IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE AIR PRODUCTS AND CHEMICALS, INC., ) ) Plaintiff, ) ) v. ) ) AIRGAS, INC.

, PETER MCCAUSLAND, ) JAMES W. HOVEY, PAULA A. SNEED, ) DAVID M. STOUT, ELLEN C. WOLF, ) LEE M. THOMAS and JOHN C. VAN ) RODEN, JR., ) ) Defendants. ) ) ) IN RE AIRGAS INC. STOCKHOLDER ) ) LITIGATION )

C.A. No. 5249-CC

REDACTED VERSION LITIGATORS’ EYES ONLY FILED UNDER SEAL Dated: February 3, 2011

C.A. No. 5256-CC

PLAINTIFF AIR PRODUCTS’ POST-SUPPLEMENTAL HEARING BRIEF MORRIS, NICHOLS, ARSHT & TUNNELL LLP Kenneth J. Nachbar (#2067) Jon E. Abramczyk (#2432) William M. Lafferty (#2755) John P. DiTomo (#4850) Eric S. Wilensky (#4774) Ryan D. Stottmann (#5237) Michael S. Sirkin (#5389) 1201 N. Market Street Wilmington, Delaware 19801 (302) 658-9200 Attorneys for Plaintiff Air Products and Chemicals, Inc.

OF COUNSEL: Thomas G. Rafferty David R. Marriott Gary A. Bornstein CRAVATH, SWAINE & MOORE LLP Worldwide Plaza 825 Eighth Avenue New York, NY 10019 (212) 474-1000 February 2, 2011

i. TABLE OF CONTENTS Page PRELIMINARY STATEMENT SUPPLEMENTAL FACTS I. AIR PRODUCTS MAKES ITS BEST AND FINAL OFFER AT A SIGNIFICANT PREMIUM TO AIRGAS’S UNAFFECTED STOCK PRICE. THE ALLEGED FINANCIAL INADEQUACY OF AIR PRODUCTS’ $70 OFFER IS THE ONLY FACTOR THE AIRGAS BOARD CONSIDERED WHEN IT RECOMMENDED AGAINST THE OFFER. 1 6

6

II.

8 11

ARGUMENT I. DEFENDANTS HAVE THE BURDEN TO PROVE THE DEFENSIVE MEASURES ARE A PROPORTIONATE RESPONSE TO A REASONABLY PERCEIVED THREAT. DEFENDANTS STILL FAIL TO DEMONSTRATE THAT THE AIRGAS BOARD IDENTIFIED REASONABLE GROUNDS FOR BELIEVING THAT AIR PRODUCTS’ OFFER POSES A COGNIZABLE THREAT. A. B. C. D. E. There Is No Threat Of Substantive Coercion: Airgas Stockholders Are Well-Informed, Not Confused. Air Products’ Offer Is Not Structurally Coercive. Air Products’ Offer Poses No Threat Of Opportunity Loss. At This Juncture, The Timing Of Air Products’ Offer Cannot Be A Threat. Defendants Unreasonably Determined That Air Products’ $70 Offer Is Inadequate. 1. The Objective Market Data Presented At The Supplemental Hearing Belies The Airgas Board’s Determination Of Financial Inadequacy.

11

II.

12 13 18 22 24 25

25

ii. TABLE OF CONTENTS (Cont.) Page 2. Defendants’ Estimation Of Airgas’s Value Continues To Be Mathematically Tied To Growth In The Overall Economy And Defendants Still Fail To Account For The Risk That The Economy May Not Improve As They Predict.

26

F.

Even If Defendants Could Show That They Reasonably Determined Air Products’ Offer To Be Inadequate, Any Consideration-Based Threat Must Still Be Viewed As NonCognizable Or Extremely Mild.

31

III.

THE EVIDENCE PRESENTED AT THE SUPPLEMENTAL HEARING CONFIRMED THAT DEFENDANTS’ MAINTENANCE OF AIRGAS’S DEFENSIVE MEASURES IS AN UNREASONABLE RESPONSE TO AIR PRODUCTS’ OFFER. A. Since Air Products Has Made Its Best And Final Offer, There Can Be No Argument That The Defensive Measures Are Needed To Maintain Negotiating Leverage. Air Products Cannot Realistically Remove Airgas’s Poison Pill By Calling A Special Meeting. If The Defensive Measures Are Maintained, Airgas Stockholders Will Never Have A Say On Air Products’ Offer.

32

33 34 39 42

B. C. CONCLUSION

iii. TABLE OF AUTHORITIES Page Cases Blasius Indus, Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988)....................................................................................................3 Chesapeake Corp. v. Shore, 771 A.2d 293 (Del. Ch. 2000).......................................................................................... Passim eBay Domestic Holdings, Inc. v. Newmark, 2010 WL 3516473 (Del. Ch. Sept. 9, 2010) ............................................................................11 Hollinger Int’l, Inc. v. Black, 844 A.2d 1022 (Del. Ch. 2004)..................................................................................................4 In re Circon Corp. S’holders Litig., 1998 WL 34350590 (Del. Ch. Mar. 11, 1998)...................................................................14, 20 Kahn v. Lynch Commc’n Sys., Inc., 669 A.2d 79 (Del. 1995) ..........................................................................................................21 Mentor Graphics Corp. v. Quickturn Design Sys., Inc., 728 A.2d 25 (Del. Ch. 1998)....................................................................................................34 Mercier v. InterTel (Delaware), Inc., 929 A.2d 786 (Del. Ch. 2007)..................................................................................................21 Moran v. Household Int’l, Inc., 500 A.2d 1346 (Del. 1985) ..................................................................................................4, 40 Robert M. Bass Group, Inc. v. Evans, 552 A.2d 1227 (Del. Ch. 1988)................................................................................................21 Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del. 1995) ..........................................................................................11, 12, 22 Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586............................................................................................................................4, 40

iv. TABLE OF AUTHORITIES (Cont.) Page Other Authorities 17 C.F.R. § 240.14D-9.....................................................................................................................4 17 C.F.R. § 240.14D-11.................................................................................................................21 Wachtell, Lipton, Rosen & Katz, Flawed Academic Challenge to Constitutionality of Delaware’s Anti-Takeover Law (Sept. 29, 2009) ....................................................................11

1. PRELIMINARY STATEMENT After a month of additional discovery, including further document production and fifteen depositions, and three days of supplemental trial testimony, the issue in this case remains crisp and clear: is the Airgas Board’s continued reliance on the company’s defensive measures to block its sophisticated, well-informed stockholders from deciding on Air Products’ best and final offer a reasonable response to a reasonably perceived threat? For the reasons set forth below and in Air Products’ other post-trial briefs, the answer is resoundingly “no.” Defendants have failed to meet their burden of showing that Air Products’ offer poses a legally cognizable threat under Unocal warranting any defensive response, let alone the disproportionate response they have brought to bear. Defendants’ position is stark and unprecedented: because the Airgas Board has decided that executing management’s business plan might ultimately produce greater long-term value than Air Products’ $70 per share offer, Airgas stockholders should not be permitted to decide on Air Products’ offer for themselves – not now, not ever. This position is unsupportable both factually and legally. Factually, the evidence at the supplemental hearing made clear that Air Products’ fully-financed, all-cash, all-shares offer, with a committed back end or even a subsequent offering period, poses no legally cognizable threat to Airgas’s corporate policy or effectiveness. Indeed, the evidence showed that no such threat was ever identified (let alone discussed) by the Airgas Board, and that the Airgas Board never discussed (let alone determined) whether the Airgas defensive measures were reasonable in relation to any such threat. Following the initial trial, Defendants introduced a new theory: that Air Products’ offer is structurally coercive or presents a so-called “prisoner’s dilemma.” But none of Defendants’ witnesses could articulate a coherent explanation of this purported threat and eventually conceded that their structural coercion theory boils down to “the risk . . . that the informed minority, in theory, will be forced

2. to do something because of the bamboozled majority, or the majority who will act because their interests’ time lines are different than that minority.” Supp. Tr. 454 (Clancey). Defendants’ inability to elucidate their structural coercion theory is unsurprising given that the Airgas Board never discussed this issue, and that it is nothing more than “a post hoc, litigation-inspired rationale” composed by Defendants’ advisors after the Airgas Board rejected Air Products’ $70 per share offer. See Chesapeake Corp. v. Shore, 771 A.2d 293, 332-33 (Del. Ch. 2000). Defendants’ substantive coercion theory was belied by the evidence at the supplemental hearing, which further confirmed that Airgas’s stockholders are sophisticated and that they have all of the company-specific information necessary to decide whether to accept Air Products’ offer. Defendants attempted at the supplemental hearing to distance themselves from their prior testimony on this point by asserting that Airgas stockholders have all the information that Airgas is “legally required” to disclose, but not other information uniquely within the knowledge of the Board. This effort to change the record was unavailing. Airgas’s witnesses ultimately acknowledged that the Airgas stockholders have “more than adequate” information upon which to base their decision on Air Products’ offer. Supp. Tr. 453 (Clancey). As one Airgas director put it: “all the information that [the Airgas stockholders] could ever want is available”, including, among other things, the opinion of the Airgas Board and its advisors and analysts reports with projections “very close or almost identical to management’s own internal projections”. Id.

van Roden Dep. 256. This testimony undercuts any claim that the Airgas Board perceives or could reasonably perceive a threat of substantive coercion – i.e., the risk that, after a year of public debate, the stockholders mistakenly will accept an underpriced tender offer.

