IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

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AIR PRODUCTS AND CHEMICALS, INC., Plaintiff, v. AIRGAS, INC., PETER MCCAUSLAND, JAMES W. HOVEY, PAULA A. SNEED, DAVID M. STOUT, ELLEN C. WOLF, W. THACHER BROWN, RICHARD C. ILL, LEE M. THOMAS AND JOHN C. VAN RODEN, JR., Defendants.

C.A. No. 5249-CC

IN RE AIRGAS INC. SHAREHOLDER LITIGATION

C.A. No. 5256-CC

DEFENDANTS’ SUPPLEMENTAL POST-TRIAL BRIEF IN RESPONSE TO THE COURT’S DECEMBER 2, 2010 LETTER ORDER

POTTER ANDERSON & CORROON LLP OF COUNSEL: Kenneth B. Forrest Theodore N. Mirvis Marc Wolinsky Joshua A. Naftalis Jasand Mock Charles D. Cording WACHTELL, LIPTON, ROSEN & KATZ 51 West 52nd Street New York, New York 10019 (212) 403-1000 Dated: December 10, 2010 Donald J. Wolfe, Jr. (No. 285) Kevin R. Shannon (No. 3137) Berton W. Ashman, Jr. (No. 4681) Ryan W. Browning (No. 4989) Hercules Plaza 1313 North Market Street, 6th Floor P.O. Box 951 Wilmington, Delaware 19801 (302) 984-6000

Attorneys for Defendants

TABLE OF CONTENTS Page THE SUPREME COURT’S BYLAW DECISION SUPPORTS THE AIRGAS BOARD’S USE OF THE COMPANY’S RIGHTS PLAN AND OTHER DEFENSES ................1 THE COURT’S NUMBERED QUESTIONS .................................................................................3 1. The claim that the Airgas Board breached its fiduciary duties by rejecting Air Products’ $65.50 offer is moot. There is no basis for the Board to issue any decision with respect to Air Products’ $70 offer.......................3 An inadequate offer is a cognizable threat under Unocal........................................5 Airgas does not presently intend to hold a special meeting in June 2011 and has not yet determined when it will hold its 2011 annual meeting.....................................................................................................................5 The unrebutted evidence demonstrates that Air Products could call a special meeting to attempt to remove the Airgas Board. .........................................6 Supreme Court precedent uniformly supports Airgas’ use of its rights plan.................................................................................................................8 Bedrock principles of Delaware law confirm the central role of a board in the takeover contest. ..........................................................................................10 Airgas’ shareholder profile consists of an unusually high percentage of arbs with highly leveraged positions......................................................................15 The market’s reaction to the Supreme Court’s bylaw ruling confirms the Board’s view on Airgas’ standalone value and the inadequacy of Air Products’ offer .................................................................................................20 The equities strongly support keeping Airgas’ rights plan in place to ensure that the Board can extract full and fair value in any sale of the company.................................................................................................................21

2. 3.

4. 5. 6. 7. 8.

9.

ADDENDUM ............................................................................................................................. A-1

TABLE OF AUTHORITIES Cases Page

Airgas, Inc. v. Air Prods. & Chems., Inc., 2010 WL 4734305 (Del. 2010).................................................................................. 1-2, 13 Bebchuk v. CA, Inc., 902 A.2d 737, 740 (Del. Ch. 2006) .................................................................................... 4 Chesapeak Corp. v. Shore, 771 A.2d 293 (Del. Ch. 2000) ............................................................................................ 4 City Capital Assocs. Ltd. Partnership v. Interco Inc., 551 A.2d 787 (Del. Ch. 1988)........................................................................... 8, 11, 12, 13 Grace Bros. Ltd. v. Farley Indus., Inc., 450 S.E.2d 814 (Ga. 1994)................................................................................................ 18 Grand Met. Pub. Ltd. v. Pillsbury Co., 558 A.2d 1049 (Del. Ch. 1988)........................................................................................... 8 In re CNX Gas Corp. S’holders Litig., 2010 WL 2291842 (Del. Ch.) ........................................................................................... 16 In re CNX Gas Corp. S’holders Litig., 2010 WL 2705147 (Del. Ch.) ............................................................................................12 In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604 (Del. Ch. 2005)........................................................................................... 16 In re Digex Inc. S’holders Litig., 789 A.2d 1176 (Del. Ch. 2000)......................................................................................... 16 In re Dollar Thrifty S’holder Litig., 2010 WL 3503471 (Del. Ch.) ........................................................................................... 12 In re IAC/InterActive Corp., 948 A.2d 471 (Del. Ch. 2008) ......................................................................................... 3-4 In re Pure Res., Inc. S’holders Litig., 808 A.2d 421 (Del. Ch. 2002)........................................................................................... 17 In re Unitrin, Inc. S’holders Litig., 1994 WL 698483 (Del. Ch.) ............................................................................................... 9 Kahn v. MSB Bancorp, Inc., 1998 WL 409355 (Del. Ch.) ............................................................................................. 10

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Moore Corp. Ltd. v. Wallace Computer Servs., Inc., 907 F. Supp. 1545 (D. Del. 1995)....................................................................................... 9 Moran v. Household Int’l, Inc., 500 A.2d 1346 (Del. 1985) ......................................................................................... 3, 6, 8 Nomad Acquisition Corp. v. Damon Corp., 1988 WL 383667 (Del. Ch.) ............................................................................................... 9 Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140 (Del. 1990) ............................................... 5, 8, 11, 12, 13, 14, 17-18 n1, 20 Paramount Commc’ns, Inc. v. Time Inc., 1989 WL 79880 (Del. Ch.) .................................................................................... 12-13, 14 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) .................................................................................... 8-9, 11, 13 Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) ....................................................................................... 5, 11, 19 Stroud v. Milliken Enters., 552 A.2d 476 (Del. 1989) ............................................................................................... 3, 4 TW Servs., Inc. v. SWT Acquisition Corp., 1989 WL 20290 (Del. Ch.) ............................................................................................... 12 Unitrin, Inc. v. American Gen. Corp., 651 A.2d 1361 (Del. 1995) ..................................................... 3, 5, 6, 7, 8, 9, 10, 11, 13, 20 Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) ................................................................. 2, 3, 5, 6, 8, 10, 11, 20 Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586 (Del. 2010) ................................................................................................ 1-2, 9 Statutes and Rules 8 Del. C. § 141(a).......................................................................................................................... 11 Other Authorities Louis Lowenstein, Pruning Deadwood in Hostile Takeovers: A Proposal for Legislation, 83 COLUM. L. REV. 249 (1983) ............................................................... 17, 18 Lucian Ayre Bebchuk, The Pressure to Tender: An Analysis and a Proposed Remedy, 12 DEL. J. CORP. LAW. 911 (1987)........................................... 17-18 n1

