Air Products went hostile in February of 2010 with a $60-per-share, cash-and-stock offer. The Airgas board recommended that its stockholders not tender into the offer, citing the recommendations of two financial advisors, its belief in the strength of the company, and the opportunistic timing of the offer. That spring, Air Products put up three nominees for Airgas's nine-person staggered board, stating that they would be independent and act in the stockholders' best interests. Airgas's board amended the company's bylaws to push its annual meeting back to September to allow it more time to inform stockholders of the company's long-term prospects. Air Products' nominees were ultimately elected to Airgas's board. By the time of the annual meeting, Air Products had increased its offer to $65.50.
In December 2010, Airgas hired a third financial advisor to evaluate Air Products' offer, and Air Products made a "best and final offer" of $70 per share in cash. After meeting to discuss the offer, now in possession of three financial advisors' opinions, all of which concluded that the offer was inadequate, the board unanimously rejected the offer. Airgas's board expressed its belief that its stock was worth at least $78 per share; one of the board members nominated by Air Products declared, "We have to protect the pill."
Airgas stockholders and Air Products sued Airgas and its directors for breach of fiduciary duties, seeking to force Airgas's board to redeem the pill, among other requested relief. By the time of the court's decision, "the material information underlying management's assumptions ha[d] been released to stockholders through SEC filings and [was] reflected in public analysts' reports as well." According to the court, Air Products gave Airgas "more time than any litigated poison pill in Delaware history—enough time to show stockholders four quarters of improving financial results." The court also found that the testimony from Airgas's own directors and management demonstrated that stockholders had all the information they needed to make an informed judgment about the tender offer.
In analyzing the conduct of Airgas's board, the court recounted the development of the concept of "substantive coercion" in the history of Unocal and poison pill jurisprudence in Delaware. Substantive coercion is the notion that stockholders will mistakenly tender into an inadequate offer because they do not trust or are ignorant of the reasons for management's estimate of the intrinsic value of a company's stock. In City Capital Associates Ltd. Partnership v. Interco Inc., 551 A.2d 787 (Del. Ch. 1988), then-Chancellor Allen recognized (though not by name) that substantive coercion did present a threat that justified leaving a pill in place—but only for as long as it took for management to "arrange an alternative value-maximizing transaction." The maintenance of a rights plan beyond that period—the "end-stage" of a takeover contest—would lack justification.
However, in Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1990), and Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995), the Delaware Supreme Court stated that the risk of a stockholder's mistaken apprehension of long-term stock value justified defensive measures in the face of a hostile tender offer and that as long as a board's defensive response is not coercive or preclusive and falls within the range of reasonableness, courts should not substitute their judgment for that of the target's board.
This calls into question the rationale underlying substantive coercion. How long can stockholders be presumed to be ignorant of a board's reasons for considering a tender offer to be too low? Beyond a certain period, assuming sufficient disclosure, it strains belief to insist on stockholders' ignorance.
Addressing this tension, the court looked to TW Services, Inc. v. SWT Acquisition Corp., 1989 WL 20290 (Del. Ch. Mar. 2, 1989), for the proposition that the distinction between Interco, on the one hand, and Paramount and Unitrin, on the other, is not whether a takeover is in the "end stage," but rather in how the board responds to the hostile tender offer. From the perspective of the board's duty to maximize short-term share value, a proposal to restructure or recapitalize in the face of such an offer is the functional equivalent of putting the company up for sale. But a company pursuing a long-term plan may legitimately resist the demands of stockholders who wish to tender into an inadequate offer. As long as a company is not for sale, the board—which has a duty to manage the corporation—has no duty to maximize short-term value. A company executing a long-term strategy could conceivably "just say no."
The Threat from Air Products
With these considerations in mind, the court analyzed under Unocal whether the Airgas board had acted consistent with its fiduciary duties. The court had little difficulty finding that Airgas's independent board, which had relied on outside financial and legal advisors, satisfied the procedural good-faith and reasonable-investigation prong of Unocal. A greater challenge was deciding whether the board had articulated a legitimate threat. The only threat discussed by Airgas's board was the inadequate price of Air Products' offer and the fear that merger arbitrageurs would seize on the opportunity to tender. This was not a structurally coercive offer because those who sold in the back end of the transaction would be treated the same as those in the front, and an opportunity loss rationale did not apply because the board was not looking to present a strategic alternative other than maintenance of the status quo in accord with its long-term plan.
This left the court to grapple with substantive coercion, but the standard explanation of this concept—stockholder ignorance—did not apply to Airgas's sophisticated investors, particularly because of the publicity and length of the dispute between the companies. Instead, Airgas argued a novel substantive coercion theory: that the arbitrageurs holding a large amount of Airgas stock have no concern for long-term value, regardless of whether they believe or disbelieve management. This is only a threat if the offer is indeed inadequate. The plaintiffs took issue with some of the assumptions in Airgas's long-term plan but could not show that these assumptions were not made in good faith; in addition, Air Products' nominees on the Airgas board themselves found the assumptions reasonable. The court also found that the arbitrageurs would tender even if they thought the offer was inadequate.
Essentially, the court concluded that an inadequate hostile tender offer must be deemed a threat to a corporate strategy designed to increase long-term value; otherwise, a board protecting such a strategy that was unable to maintain a rights plan consistent with its fiduciary duties would be forced to maximize short-term share value, which is triggered when the board has determined to sell control.
Airgas's Defensive Response
The court next concluded that Airgas's defensive measures were proportionate to the threat—that is, not preclusive or coercive and within the range of reasonableness. Airgas's use of the pill was not coercive because it was not trying to "cram down" an alternative to Air Products' offer.
But was it preclusive? A preclusive response makes the ability to gain control of a company's board through a proxy contest realistically unattainable. Recent precedent from the Delaware Supreme Court (Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586 (Del. 2010)) held that the use of a poison pill by a corporation with a staggered board was not per se preclusive because such measures merely delay an acquirer from gaining control of the board—even if the resulting delay is lengthy.
Air Products had two choices to gain control of Airgas through a proxy: remove the Airgas board at a special meeting by a supermajority vote of outstanding shares or wait until the next annual meeting. The expert testimony from both sides on the likelihood of a successful supermajority vote was unhelpful because it relied on shaky assumptions. With no historical precedent for that outcome and no testimony about likely voting preferences from Airgas stockholders, the testimony was rejected by the court, which found that obtaining control of the board at a special meeting was not realistically attainable. According to the court, "realistically attainable" should mean a "meaningful or real world shot," not a theoretical possibility.
Running a successful slate at the next annual meeting, on the other hand, was realistically attainable, even if Air Products found it an unattractive option.
Airgas's defensive measures, found not to be preclusive or coercive, were also in the range of reasonableness. The Airgas board, including the three Air Products nominees, believed in good faith that Air Products' offer was inadequate and that the pill was necessary to protect the company. The Air Products nominees were not put forward on a campaign to force a merger—the court took care to explain that its opinion was not based on such a scenario. Instead, Air Products promised stockholders that they would be independent and take a "fresh look" at the tender offer—and to Air Products' dismay, they did precisely that.
So, can a board "just say no" to an unwanted, all-cash, fully financed tender offer? The Court of Chancery here responded that this board could. After a reasonable investigation undertaken in good faith, directors who believe that the market value of a company's shares do not reflect its actual, long-term value may, consistent with their fiduciary duties, adopt and maintain a poison pill to protect the company from an inadequate tender offer.
Keywords: litigation, commercial, business, Delaware, Court of Chancery, poison pill