Air Products v. Airgas

Facts & Background Information1

Air Products is a Delaware corporation headquartered in Allentown, Pennsylvania that serves technology, energy, industrial and healthcare customers globally. It offers a unique portfolio of products, services and solutions that include atmospheric gases, process and specialty gases, performance materials, equipment and services. Air Products is the world’s largest supplier of hydrogen and helium, and it has also built leading positions in growth markets. Founded in 1940 on the concept of “on-site” production and sale of industrial gases, Air Products revolutionized the sale of industrial gases by building gas generating facilities adjacent to large-volume gas users, thereby reducing distribution costs. Today, with annual revenues of $8.3 billion and approximately 18,900 employees, the company provides a wide range of services and operates in over forty countries around the world. As of February 2011, Air Products owned approximately 2% of Airgas’s outstanding common stock.

Air Products first became interested in a transaction with Airgas in 2007, but did not pursue a transaction at that time because Airgas’s stock price was too high. Then the global recession hit, and in the spring or summer of 2009, Air Products’ interest in Airgas was reignited. On October 15, 2009, the CEOs of Airgas and Air Products met to discuss Air Products’ interest in a potential business combination with Airgas. Air Products proposed a $60 per share all equity deal. Airgas’s CEO noted that it was “not a good time” to sell the company but that he would nevertheless convey the proposal to the Airgas board. After considering the strategic plan presented by Air Products and a “discounted future stock price analysis” prepared by management, the board determined that $60 was “just so far below what we thought fair value was” that it would be harmful to Airgas’s stockholders if the board sat down with Air Products, and formally rejected the offer.

In December 2007, Air Products sent a revised proposal, raising Air Products’ offer to an implied value of $62 per share in a cash-and-stock transaction, and reiterating Air Products’ “continued strong interest in a business combination with Airgas.” The board subsequently rejected this offer as well.  By late January 2010, it was becoming clear that Air Products’ private attempts to negotiate with the Airgas board were going nowhere. The Airgas board felt that it was “precisely the wrong time” to sell the company and thus it continued to reject Air Products’ advances. So, Air Products decided to take its offer directly to the Airgas stockholders. On February 11, 2010, Air Products launched a tender offer for all outstanding shares of Airgas common stock on the terms announced in its February 4 letter—$60 per share, all-cash, structurally non-coercive, non-discriminatory, and backed by secured financing. At the time, $60 was a 38 percent premium to the closing price of Airgas shares. On February 4. In a 14D–9 filed with the SEC on February 22, 2010, the Airgas board unanimously recommended that its shareholders not tender into Air Products’ offer because it “grossly undervalues Airgas”, citing inadequacy opinions by its advisors Goldman Sachs and Merrill Lynch.

At the time of the offer, Airgas had several anti-takeover devices in place. The first was a staggered board, consisting of nine members divided into three equal classes with one class (three directors) up for election each year. Eight of the nine directors were independent outside directors. In addition to its staggered board, Airgas had three main takeover defenses: (1) a shareholder rights plan (“poison pill”) with a 15% triggering threshold, (2) Airgas had not opted out of Delaware General Corporation Law (“DGCL”) § 203, which prohibits business combinations with any interested stockholder for a period of three years following the time that such stockholder became an interested stockholder, unless certain conditions are met,2 and (3) Airgas’s Certificate of Incorporation included a supermajority merger approval provision for certain business combinations. Namely, any merger with an “Interested Stockholder” (defined as a stockholder who beneficially owns 20% or more of the voting power of Airgas’s outstanding voting stock) requires the approval of 67% or more of the voting power of the then-outstanding stock entitled to vote, unless approved by a majority of the disinterested directors or certain fair price and procedure requirements are met.

1Facts are excerpted from the third Airgas opinion, Air Products & Chemicals, Inc. v. Airgas, Inc., 16 A.3d 48 (Del. Ch. 2011).

All cases have been edited for length, and footnotes have been renumbered. 2 See 8 Del. C. § 203.

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A staggered board combined with a shareholder rights plan allows the board to consider long-term interests beyond immediate shareholder desires and prevents short-term decision making. Moreover, as a result of these protections, Air Products would need majority consent of the Airgas board to redeem the shareholder rights plan for its tender offer to succeed. If the Airgas board refused, Air Products’ primary route to acquire the company was to replace a majority of the Airgas board through a proxy contest. The newly reconstituted board would then redeem the shareholder rights plan. However, the staggered board would require Air Products to initiate two successive proxy contests to elect a majority of Airgas directors. If Airgas stuck to its regular meeting schedule, this could take up to two years as Air Products waited for each annual meeting of Airgas shareholders.

On March 13, 2010, Air Products took steps towards doing just that by nominating a slate of three independent directors for election at the Airgas 2010 annual meeting. Air Products made clear in its proxy materials that its nominees to the Airgas board were independent and would act in the Airgas stockholders’ best interests. Air Products told the Airgas stockholders that “the election of the Air Products Nominees ... will establish an Airgas Board that is more likely to act in your best interests.” Air Products actively promoted the independence of its slate.

In addition to its proposed slate of directors, Air Products also announced that it was seeking approval by Airgas stockholders of three bylaw proposals that would:

(1) Amend Airgas’s bylaws to require Airgas to hold its 2011 annual meeting and all subsequent annual shareholder meetings in the month of January;

(2) Amend Airgas’ bylaws to limit the Airgas Board’s ability to reseat directors not elected by Airgas shareholders at the annual meeting (excluding the CEO); and(3) Repeal all bylaw amendments adopted by the Airgas Board after April 7, 2010.

 Over the next several months leading up to Airgas’s 2010 annual meeting, both Air Products and Airgas proceeded to engage in a protracted “high-visibility proxy contest widely covered by the media,” during which the parties aggressively made their respective cases to the Airgas stockholders. Both Airgas and Air Products made numerous SEC filings, press releases and public statements regarding their views on the merits of Air Products’ offer.

The aim of these bylaw amendments was to create legal end-runs around the staggered board and shorten the amount of time it would take Air Products to take over the Airgas board. Airgas had previously held its annual meetings in late July or early August. Though the date for Airgas’s next meeting was not set, under Delaware law, it could be no later than thirteen months after the previous one, meaning that Airgas’s 2011 meeting could be held at any time prior to September 2011. If Air Products succeeded in moving the 2011 annual meeting to the month of January, the net effect would be that Airgas would have two director elections within four months, shortening the time it would take for Air Products to elect a majority of directors by nine to ten months.