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Richard A. Booth, Management Buyouts, Shareholder Welfare, and the Limits of Fiduciary Duty, 60 N.Y.U. L. REV. 630 (1985) ................................ 17-18 n1

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For the reasons discussed below in response to the Court’s first numbered question, the Airgas defendants believe that there is no reason for the Court to exercise its equitable powers with respect to Air Products’ $65.50 offer and that any claim regarding the $70 offer is not ripe. Plaintiffs’ claims, therefore, should be dismissed. Pending dismissal, this supplemental post-trial brief is respectfully submitted on behalf of Airgas and the individual defendants in response to the Court’s December 2, 2010 Letter Order. The addendum hereto is being submitted pursuant to a request of the three recentlyelected Airgas directors. THE SUPREME COURT’S BYLAW DECISION SUPPORTS THE AIRGAS BOARD’S USE OF THE COMPANY’S RIGHTS PLAN AND OTHER DEFENSES The Court’s threshold question is whether the Supreme Court’s decision in Airgas, Inc. v. Air Products and Chemicals, Inc., 2010 WL 4734305 (Del.), has any implications for the issues pending before the Court in this lawsuit. Defendants believe that it does. At the outset of its opinion, the Supreme Court makes clear that a staggered board “enhances the bargaining power of a target’s board and makes it more difficult for an acquiror, like Air Products, to gain control of its target without the consent of the board.” Id. at *1. Then the Supreme Court states that “[t]he market for Airgas stock suggests that the board was correct” in concluding that the Air Products offer is “grossly inadequate” and notes that the newlyconstituted Board “continues to unanimously reject the bid as ‘grossly inadequate.’” Id. at 3 & n.3 (emphasis in original). The Supreme Court also reaffirms that a target board can properly force a raider to run two proxy contests over two years. Id. at *6 n.18 (“‘[A] classified board would delay — but not prevent — a hostile acquiror from obtaining control of the board, since a determined ac-

quiror could wage a proxy contest and obtain control of two thirds of the target board over a two year period, as opposed to seizing control in a single election.’”) (quoting Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586, 604 (Del. 2010)). Taken together, these statements support what Airgas showed at trial and in its post-trial briefs: the Airgas Board was justified in resisting Air Products’ $65.50 offer and in maintaining the company’s rights plan and other defenses. As the opinion reflects, the combination of a staggered board and a rights plan enhances the bargaining power of the board without precluding the ability of shareholders to force a different outcome through the ballot box. Thus, as discussed more fully in response to Question 6, infra, the Supreme Court’s decision confirms that the Airgas Board has both the authority and non-delegable duty to keep the rights plan and the company’s other defenses in place to defend against an inadequate offer. See also Airgas Post-Trial Br. 72-75, 92-98. The Court’s additional question is whether the Supreme Court’s specific ruling, i.e., “that Airgas’ 2011 annual meeting will now take place ‘approximately’ in September 2011,” has any effect on the fundamental question raised at trial. Airgas does not believe that this aspect of the Supreme Court’s ruling affects the issues that were tried to the Court. When the annual meeting occurs, Air Products will have the opportunity to run another slate of directors to replace additional members of the Airgas Board. Moreover, as the Court notes in Question 4 of its Letter Order, Air Products also has the ability at any time to seek to call a special meeting to replace the entire Board without cause. As the Supreme Court has recognized, the proxy mechanism is the proper means for shareholders to decide the outcome of this takeover battle. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 959 (Del. 1985) (“If the stockholders are displeased with the action of their elected representatives, the powers of

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corporate democracy are at their disposal to turn the board out.”); Moran v. Household Int’l, Inc., 500 A.2d 1346, 1355 (Del. 1985); Unitrin, Inc. v. American Gen. Corp., 651 A.2d 1361, 1383 (Del. 1995). See Airgas Post-Trial Br. 77-78, 81, 112-13. THE COURT’S NUMBERED QUESTIONS 1. The claim that the Airgas Board breached its fiduciary duties by rejecting Air Products’ $65.50 offer is moot. There is no basis for the Board to issue any decision with respect to Air Products’ $70 offer. The issue that was tried to the Court was whether the Airgas Board’s response to Air Products’ $65.50 offer satisfied the Unocal standard. Yesterday, the day before this submission was due, Air Products raised its offer to $70 per share and made the claim that the offer was its best and final. In light of this new bid, defendants respectfully submit that there is no controversy for the Court to decide. The challenge to the Board’s response to Air Products’ $65.50 bid — a response that was entirely proper in every respect — is now moot. The pending action should be dismissed. See Stroud v. Milliken Enters., Inc., 552 A.2d 476, 480 (Del. 1989) (“The law is well settled that our courts will not lend themselves to decide cases which have become moot, or to render advisory opinions.”). Consistent with its fiduciary duties and as required by applicable law, the Airgas Board will review the $70 offer to determine the course of action that it believes is in the best interests of the company and its stockholders. In this connection, the Airgas Board has agreed to retain a third investment banker, to be selected by the independent directors, to advise the Board. Bank of America Merrill Lynch and Goldman Sachs will also continue to advise the Board. Since the Board has made no decision with respect to the $70 offer, the fiduciary decision that matters has yet to be made. Thus, no claim is ripe to be adjudicated, and there is no basis for the Court to order any relief. See In re IAC/InterActive Corp., 948 A.2d 471, 476, 492-