3. In addition, the evidence at the supplemental hearing demonstrated that

, and (2) Airgas’s financial inadequacy argument is built on a house of cards – premised upon a discounted cash flow analysis that is itself premised upon an economic recovery that may or may not play out as Airgas management predicts and may or may not result in company growth. Management projections – which, not coincidentally, have climbed over the last year along with Air Products’ offer price – are driven by assumptions of a robust macroeconomic recovery that are more bullish than those of analysts, independent third parties, and even Airgas’s own financial advisor. Each Airgas witness agreed that it is impossible to guarantee such a recovery and that it is impossible to predict what Airgas will be worth in six months or a year, much less five years from now. Moreover, it is indisputable that the Defendants have no greater ability to predict macroeconomic conditions than do Airgas’s stockholders. Legally, Defendants’ extreme position does not withstand scrutiny. At base, Defendants’ case is that the Airgas Board always “knows better” than the Airgas stockholders, and that the Airgas Board can maintain its poison pill and other defenses forever. Each Airgas witness testified that the decision whether to accept a tender offer is for the Board to make, not the stockholders. See, e.g., Supp. Tr. 260 (McCausland) (“[I]t’s not the shareholders decision to make a determination whether an offer should be accepted or not. It’s the board’s job.”)

This position is not supported by Delaware law. As this Court observed in Blasius, “[t]he theory of our corporation law confers power upon the directors as agents of the shareholders; it does not create Platonic masters.” Blasius Indus, Inc. v. Atlas Corp., 564 A.2d 651, 663 (Del. Ch. 1988).

4. “The passage of time has dulled many to the incredibly powerful and novel device that a so-called poison pill is. That device has no other purpose than to give the board issuing the rights the leverage to prevent transactions it does not favor by diluting the buying proponent’s interests.” Hollinger Int’l, Inc. v. Black, 844 A.2d 1022, 1083 (Del. Ch. 2004). Although the Delaware Supreme Court in Moran sanctioned the use of a poison pill in order to prevent abusive takeover tactics, it simultaneously held (and recently re-affirmed in Selectica) that a target’s adoption or reliance on a poison pill is “not absolute.” Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586, 607 (Del. 2010) (citing Moran v. Household Int’l, Inc., 500 A.2d 1346, 1354 (Del. 1985)). Rather, the poison pill was sanctioned in the takeover context to give a board breathing room to communicate with stockholders and to develop alternatives to a tender offer; it permits the board to ensure that stockholders do not tender in an uninformed way and that stockholders are not required to make their choice hurriedly, without a full range of available options. The pill does not permit a board to prevent stockholders from making that choice in perpetuity, as the Airgas Board seems to believe. See Supp. Tr. 231, 258-60 (McCausland); Miller Dep. 161-67. Indeed, why would federal law require a board to make a recommendation on a tender offer (17 C.F.R. § 240.14D-9), if boards are permitted permanently to prevent stockholders from having the ability to act on that recommendation? And why would Delaware cases repeatedly state that a target’s reliance on a poison pill is not absolute if a board could forever rely upon a paternalistic, “we know better” defense? Defendants’ position has morphed since the start of this year-long takeover drama to accommodate their shifting strategies. On day one, Defendants asserted that Airgas was not for sale. Then, when convenient to their delay (and litigation) strategy, they said Airgas needed more time to demonstrate the company’s performance coming out of an economic recession and to inform the stockholders about various matters, including the company’s new SAP

5. implementation plan. The company has achieved these goals. It has graphically communicated to the stockholders the company’s improving performance, see TX 1118 at slide 3, and published a four-page, single-spaced press release disclosing and describing the perceived future benefits associated with SAP. See TX 499. Now, Defendants are taking the extreme position that they never have to lift the company’s defensive measures to allow the stockholders to decide because the Board has deemed Air Products’ offer financially inadequate. No court has ever sanctioned the use of a poison pill and other defensive measures for such a purpose or permitted such defensive measures to be maintained for this long – well after any legitimate defensive purpose has been exhausted and a best and final offer is on the table. Rather, when the legitimate purposes of defensive measures have been served, there comes a time when the stockholders – the owners of the company – who are presented with a non-coercive, premium offer must be permitted to decide for themselves whether to tender the shares that they own. That time is now. Airgas’s poison pill and other defensive measures have

fulfilled whatever legitimate purpose they once may have had. Now, they serve only to prevent a fully informed, sophisticated stockholder base from exercising a value judgment and they foist upon those stockholders all of the risk associated with Airgas’s bet on strong macroeconomic growth that may or may not happen. Defendants’ continued blocking of Air Products’ best and final offer is an improper imposition on stockholders’ rights and an unwarranted obstacle to the efficient functioning of the capital markets. The time has come for the stockholders to have the opportunity to decide whether to accept Air Products’ premium offer. The Court should rule that Defendants have failed to meet their burden under Unocal and order that Airgas’s defensive measures be rendered inapplicable to the proposed Air Products transaction.

6. SUPPLEMENTAL FACTS I. AIR PRODUCTS MAKES ITS BEST AND FINAL OFFER AT A SIGNIFICANT PREMIUM TO AIRGAS’S UNAFFECTED STOCK PRICE. On December 9, 2010, nearly fourteen months after Mr. McCausland first told Mr. McGlade that Airgas “was not for sale”, Air Products made its best and final offer to acquire all outstanding shares of Airgas stock for $70 per share in cash. Supp. Tr. 5 (Huck), 75 (Davis), 108 (McGlade). The offer represents a 61% premium to Airgas’s unaffected stock price as of February 4, 2010, is backed by committed financing, and faces no regulatory impediments. Air Products is also committed to cashing out all non-tendering stockholders “as quick as the law would allow,” and if necessary is willing to extend a subsequent offering period for nontendering Airgas stockholders. Supp. Tr. 15 (Huck). The evidence at the supplemental hearing confirmed that absent Air Products’ $70 offer, Airgas’s stock price would drop precipitously, such that a reasonable stockholder could want $70 now, instead of bearing the risk that Airgas’s future value is (or is not) greater. Supp. Tr. 293-94 (McCausland), 180-81 (Miller), 353-54 (DeNunzio); see also Miller Dep. 120. Indeed, Airgas’s witnesses consistently testified that they would expect Airgas’s stock price to drop if Air Products’ offer fails. Supp. Tr. 288 (McCausland discussing potential “disruption in our stock price . . . in the event that Air Products withdraws.”), 397 (DeNunzio), 566-67 (Harkins); Tr. 704 (McCausland), 1235-36 (Hubbard). Airgas’s trading prices since the October trial also demonstrate that, absent Air Products’ offer, Airgas’s standalone value is substantially less than $60 per share. For example, Airgas disclosed in late October 2010 that it was finally ready to meet, and purportedly to negotiate, with Air Products’ representatives. TX 646. Airgas’s stock reacted positively to the news and traded up to $71 per share – an all-time high. See TX 1064 at 8. Thus, the prospect of

7. a deal with Air Products increased Airgas’s stock price to a level Airgas had not seen in its 24year existence as a public company. At the long awaited meeting, however, Airgas’s Chairman stated that Airgas would not accept “a penny less than $78” (Supp. Tr. 195 (McCausland)), and talks between the parties stalled at the starting line. After Airgas’s November 4, 2010 statement that “no further meetings of the parties are scheduled”, TX 652, Airgas’s stock began to decline. By December 22, 2010, the day Defendants recommended Airgas stockholders reject Air Products’ $70 offer, and a month after the Supreme Court foreclosed a January 2011 annual meeting, Airgas’s stock traded down to $61 per share. That ten-dollar per share drop reflected a loss of over $800 million for Airgas’s stockholders and occurred despite Air Products’ pending $70 per share offer. Notably, the stock price dropped despite Airgas’s numerous public

disclosures advocating that its standalone value was greater than Air Products’ offer, including Airgas’s financial results over four quarters since Air Products’ initial public offer, see TX 304, TX 433, TX 645, TX 1086, and a detailed quantification of the anticipated benefits from SAP, see TX 499.

See TX 1066 at 19.
1

Credit Suisse was engaged on December 13, 2010, eight days before the Airgas board met to consider Air Products’ $70 offer. Supp. Tr. 320 (DeNunzio). If the Airgas Board believed Credit Suisse could absorb all of the “insider information” allegedly available to the omniscient Airgas Board but not Airgas stockholders within eight days, it begs the question why the Airgas Board believes the highly sophisticated Airgas stockholders could not make value judgments after almost a year of public disclosures.

2

. See TX 1066 at

8.

4

II.