In response, in April 2010, the Airgas board amended Article II of the company’s bylaws (which addressed the timing of Airgas’s annual meetings), giving the board the ability to push back Airgas’s 2010 annual meeting. Previously, the bylaws required that the annual meeting be held within five months of the end of Airgas’s fiscal year—March—which would make August the annual meeting deadline. The amendment allowed the meeting to be held “on such date as the Board of Directors shall fix.” In other words, the board gave itself full discretion to set the date of the annual meeting as it saw fit. As it turns out, the reason the board pushed back the meeting date was to buy itself more time to “provide information to stockholders” before the annual meeting, as well as more time to “demonstrate performance of the company.” The annual meeting was scheduled for September 15, 2010.  On July 8, 2010, Air Products raised its offer to $63.50. Other than price, all other material terms of the offer remained unchanged. The following day, McGlade sent a letter to the Airgas board reiterating (once again) Air Products’ willingness to negotiate, and inviting the Airgas board and its advisors to sit down with Air Products “to discuss completing the transaction in the best interests of the shareholders of both companies.” After two telephonic board meetings and written inadequacy opinions from their financial advisors, Airgas filed an amendment to its 14D-9 on July 21, 2010, rejecting the $63.50 offer as “grossly inadequate” and recommending that Airgas stockholders not tender their shares. In this filing, Airgas set out many of the reasons for its recommendation, including its view that the offer “grossly undervalue[d]” Airgas because it did not reflect the value of Airgas’s future prospects and strategic plans, among many other reasons. Two days later, on July 23, 2010, Airgas filed its

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definitive proxy statement for the September annual meeting, urging stockholders to vote against the three Air Products Nominees and the bylaw amendments and to wait until “Airgas’s growth potential can be fully demonstrated and reflected in its results.”

Both parties continued to engage in fervent lobbying for their respective positions in preparation for the September 2010 board meeting. On September 6, 2010, Air Products further increased its offer to $65.50 per share. Again, the rest of the terms and conditions of the February 11, 2010 offer remained the same. In connection with this increased offer, Air Products threatened to walk if the Airgas stockholders did not elect the three Air Products Nominees to the Airgas board and vote in favor of Air Products’ proposed bylaw amendments at the 2010 annual meeting. However, on September 8, the Airgas board once again unanimously rejected the $65.50 offer as inadequate. On September 10, in advance of the annual meeting, members of the Airgas board and its financial advisers held a series of meetings with about 25–30 Airgas stockholders—mostly arbs, hedge funds, and institutional holders. At every meeting, the sentiment was the same, “Why don’t you guys go negotiate, sit down with Air Products.” The answer was simple: the offer was unreasonably low; it was not a place to begin any serious negotiations about fair value, though the board indicated a willingness to enter into discussions if Air Products offered at least $70. Although none of the stockholders attending these meetings said that they wanted Airgas to do a deal with Air Products at $65.50, the general sentiment was not, “Hell, no, we don’t want you to even talk to these people if they’re at 65.50”—rather, the “clear message [was:] With 65.50 on the table, the stockholders wanted the parties to engage.”

On September 15, 2010, Airgas’s 2010 annual meeting was held. The Airgas stockholders elected all three of the Air Products Nominees to the board, and all three of Air Products’ bylaw proposals were adopted by a majority of the shares voted. After the annual meeting results were preliminarily calculated, Airgas immediately filed suit against Air Products in the Delaware Court of Chancery to invalidate the January meeting bylaw. This was the subject of the first Airgas opinion.

Airgas Inc. v. Air Products and Chemicals, Inc.3 Delaware Chancery Court, October 2010

Chancellor Chandler begins,

“In this case of apparent first impression, I confront this question: whether a bylaw amendment proposed by Air Products and Chemicals, Inc. that would cause Airgas, Inc.’s annual meetings to be held each year in the month of January, as opposed to approximately seven months later (August) when Airgas’s annual meetings have historically been held, is valid under Delaware law. Of particular concern is whether Airgas, Inc.’s 2011 annual meeting may be held on January 18, 2011, barely four months after its 2010 annual meeting was held. […]

Airgas challenges the validity of the annual meeting bylaw under Delaware law, and the parties take opposing stances on whether the bylaw violates Sections 141(d), 141(k), and 211 of the Delaware General Corporation Law (“DGCL”). Also in dispute is whether the bylaw violates Airgas’s charter. The key issue here is whether the bylaw would cut short the Airgas directors’ “full term” on Airgas’s classified board by moving up the annual meeting to take place earlier in the year. Much of this debate over the validity of the bylaw boils down to a semantics war over the meaning of one word: “annual.” Specifically, in the context of an “annual meeting” that, depending on when it is held, could have the effect of altering the length of a director’s tenure on a staggered board, does the term “annual” mean “separated by approximately twelve months” or does it simply mean “occurring once a year”?”

First, Chancellor Chandler analyzed the validity of the bylaw under the Airgas charter. At issue was the definition of the length of each director’s term, which states, in relevant part.:

3 Airgas, Inc. v. Air Products & Chemicals, Inc., CIV.A. 5817-CC, 2010 WL 3960599 (Del. Ch. Oct. 8, 2010) rev'd, 8 A.3d 1182 (Del. 2010).

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“At each annual meeting of the stockholders of the Corporation, the successors to the class of Directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election.”

The main issue was the definition of the word “annual”. Airgas contended that this meant what amounted to approximately one calendar year, or about 365 days, and a “full term” of a class of directors is approximately three years. In fact, since going public in 1986, Airgas’s annual meetings had taken place between July 28 and September 15 of each year. Moreover, the shortest period of time between any two annual meetings was 11 months and 26 days, while the longest was 12 months and 28 days. Accordingly, through 2007, every class of directors elected by the Airgas stockholders at a given annual meeting has served a term of approximately three years. Thus, Airgas argued that the next annual meeting must take place “around” August or September 2011.  However, Air Products noted that neither the word “annual” nor the word “year” is defined in Airgas’s charter. As such, they argued that the locution “full term” does not specify a 36-month term, an approximately three-year term, or any other more or less precise length of time for which a director must hold office. Air Products contended that a “full term” was only defined as expiring “at the annual meeting of the stockholders held in the third year following the year of their election.” The defendants argued that had Airgas “wished to prescribe a more specific time period for its directors’ terms, it could have done so.” But, because Airgas did not specify any particular term length, Air Products argued that moving the annual meeting to January did not conflict with any provision of the Airgas charter.

In analyzing the meaning of this provision, Chancellor Chandler favored a contract interpretation of bylaws.

“Corporate charters and by-laws are contracts among the shareholders of a corporation and the general rules of contract interpretation are held to apply.”4 When the issue before the Court involves the interpretation of a contract, as it does here, the question is a purely legal one if the contract is unambiguous as to its terms.5 In interpreting charter provisions, “[c]ourts must give effect to the intent of the parties as revealed by the language of the certificate and the circumstances surrounding its creation and adoption,” 6 and the “common or ordinary meaning” of that language is what controls.7 As this Court has previously held, when presented with any ambiguity in interpreting bylaws, “doubt is resolved in favor of the stockholders’ electoral rights.”8

Ultimately, he found that the bylaw did not violate the Airgas charter as it was written. He begins by acknowledging the ambiguity in the provision.

“Airgas’s charter provision is not crystal clear on its face. A “full term” expires at the “annual meeting” in the “third year” following a director’s year of election. The absence of a definition of annual, year, or full term leads to this puzzle. Does a “full term” contemplate a durationally defined three year period as Airgas suggests? The charter does not explicitly say so. Then, if a “full term” expires at the “annual meeting,” what does “annual” mean-yearly? In turn, if “annual” means “separated by about a year,” does that mean fiscal year? Calendar year? […] The lack of a clear definition of these terms in the charter mandates my treatment of them as ambiguous terms to be viewed in the light most favorable to the stockholder franchise.