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93 (Del. Ch. 2008) (breach of fiduciary duty claim “depend[s] on the decisions actually made and the record of the directors’ deliberations” and “questions of whether the IAC directors properly discharge their fiduciary duties . . . can only be judged after the directors take action”) (citing Stroud, 552 A.2d at 480 (“Whenever a court examines a matter where facts are not fully developed, it runs the risk not only of granting an incorrect judgment, but also of taking an inappropriate or premature step in the development of the law.”)). As the Court will recall, in its letter to the Court opposing Airgas’ Third Motion to Supplement the Record, Air Products wrote “the record must be closed,” the “record is not open . . . the trial is over” and that the Court should “close the trial record once and for all.” Having made the tactical decision to withhold its $70 “best and final” offer until two months after the last day of trial, there is no basis for the Court at this time to decide any issue that might have some future bearing on a Board decision that has not yet been made. See Chesapeake Corp. v. Shore, 771 A.2d 293, 301 n.8 (Del. Ch. 2000) (parties “must accept the consequences of their tactical choice”). Furthermore, as a matter of equitable discretion, the Court should not exercise its injunctive powers in regard to a $65.50 offer while the Board is considering the new $70 offer. See Bebchuk v. CA, Inc., 902 A.2d 737, 740 (Del. Ch. 2006) (“‘common sense’ approach requires the court to decide whether the interests of those who seek relief outweigh the interests of the court and of justice in ‘postponing review until the question arises in some more concrete and final form.’” (quoting Stroud, 552 A.2d at 480)). After the Airgas Board takes action on the $70 offer, and if that action is challenged, the Court can then address the schedule for that future challenge and decide whether expedited consideration is appropriate given the manner in which Air Products has conducted itself.

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2.

An inadequate offer is a cognizable threat under Unocal. The Supreme Court has repeatedly made clear that an inadequate offer is a cogni-

zable threat. See, e.g., Unitrin, 651 A.2d at 1384 (“the ‘inadequate value’ of an all cash for all shares offer is a ‘legally cognizable threat’” (citing Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1153 (Del. 1990))). See Airgas Post-Trial Br. 91-98. The fact that the Supreme Court held in Smith v. Van Gorkom that directors breach their fiduciary duties if they agree to sell the company at anything other than an adequate price — and that adequacy must be assessed by the board in its reasoned judgment — further underscores that an inadequate offer is an independent threat. 488 A.2d 858, 875-76 (Del. 1985); see also Unitrin, 651 A.2d at 1384 (“pursuant to Delaware corporate law, a board of directors’ duty of care [is] required it to respond actively to protect the corporation and its shareholders from perceived harm”). If directors breach their duty by selling at an inadequate price, a fortiori, an inadequate offer is a threat that the directors have a non-delegable duty to resist — as Delaware precedents have consistently stated. See Unocal, 493 A.2d at 954-55; Response to Question 6, infra; Airgas Post-Trial Br. 72-73. 3. Airgas does not presently intend to hold a special meeting in June 2011 and has not yet determined when it will hold its 2011 annual meeting. The Airgas Board does not presently intend to call a special meeting of stockholders in June 2011. Of course, and as set forth in response to Question 4, infra, Air Products or any other Airgas shareholder has the right under Airgas’ charter to call a special meeting by a 33% vote. Ex. 3, art. 5, § 5. While Airgas has not yet determined the date of its 2011 annual meeting of stockholders, it does not intend to hold its next annual meeting before June when its

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fiscal year 2011 results will be available and its annual report issued. As with all of its other annual meetings, the meeting date will conform to the requirements of Delaware law. 4. The unrebutted evidence demonstrates that Air Products could call a special meeting to attempt to remove the Airgas Board. The power of Airgas shareholders to call a special meeting to replace the incumbent directors is a viable method for removing the company’s rights plan and other takeover defenses. See Airgas Post-Trial Br. 41, 81; Unocal, 493 A.2d at 959 (“If the stockholders are displeased with the action of their elected representatives, the powers of corporate democracy are at their disposal to turn the board out.”); see also Moran, 500 A.2d at 1355 (rejecting argument that rights plan effectively precludes proxy contest to oust incumbent directors); Unitrin, 651 A.2d at 1383. As the Court observes in footnote 3 of its Letter Order, the 67% vote required to remove a director without cause is reasonably obtainable if Air Products offers a sufficiently attractive price. The unrebutted testimony from Airgas’ expert witness Peter Harkins, President and CEO of D.F. King & Co., was that a 67% vote is “both mathematically possible and realistically attainable” if Air Products were to offer an “appealing share price.” Tr. 1066-68 (Harkins). See Airgas Post-Trial Br. 41 n.16. Airgas’ position is not, as Air Products would have it, that Air Products could have successfully removed the Airgas Board at $65.50. Air Products Post-Trial Reply Br. 41 n.30. Indeed, it could not. Ex. 638A at 7-8 (Harkins). Rather, the point is that if Air Products put more money on the table, it could get 67% of the vote in a special meeting. The essential logic of this position — that more money equals more votes — was conceded by Air Products CFO Paul Huck at trial. Tr. 72 (Huck) (“A higher offer would obviously get more shares.”).

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And it was recognized by the Supreme Court in Unitrin. 651 A.2d at 1383 (“If American General presented an attractive price as the cornerstone of a proxy contest, it could prevail, irrespective of whether the shareholder directors’ absolute voting power was 23% or 28%.”). As Harkins testified, the composition of Airgas’ shareholder base “is conducive to generating relatively high quorums on — on any issue.” Tr. 1073-74 (Harkins). Approximately 50% of Airgas stock was in the hands of risk arbitrageurs at the time of trial; that shareholder body is uniquely positioned and incentivized to participate in any special meeting and give its support to Air Products if the price is sufficiently attractive. And 2% of Airgas shares are in the hands of Air Products. Thus, it would take only 15% more to reach 67%, hardly the “daunting” task Air Products makes it out to be. See Tr. 1125-26 (Harkins). The only “evidence” that Air Products offers in response to this evidentiary showing is the unsupported opinion of Air Products CEO John McGlade. Air Products Post-Trial Reply Br. 41 n.30. As discussed in Airgas’ post-trial brief, McGlade’s opinion rests upon the incorrect assumption that only 75% of Airgas shareholders voted at the 2010 annual meeting and his non-expert, personal opinion that a significant percentage of Airgas shares would not respond to an increased offer. Airgas Post-Trial Br. 41 n.16. The voter turnout at the 2010 Airgas annual meeting was actually 88.3% with only a short slate of directors up for election; and 90.4% of hedge funds and arbitrageurs voted in the 2010 election, forming “a disproportionately large portion of the votes cast” for Air Products’ nominees and bylaw proposals. Ex. 638A (Harkins 2); Tr. 1111-12 (Harkins). With control of the Board up for grabs at a special meeting, voter turnout would likely be higher than that. Tr. 1108-09 (Harkins) (turnout would be higher than 88.3% at meeting “to contest control of . . . the board”).