THE ALLEGED FINANCIAL INADEQUACY OF AIR PRODUCTS’ $70 OFFER IS THE ONLY FACTOR THE AIRGAS BOARD CONSIDERED WHEN IT RECOMMENDED AGAINST THE OFFER. On December 21, 2010, the Airgas Board rejected Air Products’ $70 offer on the

same and only ground it had rejected all of Air Products’ prior offers – alleged financial inadequacy. No other basis for recommending against the $70 offer was discussed at this meeting – the only Airgas Board meeting at which the $70 per share offer was considered. For example, there was no discussion about whether Airgas stockholders were confused about the company’s value or whether they were obstructed from seeing any hidden value in Airgas. See TX 659 (Airgas’s Dec. 22, 2010 14D-9); see also Supp. Tr. 441-42 (Clancey). Nor did the board

Id.
3

4

9. discuss whether Air Products’ $70 offer was coercive to Airgas stockholders. See, e.g., Supp. Tr. 158 (Miller), 368 (DeNunzio), 438 (Clancey); see also Supp. Tr. 242 (McCausland testifying that coercion was not discussed but was merely “implicit”). There was also no discussion about whether arbitrageurs were subject to unique pressures and would be forced to tender even if they thought Air Products’ $70 offer was inadequate. Supp. Tr. 370 (DeNunzio), 439-40 (Clancey). And there was no discussion about whether the offer would somehow impose upon the stockholders’ a prisoner’s dilemma.5 Supp. Tr. 157 (Miller), 369 (DeNunzio), 438-39 (Clancey), 554-55 (Harkins). In addition, the directors never asked the Airgas financial advisors for advice concerning subjects such as stockholder coercion or a prisoners’ dilemma, and the advisors did not provide advice on any of those subjects. Supp. Tr. 368-69 (DeNunzio), 554-55 (Harkins); Rensky Dep. 359. In fact, the advisors do not recall those subjects ever coming up at the meeting.6 Supp. Tr. 368-69 (DeNunzio); Rensky Dep. 357-58. Furthermore, the directors never discussed whether the company’s defensive measures were reasonable in relation to threats allegedly posed (but, other than alleged financial inadequacy, not considered at Airgas Board meetings) by Air Products’ $70 offer and whether

5

Mr. Clancey suggested that a single scant reference in the December 21 minutes “that the Company had to protect the pill” (TX 1063 at 10) was made in the context of discussing stockholder coercion. See Supp. Tr. 420-21 (Clancey). But it is clear from the face of the minutes that the statement was not made in that context; it was made in reference to the alleged financial inadequacy of Air Products’ offer. TX 1063 at 10. Miller testified that he did not know why Clancey made the stray comment about the pill, and that “the board has not discussed whether it would be appropriate at any point to pull the pill” since he joined the Board. Supp. Tr. 151-52 (Miller). Furthermore, when Mr. Clancey was pressed on cross examination, he conceded that the subject of coercion was not discussed at the meeting, Tr. 437-38, a fact that is corroborated by each Airgas witness, all of whom testified that the subject of coercion was not specifically discussed in any Airgas Board meeting, see, e.g., Supp. Tr. 158 (Miller), 242 (McCausland), 368 (DeNunzio), 438 (Clancey). Mr. Harkins, Defendants’ putative trial expert, never provided advice to the Board on any of these subjects. Supp. Tr. 554-55 (Harkins).

6

10. those defenses should be maintained as a proportionate response to any threat posed.

Indeed, the company’s 14D-9 proves that the alleged financial inadequacy of Air Products’ offer was the Board’s sole consideration. The 14D-9 disclosed fourteen matters the Airgas Board considered in connection with its recommendation, TX 659 at 5-6, and not a single Airgas witness could identify a basis that the Board considered in recommending against the offer that was not included in the 14D-9. Supp. Tr. 434-36 (Clancey); Thomas Dep. 487; McCausland Dep. Vol. IV 85. Each consideration merely underscored the Board’s valuation judgment that the $70 offer was “clearly inadequate and that the value of Airgas in a sale, at this time, is at least $78 per share”. TX 659 at 3; see also TX 1063.

11. ARGUMENT I. DEFENDANTS HAVE THE BURDEN TO PROVE THE DEFENSIVE MEASURES ARE A PROPORTIONATE RESPONSE TO A REASONABLY PERCEIVED THREAT. “Enhanced scrutiny has been applied universally when,” as in this litigation, “stockholders challenge a board’s use of a rights plan as a defensive device.” eBay Domestic Holdings, Inc. v. Newmark, 2010 WL 3516473, at *19 (Del. Ch. Sept. 9, 2010). Similarly, “a board’s decision whether or not to waive Section 203 is subject to its fiduciary duties,” such that “[i]n any situation where fiduciary duties might compel a board to redeem a rights plan, they would also likely compel a board to waive Section 203’s waiting period.” Wachtell, Lipton, Rosen & Katz, Flawed Academic Challenge to Constitutionality of Delaware’s Anti-Takeover Law, at 1 (Sept. 29, 2009).7 Accordingly, Defendants bear the burden to demonstrate both “that the board of directors had reasonable grounds for believing that a danger to corporate policy and effectiveness existed” and “that the board of directors’ defensive response was reasonable in relation to the threat posed.” Unitrin, 651 A.2d at 1373. This burden requires Defendants to prove not only that the Airgas Board acted subjectively in good faith; but also that, on an objective basis, a legitimate threat existed and the Airgas Board’s response to the threat was reasonable and proportionate. eBay, 2010 WL 3516473, at *19. Moreover, Defendants must prove that any threats identified in this litigation as part of their defense actually were assessed and determined

7

Moreover, the Supreme Court has made clear that “[w]here all of the target board’s defensive actions are inextricably related, the principles of Unocal require that such actions be scrutinized collectively as a unitary response to the perceived threat.” Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1387 (Del. 1995) (citing Gilbert v. El Paso Co., 575 A.2d 1131, 1145 (Del. 1990)). Thus, like the repurchase program and poison pill in Unitrin, the Airgas Board’s decisions with respect to each of the poison pill, Section 203(a)(1), and Article 6 of Airgas’s Amended and Restated Certificate of Incorporation are subject to enhanced scrutiny.

12. to be a genuine concern by the Airgas Board; “post hoc, litigation-inspired rationale[s]” do not suffice. Chesapeake, 771 A.2d at 333. II. DEFENDANTS STILL FAIL TO DEMONSTRATE THAT THE AIRGAS BOARD IDENTIFIED REASONABLE GROUNDS FOR BELIEVING THAT AIR PRODUCTS’ OFFER POSES A COGNIZABLE THREAT. “The first prong of Unocal requires the defendants to establish that the [Airgas] board, ‘after a reasonable investigation, . . . determined in good faith, that the [Air Products tender offer] presented a threat that warranted a defensive response.’” Chesapeake, 771 A.2d at 330 (quoting Unitrin, Inc., 651 A.2d at 1375). When the first trial in this matter concluded, it was clear that the Airgas Board had identified only one threat allegedly posed by Air Products’ offer: the threat that the offer price was too low. See Tr. 474 (“Q. Mr. Thomas, you believe that the only threat posed to the shareholders of Airgas by the Air Products’ tender offer is a low price; correct? A. I do.”); TX 499 (Airgas Aug. 2010 Press Release) (McCausland: “In response to Air Products’ offer to acquire Airgas, we have consistently stated that it is all about value . . . .) (emphasis added); TX 435 (34-page investor presentation titled “It’s All About Value”); TX 480 (63-page investor presentation titled “It’s All About Value.”); TX 511 (70-page investor presentation titled “It’s All About Value.”). But in the wake of the October trial, Defendants apparently grew uncomfortable with their stark position: that an allegedly inadequate offer always justifies blocking a company’s sophisticated and well-informed owners from tendering their shares into a tender offer – forever. What has followed in the months since, at least in the litigation, has been an effort to conjure up additional threats posed by Air Products’ all-shares, all-cash offer. But these efforts fail. After a year of litigation, Defendants have still failed to demonstrate that they reasonably concluded that Air Products’ offer constitutes a legally

13. cognizable threat. As explained below, the supplemental hearing only confirmed the evidence at the October trial: Air Products’ offer does not threaten Airgas or its stockholders. A. There Is No Threat Of Substantive Coercion: Airgas Stockholders Are Well-Informed, Not Confused.

In October, Airgas’s representatives readily agreed that, after extensive public disclosures and a heated proxy contest, Airgas stockholders had all the information they needed to decide on Air Products’ offer.8 That testimony included the following: x Ill: Q: [O]ver the last year Airgas has given its shareholders the information necessary to make an informed judgment about Air Products’ offers; correct? A: That’s correct. (Tr. 271.) Thomas: Q: In your mind, do [Airgas’s stockholders] have every piece of information that’s available that’s necessary for a reasonable stockholder to decide whether to tender? A: I think they do. (Tr. 474.) McLaughlin: Q: Now, you would also agree with me that prior to the recent meeting of Airgas’ stockholders, stockholders have all the information they needed to make an informed decision about whether to accept or reject Air Products’ offer; right? A: That is correct. (Tr. 841.) Molinini: Q: [Y]ou believe that the stockholders have all the information they would need to make a decision on anything they wanted to make a decision on. Isn’t that correct, sir? A: That is correct. (Tr. 889.) McCausland: Q: You believe the stockholders have enough information to decide whether to accept the 65.50 offer; right? A: Yes. Q: [Y]ou feel you have met your duty in providing all the information necessary for the shareholders to make a decision; right? A: Yes. (Tr. 630-31.)

x

x

x

x

The Airgas witnesses could not have credibly claimed otherwise. Since Air Products announced its offer, Airgas has provided its stockholders with well over 100 solicitations regarding the Air Products offer, including richly-detailed presentations setting forth

8

Defendants also acknowledged that Airgas’s stockholders are “sophisticated” (Tr. 273 (Ill)), “very savvy” (Tr. 888 (Molinini)) and “capable of making a decision as to whether to accept or reject Air Products’ offer” for themselves (Tr. 573 (McCausland)). See Tr. 1103-04 (Harkins). Defendants did not attempt to undo these admissions at the supplemental hearing.