 

4 Centaur Partners, IV v. Nat’l Intergroup, Inc., 582 A.2d 923 (Del.1990) (citing Berlin v. Emerald Partners, 552 A.2d 482, 488 (Del.1988); Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 342-43 (Del.1983); Ellingwood v. Wolf’s Head Oil Refining Co., 38 A.2d 743, 747 (Del.1944)).5 JANA Master Fund, 954 A.2d at 338; United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810, 829-30 (Del.Ch.2007).6 Centaur Partners, 582 A.2d at 928 (citing Waggoner v. Laster, 581 A.2d 1127, 1134 (Del.1990)); see also Citadel Holding Corp. v. Roven, 603 A.2d 818, 822 (Del.1992) (“It is an elementary canon of contract construction that the intent of the parties must be ascertained from the language of the contract.”).7 In re IAC/InterActive Corp., 948 A.2d 471, 494 (Del.Ch.2008).8 JANA Master Fund, 954 A.2d at 339 & n. 16; Openwave Sys. Inc. v. Harbinger Capital Partners Master Fund I, Ltd., 924 A.2d 228, 239 (Del.Ch.2007); see also Harrah’s Entm’t, Inc. v. JCC Holding Co., 802 A.2d 294, 310 (Del.Ch.2002) (“When a corporate charter is alleged to contain a restriction on the fundamental electoral rights of stockholders ... it has been said that the restriction must be ‘clear and unambiguous’ to be enforceable. The policy basis for this rule of construction rests in the ‘belief that the shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests.’ ”) (quoting Centaur Partners, 582 A.2d at 927).

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Construing the ambiguous terms in that way, if the “full term” of directors does expire at the “annual meeting” in the “third year” following their year of election, I now turn to what is meant by the “annual” meeting. Plaintiffs contend that “annual” must mean separated by approximately twelve months, while defendant argues that “annual” means once a year.

In order to reconcile the differences, Chancellor Chandler turned to the dictionary definitions of “annual” and “year”, finding that “annual” was defined as “covering the period of a year” or “occurring or happening every year or once a year.”, while “year” was defined as a period of about 365 days. Accordingly, he found that, “construing the ambiguous terms of the charter in favor of the shareholder franchise, “annual” in this context must mean occurring once a year.” The question of how to interpret “year” was slightly more difficult, however.

“[T]he charter and bylaws are ambiguous as to whether directors’ terms run in accordance with a calendar year or a fiscal year. Therefore, under the “rule of construction in favor of franchise rights,”9 I cannot read the word “fiscal” into the charter, and must instead construe the ambiguous terms against the board, which leads to my conclusion that Airgas’s annual meeting cycle can validly run on a calendar year basis and still be consistent with the charter.”10

Moreover, he was not persuaded by Airgas’s historical director term lengths.

“Airgas similarly could have defined “annual meeting” elsewhere in its charter or bylaws to require a minimum durational interval between meetings (i.e. “annual meetings must be held no less than nine months apart”). It could have said that directors shall serve “three-year terms.” Had it done any of those things, then a bylaw shortening such an explicitly defined “full term” would have conflicted with its explicit provisions and thereby would have been invalid under Airgas’s charter. Airgas, however, did not clearly define these terms. Airgas’s charter and bylaws simply say that the successor shall take the place of any director whose term has expired “in the third year” following the year of election.

As such, a January 18, 2011 annual meeting would be the “2011 annual meeting.” 2011 is the third “year” after 2008. Successors to the 2008 class can be elected in the “third year following the year of their election” which is 2011. Thus, the bylaw does not violate Airgas’s charter as written.”

Next, Chancellor Chandler analyzed the validity of the bylaw amendment under Delaware law. Airgas argued that the bylaw violated DGCL Sections 141(d), 141(k), and 211. DGCL Section 141(d) authorizes corporations to adopt a staggered board of up to three classes with the following terms:

[T]he term of office of those of the first class to expire at the first annual meeting held after such classification becomes effective; of the second class 1 year thereafter; of the third class 2 years thereafter; and at each annual election held after such classification becomes effective, directors shall be chosen for a full term, as the case may be, to succeed those whose terms expire.11

However, because the DGCL does not explicitly define when a ‘full term’ expires, a specific time length for the word “annual” cannot be read into the statute. Chandler holds,

“Simply because the statute refers to “years” to separate the initial two “annual meetings” in which classification becomes effective, does not automatically mean that “annual meeting” equals “approximately one year apart”-had the General Assembly wanted to say that, it would have.[…] [T]here is no statutory requirement that there be a durational minimum amount of time between annual elections or annual meetings, unless it is so specified in a company’s bylaws or charter. […]Thus, on Airgas’s classified board, the directors whose terms expire at the next election will have served a “full term” at the 2011 “annual

9 Harrah’s Entm’t, Inc. v. JCC Holding Co., 802 A.2d 294, 310 (Del.Ch.2002); see also JANA Master Fund, 954 A.2d at 345-46.10 To be sure, this ruling that under the language of Airgas’s charter, its annual meeting cycle could be read to run on a calendar year is limited to the specific language used in the Airgas charter. That is not to suggest that “annual meetings” under Section 211 or any provision of the DGCL must be read to run on a calendar year. Other charters for other companies are not implicated, and they can adjust their charters and/or bylaws accordingly if they have a similar ambiguity.11 8 Del. C. § 141(d).

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meeting,” regardless of whether that meeting takes place earlier in the year or later in the year.”

Section 141(k) is the provision on removal of directors. It provides that, in general, “[a]ny director or the entire board of directors may be removed, with or without cause,” by a majority of the shares entitled to vote at an election of directors. For companies with staggered boards, however, “[u]nless the certificate of incorporation otherwise provides ... stockholders may effect such removal only for cause.”

Airgas argued that Air Products’ bylaw amendment was invalid because it would “[cut] short the “full term” of the directors’ up for election at the 2011 annual meeting” and as such, “the bylaw constitutes an improper removal under Section 141(k)(1), as it is both without cause and without 67% of the vote of Airgas’s stockholders as required for removal under Airgas’s charter.” The court did not find this persuasive, noting that, “Because under Airgas’s charter, the directors’ “full term” expires at the 2011 “annual meeting,” there is no removal problem.” Responding to the second prong of their argument, regarding the lack of a vote, the court holds as follows:

“While it is true that under Airgas’s charter, 33% of the stockholders could call a special meeting to remove the directors by a 67% supermajority vote, that provision governs “removal” of directors and is a separate and distinct issue from the question of what constitutes a “full term” under Airgas’s charter.”

Finally, Airgas cites DGCL Section 211(b), which provides that “an annual meeting of stockholders shall be held for the election of directors on a date and at a time designated by or in the manner provided by the bylaws” and Section 211(c), which provides that annual meetings cannot be separated by greater than thirteen months, arguing that the “policy thrust” of Section 211 is “that corporations should hold annual meetings of stockholders.”

