to tender regardless of the long-term value of Airgas. Although not central to the Court’s holding, this fact seems to have influenced the Court’s assessment of the seriousness of inadequate price as a threat to the corporate enterprise and that the board was the appropriate body to protect all stockholders.9

For additional information concerning this alert, please contact your regular Bingham contact or the following lawyers:

David K. Robbins, Partner

Stephen D. Alexander, Partner

Janice A. Liu, Counsel

1 Paramount Communications, Inc. v. Time Inc., 571 A.2d 1140 (Del. 1990).

2 Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del. 1995).

3 These bylaw amendments were ultimately struck down by the Delaware Supreme Court. See Airgas, Inc. v. Air Products and Chemicals, Inc., 8 A.3d 1181 (Del. 2010).

4 Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).

5 The Court used the standard of inadequacy, rather than employing a “range of fairness” standard that investment banks use when opining as to the consideration offered in a board approved transaction.

6 Chancellor Chandler stated five times in his opinion that he was “constrained” or “bound” by Delaware Supreme Court precedent.

7 Following the decision, Air Products withdrew its tender offer, indicating it was not willing to wait another year or so.

8 In Re Digex, Inc. Shareholders Litigation, 789 A.2d 1176 (Del. Ch. 2000).

9 Even though the Court reached this conclusion, the Court also noted that apparently a majority of the long-term stockholders sold at below the $70 offer price. Despite this fact, the existing stockholders still needed protection of the board from an offer at an “inadequate” price.

This article was originally published by Bingham McCutchen LLP.