14. Airgas’s current views of the company’s value. See, e.g., TX 1021 (16-page investor

presentation). In addition, Airgas used television appearances, analyst conferences and hundreds of face-to-face stockholder meetings to make its case against Air Products’ offer. See, e.g., Tr. 272-73 (Ill); 509-14 (Thomas); 556-57 (McCausland). Airgas has also had the opportunity to demonstrate its performance: since the tender offer was announced, Airgas has issued four quarterly earnings reports and their associated disclosures. See TX 304, TX 433, TX 645, TX 1086. At the supplemental hearing, Defendants attempted to backtrack, arguing, essentially, that a board always has more information about a company than its stockholders. See Supp. Tr. 189-91 (McCausland). Any attempt by Airgas to use this new testimony as a basis to assert that Airgas’s stockholders are anything less than fully informed should be rejected for at least five reasons. First, the uniform prior testimony of Airgas’s witnesses drains any such argument of credibility. 9 Second, Defendants have put forth no evidence – none at all – that they discussed or cited stockholder confusion or lack of information as a basis for rejecting Air Products’ tender offers. Cf. TX 659 at 5-6 (Airgas’s Dec. 22, 2010 Schedule 14D-9). Thus, the Board having made no determination on this subject, there is no determination for the Court to review for reasonableness, and, as a matter of law, any potential for stockholder confusion is not relevant to the Court’s Unocal analysis. In re Circon Corp. S’holders Litig., 1998 WL 34350590, at *1
9

And Mr. McCausland agreed with the Court that there is, by definition, no injury to those arbitrageur stockholders who tender their shares at $70. See Supp. Tr. 301-02 (McCausland).

15. (Del. Ch. Mar. 11, 1998) (“What is relevant is what the defendants knew and considered at the time they took action in response” to Air Products’ tender offer, “not information defendants did not know and did not consider.”) (Tab 1).10 Third, contrary to Defendants’ new contention at the supplemental hearing, the information publicized by Airgas over the past year has not been limited only to the legally “required disclosures”. See Supp. Tr. 189-90 (McCausland) (“[T]here’s a big difference between what you’re required to disclose in a filing and actually that which you would want to disclose in a filing”). Airgas has far, far exceeded SEC requirements. The SEC does not require, for example, that Airgas produce richly detailed presentations on its view of the value of the company or to hold quarterly conference calls where it discusses its performance. See, e.g., TX 435, TX 480, TX 511. The SEC does not require Airgas to maintain a large and professional investor relations department whose sole charge is to relay management’s view of the value of the company to stockholders. The SEC did not require Mr. McCausland to host 300 meetings with stockholders over the past year. Supp. Tr. 200-01 (McCausland). The SEC did not require Mr. McCausland to appear on radio, television and print to advocate against Air Products’ offer. Supp. Tr. 253 (McCausland) (“Q. You’ve said that [the $70 offer is inadequate] hundreds, if not thousands of times. You’ve said it in print. You’ve said it on radio, on television. Is there any place you haven’t said it, sir? A. I can’t think of any.”). The SEC does not require Airgas to release forward-looking earnings guidance, as well as analyses of its successes and failures in hitting prior guidance. The SEC does not require Airgas to communicate with and cater to the
10

Having not even considered the issue, it follows that the Board performed no factual investigation to determine whether any Airgas stockholders or analysts, in fact, lacked any material information. See Chesapeake, 771 A.2d at 332 (discounting defendant board’s identification of a stockholder confusion threat because the board failed to undertake “any sort of informal survey of its largest stockholders or the analyst community to see if they were befuddled by the [bidder’s] Tender Offer.”).

16. large community of brokerage house analysts that cover Airgas, including through full-day meetings with analysts in which the company covers all major aspects of Airgas’s business. See TX 109; McCausland Dep. Vol. III 150-53; Supp. Tr. 206 (McCausland). Nor does the SEC require that Airgas enlist a roster of external advisors, including teams from Joele Frank, Innisfree M&A, Goldman Sachs, and Bank of America/Merrill Lynch to further communicate with its stockholders. See, e.g., Tr. 136 (Huck). Airgas’s stockholders clearly have sufficient information. Fourth, even at the supplemental hearing, Defendants’ own witnesses failed to identify any particular information lacked by Airgas stockholders. Indeed, when prompted with precisely this question, Defendants’ witnesses replied that stockholders are sufficiently wellinformed to make up their own minds regarding the offer: x DeNunzio: THE COURT: In your opinion, personally, what would you tell me a shareholder at Airgas needs to know more than they do know about making an informed judgment about accepting an offer at 70 or some other price? THE WITNESS: [Pause.] Well, I think you have to conclude that this shareholder base is quite well-informed. (Supp. Tr. 396.) Miller: Q. Do you have any facts about Airgas’s business strategy or Air Products’ offer that would make Airgas’s stockholders incapable of properly making an economic judgment about the tender offer? A. I have no facts. (Supp. Tr. 154-55.)

x

x

x

Clancey: THE COURT: What information would you recommend that the stockholders have that they don’t already have? THE WITNESS: You know, we live in a day of information overload . . . but they have -- all the information that they could ever want is available. ...

17. THE COURT: So it’s a pretty rich information base [available to Airgas stockholders]. I’m just asking if you agree or disagree with me. THE WITNESS: It is. More than adequate. (Supp. Tr. 452-54.) The testimony of Mr. McCausland was more equivocal on this point, but in substance it was the same. When pressed to identify any hidden value within Airgas, Mr. McCausland could only specify Airgas’s implementation of SAP software. Supp. Tr. 307–09 (McCausland). But the evidence showed that, while Airgas believes that SAP will become a valuable contributor to Airgas’s performance, the impact Airgas believes will be achieved is not hidden at all.11 Elsewhere, Defendants also noted that stockholders did not have access to every detail in management’s five-year plan. See, e.g., Supp. Tr. 190 (McCausland). But Airgas’s

representatives admitted that the material information from Airgas’s plan has been released publicly through, for example, SEC filings. See. Supp. Tr. 189-90 (McCausland). In fact, many analysts (who have been briefed extensively by the company in numerous meetings) have issued reports containing analyses and projections that very closely track management’s five-year plan.

11

The October testimony of Michael Molinini (“the guy [at Airgas] who is going to operate and live with SAP”, Tr. 872) and the August 31, 2010 memorandum/press release on Airgas’s SAP implementation prepared by Mr. Molinini’s team (TX 499) prove this point. Together, these can only be described as a thorough walk-through of both the qualitative and quantitative benefits Airgas hopes to achieve from SAP and why. The August 31 memorandum, which spans four single-spaced pages, is particularly noteworthy. TX 499. The press release was part of an effort by Mr. McCausland to “push” Mr. Molinini and his team to quantify the benefits of SAP prior to the September 2010 meeting at which Mr. McCausland was up for reelection to the Airgas Board. Tr. 906 (Molinini) (“Q. So he was pushing you along to get this done to get the benefits quantified so you could get it out to the public in advance of the meeting in September. Isn’t that right? A. Yes.”). And the press release successfully did just that. Tr. 889 (Molinini) (“Q. And this press release includes a quantification of the economic benefits expected to be achieved in the key areas of sales growth, price management, and administrative and operating efficiencies as a result of the implementation of SAP. Correct? A. Yes.”). Indeed, after the press release was issued, Mr. Molinini testified that Airgas’s stockholders had all the information they would need to “make a decision on anything they wanted to make a decision on.” Tr. 889 (Molinini). Based on this record, the future implementation of SAP software cannot reasonably be viewed as an Airgas asset that is hidden from Airgas’s stockholders.

18. See Supp. Tr. 395-96 (DeNunzio) (“THE COURT: You mentioned earlier . . . how remarkably close analysts’ EPS projections were to management’s. THE WITNESS: That’s right. THE COURT: . . . So that information’s available to the world, isn’t it? Analysts’ reports are available publicly? THE WITNESS: That’s right.”). Fifth, Defendants’ position essentially amounts to the contention that a Board always has more access to information about the corporation than its stockholders.12 This is simply a new variation on Defendants’ theme: that the Board always knows what’s best, and that its decisions should not be second-guessed. Under this theory, no Court could ever order a target to redeem its poison pill. This is not a sensible interpretation of Unocal. See Chesapeake, 771 A.2d at 308 (rejecting substantive coercion argument when “[t]he most the [defendant] directors are able to credibly say is that stockholders will never understand the relevant information as deeply as the directors do . . . .”).13 B. Air Products’ Offer Is Not Structurally Coercive.

Air Products’ offer – an all-cash, all-shares offer, with a commitment to consummate a second-step transaction at the same price as soon as practicable – presents no

12

The notion that the Airgas stockholders cannot, after a year of digesting detailed public disclosures regarding the value of Airgas, make a fully informed judgment on Air Products’ offer is belied by the speed with which the individuals elected to the Airgas Board in September 2010 began making value judgments.