Similarly, the court finds that had the plaintiffs wanted to establish a specific period of time that was required between meetings, they could have done so explicitly in their bylaws, but “the default rules in Delaware do not require waiting a “year,” or “twelve months” or any set amount of time from one annual meeting to the next.” Moreover, while Section 211(c) “explicitly prohibits holding the annual meeting later than thirteen months after the last annual meeting, […] [t]he statute does not explicitly prohibit the annual meeting interval from being shortened by any amount of time.”

Striking down Airgas’s policy argument, the court cites the policy behind DGCL 211 as, “concern for corporate democracy”. The court argues that the mechanisms of the statute as it is written, combined with the equitable power of the court to is enough to prevent the sort of abuse that Airgas is concerned with:

“The statute is aimed at preventing board entrenchment by ensuring that stockholders have an opportunity to have their voices heard and to hold directors accountable.12 This thirteen-month period also limits gamesmanship by insurgents. That is, insurgents who make a tactical decision to move an annual meeting forward in the year do not have unlimited authority to keep changing the dates as it suits them. […] If, once in office, the insurgents engage in musical meeting games advancing or delaying meetings for entrenchment, disenfranchisement, or other improper purposes, this Court’s broad equitable powers would have bite, as would the thirteen month limit under Section 211(c). Equity stands ready to thwart misuse or abuse by directors or by insurgents.13”

12 See MM Cos., Inc. v. Liquid Audio, Inc., 813 A.2d 1118, 1127 (Del.2003) (“Maintaining a proper balance in the allocation of power between the stockholders’ right to elect directors and the board of directors’ right to manage the corporation is dependent upon the stockholders’ unimpeded right to vote effectively in an election of directors.... [The Delaware Supreme] Court and the Court of Chancery have remained assiduous in carefully reviewing any board actions designed to interfere with or impede the effective exercise of corporate democracy by shareholders, especially in an election of directors.”) (citing Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1378 (Del.1995); Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 659-61 (Del.Ch.1988); In re Gaylord Container Corp. S’holders Litig., 753 A.2d 462 (Del.Ch.2000)).13 See Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del.1971) (holding that attempts by a board to “utilize the corporate machinery and the Delaware Law for the purpose of perpetuating itself in office [and] for the purpose of obstructing the legitimate efforts of dissident stockholders in the exercise of their rights to undertake a proxy contest against management [ ] are inequitable purposes, contrary to established principles of corporate democracy.”). Thus, in Schnell, the Court held that the advancement by directors of a bylaw date of a stockholders’ meeting was not permitted to stand for inequitable purposes. A court of equity has jurisdiction over corporate cases to make sure that fiduciaries don’t abuse their trust; not to protect fiduciaries. Absent a clear statutory or contractual right to a full year’s (or three years’) service, there exists no animating principle under

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In short, the court finds that the bylaw amendment is proper under both the Airgas charter and Delaware General Corporation Law.

Airgas, Inc. v. Air Products and Chemicals, Inc.14

Delaware Supreme Court, November 2010

However, the Delaware Supreme Court swiftly overturned this decision. While the Supreme Court agreed that the Airgas charter was ambiguous as to the definition of the duration of the directors’ terms, it found that the Chancery Court erred in not looking to extrinsic evidence to establish the definition. Citing AT & T Corp. v. Lillis, 953 A.2d 241, 253 (Del.2008), the court writes, “If there is more than one reasonable interpretation of a disputed contract term, consideration of extrinsic evidence is required to determine the meanings the parties intended.” What follows is an excerpt from the court’s opinion.

“We agree with the Court of Chancery that the relevant Charter language is ambiguous. But as more fully discussed below, there is overwhelming extrinsic evidence that under the Annual Meeting Term Alternative adopted by Airgas, a term of three years was intended. Therefore, the January Bylaw is inconsistent with Article 5, Section 1 of the Charter because it materially shortens the directors’ full three year term that the Charter language requires. It is settled Delaware law that a bylaw that is inconsistent with the corporation’s charter is invalid.15

Article 5, Section 1 of the Charter is Ambiguous

To determine whether the January Bylaw is inconsistent with the Charter, we first must address Article 5, Section 1 of the Charter. Although the Annual Meeting Term Alternative employed in that section is facially ambiguous, our precedents, and the common understanding of that language enable us to interpret that provision definitively. The “context clearly requires” the interpretation we adopt, because the relevant “legal phrase[ ] ha[s] a special meaning,”16 and because we “must give effect to the intent of the parties as revealed by the language of the certificate and the circumstances surrounding its creation and adoption.”17 “If there is more than one reasonable interpretation of a disputed contract term, consideration of extrinsic evidence is required to determine the meanings the parties intended.”18 Delaware courts often look to extrinsic evidence for the common understanding of ambiguous language whether in a statute, a rule or a contractual provision.19

The Annual Meeting Term Alternative and the Defined Term Alternative in PracticeAlthough practice and understanding do not control the issue before us, we agree with Airgas that “[p]ractice and understanding in the real world” are relevant. Here, we find the industry practice and understanding of similar charter language to be persuasive. Of the Fortune 500 Delaware corporations that have staggered boards, [79% of corporations using the Annual Meeting Term Alternative] expressly represent in their proxy statements that their

which I would strike down the January annual meeting bylaw. Indeed, plaintiffs suggest that “there is no need [for this Court] to decide here how far short of twelve months is too short”-only that four months is not long enough. But under plaintiffs’ definition of “annual,” just how far short of twelve months would be too short? If annual meetings are to be held “approximately every twelve months,” must amendments to annual meeting dates always go forward and never backwards? Pls.’ Reply Br. 20. If not, would an amendment to move the annual meeting back by one or two months be okay, but three months would not (i.e., only a “material shortening” is prohibited)? There is no basis in the DGCL or in our common law for such a ruling. To hold in favor of the target (plaintiffs) would require twisting the Schnell doctrine against stockholders to protect directors who have no clear right-statutory or contractual-to serve 365 days.14 Airgas, Inc. v. Air Products & Chemicals, Inc., 8 A.3d 1182 (Del. 2010).15 See 8 Del. C. § 109(b); Centaur Partners, 582 A.2d at 929.16 See Hibbert, 457 A.2d at 343.17 Centaur Partners, 582 A.2d at 928 (quoting Waggoner, 581 A.2d at 1134).18 AT & T Corp. v. Lillis, 953 A.2d 241, 253 (Del.2008) (quoting Appriva S’holder Litig. Co., LLC v. ev3, Inc., 937 A.2d 1275, 1291 (Del.2007)).19 See, e.g., Perry v. Berkley, 996 A.2d 1262, 1268 (Del.2010) (relying on Federal Rules of Evidence Manual to interpret Delaware Rules of Evidence); Hicklin v. Onyx Acceptance Corp., 970 A.2d 244, 251 (Del.2009) (relying on White & Summers treatise to interpret Delaware Uniform Commercial Code).

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staggered-board directors serve three year terms. Indeed, Air Products itself uses the Annual Meeting Term Alternative in its charter,20 and represents in its proxy statement that: “Our Board is divided into three classes for purposes of election, with three-year terms of office ending in successive years.”21

 [Moreover, out of the corporations with “de-staggered” boards], 97% of the corporations using the Annual Meeting Term Alternative represented in their proxy statements that their directors served three year terms. We cannot ignore this widespread corporate practice and understanding it represents. It supports a construction that the Annual Meeting Term Alternative is intended to provide that each class of directors serves three year terms. Air Products has offered no evidence to the contrary.