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5.

Supreme Court precedent uniformly supports Airgas’ use of its rights plan. Airgas is not aware of any Delaware Supreme Court precedent standing for the

proposition that plaintiffs are entitled to mandatory relief compelling the redemption of the Airgas rights plan and the dismantling of the company’s other takeover defenses before the next annual meeting. To the contrary, the Supreme Court authority — Unocal, Moran, Paramount and Unitrin — hold that a Court should not second-guess the good faith and informed business judgment of a target board to resist an inadequate offer. The Supreme Court has unequivocally rejected the only two Chancery Court decisions ever to have ordered redemption of rights plans, both of which occurred in circumstances far different than here. Paramount, 571 A.2d at 1153 (rejecting Interco and its progeny, including Grand Met); Airgas Post-Trial Br. 75-77. In order for Air Products to prevail in its request for mandatory relief, this Court would have to find that Airgas’ directors breached their fiduciary duties. See Unocal, 493 A.2d at 958; Moran, 500 A.2d at 1355-56; Unitrin, 651 A.2d at 1377 n.18. But as discussed below in response to Question 6, directors are duty-bound to oppose an offer that they believe to be inadequate. When exercising that authority, the Board has “substantial latitude in defending . . . against perceived threats” and their actions are permissible so long as they are within a “range of reasonableness.” Unitrin, 651 A.2d at 1388 & n.38. See also Airgas Post-Trial Br. 7273, 101-13. There simply is no basis to conclude that the Airgas directors breached their fiduciary duties by refusing to remove the company’s defense to facilitate Air Products’ $65.50 per share offer. See also Airgas Post-Trial Br. 102-04. At the barest minimum, directors breach no duty if they oppose an inadequate offer by simply maintaining the company’s rights plan. See Revlon, Inc. v. MacAndrews & Forbes

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Holdings, Inc., 506 A.2d 173, 181 (Del. 1986) (“Under the circumstances, it cannot be said that the Rights Plan as employed was unreasonable, considering the threat posed.”); Nomad Acquisition Corp. v. Damon Corp., 1988 WL 383667, at *3, *5 (Del. Ch.); In re Unitrin, Inc. S’holders Litig., 1994 WL 698483, at *8 (Del. Ch.), rev’d on other grounds, 651 A.2d 1361 (Del. 1995); Moore Corp. Ltd. v. Wallace Computer Servs., Inc., 907 F. Supp. 1545, 1563 (D. Del. 1995). Rather, as discussed above, the recent decision from the Supreme Court in Selectica unmistakably confirms that a target board may reasonably maintain a rights plan to protect shareholder value after a bidder’s nominees are elected to the board. The situationally specific circumstances of this case also confirm that the Airgas Board’s actions in resisting a $65.50 bid were within a range of reasonableness: First and foremost, neither the September election, nor the Supreme Court decision change the fact that $65.50 is grossly inadequate. Air Products itself acknowledges that it is opportunistically attempting to take advantage of a “pricing window” that will evaporate once Airgas’ business recovers. Ex. 150 at 1. And Air Products admitted that it could have paid more but would not have done so if Airgas’ defenses were removed. Tr. 46, 79-80 (Huck). See Airgas Post-Trial Br. 3-4, 80; Response to Question 2, supra. Second, the Airgas Board determined, after a reasonable and good faith investigation (during which it was advised by two preeminent investment banks) that the offer was inadequate, opportunistic and posed a threat to the company and its shareholders. See Airgas PostTrial Br. 80-95. The record establishes that the Board’s judgment in November 2009 to resist Air Products’ first approach was correct, that the Board was justified in concluding that the company was poised for a turnaround and that the company’s unaffected stock price would trade through Air Products’ offering price in a relatively short time frame. See, e.g., Ex. 529 at 11;

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Ex. 433 (Airgas Q1 earnings release); Ex. 645 (Airgas Q2 earnings release); Airgas Post-Trial Br. 45-46, 68-69. Third, Airgas did nothing to impede the emergence of the higher offer that has now been made, did not alter the capital structure of the company in any way and did not seek to cram down a coercive or preclusive transaction. Fourth, the Airgas Board has very substantial “skin in the game,” with a CEO who owns 8,556,164 shares and outside directors who, at the time the $65.50 per share offer was rejected, owned 626,868 shares, stakes that undoubtedly align the directors’ interests with the interests of the company’s shareholders. See Airgas Pre-Trial Brief at 57 & n.22 (citing Unitrin and Kahn v. MSB Bancorp, Inc., 1998 WL 409355, at *3 (Del. Ch.), aff’d, 734 A.2d 158 (Del. 1999)). 6. Bedrock principles of Delaware law confirm the central role of a board in the takeover contest. A bedrock principle of Delaware law is that a company’s response to a takeover attempt is a business judgment of the board of directors. Thus, as with every business judgment — whether in response to a takeover, or regarding a merger, expansion into a new business or any of the myriad other business decisions a board routinely makes — shareholders ultimately bear the risk and reap the rewards of the business judgments made by their elected representatives. The Supreme Court made this clear in Unocal: “When a board addresses a pending takeover bid it has an obligation to determine whether the offer is in the best interests of the corporation and its shareholders. In that respect a board’s duty is no different from any other responsibility it shoulders, and its decisions should be no less entitled to the respect they otherwise

