June 8, 2011
Edward M. McNally
Delaware Business Court Insider

Why do so many people care about whether the Delaware courts will continue to uphold the "poison pill" defense to a hostile takeover? After all, comparatively few lawyers practice merger and acquisition law. Few companies are subject to hostile takeover threats, especially in recent years. And who really stays up at night worrying about the fight between the two largely unknown companies that were the participants in Delaware's latest hostile takeover battle and the weapon of choice among defenders in such battles, the poison pill?

Yet, since the Feb.15 Court of Chancery decision in the Air Products case, there have been almost too-many-to-count blog postings, journal articles and symposia about that decision and its upholding of a poison pill. Who cares?

Before trying to explain that phenomena, some brief background may help.

In February 2010, Air Products & Chemicals Inc. began a public tender offer for all the shares of Airgas Inc. When Airgas' board rebuffed Air Products' overture, Air Products then tried to replace the Airgas board by waging a proxy contest. However, as Airgas had a staggered board of directors, Air Products was only able to elect three of the nine members of the Airgas board of directors at the Sept. 15, 2010, annual meeting of the Airgas stockholders.

More importantly for Air Products' tender offer, Airgas had in place a poison pill. The effect of the pill was to dramatically increase the cost to Air Products if it acquired a majority of the stock of Airgas without the consent of the Airgas board of directors. That cost increase made the tender offer impractical. The effect was the same as if the seller of a house said to a prospective buyer, "I will sell, but only at twice the price you are offering to pay."

Air Products' strategy was then to put pressure on the Airgas board to redeem the poison pill. The first step in that strategy was to elect three new directors to the Airgas board who, hopefully, would support Air Products' tender offer and the redemption of the pill.

Well, that strategy backfired. The three new directors voted onto the Airgas board through the Air Products proxy fight decided to support the board's decision to uphold the poison pill and thereby thwart the Air Products offer. Presumably, this was quite a shock to Air Products, which had spent millions on their election. American voters know that feeling well when their elected politicians change course once in office.

Even more startling, by the end of 2010 after repeated increases in the price to be paid in Air Products' tender offer, more than 50 percent of the Airgas stock had been sold to arbitrageurs at close to the $70 per share tender price. Thus, the majority of Airgas' stockholders wanted its board to redeem the pill, let the tender offer proceed and make a quick profit. But still, the Airgas board said "no."

On Feb. 15, after a full trial, the Delaware Court of Chancery refused to overrule the Airgas board, and the poison pill remained in place. Air Products then withdrew its tender offer and limped home, many millions of dollars poorer for all its efforts.

Former Chancellor William B. Chandler's 151-page opinion has 514 footnotes and has justifiably been hailed as a model of scholarship and judicial reasoning. As the chancellor made clear, he applied the Delaware law as it now exists -- even if he personally did not agree with the Airgas board's decision. The chancellor wrote that he favors letting a majority of the stockholders decide if a hostile bid should be accepted, at least when they are fully informed about their company and have adequate time to decide what to do. On the other hand, letting the arbitrageurs who hold 51 percent of the stock make that decision permits them to let the 49 percent long-term stockholders be forced out in the cash-out merger that will follow the tender offer. So the debate will continue.

So what might explain the interest in this case?

The arguments over hostile takeover defenses raise political questions at the heart of much debate throughout American history. Because these questions arise in the context of a business dispute, we may not consciously recognize the importance of the issues involved. But, under the surface at least, many of us sense the outcome of these business disputes has broader implications than just the immediate results for the parties involved. Hence, we are interested in whether a poison pill should be upheld, even if we are not quite sure why we care.

At the heart of the Air Products/Airgas dispute is a fundamental question: How do we want American corporations to be governed? Do we want to have a pure democratic model where the majority of the shareholders decide whether to take a hostile bid? Or do we want a more republican model, where the shareholders' elected representatives, the board of directors, cast the deciding votes on whether a takeover should be accepted? That is a question much too big for this short article to even begin to address. But, that is the question that lies at the heart of our fascination with corporate takeover law.

Corporate law is the constitutional law for an American business corporation. It allocates power among the corporate constituencies. It even protects minority rights, such as by imposing fiduciary duties on those in actual control of a company. The allocation of power and the protection of individual rights is what the U.S. Constitution is all about. When similar issues are raised in a battle for control of a corporation, it is no wonder that even those on the sidelines want to watch the game.

Edward M. McNally is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He practices primarily in the Delaware Superior Court and Court of Chancery handling disputes involving contracts, business torts and managers and stakeholders of Delaware business organizations. The views expressed herein are his alone and not those of his firm or any of the firm's clients. He can be contacted by e-mailing emcnally@morrisjames.com.