January 24, 2011
Poison pill in Delaware court on Tuesday
So, tomorrow Chancellor Chandler will take up the question of whether to order the Airgas board to pull its pill. Air Products, you'll remember, has been pursuing Airgas for many months now. Airgas has steadfastly said "No." In the fall Air Products elected three members to the board and got shareholders to vote to approve a new bylaw that would have moved up the next annual meeting to January - thereby cutting short the defense that time provides in the classified board. The Chancery Court upheld the bylaw change. But then, in a little bit of a stunner, the Delaware Supreme Court overruled the Chancery Court's opinion. The Chancellor, I assuming confident that his opinion wouldn't be overruled, had put off the question of whether to order the rights plan pulled to a date just past the accelerated shareholder meeting date. That was a nice way to avoid the question of the pulling the pill -- had the Chancery Court's opinion not been overruled, the shareholders would have met by now, and presumably, voted in a new majority for the board, thus making the question of the pill moot. The Delaware Supreme Court decision ensured that this was not to be.
So, Chancellor Chandler is put in the uncomfortable position of having to consider whether to order a board that has lost the first round in a proxy contest whether it must pull its rights plan. Of course, Chancellor Chandler is not opposed to issuing such an order in the right circumstances. In the Craigslist case he order the board to pull its pill. Craigslist was a bit of a unique case. How many closely-held firms have shareholder rights plans anyway? Probably just Craigslist. The Airgas case is more difficult. Why? Well because it's precisely the kind of case that the Chancery Court has studiously avoided hearing for year. In his 2002 paper, which is a response to a paper from Profs. Bebchuk, Coates, and Subramanian, Vice Chancellor Strine described just this scenario as the "professorial bear hug" intended to forces judges to deal directly with the fiduciary duty issues related to the pill.
The question the authors ask us to decide affirmatively is fundamental: Can control of the corporation be sold over the objections of a disinterested board that believes in good faith that the sale is inadvisable? That is, at bottom, the authors want to force the hand of the Delaware courts to decide, once and for all, that impartial and well-intentioned directors do not have the fiduciary authority to "just say no" for an indefinite--even perpetual--period to a noncoercive tender offer made to their company's shareholders. ...
... When the stockholders of a corporation with an ESB have expressed their desire to receive a fully funded, all-shares tender offer in a fair, noncoercive board election that was preceded by an adequate opportunity for the incumbent board to develop a better strategy and make their case to the target stockholders, does a well-motivated and well- informed majority of independent, incumbent directors who believe that the offer is inadequate have the power to block that tender offer by continuing to deploy a poison pill?
And that, in essence, is what is at stake tomorrow in Chancellor Chandler's courtroom. A couple of months ago, I predicted that we'd never get to see this day. I also predicted that the Del. Supreme Court wouldn't overturn Chancellor Chandler's bylaw decision and that the Pats would beat the Jets (not cover the spread, just beat them). Clearly, I'd be a mess if I had to make my living in Vegas, so I'm making no predictions. Chancellor Chandler has shown himself to be sufficiently peeved at being overruled in his earlier decision that I think most bets are off. I continue to be amazed that the Delaware Supreme Court wasn't able to look ahead to tomorrow and realize that by knocking down the bylaw they set up this Just-Say-No case to come before Chandler, and inevitably them. Why is that a better outcome than letting the bylaw survive? I don't know. Anyway, tune in tomorrow for all the fun.
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