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would be accorded in the realm of business judgment.” 493 A.2d at 954 (emphasis added). See also id. at 949. This is because a board’s “duties and responsibilities proceed from the inherent powers conferred by 8 Del. C. § 141(a), respecting management of the corporation’s ‘business and affairs,’” and therefore “[t]he board has a large reservoir of authority upon which to draw.” Unocal, 493 A.2d at 953 (emphasis added). See also Unitrin, 493 A.2d at 1372 (“The business judgment rule applies to the conduct of directors in the context of a takeover.”); Paramount, 571 A.2d at 1153 (rejecting Interco (and its progeny) as “not in keeping with a proper Unocal analysis” because the Chancery Court “substitut[ed] its judgment as to what is a ‘better’ deal for that of a corporation’s board of directors”); Airgas Post-Trial Br. 75-77. Part and parcel of this core principle is that directors are duty-bound to oppose an inadequate offer and cannot delegate that duty to shareholders. This is the teaching of a long line of Supreme Court decisions stretching back at least as far as Van Gorkom. See Response to Question 2, supra. In Unocal, the Court recognized the same principle: “the board’s power to act derives from its fundamental duty and obligation to protect the corporate enterprise, which includes stockholders from harm reasonably perceived, irrespective of its source.” 493 A.2d at 954. See also id. at 954 n.18 (the board’s duties are no different than in “traditional areas of fundamental corporate change,” where “director action is a prerequisite”); Airgas Post-Trial Br. 72-73. This fundamental doctrine was front and center in Paramount. 571 A.2d at 1154 (“That duty may not be delegated.”). There, the plaintiff argued (as plaintiffs have here) that “Time’s response was unreasonable in precluding Time’s shareholders from accepting the tender offer or receiving a control premium in the immediately foreseeable future.” Id. The Supreme Court, relying on 8 Del. C. § 141(a), Van Gorkom and Revlon, rejected that argument in the

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strongest terms and found that a board can reasonably reject a short-term premium offer if it reasonably believes that following its existing strategy will deliver greater value to its shareholders: Once again, the contention stems, we believe, from a fundamental misunderstanding of where the power of corporate governance lies. Delaware law confers the management of the corporate enterprise to the stockholders’ duly elected representatives. The fiduciary duty to manage a corporate enterprise includes the selection of the time frame for achievement of corporate goals. That duty may not be delegated to the stockholders. Directors are not obliged to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy. 571 A.2d. at 1154 (citations omitted; emphasis added). See also In re Dollar Thrifty S’holder Litig., 2010 WL 3503471, at *29 (Del. Ch.) (“our law does not require a well-motivated board to simply sell the company whenever a high market premium is available”). Chancellor Allen applied these same principles in his decision in Paramount, writing even before Interco was rejected by the Supreme Court: The value of a shareholder’s investment, over time, rises or falls chiefly because of the skill, judgment and perhaps luck — for it is present in all human affairs — of the management and directors of the enterprise. When they exercise sound or brilliant judgment, shareholders are likely to profit; when they fail to do so, share values likely will fail to appreciate. In either event, the financial vitality of the corporation and the value of the company’s shares is in the hands of the directors and managers of the firm. The corporation law does not operate on the theory that directors, in exercising their powers to manage the firm, are obligated to follow the wishes of a majority of shares. In fact, directors, not shareholders, are charged with the duty to manage the firm. Paramount Commc’ns, Inc. v. Time Inc., 1989 WL 79880, at *30 (Del. Ch.) (citations omitted; emphasis added). See also In re CNX Gas Corp. S’holders Litig., 2010 WL 2705147, at *10 (Del. Ch.) (“to elevate the power of the stockholder majority . . . over the power of the board . . . is contrary to Delaware law”); TW Servs., Inc. v. SWT Acquisition Corp., 1989 WL 20290, at *8 n.14 (Del. Ch.) (“A corporation is not a New England town meeting.”). - 12 -

And the Chancellor recognized that as in any board decision, shareholders bear the risk that the board’s judgment could turn out to be wrong: In the decision they have reached here, the Time board may be proven in time to have been brilliantly prescient or dismayingly wrong. In this decision, as in other decisions affecting the financial value of their investment, the shareholders will bear the effects for good or ill. That many, presumably most, shareholders would prefer the board to do otherwise than it has done does not, in the circumstances of a challenge to this type of transaction, in my opinion, afford a basis to interfere with the effectuation of the board’s business judgment. Paramount, 1989 WL 79880, at *30. Similarly, in Unitrin, the Supreme Court expressly stated that the board had “the power and the duty, upon reasonable investigation, to protect Unitrin’s shareholders from what it perceived to be the threat from American General’s inadequate all-cash for all-shares Offer.” 651 A.2d at 1376, 1389-90. See also Revlon, 506 A.2d at 179 (that directors have the “ultimate responsibility” is the “bedrock of our law regarding corporate tender offer issues”); Airgas, 2010 WL 4734305, at *1 (“A staggered board . . . enhances the bargaining power of a target’s board and makes it more difficult for an acquiror, like Air Products, to gain control of its target without the consent of the board.”). Indeed, the fact that the Airgas Board is not attempting to foist an alternative transaction on shareholders only supports the reasonableness of its response. As in Paramount, the Airgas Board reasonably believed that its pre-existing business plan offers greater value to its shareholders than the unsolicited $65.50 offer. In fact, Airgas has outperformed both the fiveyear plan and analyst estimates. Of course, the critical circumstance in Interco — the high water mark of judicial activism squarely rejected in Paramount, 571 A.2d at 1153 — was that “management was presenting and seeking to ‘cram down’ a transaction that was the functional equivalent of the very leveraged ‘bust up’ transaction that management was claiming presented a threat - 13 -

to the corporation.” Paramount, 1989 WL 79880, at *28. By contrast, Airgas is not seeking to “‘cram[] down’ on its shareholders a management-sponsored alternative,” but rather has as its goal the legitimate “carrying forward” of a pre-existing corporate plan. 571 A.2d at 1154-55. Four final points are worth noting: First, it was entirely reasonable for the Board to conclude that running Airgas in accordance with its business plan is preferable to selling out at an inadequate price. Airgas has consistently met or exceeded its business plans, and has delivered outstanding returns to the company’s shareholders. That “financial alternative” to Air Products’ offer is neither coercive nor preclusive, and the Board’s decision to pursue that alternative should not be subjected to judicial-second guessing in these circumstances. Second, no Airgas shareholder is being forced to endure the risk of Airgas’ fiveyear plan coming to fruition. Any shareholder who wanted to avoid that risk could have sold its shares in the open market at a premium to Air Products’ various offers at any point along the way, including at the point when the company’s stock traded at prices in excess of $71 per share. Risk arbitrageurs are called that for a reason; they chose to enter this contest and assumed the risk that Air Products would not succeed. Third, to the extent that shareholders are bearing the risk that the valuation judgment of the Airgas Board is incorrect, their remedy is at the ballot box or in the open market. See pp. 2-3, supra; Response to Question 4, supra. Fourth, to the extent Airgas’ shareholders face the risk that the Airgas Board’s valuation judgment is incorrect, they do not face that risk alone. The Airgas Board owns in excess of 10% of the company’s shares.