Model Forms and CommentaryThe ABA’s Public Company Organizational Documents: Model Forms and Commentary contains the following model charter provision for a staggered board that repeats the language that has been commonly understood for decades to provide for a three year term:

[…] At each annual meeting of stockholders beginning with the first annual meeting of stockholders following the filing of this certificate of incorporation, the successors of the class of directors whose terms expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in the third year following the year of their election, with each director in each such class to hold office until his or her successor is duly elected and qualified.22

 Notably, the accompanying commentary explains:

The DGCL permits the certificate of incorporation to provide that the board of directors may be divided into one, two, or three classes, with the term of office of those of the first class to expire at the annual meeting next ensuing; of the second class, one year thereafter; of the third class, two years thereafter, and at each annual election held after such classification and election, directors elected to succeed those whose terms expire shall be elected for a three-year term. DGCL Section 141(d).  Thus, this model form commentary confirms the understanding that the Annual Meeting Term Alternative intends to provide that each class of directors is elected for a three year term.

Other CommentaryThe DGCL, from its initial enactment in 1899, has authorized Delaware corporations to stagger the terms of their boards of directors.23 Although the statutory language has been amended from time to time, it has remained substantially the same over the past one hundred eleven years. As early as 1917, commentators understood that the staggered board provision contemplates three year director terms. In its 1917 pamphlet entitled Business Corporations Under the Laws of Delaware, the Corporation Trust Company commented: “[Directors] can be divided into one, two or three classes, to serve one, two and three years, and at each annual meeting the directors are elected to serve for the term of three years, so that one class expires each year. They are elected annually by the stockholders.”24 This historical understanding that directors are elected to serve for the term of three years is significant.  

20 Article 10 of Air Products’ charter provides: “... [T]he directors chosen to succeed those whose terms are expiring shall be identified as being of the same class as the directors whom they succeed and shall be elected for a term expiring at the third succeeding annual meeting of stockholders or thereafter in each case when their respective successors are elected and qualified....”21 See Air Products & Chemicals, Inc., Definitive Proxy Statement (Schedule 14A), at 6 (Dec. 10, 2009) (emphasis added), available at http:// www.sec.gov/Archives/edgar/data/2969/000119312509250372/ddef14a. htm.22 ABA, Public Company Organizational Documents: Model Forms and Commentary, 67 (2009) (emphasis added).23 See Insituform of N.Am., Inc. v. Chandler, 534 A.2d 257, 264-65 (Del.Ch.1987) (citing 21 Del. L. Ch. 273 § 20 (1899)). The 1899 statute provided as follows: “The directors of any corporation organized as aforesaid may, by a vote of the stockholders, be divided into one, two or three classes, the term of office of those of the first class to expire at the annual meeting next ensuing, of the second class one year thereafter, of the third class three years [sic] thereafter; and at each annual election held after such classification directors shall be chosen for a full term, as the case may be, to succeed those whose terms expire.”24 CORPORATION TRUST COMPANY OF AMERICA, BUSINESS CORPORATIONS UNDER THE LAWS OF DELAWARE 18-19 (4th ed.1917).

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Essential Enterprises v. Automatic Steel Products, Inc.25 This same understanding has long been embedded in Delaware case law addressing issues similar to those presented in this case. Fifty years ago, Chancellor Seitz considered in Essential Enterprises whether a bylaw that authorized the removal of directors by a majority stockholder vote was inconsistent with a charter provision that provided for staggered, three-year terms for the corporation’s directors. Although the charter provided that each class of directors “s hall be elected to hold office for the term of three years,”26 Chancellor Seitz found that the charter reflected the underlying intent of DGCL Section 141(d), and explained: “While the conflict considered is between the by-law and the certificate, the empowering statute is also involved since the certificate provision is formulated basically in the words of the statute.” Holding that the bylaw that authorized the removal of directors by a majority stockholder vote was inconsistent with the charter provision that authorized staggered three year terms for the corporation’s directors, Chancellor Seitz concluded: “Clearly the ‘full term’ visualized by the statute is a period of three years-not up to three years;” and the bylaw would “frustrate the plan and purpose behind the provision for staggered terms....”  Air Products contends that Essential Enterprises and this case are distinguishable […]. First, Air Products argues that Essential Enterprises was a director “removal” case, whereas this case is an “annual meeting” case. In form, the January Bylaw addresses the date of Airgas’s annual meeting. But in substance, the January Bylaw, like the bylaw in Essential Enterprises, has the effect of prematurely removing Airgas’s directors who would otherwise serve an additional eight months on Airgas’s board. In that significant respect this case is indistinguishable from Essential Enterprises. […] No party to this case has argued that DGCL Section 141(d) or the Airgas Charter requires that the three year terms be measured with mathematical precision.27 Nor is it necessary for us to define with exactitude the parameters of what deviation from 365 days (multiplied by 3) satisfies the Airgas Charter three year durational requirement. In this specific case, we may safely conclude that under any construction of “annual” within the intended meaning of the Airgas Charter or title 8, section 141(d) of the Delaware Code, four months does not qualify. In substance, the January Bylaw so extremely truncates the directors’ term as to constitute a de facto removal that is inconsistent with the Airgas Charter. The consequence of the January Bylaw is similar to the bylaw at issue in Essential Enterprises. It serves to “frustrate the plan and purpose behind the provision for [Airgas’s] staggered terms and [ ] it is incompatible with the pertinent language of the statute and the [Charter].”28 Accordingly, the January Bylaw is invalid not only because it impermissibly shortens the directors’ three year staggered terms as provided by Article 5, Section 1 of the Airgas Charter, but also because it amounted to a de facto removal without cause of those directors without the affirmative vote of 67% of the voting power of all shares entitled to vote, as Article 5, Section 3 of the Charter required.”

25 159 A.2d 288 (Del.Ch.1960).26 The charter provision at issue relevantly provided: “At each annual election, commencing at the next annual meeting of the stockholders, the successors to the class of directors whose term expires in that year shall be elected to hold office for the term of three years to succeed those whose term expires so that the term of office of one class of directors shall expire in each year.” Id. at 290.27 We recognize that Delaware corporations have some latitude in setting the date for an annual meeting. See 8 Del. C. § 211. Therefore, a director’s term may properly end at an annual meeting even though that director only served approximately three years rather than exactly three years. In this case, however, we need not decide the parameters of an approximate term of three years because twenty-eight months is not approximately three years.28 See Essential Enterprises, 159 A.2d at 291; 8 Del. C. § 141(d) (providing that “the term of office ... of the second class 1 year thereafter; of the third class 2 years thereafter....”).

