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

Delaware Court of Chancery · Corporations

CorporationsTakeover defensesPoison pillFiduciary dutiesHostile tender offersUnocalpoison pillshareholder rights plan

Facts

Air Products launched a structurally non-coercive, all-cash, fully financed tender offer for all Airgas shares and eventually raised it to a stated "best and final" $70 per share. Airgas's board, composed mostly of independent directors and advised by three outside independent financial advisors, unanimously concluded that $70 was clearly inadequate and that Airgas was worth at least $78 in a sale. Airgas kept in place a poison pill, a staggered board, and other takeover defenses, even after Air Products won one election contest and placed three nominees on the Airgas board. Those nominees, after receiving inside information and additional advice, joined the rest of the board in concluding that the $70 offer was inadequate and that the pill should remain in place.

Issue

May a Delaware board, acting in good faith and on a reasonable basis, continue to maintain a poison pill against a structurally non-coercive, all-cash, fully financed hostile tender offer that the board believes is inadequate, even after stockholders are fully informed and the bidder has won one election contest? More specifically, does Delaware law permit the board to block such an offer under Unocal based on the threat of inadequate price and substantive coercion?

Rule

Under Delaware law, a board may not simply "just say no" to a hostile tender offer; its conduct is subject to Unocal enhanced scrutiny. To maintain a poison pill, the board must show reasonable grounds, after good-faith and reasonable investigation, for believing a threat to corporate policy and effectiveness exists, and its response must be reasonable in relation to that threat; inadequate price, coupled with the risk that stockholders may tender into that inadequate offer (substantive coercion), is a legally cognizable threat, and a board that in good faith and on a reasonable basis believes a bid is inadequate may continue to block it with a poison pill if its response is neither coercive nor preclusive and falls within a range of reasonableness.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Granite Harbor Systems, a Delaware corporation based in Seattle, receives a hostile all-cash, fully financed tender offer from North Basin Holdings for all outstanding shares. Granite Harbor's ten-member board is nine-tenths independent, two insurgent nominees recently elected by stockholders now agree the bid is too low after receiving inside information and advice from outside bankers, and the board keeps its poison pill in place.

If North Basin sues to force redemption of the poison pill, what standard of review should a Delaware court apply to the board's refusal?

Explanation. The majority opinion holds that a board maintaining a poison pill in response to a hostile tender offer is subject to Unocal enhanced scrutiny, not the business judgment rule. Independence and good faith help satisfy Unocal's first prong, but they do not eliminate the need for enhanced review. Nor does an all-cash hostile offer automatically trigger Revlon when the board is maintaining the status quo and not selling the company. (Derived from Airgas, Inc. v. Air Products and Chemicals, Inc. (n.d.).)