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7.

Airgas’ shareholder profile consists of an unusually high percentage of arbs with highly leveraged positions. The evidence establishes that, at the time of trial, approximately 50% of Airgas

shares were in the hands of risk arbitrageurs with short-term investment horizons focused on the consummation of a transaction, not Airgas’ fundamentals. Tr. 63-64 (Huck); Tr. 1118 (Harkins) Ex. 638A at 9 (Harkins Supp. Report); Ex. 565A (Inspector of Elections Final Report). The record evidence also establishes that many of these arbs’ holdings in Airgas are leveraged and that these positions were purchased at elevated price levels after the $60 offer was made public in February 2010. Ex. 638 at 10 (Harkins Report); Tr. 1117-18 (Harkins). This concentration of arbs was the result of a deliberate strategy by Air Products to manipulate Airgas’ shareholder base through promises of a higher offer, threats and carefully timed bumps. Tr. 63-64 (Huck); 151-52 (McGlade); Ex. 257 at 8-9. While these shareholders are largely sophisticated, they face a collective action problem; if the rights plan is redeemed, they will not be able to negotiate effectively with Air Products. Indeed, that is why Air Products wants the Airgas Board stripped of its authority. Air Products recognizes that shareholders individually cannot negotiate effectively. So it argues that Airgas shareholders themselves can work together and negotiate with Air Products effectively. Air Products Post-Trial Opening Br. 43; Air Products Post-Trial Reply Br. 27-28, 45. But there is still a collective action problem; a disparate group of shareholders simply cannot negotiate as effectively as a board of directors. Notably, Air Products conceded at trial that it would have to pay a higher price if it negotiated with the Airgas Board. Tr. 76 (Huck). And Air Products also acknowledged that it would have sought to close on the $65.50 offer if the pill were pulled. Tr. 46, 79-80 (Huck).

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Moreover, individual shareholders, acting alone or collectively, do not owe fiduciary duties to other shareholders, and do not have a duty to maximize the value of the company in a sale transaction. Their interests are to maximize their own returns, based on their own investment objectives and individualized circumstances. Only the board of directors has a duty to maximize value for all shareholders. And only the board is able to overcome the collective action problem facing shareholders in the takeover context. See In re Digex Inc. S’holders Litig., 789 A.2d 1176, 1201 (Del Ch. 2000); In re CNX Gas Corp. S’holders Litig., 2010 WL 2291842, at *13 (Del. Ch.) (“‘A good board is best positioned to extract a price at the highest possible level because it does not suffer from the collective action problem of disaggregated stockholders.’” (quoting In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604, 619 (Del. Ch. 2005)); see also Airgas Post-Trial Br. 95-96 & n.51. Addressing the Court’s Question directly, the fact that such a high percentage of Airgas shares were held by risk arbitrageurs suggests that the Airgas shareholders are uniquely vulnerable to being pressured into tendering into an offer that, individually, they would reject. The threat is not only that shareholders may disbelieve the Airgas Board and mistakenly tender. The problem is also that shareholders may be pressured into tendering into an offer that they don’t want to accept because of the prospect that a bare majority of the other shares will be tendered (meeting the minimum condition of the offer). And with approximately 50% of the company’s shares in arb hands, the prospect of this happening is greater than it would be in a company with a larger percentage of shareholders with a long-term investment horizon. Airgas PostTrial Br. 95-98. A voting decision is very different than the decision on whether to tender. When shareholders vote for directors or on a merger, they do not bear the risk of suffering an economic

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penalty for being “wrong” if they are on the “losing” side. They can vote “yea” or “nay” without considering how other shareholders are voting. If a shareholder votes against a proposed merger, but the majority votes for the merger, the “losing” shareholder is still guaranteed that it will receive the same consideration as the shareholders who voted for the merger at the same time as all other shareholders. Likewise, a shareholder suffers no economic penalty by supporting the “wrong” side of a proxy contest. See, e.g., In re Pure Res., Inc. S’holders Litig., 808 A.2d 421, 441-42 & n.40 (Del. Ch. 2002); Louis Lowenstein, Pruning Deadwood in Hostile Takeovers: A Proposal for Legislation, 83 COLUM. L. REV. 249, 254, 307-09 (1983). Not so in a tender offer. In a tender offer, shareholders face a prisoner’s dilemma because they do not know what other shareholders will do and there is the real and significant risk of being penalized if they are wrong. See Pure Res., 808 A.2d at 441-42; Lowenstein, supra, at 254, 307-09; Airgas Post-Trial Br. 96-97. Because of the coercive nature of a tender offer, “[a]n offer at almost any premium over market may be accepted by the shareholders, each of whom may feel compelled to tender even while knowing that by collective action or by creating an auction he could have obtained a much better price.” Lowenstein, supra, at 254. As sellers, they are not in a position to communicate with each other or to negotiate cooperatively for better terms. Unlike the referendum on management’s performance or proxy contest, . . . the shareholders are not making a collective decision in which each votes according to his judgment and is then bound by the collective wisdom. The shareholder who would reject the offer as inadequate has no ability to bind or, in practice, even to influence his peers. Lowenstein, supra, at 307. 1 The board, as noted, solves this prisoner’s dilemma and is able to overcome the collective action problem facing disaggregated shareholders.

