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

Delaware Court of Chancery · 2011 · Corporations

CorporationsTakeover defensesPoison pillFiduciary dutiesUnocalpoison pillrights planhostile tender offer

Facts

Air Products launched a hostile, structurally non-coercive, all-cash, fully financed tender offer for all Airgas shares and ultimately raised the bid to $70 per share, calling it its 'best and final' offer. Airgas's board, composed of a majority of independent directors and advised by three outside financial advisors, unanimously concluded that $70 was clearly inadequate and that Airgas was worth at least $78 in a sale transaction; the three directors elected on Air Products' slate joined that conclusion after joining the board. Airgas kept in place a poison pill, a staggered board, and other defenses, even after Air Products won one election contest. The record showed Airgas stockholders were sophisticated and well-informed, but the board believed a majority might nevertheless tender into an inadequate offer, particularly because many shares were held by merger arbitrageurs.

Issue

May a Delaware target board, acting in good faith and with a reasonable basis, keep its poison pill in place to block a hostile, all-cash, fully financed, structurally non-coercive tender offer that the board believes is inadequate, even after a year has passed and the bidder has won one election contest? More specifically, did Airgas's continued refusal to redeem its pill satisfy Unocal enhanced scrutiny?

Rule

Under Unocal, when a board maintains a poison pill in response to a hostile tender offer, the board must show (1) reasonable grounds for believing a danger to corporate policy and effectiveness existed, demonstrated by good faith and reasonable investigation and by articulating a legally cognizable threat, and (2) that its defensive response was reasonable in relation to the threat posed. Under Delaware Supreme Court precedent as applied here, inadequate price can constitute a legally cognizable threat in the form of substantive coercion, and a board acting in good faith with a reasonable basis may keep a poison pill in place to block such an offer if the response is neither coercive nor preclusive and falls within a range of reasonableness.

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Harbor Peak Systems, a Delaware corporation based in Seattle, faces an unsolicited all-cash tender offer from North Vale Holdings for all outstanding shares. Harbor Peak's board, composed mostly of independent directors, keeps its poison pill in place after rejecting the bid as too low, and stockholders sue arguing the board's decision should be reviewed under the business judgment rule because the directors are independent and relied on outside advisors.

What is the best statement of the applicable standard of review?

Explanation. When a board maintains a poison pill in response to a hostile takeover bid, Delaware applies Unocal enhanced scrutiny, not the business judgment rule. Independence and advisor reliance help satisfy Unocal's first prong, but they do not eliminate enhanced scrutiny. The court expressly rejected the argument that independence alone returns the case to business judgment review.