Tuesday, February 8, 2011
Airgas will be back in a Delaware court today. I'll be dropping in and out of the proceedings thanks to the good people at CourtroomView Network and updating the blog regularly during the day.
Update: David Marcus reminds us that even if Chandler orders the pill pulled today, that Sec. 203 is still in play.
Air Products is now making the argument that pill has served its purpose and has should now be pulled to permit the shareholders to make a decision whether to accept the offer. The pill is - per Air Products - no longer proportional. Mr. Nachbar is essentially making the Interco argument. It's all about balance. Pills are not outlawed, but they are subject to limitations. The courts have rejected an ulimited use of the pill. Uh-oh...now he's showing a clip from The Deal of a recent interview with Marty Lipton recollecting the invention of the pill (we've previously posted that clip on this site and you can get it again here).
Citing a 1987 Marty Lipton article in the U Penn Law Review - Corporate Governance in the Age of Financial Corporatism - in which Nachbar argues that Lipton recginized there are limits to the valid use of pills and that under certain circumstances courts should require a pill to be redeemed. His quotes from the paper read like they came straight out of Air Products' brief. Ouch. Hey! Who's on trial here?! From the article (p75):
Thus, under conditions that ensure that a bidder is not abusing the tender offer process, the second generation pill allows the target's shareholders to determine the fate of the company after disclosure of all relevant information and with sufficient time to consider and act on such information.
Nachbar has moved on the Interco and Blasius. Back at Lipton again. This time citing his 2002 Chicago Law Review paper - Pills, Polls, and Professors Redux. Nachbar is making the point that all of the caveats in the paper that Lipton noted would be required before a pill should be pulled and the shareholders should be permitted to decide have all been met. He's using Lipton's own written record to argue that the defendants are moving the goal-posts.
Nachbar is giving a shout-out to Lucien Bebchuk's recent Airgas natural experiment paper. Chancellor Chandler wants to know if the Airgas experience is generalizable to all firms and is - playfully - suggesting Prof. Bebchuk write a paper on that topic. I think that was the point of Bebchuk's study, but whatever.
Citing the Shark Repellent data that only 11% of public firms now have pills in place -- presumbably that means that stockholders don't like pills. But, of the firms that don't have pills in place, how many could put one in place in less than 10 minutes during a board meeting? How about all of them. It's not a strong argument.
Wrapping up ... I think. His summary - ruling for Air Products won't end the world. On the other hand, ruling for Airgas means that any firm with a staggered board and a pill will forever be - essentially, if not absolutely - takeover proof. The defensive measures have long since served their purpose. It's time for the shareholders should decide. The board has offered no good reason why the shareholders should not be permitted to decide on an informed basis. The offer is non-coercive, the shareholders are informed, so he argues that Delaware law is "clear" that the continuing use of the pill is not a proportionate response to a non-extistent threat. Now, Nachbar sits and the court takes a 10 minute recess.
Back. Another Air Products Plaintiff shareholder attorney making an argument - sorry, don't know who she is [ed. Pamela Tikkelis]. In general, all the information is out there. There are no surprises, the offer is at a premium of any potential trading bands. All other options have been considered - LBO, recap, white knight - and rejected by the board. So, what threat is left? Not much. Potentially an injury to an informed minority - she recaps a colloquy between Chandler and McCausland.
OK, now we've moved on the the Airgas defense. Airgas' attorney stands up and says this is an easy case. The cases say that the board can take actions to defeat an offer, to kill it. The board is fully within its rights (and obligations) to use the pill to pursue the long term interests of the corporation. He points out that the Interco argument was specifically rejected in Paramount. The Supreme Court has made it clear that the board is not obliged to abandon a strategy unless there is no basis to sustain the corporate strategy. The corporate plan, he argues, is credible and one that Airgas has been pursuing since before the offer. It's not cooked up as a litigation strategy.
He asks - if the director has a duty to oppose an inadequate offer, how can it be a violation of those same duties when a board determines an offer is inadequate and fights against it. He's now pulling out the Air Products nominees and wielding them against APD. These guys were supposed to be independent and it turns out they were. They weren't puppets of APD and now they are also opposed to APD's offer. The new directors agreed with the incumbent directors. Ouch, again.
Buttering up Chandler by reading back to him the "highest authority" - Chandler's opinion in Unitrin. The three new directors agreed with the incumbents - therefore there is no basis that the board acted outside the realm of reasonableness. Anyway, if the shareholders don't like it, they vote out the entire board with a supermajority vote (citing Unocal and Aronson, 141(k), 211(b)). More buttering up of Chandler by talking approvingly of the Chancery Court opinion in Unitrin.
Now attacking APD's decision to decide to take the company through a strategy of getting control of the board through two annual meetings rather than using the supermajority route to oust the directors. The argument being - the reason that we're here at all is because APD decided to drag the process out, and try to low-ball shareholders. Key to that strategy was to put friendly directors on the board. Well, that didn't work out.
Let's see now going through and rebutting what he calls the plaintiff's campaign slogans. His point-by-point rebuttals are summarized in the slide below:
Going after the arbs: The board does not have a duty to short term stockholders - transient majority. It would be a terrible rule of law if a company must sell because of arbs - that companies must abandon plans and chase bids that are on the table rather than long-term shareholder value. Citing Dollar Thrifty - Delaware law does not require a sale whenever there is an offer on the table.
Ho-ho-ho we're showing video clips from Streetcar Named Desire!! Black and White - no colorized version for you. "Whoever you are...I've always depended on the kindness of strangers..." And the shareholders are supposed to be depending on the kindness of strangers... I get it. OK, that's fine the classroom, but let's keep the video clips out of the courtroom. Lunch? Chandler suggests popcorn. Back at 2pm.
OK, just dropping back into the arguments. Airgas is up arguing that the APD tender offer is coercive because of the involvement of arbs.
Airgas managers are in the best position to determine what is a good offer for shareholders. For example, look at the transformation of APD's directors. When they were on the outside they thought that APD's offer was fair. Once they got inside the tent and got more information than the shareholders they changed their mind.
Chancellor Chandler makign a point about what he meant by "best and final offer" in his communications to the parties.
An aside: They've not spent much time on this issue, yet but there's a question in the comments on 203 (see David Marcus above). Yes, that's still out there. I think this is a harder argument for APD to make. 203 is a statutory power. The language of the statute does not require any reasonableness standard be applied to a board's decision not to waive 203. I assume APD will argue that the court should read into 203 a reasonableness standard, but I think that will be a hard sell. We'll see, though.
.. OK, Airgas is still arguing that the APD best and final offer is not really a best and final offer. It's just a negotiating tactic - notwithstanding what APD has already told the court. It's all about "bester and finaler" offers... if best and final doesn't mean that, then the pill still has a purpose.
Airgas - investors do better when boards resist unwanted bids. Maybe. But, what if the bidder walks? I don't think the data is so uncategorical.
Anyway, Airgas has now moved onto the question of the threat analysis under Unocal. Again with the Chancery Court opinion in Unitrin!