The speed with which the new directors joined the incumbents in rejecting Air Products’ offer “give[s] even more reason to believe that the Airgas shareholders will not ‘mistakenly’ tender into a grossly inadequate offer.” 12/2/10 Letter Order at 2, n.2. See supra, n. 1.
13

In addition, as noted below in Section II.E, the evidence shows that reasonable stockholders could find Air Products’ $70 offer to be fair value for the company in a sale.

19. prisoner’s dilemma and is not a coercive tender offer under Delaware law. See Air Products’ Dec. 21, 2010 Ltr. 8-11; Air Products’ Post-Trial Reply Br. 30-33; TX 1085 (Morrow Report) at 3-6. This was only reaffirmed by the evidence at the supplemental hearing, which further showed that (1) the prisoner’s dilemma is a post hoc, litigation-inspired rationale and (2) Air Products is committed, if its tender offer prevails, to provide $70 in cash for each remaining Airgas share as quickly as possible. The record before the Court clearly establishes that the alleged threat of a prisoner’s dilemma was conceived by counsel after the fact and is not a real threat identified as a genuine concern by the Airgas Board. Chesapeake, 771 A.2d at 333. In fact, Defendants’ witnesses never mentioned a prisoner’s dilemma or structural coercion at the first trial; the theory first appeared in Defendants’ Post-Trial Brief. Additionally, the evidence introduced at the supplemental hearing – including the Schedule 14D-9 filed by Airgas, the minutes of Airgas’s Board meetings, and the testimony of Airgas’s witnesses – all confirmed that coercion or a prisoner’s dilemma was never identified or deemed a threat by Airgas’s Board when rejecting Air Products’ offers, including the current $70 per share offer. For example, at the supplemental hearing, Airgas’s witnesses gave the following testimony: x DeNunzio: Q. No discussion at [Airgas’s December 21 Board] meeting whether Airgas’ stockholders would be coerced into tendering if they thought the price was inadequate, was there? A. Not that I recall. Q. No discussion at [Airgas’s December 21] board meeting about stockholders being subject to a prisoner’s dilemma, was there? A. Not that I recall. (Supp. Tr. 368-69.) x Clancey: Q. But you never said and nobody else ever actually said anything about shareholders being coerced. Correct? A. Correct. Q. And neither you nor any of your fellow board members said anything about a so-called prisoner’s dilemma. Is that correct? A. That is correct. (Supp. Tr. 438.)

20. x Miller: Q. Do you recall any discussion at any time with anyone about whether Air Products shareholders are being subject to pressures or coercion that would force them somehow to tender the $70 share offer. A. I don’t recall that specifically. Q. Did you generally discuss that topic with someone? A. No. Q. Did you recall that subject being discussed at any board meeting? A. No. (Supp. Tr. 158.) Indeed, Mr. Miller testified that the only time he had ever discussed a prisoner’s dilemma in connection with Air Products’ offer was with litigation counsel while preparing for his testimony. Supp. Tr. 157-58; see also Supp. Tr. 439 (Clancey) (“Q. [P]rior to your deposition, you had never heard the concept of a prisoner’s dilemma used in the context of the Air Products offer. Is that correct? A. That is correct.”). This record cannot support Defendants’ burden of demonstrating that they made an informed judgment that the Airgas stockholders would be coerced into accepting an inadequate offer as a result of the structure of the offer. For example, no evidence was

considered by the Airgas Board that might show that Air Products was unwilling or unable to consummate a second-step merger at $70 per share as soon as possible. And no evidence was presented that even a single stockholder of Airgas feels that, if the pill were to be pulled, it would be coerced into tendering its shares despite believing that $70 per share was inadequate. Cf. Supp. Tr. 13 (Huck) (“Q. Have any Airgas stockholders ever complained to you that Air Products’ offer is coercive in any way? A. They have not.”). As such, Defendants’

“identification” of this threat for litigation purposes is irrelevant to the issues before the Court. See In re Circon Corp. S’holders Litig., 1998 WL 34350590, at *1 (Del. Ch. Mar. 11, 1998); see also Chesapeake, 771 A.2d at 333. But even if the Airgas Board had considered the so-called prisoners’ dilemma and deemed it a threat to Airgas’s corporate policy and effectiveness, that decision would have been

21. unreasonable based on the record in this case. Even if one ignored appraisal rights and potential entire fairness implications, there is no credible evidence to suggest that a single Airgas stockholder’s tendering decision will be coerced by fear that the second step would not be promptly consummated at $70 per share – the same price received by those initially tendering. See, e.g., Kahn v. Lynch Commc’n Sys., Inc., 669 A.2d 79, 86 (Del. 1995) (“In this case, no shareholder was treated differently in the transaction from any other shareholder, nor subjected to a two-tiered or squeeze-out treatment. [The bidder] offered cash for all the minority shares and paid cash for all shares tendered. Clearly there was no coercion exerted which was material to this aspect of the transaction . . . .”) (internal citation omitted). To the contrary, Air Products has now committed in court to (1) promptly pay $70 in cash for each and every share of Airgas that is acquired; (2) do so as quickly as the law and/or the Airgas Board will allow; and (3) include a subsequent offering period14 for Airgas stockholders if they request it or the Court makes it a condition to disarming Airgas’s takeover defenses. See e.g. Supp. Tr. 15-16 (Huck).15
14

The effect of a subsequent offering period is to give a non-tendering stockholder a second chance to tender into the offer immediately after the offer initially expires, and promptly to receive the same consideration that is received by stockholders who tender into during the initial offering period. See TX 1085 (Morrow Report) at 5-6; 17 C.F.R. § 240.14D-11. Defendants fail coherently to explain how any coercion could exist if Air Products were to include a subsequent offering period. While Mr. Harkins opined that a delay of even one day would be costly for stockholders, Supp. Tr. 569, such costs are obviously de minimis, and Defendants fail to appreciate the irony that this argument presents given their blocking Air Products’ offer for a year. Contrary to Defendants’ arguments, a cognizable threat under Unocal cannot exist solely because a portion of Airgas stockholders may have investment horizons shorter than other Airgas stockholders. First, “shorter-term” holders now are in the stock precisely because “longer-term” stockholders sold. See TX 1085 (Morrow Rep.) at 6-8; Supp. Tr. 747-48 (Morrow). Merger arbitrageurs provide liquidity in almost every hostile takeover when a high premium is offered. Supp. Tr. 747-48 (Morrow). This inevitable occurrence is no basis for allowing a company to use its pill to block a tender offer forever. Mercier v. InterTel (Delaware), Inc., 929 A.2d 786, 815 (Del. Ch. 2007) (“[T]he bad arbs and hedge funds who bought in, had obviously bought their shares from folks who were glad to take the profits that came with market prices generated by the Merger and Vector Capital’s hint of a higher price.

15

22. C. Air Products’ Offer Poses No Threat Of Opportunity Loss.

The October trial established that Air Products’ offer has ceased to pose any threat of “opportunity loss” – the threat that stockholders may tender into the offer before their board has had sufficient time to consider it and present strategic alternatives for their consideration. See Unitrin, 651 A.2d at 1384 (defining opportunity loss as the threat that a “hostile offer might deprive target stockholders of the opportunity to select a superior alternative offered by target management or . . . another bidder”) (internal citation omitted). Specifically, the evidence established that Airgas fully explored its “strategic alternatives going forward”, Tr. 291 (Ill), such as selling the company to another bidder or undertaking a recapitalization transaction, and decided that it needed no further time to do so. Indeed, in the course of preventing inquiry into the lack of alternative bidders, defense counsel affirmatively represented to the Court that “we’re not asserting that we need more time to explore a specific alternative”. Tr. 315.

Those folks, one can surmise, had satisfied whatever long-term objective they had for their investment in Inter-Tel.”); see also Robert M. Bass Group, Inc. v. Evans, 552 A.2d 1227, 1240 (Del. Ch. 1988). Second, Defendants’ entire argument that shorter- and longer-term holders are pitted against each other is based on a series of unsupported assumptions – not fact – regarding the behavior of hedge funds and merger arbitrageurs, including unsubstantiated speculation that the arbitrageurs are highly leveraged. See Supp. Tr. 222 (McCausland does not “know in fact if any Airgas shareholder[s] are leveraged”); see also TX 1085 (Morrow Report) at 7-8; Supp. Tr. 555-56 (Harkins). Yet, Defendants have provided no evidence that any particular Airgas stockholder is so “focused on the short-term” that they would “take a smaller harvest in the swelter of August over a larger one in Indian Summer.” Mercier, 929 A.2d at 815. In fact, even Defendants’ own expert acknowledged that a significant percentage of the arbitrageurs and hedge funds voted against Air Products’ proposals at the 2010 annual meeting. There is no evidence in the record that these holders would not similarly reject the $70 offer if it was viewed by them to be inadequate. See TX 638A at 2. In short Defendants have not demonstrated a single fact supporting their argument that a threat to Airgas stockholders exists because the Airgas stock is held by investors with varying time horizons.