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Air Products & Chemicals, Inc. v. Airgas, Inc.29

While the first two Airgas cases made their way through the courts, Air Products continued to make acquisition attempts for Airgas. In testimony during the October trial, Air Products admitted that although the $65.50 offer that was on the table at the time was not its best and final offer, if Airgas were stripped of its defenses at that point, Air Products would seek to close on that $65.50 offer. So Air Products was moving forward with an offer that admittedly was not its highest and aggressively seeking to remove Airgas’s defensive impediments standing in its way. At the same time, Airgas’s stockholders arguably knew all of this, and knew whatever information they needed to know in order to make an informed decision on whether they wanted to tender into Air Products’ “grossly inadequate” and not-yet-best offer.

On October 26, 2010, after announcing strong second-quarter earnings earlier that day, Airgas Chairman John van Roden sent a letter to the CEO of Air Products. In the letter, van Roden reiterated that each of Airgas’s ten directors—including the three newly-elected Air Products Nominees—“is of the view that the current Air Products offer of $65.50 per share is grossly inadequate.” Indeed, the board viewed the current offer price as not even close to the right price for a sale of the company. Nevertheless, the letter showed signs that the Airgas board was willing to negotiate with Air Products if Air Products could provide them with sufficient reason to believe that such negotiations would lead to a transaction at a price “meaningfully in excess of $70 per share.”

Van Roden followed up with a November 2, 2010 letter, in which he stated that, “the board has unanimously concluded that it believes that the value of Airgas in a sale is at least $78 per share”. Although Air Products felt that $78 per share was not “a realistic valuation for Airgas, nor ... anywhere near what [Air Products is] prepared to pay,” nevertheless, they agreed to a meeting because they felt it was “in the best interest of both companies.” The parties met on November 4, but no in fact a legitimate attempt between the parties to reach some sort of meeting of the minds despite their disagreements over Airgas’s value (as opposed to a litigation sham designed by defendants), and that both sides acted in good faith.

On December 7, 2010, the three new directors sent a letter to van Roden formally requesting the Airgas board to authorize their retention of independent outside legal counsel and financial advisors of their choice to assist them in the event Air Products raised its offer. The letter also suggested that statements about the “unanimous” views of the board on issues relating to Air Products’ offer may have “become misleading.” Specifically, they sought to clarify the statement in the November 2 letter about the $78 offer. Their letter stated, in relevant part:

“We do not believe that such an unequivocal statement is accurate. [W]e expressed our beliefs that proposing a price (any price, within reason) would be more likely to generate a constructive dialogue between [Airgas and Air Products” and potentially result in an increased offer from Air Products than would a figurative “stiff arm.” It was in that context, and only in that context, that we agreed to communicate a $78 price to Air Products. To be clear, at no time did any of us take the position that a $78 offer price was the price of admission to having any discussions with Air Products, nor did we agree that $78 was the minimum per share price at which Airgas might be purchased …”

The December 7 letter from the three newly-elected board members was actually “meant as leverage” in their efforts to prompt the rest of the board to act on their request for a third independent financial advisor. On December 10, the nine independent directors unanimously agreed to retain Credit Suisse as a third independent financial advisor to represent the full board.

Meanwhile, the Air Products board considered its options, and determined that, “increasing the offer to the Company’s best and final price could strengthen the case for removal of the poison pill.” Accordingly, on December 9, 2010, Air Products made its “best and final” offer for Airgas, raising its offer price to $70 per share.  On December 21, the Airgas board met to consider Air Products’ “best and final” offer. Management kicked off the meeting by presenting an updated five-year plan to the board. Bank of America Merrill Lynch, Goldman Sachs, and Credit Suisse all came to the conclusion that “the Air Products’ $70 offer was inadequate from a financial point of view.” After considering Airgas’s updated five-year plan and the inadequacy opinions of all three of the company’s

29 Air Products & Chemicals, Inc. v. Airgas, Inc., 16 A.3d 48 (Del. Ch. 2011)

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financial advisors, the Airgas board unanimously—including the Air Products Nominees—rejected the $70 offer. Interestingly, the Air Products Nominees were some of the most vocal opponents to the $70 offer.

In their revised 14D-9 filing, Airgas listed numerous reasons for its recommendation, in two pages of easy-to-read bullet points. These reasons included the Airgas board’s knowledge and experience in the industry; the board’s knowledge of Airgas’s financial condition and strategic plans, including current trends in the business and the expected future benefits of SAP and returns on other substantial capital investments that have yet to be realized; Airgas’s historical trading prices and strong position in the industry; the potential benefits of the transaction for Air Products, including synergies and accretion; the board’s consideration of views expressed by various stockholders; and the inadequacy opinions of its financial advisors.

Opinion

In response, Air Products, along with several shareholder plaintiffs, sued to ask the Court to order Airgas to redeem its poison pill and other defenses that were stopping Air Products from moving forward with its hostile offer, and to allow Airgas’s stockholders to decide for themselves whether they want to tender into Air Products’ (inadequate or not) $70 “best and final” offer.

Chancellor Chandler formulated the question before the court in the following manner:

“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?”

Ultimately, the Chancellor did NOT require the Airgas board to redeem the pill, he held that this did NOT mean that a corporation could simply get by with a “just say never” approach. Instead, he wrote:

“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.”

 

The Unocal Analysis

The Chancellor found that the proper standard of review was the Unocal standard:

Because of the “omnipresent specter” of entrenchment in takeover situations, it is well-settled that when a poison pill is being maintained as a defensive measure and a board is faced with a request to redeem the rights, the Unocal standard of enhanced judicial scrutiny applies.30 Under that legal framework, to justify its defensive measures, the target board must show (1) that it had “reasonable grounds for believing a danger to corporate policy and effectiveness existed” (i.e., the board must articulate a legally cognizable threat) and (2) that any board action taken in response to that threat is “reasonable in relation to the threat posed.”31

1. Has the Airgas Board Established That It Reasonably Perceived the Existence of a Legally Cognizable Threat?First, the court analyzed whether the board met the process requirement. “Under the first prong of Unocal, defendants bear the burden of showing that the Airgas board, “after a reasonable investigation ... determined in good faith, that the [Air Products offer] presented a threat ... that warranted a defensive response.”32 Not only were nine

30 Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del.1985), see also Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310, 335 (Del.Ch.2010) (“[I]t is settled law that the standard of review to be employed to address whether a poison pill is being exercised consistently with a board’s fiduciary duties is [ ] Unocal.”).31 Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del.1995) (citing Unocal, 493 A.2d at 955).32 Chesapeake v. Shore, 771 A.2d 293, 330 (Del.Ch.2000) (citing Unitrin, 651 A.2d at 1375).

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out of ten directors independent, but the board used no fewer than three outside independent financial advisers in coming to the conclusion that the Air Products offers were inadequate. Since “the presence of a majority of outside independent directors coupled with a showing of reliance on advice by legal and financial advisors, ‘constitute[s] a prima facie showing of good faith and reasonable investigation.’ ”33, the court had no trouble finding that Airgas’s process met “the threshold of showing good faith and reasonable investigation.”

2. What is the threat?The first part of Unocal review requires the board to show that its good faith and reasonable investigation ultimately gave the board “grounds for concluding that a threat to the corporate enterprise existed.” In evidentiary hearings, Airgas cited a great number of threats posed by the $70 Air Products offer.34 However, the only threat that the board actually discussed in its deliberations was “inadequate price”. Thus, “inadequate price coupled with the fact that a majority of Airgas’s stock is held by merger arbitrageurs who might be willing to tender into such an inadequate offer, [was] the only real “threat” alleged.”

