16 A.3d 48 (Del. Ch. 2011)
In mid-October 2009, John McGlade, President and CEO of Air Products, privately approached Peter McCausland, founder and CEO of Airgas, about a potential acquisition or combination.1 After McGlade's private advances were rebuffed, Air Products went hostile in February 2010, launching a public all-cash tender offer for all outstanding Airgas shares at $60 per share.2 The Airgas board unanimously rejected the offer as grossly inadequate, maintained its poison pill with a 15% trigger along with its staggered board, DGCL § 203, and supermajority charter provision, and repeatedly expressed the view that Airgas was worth at least $78 per share in a sale transaction.3
Air Products raised its offer several times while simultaneously conducting a proxy contest.4 By September 2010 the offer stood at $65.50 per share.5 At the September 15, 2010 annual meeting Airgas stockholders elected all three Air Products nominees to the staggered board and approved Air Products' bylaw proposals.6 The Delaware Supreme Court later invalidated the January-meeting bylaw.7 Air Products then raised its offer to its stated "best and final" price of $70 per share in December 2010.8
The Airgas board, now including the three Air Products nominees, unanimously rejected the $70 offer as clearly inadequate after receiving updated five-year plan projections and inadequacy opinions from three independent financial advisors. A week-long trial was held from October 4 through October 8, 2010.9 After the Supreme Court's bylaw ruling, the parties conducted supplemental discovery and a three-day evidentiary hearing from January 25 through January 27, 2011, followed by closing arguments on February 8, 2011.10
Chancellor Chandler issued his post-trial opinion on February 15, 2011, denying Air Products' and the shareholder plaintiffs' requests to order redemption of the poison pill and other defenses.11
Whether the Airgas board reasonably perceived Air Products' $70 per share all-cash tender offer as posing a threat to Airgas and its stockholders that justified maintaining defensive measures?12
Under Unocal, a target board must demonstrate that it had reasonable grounds for believing a danger to corporate policy and effectiveness existed, shown through good faith and reasonable investigation materially enhanced by a majority of outside independent directors and reliance on outside advisors.13
Yes. The Airgas board, including the three Air Products nominees elected in September 2010, after receiving updated five-year plan projections and inadequacy opinions from three independent financial advisors at the December 21, 2010 meeting, unanimously concluded that the $70 offer was clearly inadequate because Airgas was worth at least $78 per share in a sale transaction, thereby articulating the threat of substantive coercion in which a majority of sophisticated but short-term arbitrageur stockholders might tender despite the board's informed view of long-term intrinsic value.
The Airgas board satisfied the first prong of Unocal by reasonably perceiving a legally cognizable threat.14
Whether the Airgas board's maintenance of its poison pill, staggered board, and related defenses was a proportionate response to the perceived threat under the second prong of Unocal?15
Under Unocal prong two, once a threat is identified the board must show that its defensive response is neither preclusive nor coercive and falls within a range of reasonableness.16
Yes. The Airgas board's maintenance of the poison pill with its 15 percent trigger, the staggered board requiring two election cycles for full control, DGCL § 203, and the supermajority charter provision was a proportionate response because the measures were not coercive, as the board was not cramming down any management-sponsored alternative, and were not preclusive, as the Supreme Court precedent in Selectica establishes that a classified board plus rights plan merely delays but does not prevent a determined acquiror from obtaining board control over two years, while the board's good-faith belief in the inadequacy of the $70 offer placed the response within the range of reasonableness.17
The Airgas board satisfied the second prong of Unocal.18
Whether inadequate price alone constitutes a legally cognizable threat under Delaware law when the tender offer is structurally non-coercive, all-cash, fully financed, and made to a fully informed stockholder base?19
Delaware Supreme Court precedent in Paramount and Unitrin recognizes that the risk of substantive coercion, defined as stockholders mistakenly tendering into an inadequate offer because they disbelieve the board's assessment of long-term value, is a valid threat even for a structurally non-coercive all-cash, all-shares offer.20
Yes. Although the $70 offer was structurally non-coercive, all-cash, fully financed, and made after Airgas stockholders had received four earnings releases, multiple 14D-9 filings, and extensive public information, the Airgas board's good-faith determination that the offer price was clearly inadequate relative to the company's intrinsic value of at least $78 per share, supported by three independent financial advisors, established the threat of substantive coercion under binding Supreme Court authority that trial courts may not disregard.21
Inadequate price alone constitutes a legally cognizable threat under existing Delaware law.22
Whether the combination of a staggered board and poison pill renders a change of board control realistically unattainable and therefore preclusive?23
A defensive measure is preclusive only if it renders a successful proxy contest and change of board control realistically unattainable. Under Selectica, the combination of a classified board and rights plan merely delays but does not prevent a determined acquiror from obtaining control over two election cycles.24
No. Although Air Products had already elected three nominees at the September 2010 annual meeting and the next annual meeting would not occur until approximately September 2011, the combination of Airgas's staggered board and poison pill did not render board control realistically unattainable because a bidder could still wage a second successful proxy contest at the 2011 annual meeting to obtain a board majority and redeem the pill, consistent with the Supreme Court's holding that such measures delay but do not preclude control.25
The combination of a staggered board and poison pill is not preclusive.26
Whether the Airgas board's actions fell within a range of reasonableness after it had lost one election contest and more than a year had elapsed since the offer was first announced?27
Even after losing one election contest and after sufficient time has passed for stockholders to become fully informed, a board acting in good faith with a reasonable basis to believe an offer is inadequate may maintain a poison pill to protect long-term corporate strategy. Directors are not obliged to abandon a deliberately conceived plan for short-term shareholder profit unless there is clearly no basis to sustain the strategy.28
Yes. After the September 2010 election of the three Air Products nominees and more than sixteen months since the initial February 2010 announcement, the Airgas board, now including those nominees, continued to act within a range of reasonableness by maintaining its defenses because it had relied on three independent financial advisors, updated its five-year plan, and unanimously concluded that the $70 best-and-final offer remained inadequate relative to Airgas's long-term value, thereby protecting stockholders from surrendering control at an unfair price while the Supreme Court precedent permits such action when the board has a good-faith basis.29
The Airgas board's actions remained within a range of reasonableness.30