23. At the supplemental hearing, however, Airgas witnesses repeatedly insinuated that other industrial gas companies, having chosen not to bid on the company at any point over the past year, were unwilling to outbid Air Products for only temporary reasons, ranging from a “reluctan[ce] to bid in a public fish bowl”, Supp. Tr. 331 (DeNunzio), to “sovereign debt problems”, Supp. Tr. 305 (McCausland). But that is speculation.

. See Tr. 316 (Ill). To the contrary, all three potential alternative suitors of Airgas in the industrial gas industry have affirmatively disavowed any interest in acquiring Airgas. These potential bidders have done so not because they fear public fish bowls or European sovereign debt problems, but because they concluded that Airgas will grow at a rate they find unattractive. See, e.g., TX 525 at slide 9 (showing Praxair’s CFO stating that Praxair “do[es]n’t see much growth in U.S. packaged gases” and Air Liquide’s CEO stating that Airgas is “an American operation. Our strategy is growth. We see growth in emerging markets and that’s where we will invest our resources.”). It also emerged at the supplemental hearing that Mr. McCausland has again pursued a management-led leveraged buyout of Airgas. Despite the fact that interest rates are currently at historic lows, Mr. McCausland conceded that his attempts to find a private equity firm to outbid Air Products’ allegedly low $70 offer had proven to be “kind of a stretch”. Supp. Tr. 306. Indeed, when Mr. McCausland approached Bain and Clayton Dubilier, “neither of those firms . . . expressed enthusiasm about an LBO at prices of $70 or higher.” Supp. Tr. 378 (DeNunzio). And Airgas’s bankers advised the Board that they did not believe that an LBO could be accomplished at a price higher than Air Products’ $70 offer. Supp. Tr. 377 (DeNunzio)

24. (“Q. You certainly didn’t think an LBO could be financed at prices higher than $70 per share; right? A. That’s correct.”). The fact that Defendants have delayed a potential transaction with Air Products for more than a year while they explored and failed to find any more attractive alternative precludes any argument that the Air Products’ offer poses a risk of opportunity loss. D. At This Juncture, The Timing Of Air Products’ Offer Cannot Be A Threat.

There has never been any merit to Airgas’s allegation that the “timing” of Air Products’ offer constituted a threat because it was “made at a time when Airgas’s earnings were at the trough of a recession”. See Air Prods.’ Post-Trial Reply Br. 29-30. As Air Products has argued previously, Defendants’ claim that the timing of Air Products’ offer poses a threat is simply another variation of their argument that Air Products’ offer is financially inadequate. See id. The evidence at the supplemental hearing further undermined this argument. According to Airgas’s witnesses, Airgas’s business is currently performing strongly. Supp. Tr. 184

(McCausland) (“Q. How’s business? A. Very good.”) In fact, Mr. McCausland testified that Airgas is now hitting higher profit margins than ever and has increased its earnings guidance. Supp. Tr. 185 (McCausland). Following the Court’s December 2 letter requesting additional information from the parties, various brokerage houses that cover Airgas put out a “rash of offcycle analysts’ reports” (Supp. Tr. 147 (McGlade)) that included price targets reflecting the views of Airgas’s management. See Supp. Tr. 206 (McCausland) (“Q. You talked to some of the analysts who published in the last month or so, is that right? A. I talk to the analysts all the time.”). Those analyst reports are of course available for Airgas stockholders to review and consider. Airgas stockholders have had more than adequate time to see and absorb information about Airgas’s performance in the current economic environment, as it has evolved since the announcement of Air Products’ offer.

25. E. Defendants Unreasonably Determined That Air Products’ $70 Offer Is Inadequate.

As with Air Products’ previous offers, Defendants assert that the $70 offer constitutes a threat because, by executing its five-year plan, Airgas may create more value for its stockholders in the future than Air Products’ offer represents today. But it is unreasonable to perceive Air Products’ $70 offer as a threat.

Second, Defendants’ assessment of Airgas’s value is mathematically tied to, and wholly dependent on, robust growth in the overall economy, and Defendants did not reasonably account for the very real prospect that the economy may not perform as well as they predict. A reasonable stockholder could disagree with the Board’s optimistic macroeconomic forecasts – indeed, market consensus forecasts are below the forecasts on which Airgas’s fiveyear plan is predicated. In these circumstances, there is no price-based threat. 1. The Objective Market Data Presented At The Supplemental Hearing Belies The Airgas Board’s Determination Of Financial Inadequacy.

At the December 21, 2010 Airgas Board meeting, Credit Suisse presented three analyses: a selected public companies analysis, a selected transactions analysis and a discounted cash flow analysis. The Airgas Board’s determination of inadequacy was based on those three analyses. TX 659, at 6; TX 1063 at 7-9.

26.

Despite Defendants’ refusal to call any witness from either Goldman Sachs or BAML to testify at the supplement hearing, the banks did present five analyses to the Airgas Board on December 21, 2010:

Id. 2. Defendants’ Estimation Of Airgas’s Value Continues To Be Mathematically Tied To Growth In The Overall Economy And Defendants Still Fail To Account For The Risk That The Economy May Not Improve As They Predict.

TX 1066 at 24. But Credit Suisse’s DCF was not based on objective, ascertainable data. Rather, it was based on management’s projections, which assume robust, continuous growth over all five years of the plan and which may or may not be realistic.

27. More specifically, it remains undisputed that (1) projected same-store-sales growth is the foundation of Airgas’s five-year plan (McLaughlin Dep. 343; Tr. 733 (McLaughlin)); (2) samestore-sales growth projections are mathematically tied to five non-Airgas-specific

macroeconomic factors by an arithmetic algorithm (Supp. Tr. 361 (DeNunzio)); and (3) three of those five macroeconomic factors (private nonresidential construction, fabricated new metals, new orders, and the ISM index) are the principal drivers of Airgas’s same-store-sales growth projections (Supp. Tr. 280 (McCausland)). estimates As for those key drivers, Airgas management

Id.

Rather they are bullish assumptions that mathematically determine Airgas’s projected same-store-sales growth. Supp. Tr. 361 (DeNunzio). And projected same-store-sales in turn drive EBITDA projections. If Airgas’s estimates are too optimistic by just a small amount, Airgas stockholders stand to lose a lot of money.

28.

16

TX 1064 at 29.

29. The economic reality does not support management’s bullishness. Despite

positive macroeconomic performance generally since the October trial, at his January 22, 2011 deposition, CFO McLaughlin testified that management had still

.18

17 18

Defendants declined to call Mr. McLaughlin to testify at the supplemental hearing. See TX 639 (Fischel Report), at 17

upp. Tr. 237 (McCausland testifying that plan assumes “modest economic growth”);

30. 1063 at 8. Given Airgas’s forecasting track record, a reasonable stockholder may not want to take that bet. Furthermore, while Airgas’s Board relied on the bankers’ analyses (and principally the DCF analyses) to conclude that the Air Products’ offer is inadequate, Airgas’s own bankers agreed that “if the projections that went into the DCF analysis are overly optimistic, the DCF analysis will result in inflated valuations.” Supp. Tr. 361 (DeNunzio). However, the bankers never tested managements’ assumptions and relied wholly on management’s projections. Supp. Tr. 363-64, 391-92 (DeNunzio); Rensky Dep. 320. The bankers did not test the

macroeconomic assumptions underlying the plan. Supp. Tr. 361-62 (DeNunzio). They did not run any analysis on less optimistic assumptions. Supp. Tr. 375-76 (DeNunzio).19

19

; see also Supp. Tr. 372 (DeNunzio). Indeed, Mr. DeNunzio confirmed this when he testified that Credit Suisse was not asked to perform, and did not perform, a downside case analysis. See Supp. Tr. 371 (Q: There’s no discussion about the sensitivity of the projections to macroeconomic factors, was there? A: No, not specifically.”); id. at 375 (impeaching witnesses with prior inconsistent testimony); see also

31. . And one thing is undisputed by both Air Products and Airgas -- reasonable minds can differ as to the view of future value. Supp. Tr. 31 (Huck), 82 (Davis), 121 (McGlade); 293-94 (McCausland), 353-54 (DeNunzio), 180-81 (Miller). * * *

In sum, the evidence shows that if there is any value-based “threat” from Air Products’ $70 offer, it is that Airgas’s bet will turn out to be wrong and its stockholders will be robbed of the opportunity to accept the immediate value they stand to gain through a transaction with Air Products. For these reasons, as well as those set forth in Air Products’ prior briefs, Defendants have failed to demonstrate that the alleged financial inadequacy of Air Products’ offer constitutes a threat that warrants a defensive response. F. Even If Defendants Could Show That They Reasonably Determined Air Products’ Offer To Be Inadequate, Any Consideration-Based Threat Must Still Be Viewed As NonCognizable Or Extremely Mild.

As explained above, Defendants’ primary (as a matter of litigation strategy) and sole (as a matter of fact) basis for rejecting Air Products’ offer – the offer’s alleged financial inadequacy – remains unfounded. But, in any event, and as discussed at length in Air Products’ prior briefs, financial inadequacy does not constitute a threat once a board has had sufficient time to explore alternatives and to communicate its view on valuation to sophisticated and wellinformed stockholders. See Air Prods. Post-Trial Br. 27-43; Air Prods.’ Post-Trial Reply Br. 2327; Air Prods.’ Supp. Br. 4-7. If Airgas’s stockholders, who are the company’s true owners, make the fully informed decision to sell the company, that cannot constitute a threat to Airgas. No evidence introduced by Airgas at the supplemental hearing altered that analysis.