3. Is this threat legally cognizable?Chancellor Chandler was reluctant to find that, “an inadequate all cash, all shares tender offer, with a back end commitment at the same price in cash, can be considered a continuing threat under Unocal.” As such, the offer was not structurally coercive because it did not involve “the risk that disparate treatment of non-tendering shareholders might distort shareholders’ tender decisions.”35

Nonetheless, he ended up holding that the bid was substantively coercive. Substantive coercion is defined as, “the risk that [Airgas’s] stockholders might accept [Air Products’] inadequate Offer because of ‘ignorance or mistaken belief’ regarding the Board’s assessment of the long-term value of [Airgas’s] stock.” In other words, if management advises stockholders, in good faith, that it believes Air Products’ hostile offer is inadequate because in its view the future earnings potential of the company is greater than the price offered, Airgas’s stockholders might nevertheless reject the board’s advice and tender.

The core of the threat was found in the composition of Airgas’s shareholders. Airgas had a large number (almost half) of “short term” shareholders—arbitrageurs who had bought into the stock when Air Products had announced its first interest in Airgas, when Airgas shares were trading at much lower prices. Such shareholders are more concerned about large returns than obtaining a fair value for Airgas shares. As a result, they “would be willing to tender into an inadequate offer because they stand to make a significant return on their investment even if the offer grossly undervalues Airgas in a sale.” The court found that, “the substantial ownership of Airgas stock by these short-term, deal-driven investors poses a threat to the company and its shareholders”—the threat that, because it is likely that the arbs would support the $70 offer, “shareholders will be coerced into tendering into an inadequate offer.”

While Chancellor Chandler expressed some qualms about this argument, asking, “if a majority of stockholders want to tender into an inadequately priced offer, is that substantive coercion?”, he ultimately recognized that Delaware precedent required him to find that the risk was real because the imminent threat of takeover essentially placed Airgas into Revlon mode. The opinion states, in relevant part:

“[T]here is at least some evidence in the record suggesting that this risk may be real. […] Based on the testimony of both expert witnesses, I find sufficient evidence that a majority of stockholders might be willing to tender their shares regardless of whether the price is adequate or not—thereby ceding control of Airgas to Air Products. This is a clear “risk” under the teachings of TW Services36 and Paramount37 because

33 Selectica Inc. v. Versata Enters., Inc., 2010 WL 703062, at *12 (Del.Ch. Feb. 26, 2010).34 “It is coercive. It is opportunistically timed. It presents the stockholders with a “prisoner’s dilemma.” It undervalues Airgas—it is a “clearly inadequate” price. The merger arbitrageurs who have bought into Airgas need to be “protected from themselves.” The arbs are a “threat” to the minority. The list goes on.”35 Ronald Gilson & Reinier Kraakman, Delaware’s Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus. Law. 247, 258 (1989).36 TW Servs., Inc. v. SWT Acquisition Corp., 1989 WL 20290 (Del.Ch. Mar. 2, 1989).37 Airgas’s board is not under “a fiduciary duty to jettison its plan and put the corporation’s future in the hands of its stockholders.” Paramount Commc’ns, Inc. v. Time, Inc., 571 A.2d 1140, 1149–50 (Del.1990).

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it would essentially thrust Airgas into Revlon mode.

4. Is the Continued Maintenance of Airgas’s Defensive Measures Proportionate to the “Threat” Posed by Air Products’ Offer?

The Chancellor notes that directors, “bear the burden of showing that their defenses are not preclusive or coercive, and if neither, that they fall within a “range of reasonableness.”

First, the Chancellor explained that a defensive measure is coercive “if it is “aimed at ‘cramming down’ on its shareholders a management-sponsored alternative.” In this respect, Airgas’s defensive measures were not coercive since Airgas was “specifically not trying to cram down a management sponsored alternative”. Rather, Airgas “simply want[ed] to maintain the status quo and manage the company for the long term.”

Next, the court examined whether the defensive measures were preclusive. A response is preclusive if it “makes a bidder’s ability to wage a successful proxy contest and gain control [of the target’s board] ... ‘realistically unattainable.’ ”38 Air Products argued that the measures were preclusive because the Airgas staggered board made “the possibility of Air Products obtaining control of the Airgas board and removing the pill realistically unattainable in the very near future”. The court cites the holding in Versata Enterprises, Inc. v. Selectica, Inc., “[W]e hold that the combination of a classified board and a Rights Plan do not constitute a preclusive defense.” Thus, Chancellor Chandler concludes, “I am thus bound by this clear precedent to proceed on the assumption that Airgas’s defensive measures are not preclusive if they delay Air Products from obtaining control of the Airgas board (even if that delay is significant) so long as obtaining control at some point in the future is realistically attainable.”

The Chancellor explains that an insurgent needs more than a theoretical possibility of obtaining control for control to be “realistically attainable” despite defensive measures. One way to achieve Air Products’ objective would be to run a proxy contest at the next annual meeting to elect a majority of the Airgas directors. The court found that this was realistic, despite the delay caused by the failed bylaw amendment.

“The reality is that obtaining a simple majority of the voting stock is significantly less burdensome than obtaining a supermajority vote of the outstanding shares, and considering the current composition of Airgas’s stockholders (and the fact that, as a result of that shareholder composition, a majority of the voting shares today would likely tender into Air Products’ $70 offer), if Air Products and those stockholders choose to stick around, an Air Products victory at the next annual meeting is very realistically attainable.

[…] If Air Products is unwilling to wait another eight months to run another slate of nominees, that is a business decision of the Air Products board, but as the Supreme Court has held, waiting until the next annual meeting “delay[s]—but [does] not prevent—[Air Products] from obtaining control of the board.”39 I thus am constrained to conclude that Airgas’s defensive measures are not preclusive.40”

Range of Reasonableness

38 Selectica,5 A.3d at 601 (citing Carmody v. Toll Bros., Inc., 723 A.2d 1180, 1195 (Del.Ch.1998)). Until Selectica, the preclusive test asked whether defensive measures rendered an effective proxy contest “ ‘mathematically impossible’ or ‘realistically unattainable,’ ” but since “realistically unattainable” subsumes “mathematically impossible,” the Supreme Court in Selectica explained that there is really “only one test of preclusivity: ‘realistically unattainable.’ ”39 Selectica, 5 A.3d at 604. Although the three Air Products Nominees from the September 2010 election all have joined the rest of the Airgas board in its current views on value, if Air Products nominated another slate of directors who were elected, there is no question that it would have “control” of the Airgas board—i.e. it will have nominated and elected the majority of the board members. There is no way to know at this point whether or not those three hypothetical New Air Products Nominees would join the rest of the board in its view, or whether the entire board would then decide to remove its defensive measures. The preclusivity test, though, is whether obtaining control of the board is realistically unattainable, and here I find that it is not. Considering whether some future hypothetical Air–Products–Controlled Airgas board would vote to redeem the pill is not the relevant inquiry.40 Our law would be more credible if the Supreme Court acknowledged that its later rulings have modified Moran and have allowed a board acting in good faith (and with a reasonable basis for believing that a tender offer is inadequate) to remit the bidder to the election process as its only recourse. The tender offer is in fact precluded and the only bypass of the pill is electing a new board. If that is the law, it would be best to be honest and abandon the pretense that preclusive action is per se unreasonable.

