Air Products And Chemicals Inc.

• Decision Date: 15 February 2011
• Docket Number: Civil Action Nos. 5249–CC,5256–CC.
• Citation: 16 A.3d 48
• Parties: AIR PRODUCTS AND CHEMICALS, INC., Plaintiff,v.AIRGAS, INC., Peter McCausland, James W. Hovey, Paula A. Sneed, David M. Stout, Ellen C. Wolf, Lee M. Thomas and John C. van Roden, Jr., Defendants.In re Airgas Inc. Shareholder Litigation.
• Court: Court of Chancery of Delaware

16 A.3d 48

AIR PRODUCTS AND CHEMICALS, INC., Plaintiff,

v.AIRGAS, INC., Peter McCausland, James W. Hovey, Paula A. Sneed, David M. Stout, Ellen C. Wolf, Lee M. Thomas and John C. van Roden, Jr., Defendants.In re Airgas Inc. Shareholder Litigation.

Civil Action Nos. 5249–CC

5256–CC.

Court of Chancery of Delaware.

Submitted: Feb. 8, 2011.Decided: Feb. 15, 2011.

Kenneth J. Nachbar, Jon E. Abramczyk, William M. Lafferty, John P. DiTomo, Eric S. Wilensky, John A. Eakins, Ryan D. Stottmann and S. Michael Sirkin, of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; Of Counsel: Thomas G. Rafferty, David R. Marriott and Gary A. Bornstein, of Cravath, Swaine & Moore LLP, New York, New York, Attorneys for Plaintiff Air Products and Chemicals, Inc.Pamela S. Tikellis, Robert J. Kriner, Jr., A. Zachary Naylor and Scott M. Tucker, of Chimicles & Tikellis LLP, Wilmington, Delaware; Of Counsel: Jeffrey W. Golan, M. Richard Komins and Julie B. Palley, of Barrack, Rodos & Bacine, Philadelphia, Pennsylvania; Mark Lebovitch, Amy Miller and Jeremy Friedman, of Bernstein Litowitz Berger & Grossman LLP, New York, New York; Randall J. Baron, A. Rick Atwood, Jr. and David T. Wissbroecker, of Robbins Geller Rudman & Dowd LLP, San Diego, California; Leslie R. Stern, of Berman Devalerio, Boston, Massachusetts; Joseph E. White III, of Saxena White P.A., Boca Raton, Florida, Attorneys for Shareholder Plaintiffs.Donald J. Wolfe, Jr., Kevin R. Shannon, Berton W. Ashman, Jr. and Ryan W. Browning, of Potter Anderson & Corroon LLP, Wilmington, Delaware; Of Counsel: Kenneth B. Forrest, Theodore N. Mirvis, Eric M. Roth, Marc Wolinsky, George T. Conway III, Joshua A. Naftalis, Bradley R. Wilson, Jasand Mock and Charles D. Cording, of Wachtell, Lipton, Rosen & Katz, New York, New York, Attorneys for Defendants.

OPINION

CHANDLER, Chancellor

+-----------------+
                ¦TABLE OF CONTENTS¦
                +-----------------+
                

                INTRODUCTION                                                            55
                

                I.  FACTS                                                               58
                    BACKGROUND FACTS                                                    58
                

 A. The Parties                                                    59
                

         1.  Air Products                                               59
                         2.  Shareholder Plaintiffs                                     60
                         3.  Airgas Defendants                                          60
                

 B. Airgas's Anti–Takeover Devices                               62
                    C. Airgas's Five–Year Plan                                      62
                    D. Air Products Privately Expresses Interest in Airgas            63
                

         1.  The $60 all-stock offer                                    63
                         2.  Airgas Formally Rejects the Offer                          65
                         3.  The $62 cash-stock offer                                   66
                

 E. Air Products Goes Public                                                         68
                   F. The $60 Tender Offer                                                             69
                   G. The Proxy Contest                                                                71
                   H. Airgas Delays Annual Meeting                                                     73
                   I. The $63.50 Offer                                                                 73
                   J. Tension Builds Before the Annual Meeting                                         75
                   K. The $65.50 Offer                                                                 76
                        “With $65.50 on the table, the stockholders wanted the parties to engage.”
                L.                                                                                    76
                   M. The Annual Meeting                                                               77
                   N. The Bylaw Question                                                               77
                   O. The October Trial                                                                78
                