32. III. THE EVIDENCE PRESENTED AT THE SUPPLEMENTAL HEARING CONFIRMED THAT DEFENDANTS’ MAINTENANCE OF AIRGAS’S DEFENSIVE MEASURES IS AN UNREASONABLE RESPONSE TO AIR PRODUCTS’ OFFER. Under Delaware law, Defendants bear the burden of proving that their use of the Defensive Measures is proportionate to any legitimately identified threat posed by Air Products’ offer. Prior to the supplemental hearing, it was clear that Defendants had not met this burden. As Air Products argued more fully in its previous briefs, and as further explained above, there is no “threat” here to Airgas’s corporate policy and effectiveness. The only “threat” even

conceivably posed by Air Products’ offer is that Airgas’s sophisticated and fully informed stockholders might disagree with the Board’s conclusions on value. Defendants’ argument that they can respond to such an alleged “threat” by using the Defensive Measures to block Air Products’ offer in perpetuity is unsupportable. Defendants’ position amounts to an assertion that a board can always use a poison pill and its other defensive measures to block any tender offer on a permanent basis, as long as the Board purports to conclude that the offer is financially inadequate. Such a position would gut Unocal and effectively render it indistinguishable from the business judgment rule. The additional evidence adduced at the supplemental hearing reinforces these conclusions. Most importantly, the chief proportionality argument in Defendants’ Post-Trial Brief – that Defendants need the Defensive Measures to maintain negotiating leverage – is now a dead letter. Air Products has made its best and final offer, and no other bidder has emerged, so there is nothing more to negotiate. Further, Defendants admitted that their assertion that Air Products can circumvent the pill and other defensive measures by calling a special meeting is not a viable path to a transaction. In Defendants’ view, even a newly elected Board would have the obligation to continue to maintain the Defensive Measures to prevent stockholders from having

33. the opportunity to tender into Air Products’ offer. Supp. Tr. 226-27 (McCausland). The

evidence at the supplemental hearing also showed that victory at such a special meeting is not realistically attainable. In any event, the viability of a special meeting would only show that the defensive measures were not preclusive but would not address the reasonableness of Defendants’ response to the offer. The evidence at the supplemental hearing confirms that the Board’s decision to refuse to render the Defensive Measures inapplicable to the proposed transaction is unreasonable. A. Since Air Products Has Made Its Best And Final Offer, There Can Be No Argument That The Defensive Measures Are Needed To Maintain Negotiating Leverage.

In their Post-Trial Brief, Defendants offered one main explanation for why their refusal to render the Defensive Measures inapplicable to the proposed transaction was a proportionate response to Air Products’ offer: that the Defensive Measures would give the Board leverage to extract a greater price from Air Products. Defs.’ Post-Trial Br. 102-04. That argument carries no weight now. As all three of Air Products’ witnesses have testified, Air Products has made its best and final offer. Supp. Tr. 5-6 (Huck), Supp. Tr. 75-76 (Davis), Supp. Tr. 108-09 (McGlade). Further, Air Products has announced to the world that its offer will not be further increased. See TX 657; TX 1075. At this late stage in the game, whatever usefulness the pill might have had as a bargaining tool is now gone. Air Products has made its last offer; it is time for stockholders to have the opportunity to decide whether to accept it. At the supplemental hearing, Defendants contended that they did not believe Air Products had really reached the maximum price it was willing to pay. For example, some witnesses stated that they thought Air Products might raise its offer on the grounds that other bidders have sometimes done so after making a “best and final” offer. Supp. Tr. 418 (Clancey) (“I’m not bashful about best and final. We do 90 percent of our business on contracts. We play

34. best and final.”). Others argued that Air Products could raise its offer because they believed that the transaction would still be accretive to Air Products at a higher price. See Supp. Tr. 219-20 (McCausland). These other considerations are irrelevant. Air Products has always said that it would be disciplined on price, Supp. Tr. 127 (McGlade), and the evidence shows that Air Products’ management has concluded that $70 is the highest price it can justify paying to acquire Airgas, in light of competing business considerations. See Supp. Tr. 9 (Huck), 109-10

(McGlade). After performing that analysis, Air Products’ management recommended to the Air Products Board that it authorize a $70 best and final offer, and after robust discussion the Air Products Board unanimously endorsed that recommendation. Supp. Tr. 7-9 (Huck), 108-10 (McGlade). Defendants’ argument that Air Products’ $70 offer might be further increased finds no support in the record. B. Air Products Cannot Realistically Remove Airgas’s Poison Pill By Calling A Special Meeting.

The evidence at the supplemental hearing confirmed that Air Products cannot realistically expect to win a special meeting election to remove the Board. The evidence also showed that this issue is something of a side-show. It is Defendants’ view that victory at a special meeting would have no effect on the Defensive Measures because the newly elected Board would be obligated to keep them in place. Supp. Tr. 226-27 (McCausland). Thus, the only purported “option” that Defendants contend the stockholders have to make their views felt is no option at all. The evidence at the supplemental hearing shows that Defendants claim for themselves the right to block stockholders from deciding whether to accept Air Products’ offer forever. Further, even if victory were realistically attainable, that would only prove that the Defensive Measures are not preclusive and would not address the reasonableness portion of the Unocal analysis. See Mentor Graphics Corp. v. Quickturn Design Sys., Inc., 728 A.2d 25, 47-52 (Del. Ch. 1998) (finding delayed redemption pill to be non-preclusive but enjoining it as

35. unreasonable), aff’d on other grounds, sub nom. Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281 (Del. 1998); cf. Chesapeake Corp. v. Shore, 771 A.2d 293 (Del. Ch. 2000) (enjoining a bylaw that did not prevent bidder from replacing board by winning two director elections). In any event, Defendants have failed to prove that Air Products could realistically attain victory at a special meeting election. Under Airgas’s bylaws, stockholders must win the votes of 67% of the outstanding shares to remove directors without cause. See TX 295 at 6. Airgas’s officers and directors own roughly 11% of Airgas’s stock, TX 1051A at 8, and based on the quorum at the September 2010 annual meeting, roughly 12% of the stock can be expected not to vote, TX 565A. Thus, taking into account Air Products’ roughly 2% ownership, TX 1051A at 8, Air Products would have a pool of only approximately 75% of the shares from which to win the additional 65% needed to reach the 67% threshold. Put differently, it is undisputed that Air Products would need to win approximately 86% of the votes from participating, unaffiliated shares. See TX 1085 (Morrow Report) at 2-3; Supp. Tr. 523 (Harkins).20 In his 46 years in the proxy solicitation business, Mr. Morrow cannot recall this ever occurring. Supp. Tr. 759; see also Chesapeake, 771 A.2d at 341-44 (winning 88% of participating, unaffiliated shares not realistically attainable). Mr. Harkins brought his 25 years of experience to trial and noticeably did not offer a single counterexample. And neither Mr. Morrow nor Mr. Harkins can remember any instances of a bidder winning a contested control election where a two-thirds supermajority requirement applied. See Supp. Tr. 535-36 (Harkins); Supp. Tr. 759 (Morrow). Certainly, Defendants have failed to identify any such instance.

20

Mr. Harkins estimates that turnout would be 89.8%, Supp. Tr. 465, but this does not materially change the analysis. Even under this assumption, Air Products would have to win 84.7% of the participating, unaffiliated shares to prevail.

36. Mr. Harkins nonetheless predicts that the 67% threshold is realistically attainable, but the record demonstrates at least five additional reasons why Mr. Harkins’s predictions should be given no weight. First, Mr. Harkins’s predictions are based on a circuitous and undefined formulation that Air Products could realistically obtain the votes of 67% of the outstanding shares so long as Air Products makes a “sufficiently appealing offer”, which Harkins defines as “[a]n offer that that will garner 67 percent of the vote”. Supp. Tr. 508. A prediction based on such circular logic is devoid of any useful meaning. It is hard to see how Defendants’ position is helped in any way if, for example, Air Products could replace a majority of the Board if it offered $1,000 per share. Without any analysis of whether the price at which the Board can be replaced is realistically possible (for example, whether any bidder could obtain financing to make such an offer or whether any bidder realistically would make such an offer), Mr. Harkins’s opinion regarding the realistic attainability of a 67% vote cannot assist the Court.21 Second, Mr. Harkins based his predictions on his assumptions regarding the “likely” turnout and “likely” voting behavior of various categories of stockholders. Supp. Tr. 482. The record confirms, however, that in forming his view, Mr. Harkins did not talk to a single Airgas stockholder. Supp. Tr. 509-10 (Harkins). Such predictions are not reliable unless based on communications with a target’s stockholders, Supp. Tr. 760-61, 771-74 (Morrow), and

21

Mr. Harkins never defined the specific number that is necessary and sufficient to obtain the 67% vote. In other words, he has no opinion on what a sufficiently attractive bid is and he has no opinion on whether $70 per share is a sufficiently attractive bid. See Supp. Tr. 508 (“I’m not opining as to how appealing $70 is.”). However, he did testify that stockholders owning at least 50% of the shares would accept Air Products’ offer. Supp. Tr. 591; see also Supp. Tr. 202 (McCausland) (“The tender offer would succeed if the pill were pulled. I have no doubt about that.”). Defendants have identified no principle that allows the Board to prevent a tender offer supported by a majority of the stockholders from succeeding unless the bidder can obtain the affirmative vote of 67% of the outstanding shares.