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Finally, the defensive measures must have been within a “range of reasonableness”. The reasonableness of a board’s response is “evaluated in the context of the specific threat identified—the “specific nature of the threat [ ] ‘sets the parameters for the range of permissible defensive tactics’ at any given time.”

The Chancellor emphasized that the record has amply indicated that the Airgas board was acting in good faith and with numerous independent advisors to come to the conclusion that the Air Products offer grossly undervalued Airgas. He notes that, “[t]his conclusion is bolstered by the fact that the three Air Products Nominees on the Airgas board have now wholeheartedly joined in the board’s determination—what is more, they believe it is their fiduciary duty to keep Airgas’s defenses in place.” Citing Unitrin, the Chancellor continues:

“Moreover, “[t]he fiduciary duty to manage a corporate enterprise includes the selection of a time frame for achievement of corporate goals. That duty may not be delegated to the stockholders.” The Court continued, “Directors are not obligated to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy.” Based on all of the foregoing factual findings, I cannot conclude that there is “clearly no basis” for the Airgas board’s belief in the sustainability of its long-term plan.”

“[…] The board is not “cramming down” a management-sponsored alternative—or any company-changing alternative. Instead, the board is simply maintaining the status quo, running the company for the long-term, and consistently showing improved financial results each passing quarter. The board’s actions do not forever preclude Air Products, or any bidder, from acquiring Airgas or from getting around Airgas’s defensive measures if the price is right. In the meantime, the board is preventing a change of control from occurring at an inadequate price. This course of action has been clearly recognized under Delaware law: “directors, when acting deliberately, in an informed way, and in the good faith pursuit of corporate interests, may follow a course designed to achieve long- term value even at the cost of immediate value maximization.””

Policy

Despite obvious misgivings, Chancellor Chandler felt compelled to rule in favor of Airgas, while making sure to limit the ruling to the facts of the case. At the same time, he seemed to be inviting the Delaware Supreme Court to reevaluate its rulings in this area. This portion of the opinion is reproduced in relevant part below:

“The contours of the debate have morphed slightly over the years, but the fundamental questions have remained. Can a board “just say no”? If so, when? How should the enhanced judicial standard of review be applied? What are the pill’s limits? And the ultimate question: Can a board “just say never”? In a 2002 article entitled Pills, Polls, and Professors Redux, Lipton wrote the following:

As the pill approaches its twentieth birthday, it is under attack from [various] groups of professors, each advocating a different form of shareholder poll, but each intended to eviscerate the protections afforded by the pill.... Upon reflection, I think it fair to conclude that the [ ] schools of academic opponents of the pill are not really opposed to the idea that the staggered board of the target of a hostile takeover bid may use the pill to “just say no.” Rather, their fundamental disagreement is with the theoretical possibility that the pill may enable a staggered board to “just say never.” However, as ... almost every [situation] in which a takeover bid was combined with a proxy fight show, the incidence of a target’s actually saying “never” is so rare as not to be a real-world problem. While [the various] professors’ attempts to undermine the protections of the pill is argued with force and considerable logic, none of their arguments comes close to overcoming the cardinal rule of public policy—particularly applicable to corporate law and corporate finance—“If it ain’t broke, don’t fix it.”41

Well, in this case, the Airgas board has continued to say “no” even after one proxy fight. So what Lipton has called the “largely theoretical possibility of continued resistance after loss of a proxy fight” is now a real-world situation. Vice Chancellor Strine recently posed Professor Bebchuk et al.’s Effective Staggered Board (“ESB”) hypothetical in Yucaipa:

41 Martin Lipton, Pills, Polls, and Professors Redux, 69 U. Chi. L.Rev. 1037, 1065 (2002) (emphasis added).

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[T]here is a plausible argument that a rights plan could be considered preclusive, based on an examination of real world market considerations, when a bidder who makes an all shares, structurally non-coercive offer has: (1) won a proxy contest for a third of the seats of a classified board; (2) is not able to proceed with its tender offer for another year because the incumbent board majority will not redeem the rights as to the offer; and (3) is required to take all the various economic risks that would come with maintaining the bid for another year.42

At that point, it is argued, it may be appropriate for a Court to order redemption of a poison pill. That hypothetical, however, is not exactly the case here for two main reasons. First, Air Products did not run a proxy slate running on a “let the shareholders decide” platform. Instead, they ran a slate committed to taking and independent look and deciding for themselves afresh whether to accept the bid. The Air Products Nominees apparently “changed teams” once elected to the Airgas board (I use that phrase loosely, recognizing that they joined the Airgas board on an “independent” slate with no particular mandate other than to see if a deal could be done). Once elected, they got inside and saw for themselves why the Airgas board and its advisors have so passionately and consistently argued that Air Products’ offer is too low (the SAP implementation, the as-yet-unrealized benefits from recent significant capital expenditures, the timing in which Airgas historically has emerged from recessions, the intrinsic value of this company, etc.). The incumbents now share in the rest of the board’s view that Air Products’ offer is inadequate—this is not a case where the insurgents want to redeem the pill but they are unable to convince the majority. This situation is different from the one posited by Vice Chancellor Strine and the three professors in their article, and I need not and do not address that scenario.

Second, Airgas does not have a true “ESB” as articulated by the professors. As discussed earlier, Airgas’s charter allows for 33% of the stockholders to call a special meeting and remove the board by a 67% vote of the outstanding shares. Thus, according to the professors, no court intervention would be necessary in this case. This factual distinction also further differentiates this case from the Yucaipa hypothetical.”

Conclusion

Chancellor Chandler concludes as follows:

“Directors of a corporation still owe fiduciary duties to all stockholders—this undoubtedly includes short-term as well as long-term holders. At the same time, a board cannot be forced into Revlon mode any time a hostile bidder makes a tender offer that is at a premium to market value. The mechanisms in place to get around the poison pill—even a poison pill in combination with a staggered board, which no doubt makes the process prohibitively more difficult—have been in place since 1985, when the Delaware Supreme Court first decided to uphold the pill as a legal defense to an unwanted bid. That is the current state of Delaware law until the Supreme Court changes it.”

Aftermath

Air Products ultimately abandoned its pursuit of Airgas immediately after the third opinion was handed down. A day later, the Airgas board announced a repurchase program for up to $300 million of its outstanding shares in order to demonstrate confidence in its long-term strategy.

42 Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310, 351 n. 229 (Del.Ch.2010) (citing Bebchuk et al. at 944–46); see also Leo E. Strine, Jr., The Professorial Bear Hug: The ESB Proposal As a Conscious Effort to Make the Delaware Courts Confront the Basic “Just Say No” Question, 55 Stan. L.Rev. 863, 877–79 (2002) (questioning whether the continued use of a pill could ever be deemed preclusive if it is considered non-preclusive to maintain a pill after a bidder has won an election for seats on an ESB).

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