1

Contrary to Air Products’ claim in its reply brief (pp. 30-31), shareholders confront a prisoner’s dilemma in an all-cash, all-shares offer, as well as two-tier offers. See Richard A. (footnote continued) - 17 -

Air Products candidly admitted at trial that if Airgas’ pill were pulled, it could make the same threat to Airgas shareholders it made before the September 2010 annual meeting — “We hope you enjoy Airgas stock falling back to a low price” — in order to force Airgas shareholders to tender into its offer. Tr. 68, 79-80 (Huck). If Air Products threatens to withdraw or lowers its offer, whatever it is, the short-term shareholders who are not in the business of investing for the long term will effectively have no choice but to sell their shares or tender into an inadequate offer to capture whatever profit they can and close out their leveraged positions. Shareholders will also be pressured to tender to avoid the economic penalty of a delayed payment in the second step (not present in a merger), plus the risk that there is no second step at all. See Grace Bros. Ltd. v. Farley Indus., Inc., 450 S.E.2d 814 (Ga. 1994) (minority shareholders forced to cash out at $46 two years after tender offer despite bidder commitment at time of tender offer to pay non-tending shareholders the tender offer price of $58); Lowenstein, supra, at 307 (“It has frequently been said that tender offers owe their high rate of success to the fact that arbitrageurs and even institutional investors, unlike ‘real’ shareholders, have an interest only in a quick sale at a profit. . . . It is better to receive some premium over market rather than none, and it is better to receive it sooner rather than later.”).

(footnote continued) Booth, Management Buyouts, Shareholder Welfare, and the Limits of Fiduciary Duty, 60 N.Y.U. L. REV. 630, 658 (1985) (in all-cash, all-shares bids, “shareholders might be induced to tender at an inadequate price for fear of missing the opportunity for a premium”); Lucian Ayre Bebchuk, The Pressure to Tender: An Analysis and a Proposed Remedy, 12 DEL. J. CORP. LAW. 911, 912, 926-27 (1987) (“[T]he problem of distorted choice is in no way limited to, or even especially acute in, partial bids and two-tier bids.”). And of course, the Supreme Court made clear in Paramount that “[t]he usefulness of Unocal as an analytical tool is precisely its flexibility in the face of a variety of fact scenarios.” Paramount, 571 A.2d at 1153.

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As this Court observed in its Letter Order, the Delaware Supreme Court has recognized that stockholders are intelligent enough to oust directors from office, and that one can argue that there is tension between that idea and the idea that a Board has wide latitude in opposing an unsolicited tender offer. But as noted, a voting decision is very different from a decision on whether to tender. An intelligent shareholder could readily vote one way on the election or removal of directors, and make a very different decision on whether to tender. In fact, that is exactly what happened here. Compare Ex. 638A at 2 (Harkins: 55.9% of outstanding shares voted for Air Products’ nominees at September 15, 2010 annual meeting), with Ex. 648 (barely 2% of Airgas shares tendered into $65.50 offer as of October 27, 2010). Moreover, it is simply indisputable that directors have more information about the company than the shareholders. See Tr. 1217-18 (Hubbard) (“shareholders as a body [do not] have identical information or views as insiders’ boards or managers”); Tr. 1293 (Hubbard) (addressing reliability of the five-year plan: “it would be rare that outsiders would have better information than insiders”). That is why the Supreme Court has recognized that “[u]sing market price as a basis for concluding that the premium adequately reflect[s] the true value of the Company [is] a clearly faulty, indeed fallacious, premise.” Van Gorkom, 488 A.2d at 875-76. And, indeed, the markets’ overreaction to Airgas’ minor earnings miss back in January 2010 clearly shows that just because shareholders have information does not mean that they will get it right. See Tr. 1224 (Hubbard); Airgas Post-Trial Br. 27. The Airgas Board’s responsibility, therefore, is to assure that even if a majority of Airgas shareholders tenders (a distinct possibility given that almost 50% of the stock is owned by risk arbitrageurs and almost 2% is owned by Air Products), the remaining Airgas shareholders

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who believe that Airgas is worth more than the offer price are not squeezed out at an inadequate price. Delaware law not only gives the board the power to consider the interest of all shareholders, as noted in response to Question 6, it imposes a non-delegable duty upon them to do so. See Unitrin, 651 A.2d at 1386 (“a board may reasonably consider the basic stockholder interests at stake, including those of short term speculators, whose action may have fueled the coercive aspect of the offer at the expense of the long term investor”); Unocal, 493 A.2d at 955-56 (same); Paramount, 571 A.2d at 1150. 2 8. The market’s reaction to the Supreme Court’s bylaw ruling confirms the Board’s view on Airgas’ standalone value and the inadequacy of Air Products’ offer. The price of Airgas stock fell to as low as $60.31 per share and closed at $62.04 on the day’s trading prior to the issuance of the Court’s Letter Order. (Airgas stock rebounded somewhat amid speculation following the Court’s Letter Order of December 2.) While it is difficult to ascertain exactly what factors led to the decline in price after the Supreme Court’s ruling, the predominant factor certainly was the prospect that Air Products would not be able to consummate an acquisition of Airgas. The company’s stock price, therefore, was largely or entirely trading on fundamentals. See Tr. 339-41, 346-48, 350 (Fischel); Tr. 1235-37 (Hubbard). In light of all of this, Airgas believes that the $60.31 to $62.04 per share price approximately reflects the unaffected price of Airgas stock, and that this confirms that $65.50 was inadequate (at most barely an 8.6% premium).

2

Air Products’ claim (Post-Trial Reply Br. 33) that this threat is a “post-hoc, litigationinspired rationale” is belied by the extensive testimony at trial regarding Airgas’ communications with and concern about the higher percentage of arbs in its stock. Indeed, the bankers’ book presented to the Airgas Board contained extensive shareholder breakdowns. See, e.g., Ex. 328 at 31; Ex. 206 at 29.

