Delaware Court of Chancery Gets Airgas Right

Stanley Keller is partner of Edwards Angell Palmer Dodge LLP. The Airgas case was previously discussed in an op-ed by Professor Lucian Bebchuk, available here, and a paper from the Program on Corporate Governance, available here. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Chancellor Chandler’s decision in Air Products and Chemicals Inc. v. Airgas, Inc. (Del. Ch., CA No. 5249-CC, 2/15/11) upholding the board’s maintenance of the company’s shareholder rights plan in the face of an unfriendly cash tender offer the board determined was inadequate has justifiably received a great deal of attention and analysis.  Despite his reluctance, I believe the Chancellor got it right.  By permitting the Airgas board to keep the rights plan in place under the facts of that case, he upheld the foundational director-centric model for governance of Delaware corporations and recognized the importance of long-term value creation as a critical focus for Delaware corporate enterprises.

The Delaware General Corporation Law clearly establishes the central role of directors in change-of-control transactions by requiring board approval for a merger (§ 251) or sale of assets (§ 271).  This legislative policy is appropriately recognized when the change-of-control transaction is in the form of a tender or exchange offer.  Treating like transactions alike finds support in the unified standard for review of change-of-control transactions promoted by Vice Chancellors Strine and Laster.  This approach makes complete sense and, in my judgment, extends to recognition of the important role directors play in protecting the interests of the corporation and all its shareholders in a change-of-control transaction, whether it be in the form of a merger, sale of assets or share exchange.  Recognition of the role of directors also dovetails with the responsibility imposed upon them to act reasonably and maximize value in these types of transactions, as required under Revlon.

The question posed by Airgas is often framed in terms of whether the directors should be able to prevent the shareholders from deciding to sell their shares when there is an all cash, fully disclosed, non-coercive offer that has been pending for a significant period of time.  While it is clear that ordinarily shareholders should be free to decide whether and on what terms to sell their shares, a change-of-control transaction involves a group decision that affects all shareholders, not just those wishing to sell.  Thus, in my view, the better question is what role the directors have to play in a change-of-control transaction, regardless of its form, to protect the interests of all shareholders.  I believe the right answer, as reflected in Airgas, is that they have a central role if the importance of long-term value creation in the interests of the corporation and all its shareholders is to be recognized.  Experience tells us that share accumulation by investors, such as arbitrageurs, with a short-term horizon occurs upon announcement of a proposed change-of-control transaction, and that these investors often are happy to sell at a small gain at the expense of the long-term interests of other shareholders.  Left unchecked, these investors can control the outcome.  It is the board, subject to enhanced judicial scrutiny, that can provide the essential check.

The Airgas decision did not validate the ability of boards to “just say no” or “just say never” but rather confirmed the ability of a board, acting in good faith and with proper process, to reasonably and on an informed basis determine that there is a threat to the corporation in the form of a materially inadequate price.  This determination is subject to judicial review under an enhanced scrutiny standard without the deference afforded by the business judgment rule.  The Airgas board was able to meet this standard in this particular circumstance.  Another board (and for that matter, the Airgas board on another occasion) might not.

Post a comment or leave a trackback: Trackback URL.

One Trackback

  1. […] HLS Forum on Corporate Governance and Financial Regulation: Delaware Court of Chancery Gets Airgas Right – In this post, Practice Center Contributor Stan Keller discusses Chancellor Chandler’s decision […]

Post a Comment

Your email is never published nor shared. Required fields are marked *


You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

  • Subscribe

  • Cosponsored By:

  • Supported By:

  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Robert J. Jackson, Jr.
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

  • Program on Corporate Governance Advisory Board

    William Ackman
    Peter Atkins
    Joseph Bachelder
    John Bader
    Allison Bennington
    Richard Brand
    Daniel Burch
    Richard Climan
    Jesse Cohn
    Isaac Corré
    Scott Davis
    John Finley
    David Fox
    Stephen Fraidin
    Byron Georgiou
    Carl Icahn
    Jack B. Jacobs
    Paula Loop
    David Millstone
    Theodore Mirvis
    James Morphy
    Toby Myerson
    Morton Pierce
    Barry Rosenstein
    Paul Rowe
    Rodman Ward