    FACTS DEVELOPED AT THE SUPPLEMENTAL EVIDENTIARY HEARING             79
                

 P. Representatives from Airgas and Air Products Meet              80
                    Q. More Post–Trial Factual Developments                         82
                

             The Air Products Nominees and the November 1–2 Airgas
                         1.  Board Meeting                                              82
                         2.  December 7–8 Airgas Board Letters                          84
                

 R. The $70 “Best and Final” Offer 64                          85
                    S. The Airgas Board Unanimously Rejects the $70 Offer             88
                

II. STANDARD OF REVIEW                                                  91
                

 A. The Unocal Standard                                            91
                    B. Unocal—Not the Business Judgment Rule—Applies Here         93
                    C. A Brief Poison Pill Primer—Moran and its Progeny             94
                    D. A Note on TW Services                                          101
                

III. ANALYSIS                                                           103
                

 A. Has the Airgas Board Established That It Reasonably Perceived the Existence of a Legally Cognizable Threat?   103
                

         1.  Process                                                    103
                         2.  What is the “Threat”                                       104
                

 B. Is the Continued Maintenance of Airgas's Defensive MeasuresProportionate to the “Threat” Posed by Air Products' Offer?   113
                

         1.  Preclusive or Coercive                                     113
                         2.  Range of Reasonableness                                    122
                

 C. Pills, Policy and Professors (and Hypotheticals)               126
                

CONCLUSION                                                              128
                 

This case poses the following fundamental question: Can 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, keep a poison pill in place so as 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 as to the target board's views on the inadequacy of the offer? If so, does that effectively mean that a board can “just say never” to a hostile tender offer?

The answer to the latter question is “no.” A board cannot “ just say no” to a tender offer. Under Delaware law, it must first pass through two prongs of exacting judicial scrutiny by a judge who will evaluate the actions taken by, and the motives of, the board. Only a board of directors found to be acting in good faith, after reasonable investigation and reliance on the advice of outside advisors, which articulates and convinces the Court that a hostile tender offer poses a legitimate threat to the corporate enterprise, may address that perceived threat by blocking the tender offer and forcing the bidder to elect a board majority that supports its bid.

In essence, this case brings to the fore one of the most basic questions animating all of corporate law, which relates to the allocation of power between directors and stockholders. That is, “when, if ever, will a board's duty to ‘the corporation and its shareholders' require [the board] to abandon concerns for ‘long term’ values (and other constituencies) and enter a current share value maximizing mode?” ¹ More to the point, in the context of a hostile tender offer, who gets to decide when and if the corporation is for sale?

Since the Shareholder Rights Plan (more commonly known as the “poison pill”) was first conceived and throughout the development of Delaware corporate takeover jurisprudence during the twenty-five-plus years that followed, the debate over who ultimately decides whether a tender offer is adequate and should be accepted—the shareholders of the corporation or its board of directors—has raged on. Starting with Moran v. Household International, Inc.² in 1985, when the Delaware Supreme Court first upheld the adoption of the poison pill as a valid takeover defense, through the hostile takeover years of the 1980s, and in several recent decisions of the Court of Chancery and the Delaware Supreme Court,³ this fundamental question has engaged practitioners, academics, and members of the judiciary, but it has yet to be confronted head on.

For the reasons much more fully described in the remainder of this Opinion, I conclude that, as Delaware law currently stands, the answer must be that the power to defeat an inadequate hostile tender offer ultimately lies with the board of directors. As such, I find that the Airgas board has met its burden under Unocal to articulate a legally cognizable threat (the allegedly inadequate price of Air Products' offer, coupled with the fact that a majority of Airgas's stockholders would likely tender into that inadequate offer) and has taken defensive measures that fall within a range of reasonable responses proportionate to that threat. I thus rule in favor of defendants. Air Products' and the Shareholder Plaintiffs' requests for relief are denied, and all claims asserted against defendants are dismissed with prejudice.⁴

INTRODUCTION

This is the Court's decision after trial, extensive post-trial briefing, and a supplemental evidentiary hearing in this long-running takeover battle between Air Products & Chemicals, Inc. (“Air Products”) and Airgas, Inc. (“Airgas”). The now very public saga began quietly in mid-October 2009 when John McGlade, President and CEO of Air Products, privately approached Peter McCausland, founder and CEO of Airgas, about a potential acquisition or combination. After McGlade's private advances were rebuffed, Air Products went hostile in February 2010, launching a public tender offer for all outstanding Airgas shares.

Now, over a year since Air Products first announced its all-shares, all-cash tender offer, the terms...