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On November 29, Airgas publicly filed an investor presentation bringing forward the analysis of its standalone value. That presentation shows that in the five years prior to Air Products’ offer, Airgas traded at a median P/E multiple of 16.7x next twelve months earnings. And in periods of modest economic growth over the last five years, Airgas traded at 17.7x forward earnings. Moreover, Airgas’ peers are presently trading near or above their five-year average multiples, strongly implying that Airgas too would trade at its historical multiple absent Air Products’ offer. See Airgas, Inc., Fundamentals of Shareholder Value at 3-5, Form 14A (filed Nov. 29, 2010), available at http://bit.ly/Airgas_Nov_29_2010. Applying the market multiples at that time to the then-current analyst consensus earnings estimate for calendar year 2011 of $3.68 per share (including costs associated with the implementation of SAP, which are viewed by Airgas shareholders as discrete transaction expenses), Airgas’ unaffected stock price would be approximately $61.50 to $65.10 per share. On this basis, Air Products’ $65.50 per share offer reflected a premium of only about 0.6% to 6.5%. 9. The equities strongly support keeping Airgas’ rights plan in place to ensure that the Board can extract full and fair value in any sale of the company. As noted at the outset, there is nothing for the Court to enjoin at this time. The Airgas Board has not taken any action with respect to Air Products’ $70 per share offer. But it is now clear that, whatever the future brings, the entry of the injunction that plaintiffs sought would have harmed the interests of Airgas and its shareholders. At this juncture, four additional points are worth noting: 1. Air Products can pay $78 and still have a transaction that would be 17.9%

accretive on a cash basis. See Nov. 29, 2010 Form 14A, supra, at 7; see also Ex. 529 at 18 (16.9% accretive on a cash basis at $80 per share).

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2.

In deciding whether to redeem the rights plan and the company’s other de-

fenses, the Board has to consider that the company can only be sold once. Thus, the loss of the “opportunity” to sell the company to Air Products today at an inadequate price is no loss at all. This is especially true because, as the evidence at trial showed, Airgas has an exceedingly bright future on a standalone basis. 3. Air Products has no countervailing, legally cognizable interest. It is not a

champion of the Airgas shareholders. As both Huck and McGlade conceded, their duty is to the Air Products shareholders, and their goal is to acquire Airgas on terms that are advantageous to Air Products and its shareholders. Tr. 50, 60 (Huck); Tr. 149 (McGlade). Thus, the only “harm” that Air Products would suffer is a missed opportunity to acquire Airgas “at the lowest possible price.” Tr. 46 (Huck). 4. The individual shareholder plaintiffs, likewise, face no prospect of irrepa-

rable harm. None of them even bothered to come to trial, let alone testify. And certainly no evidence was adduced that any of the shareholders that they claim to represent wanted the Airgas Board to redeem the pill and drop the company’s other defenses in favor of a $65.50 per share bid. * * *

WHEREFORE, and for the reasons set forth in its pre- and post-trial briefs, defendants respectfully submit that plaintiffs should be denied any relief, their claims with respect to the $65.50 offer should be dismissed and defendants should be awarded affirmative relief on Air Products’ spurious allegation that McCausland engaged in unlawful option exercises. The Court should not, at this time and on this record, make any ruling with respect to Air Products’ $70 offer.

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ADDENDUM On December 7, 2010, after this Court issued its Letter Order, the three recentlyelected Airgas directors (John Clancey, Robert Lumpkins and Ted Miller) sent a letter to Airgas Chairman John van Roden, Jr. Messrs. Clancey, Lumpkins and Miller open their letter by reaffirming that they “have joined with the Airgas board in declaring that in its view the current Air Products $65.50 per share cash offer for Airgas is grossly inadequate.” With regard to Question 2, their letter requested that the Court be advised as follows: Of particular importance, we seek to clarify an issue on which Chancellor Chandler focused in his December 2 letter opinion as an important part of his analysis in considering the Airgas shareholders rights plan. The letter opinion suggests that Airgas contends the company is worth $78 or more per share, and that the three of us have joined in that view. We do not believe that such an unequivocal statement is accurate. Any discussion about the $78 valuation must be framed in the context in which that number was actually discussed at the November, 2010 board meeting. Specifically, in the context of a board discussion about what should be the next steps in responding to Air Products, we expressed our beliefs that proposing a price (any price, within reason) would be more likely to generate a constructive dialogue between the two companies and potentially result in an increased offer from Air Products than would a figurative “stiff arm.” It was in that context, and only in that context, that we agreed to communicate a $78 price to Air Products. (Footnote omitted.) To be clear, at no time did any of us take the position that a $78 offer price was the price of admission to having any discussions with Air Products, nor did we agree that $78 was the minimum per share price at which Airgas might be purchased, and it would be wrong for you to insinuate otherwise to the Court. Given the circumstances under which we were elected, on matters central to shareholders assessing the Air Products offer and any future improvements to it, we believe that Airgas has a responsibility to fairly and accurately present our views to shareholders. No less an obligation is owed to the Court.

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After consulting with a number of his fellow directors, Mr. van Roden responded to Messrs. Clancey, Lumpkins and Miller the next day, stating that all of the statements that Airgas had made to the Court and publicly were accurate and disputing the three newly-elected directors’ characterization of the deliberations leading up to the decision to send the Airgas Board’s November 2 letter publicly stating the Board’s belief that the company is worth at least $78 per share in a sale transaction.

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POTTER ANDERSON & CORROON LLP OF COUNSEL: Kenneth B. Forrest Theodore N. Mirvis Marc Wolinsky Joshua A. Naftalis Jasand Mock Charles D. Cording WACHTELL, LIPTON, ROSEN & KATZ 51 West 52nd Street New York, New York 10019 (212) 403-1000 Dated: December 10, 2010
993014

By /s/ Kevin R. Shannon Donald J. Wolfe, Jr. (No. 285) Kevin R. Shannon (No. 3137) Berton W. Ashman, Jr. (No. 4681) Ryan W. Browning (No. 4989) Hercules Plaza 1313 North Market Street, 6th Floor P.O. Box 951 Wilmington, Delaware 19801 (302) 984-6000

Attorneys for Defendants

CERTIFICATE OF SERVICE I hereby certify that on this 10th day of December, 2010, copies of the foregoing documents were served electronically via LexisNexis File & Serve upon the following attorneys of record:

Kenneth J. Nachbar, Esquire Jon E. Abramczyk, Esquire John A. Eakins, Esquire MORRIS NICHOLS ARSHT & TUNNELL LLP 1201 North Market Street Wilmington, DE 19801

Pamela S. Tikellis, Esquire Robert J. Kriner, Jr., Esquire A. Zachary Naylor, Esquire Meghan A. Adams, Esquire CHIMICLES & TIKELLIS LLP 222 Delaware Ave. Wilmington, DE 19899

/s/ Berton W. Ashman, Jr. Berton W. Ashman, Jr. (No. 4681)

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