37. even Mr. Harkins admits that, in the normal course of his proxy solicitation business, he usually relies on such communications. Supp. Tr. 510. Third, Mr. Harkins provides no support for the unrealistic assumption that 100 percent of the shares voted by arbitrageurs and event-driven investors will be voted for Air Products. Even under Mr. Harkins’s own calculations, only 81.6% of the shares voted by arbitrageurs and hedge funds voted for Air Products’ January Meeting Bylaw (90.4% of those shares voted for Air Products’ director nominees), TX 638A (Harkins Supp. Rep.) at 2, and Mr. Harkins has long argued that it would be even tougher to convince stockholders to support Air Products at a control election. See TX 638A (Harkins Rep.) at 4-8. Indeed, as Mr. Morrow testified based on his extensive experience in the proxy solicitation business, one cannot count on arbitrageurs to vote 100% of their shares in favor of a bidder in any contested control election. Supp. Tr. 760. Mr. Harkins does not provide any examples of transactions in which 100% of the arbitrageur vote has sided with a bidder. Although Mr. Harkins has provided no support for this prediction, it is critical to his conclusion that Air Products could realistically expect to win a special meeting election. If only 90% of the shares voted by arbitrageurs and hedge funds are voted in favor of Air Products – and all of Mr. Harkins’s other distorted assumptions remain unchanged – then victory would be mathematically impossible under Mr. Harkins’ calculations.22

22

Mr. Harkins testified that Air Products would only have to win 51.3% of the votes cast by “other institutional investors” if all of his other assumptions regarding the likely turnout and voting behavior of other Airgas shareholders proved correct. Supp. Tr. 482. But if only 90% of the shares voted by arbitrageurs and other event-driven investors were to vote for Air Products, then Air Products would need more than 100% of the votes of “other institutional investors” to win under Mr. Harkins’ own formulae. This is obviously mathematically impossible.

38. Fourth, Mr. Harkins provides no support for the assumption that ISS will recommend in favor of Air Products. In fact, he cannot recall any instances in which ISS has recommended against the board in a control election. Supp. Tr. 539-40; see also Supp. Tr. 75960 (Morrow opining that ISS would likely not support Air Products). If Mr. Harkins is wrong and ISS recommends against Air Products – and all of Mr. Harkins’s other assumptions remain unchanged – then victory would again be mathematically impossible under Mr. Harkins’ calculations.23 Finally, Mr. Harkins also assumes that two of the three large index fund investors would vote in favor of Air Products, even though this did not happen at the last election.24 But if only one of these investors votes in Air Products’ favor – and all of Mr. Harkins’s other assumptions remain unchanged – then victory becomes unrealistically out of reach.25 All three of these assumptions find no support in the record, and Harkins has failed to talk to even a single Airgas stockholder to determine whether his assumptions are realistic. Supp. Tr. 509-10 (Harkins); Supp. Tr. 760-61, 771-74 (Morrow). In addition, Air Products has to hit all three of these targets to win; if it falls short in the arbitrageur vote, fails to receive the recommendation of ISS, or loses the vote of one more index fund investor, it has no realistic shot of winning even under Mr. Harkins’s own predictions. And he has provided little
23

Again, if Mr. Harkins had assumed that ISS would recommend in favor of Airgas, Air Products would need more than 100% of the votes cast by “other institutional investors” to win. Accordingly, in this scenario victory would be mathematically impossible. under Mr. Harkins’ own calculations. According to Defendants, one of the three funds voted for Air Products, the second voted for Airgas, and the third split its vote. See Supp. Tr. 216-17 (McCausland); Supp. Tr. 481 (Harkins). In such a scenario, under Mr. Harkins’ calculations, Air Products would have to win more than 90% of the votes cast by shareholders labeled by Mr. Harkins as “other institutional investors”.

24

25

39. proof for many of the other assumptions in his chart: that arbitrageurs would own 46% of the stock as opposed to the current 41%26; that 100% of the shares held by arbitrageurs would vote; etc. While Defendants have not explained why Air Products’ ability to win a special meeting is central to the key issues before the Court, Mr. Harkins’ testimony does nothing to establish that such a victory is realistically attainable. C. If The Defensive Measures Are Maintained, Airgas Stockholders Will Never Have A Say On Air Products’ Offer.

If the Court does not enjoin the application of the Defensive Measures to the proposed transaction, Airgas’s stockholders will permanently lose the opportunity to decide on Air Products’ offer. As Mr. Huck testified, and as Air Products publicly announced, Air

Products cannot continue its pursuit of Airgas until Airgas’s 2011 annual meeting (whenever it may be held). See Supp. Tr. 10-12 (Huck). Air Products’ continued pursuit of Airgas requires it to forego other strategic opportunities. See id. The uncertainty to Air Products caused by maintaining its offer has also weighed on Air Products’ stock price for over a year, and Air Products’ stockholders must at some point be free of this burden. See id. In addition, pursuing the offer drains management’s resources and requires Air Products to incur significant expenses. See Supp. Tr. 10-12, 18 (Huck). At some point, Air Products’ acquisition attempt must come to an end. (It is little surprise that no bidder has ever replaced a majority of the directors on a staggered board by winning two successive annual meeting elections. See Supp Tr. 657-58 (Harkins). It is an extraordinarily demanding feat, even for a bidder as determined as Air Products.).

26

See Supp. Tr. 203 (McCausland testifying that the percentage of arbitrageur and hedge fund ownership has decreased to about 41%).

40. In addition, even if Air Products kept its offer open for an additional nine or ten months to participate in a second proxy contest, there would still be no guarantee that Airgas stockholders would be able to accept the offer. According to Mr. McCausland, any new directors elected to Airgas’s Board would be duty-bound to use the Defensive Measures to continue blocking Air Products’ offer. See Supp. Tr. 226-27. In Mr. McCausland’s view,

Airgas’s poison pill confers to the Airgas Board a permanent, unappealable veto. Defendants’ decision to effectively deprive stockholders of a choice on Air Products’ offer is unreasonable. Defendants acknowledge that their actions force Airgas’s stockholders to bear considerable risks. Defendants admit that Airgas’s stock price – which is already considerably below Air Products’ offer price – will decline if Air Products withdraws its offer. See Supp. Tr. 397 (DeNunzio). They also concede that Airgas might not perform as well as management’s optimistic projections assume. See Supp. Tr. 163 (Miller), 353 (DeNunzio). Nor can they dispute that Airgas would be adversely affected if the economy does not recover as strongly as management predicts. See Supp. Tr. 376 (DeNunzio). Rather than incur these risks, the owners of Airgas may reasonably prefer Air Products’ offer, as it provides an opportunity to lock in a certain gain in an uncertain environment. See Supp. Tr. 353-54 (DeNunzio). * * *

Defendants’ ultimate argument is that Delaware law grants a Board authority to block any tender offer indefinitely, as long as it deems the offer to be financially inadequate. This is inconsistent with the promise, announced in the Supreme Court’s earliest pill decision and reaffirmed in its most recent, that the poison pill is “not absolute”. Versata Enters., Inc. v. Selectica Inc., 5 A.3d 586, 606-07 (Del. 2010); Moran v. Household Int’l, Inc., 500 A.2d 1346, 1354-55 (Del. 1985). Under Defendants’ reasoning, the decision to refuse to redeem a poison

41. pill is effectively reviewable only under the deferential business judgment standard. That is contrary to the principles of Unocal, and it is not the law in Delaware.

42. CONCLUSION For the foregoing reasons, the Court should enter Air Products’ proposed partial final order and judgment.

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

/s/ William M. Lafferty Kenneth J. Nachbar (#2067) Jon E. Abramczyk (#2432) William M. Lafferty (#2755) John P. DiTomo (#4850) Eric S. Wilensky (#4774) Ryan D. Stottmann (#5237) Michael S. Sirkin (#5389) 1201 N. Market Street Wilmington, DE 19801 (302) 658-9200 Attorneys for Plaintiff Air Products and Chemicals, Inc. OF COUNSEL: Thomas G. Rafferty David R. Marriott Gary A. Bornstein CRAVATH, SWAINE & MOORE LLP Worldwide Plaza 825 Eighth Avenue New York, NY 10019 (212) 474-1000

February 2, 2011
4068327.4

CERTIFICATE OF SERVICE I hereby certify that on this 3rd day of February, 2011, a copy of the foregoing was served electronically via LexisNexis File & Serve upon the following attorneys of record:

Kenneth J. Nachbar, Esquire Jon E. Abramczyk, Esquire William M. Lafferty, Esquire John P. DiTomo, Esquire Ryan D. Stottman, Esquire MORRIS NICHOLS ARSHT & TUNNELL LLP 1201 North Market Street Wilmington, DE 19801

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

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

PAC 988563v.1

Sign up to vote on this title
UsefulNot useful