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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, LEE M. THOMAS AND JOHN C. VAN RODEN, JR.,
C.A. No. 5249-CC
REDACTED VERSION REDACTED VERSION Dated: February 3, 2011 Dated: February 2, 2011
IN RE AIRGAS INC. SHAREHOLDER LITIGATION
C.A. No. 5256-CC
DEFENDANTS’ POST-SUPPLEMENTAL HEARING MEMORANDUM POTTER ANDERSON & CORROON LLP OF COUNSEL: Kenneth B. Forrest Theodore N. Mirvis Eric M. Roth Marc Wolinsky George T. Conway III Joshua A. Naftalis Bradley R. Wilson Jasand Mock Charles D. Cording WACHTELL, LIPTON, ROSEN & KATZ 51 West 52nd Street New York, New York 10019 (212) 403-1000 Dated: February 2, 2011 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 TABLE OF AUTHORITIES ......................................................................................................... iii PRELIMINARY STATEMENT .....................................................................................................1 ISSUES TO BE DECIDED .............................................................................................................4 I. WHETHER, UNDER UNOCAL AND ITS PROGENY, THE COURT SHOULD ORDER THAT AIRGAS BE STRIPPED OF ALL ITS DEFENSES TO FACILITATE AN INADEQUATE OFFER. ANSWER: NO. .........................................4 A. Unocal does not apply in a situation where the bidder’s nominees agree with the incumbent directors after receiving advice from a new investment banker.......................................................................................................................4 The independent Airgas Board acted in good faith and after reasonable investigation. ...............................................................................................................6 1. 2. The new directors and Credit Suisse enhanced the already robust investigation by the Airgas Board................................................................7 The Airgas Board relied on the advice of three preeminent investment banks and on its own business judgment based on Airgas’ performance, improvements in the economic environment and several other factors. .........................................................................................9 Plaintiffs did not prove that the Board’s reliance on expert advice and Airgas’ five-year plan was unreasonable. ...........................................10
The Airgas Board reasonably concluded that the $70 offer constitutes a threat. .....................................................................................................................15 1. 2. 3. 4. The $70 offer is clearly inadequate............................................................15 The offer is opportunistic and came at a time when it would be disadvantageous to sell the company..............................................................20 Consummation of the offer will interfere with the execution of Airgas’ corporate plan................................................................................21 The $70 offer is particularly coercive given the successful execution of Air Products’ plan to drive shares into the hands of arbitrageurs...........................................................................................................23 -i-
The possibility of an appraisal remedy, the majority shareholder’s fiduciary duties to the minority shareholders, and the possibility of a subsequent offering period do not diminish the coercive nature of the $70 offer. .............................................................................................26 The offer is substantively coercive. ...........................................................30 The Board reasonably concluded that Air Products has not necessarily made its best and final offer and the company’s defenses therefore still provide the Board with a valuable negotiating tool.............34
The Airgas Board’s response is reasonable in relation to the threat posed. ..........38 1. 2. The Board is willing to sell........................................................................39 The effect of the Board’s actions is to require Air Products to proceed in accordance with the company’s pre-existing corporate governance structure, a structure that is authorized by Delaware law...........40 Removing the Airgas Board by obtaining a 67% vote at a special meeting is “realistically attainable.” ..........................................................42
WHETHER EQUITABLE PRINCIPLES SUPPORT THE ENTRY OF A PERMANENT INJUNCTION. ANSWER: NO..............................................................51 A. B. Plaintiffs have failed to demonstrate that, absent an injunction, they will suffer irreparable harm...........................................................................................51 The equities do not favor entry of a mandatory permanent injunction..................52
WHETHER McCAUSLAND’S OPTION EXERCISE WAS PROPER. ANSWER: YES................................................................................................................56
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TABLE OF AUTHORITIES Cases Page
Barkan v. Amsted Indus., Inc., 567 A.2d 1279 (Del. 1989) ........................................................................................................ 6 Berlin v. Emerald Partners, 552 A.2d 482 (Del. 1988) ....................................................................................................... 41 Broz v. Cellular Info. Sys., 673 A.2d 148 (Del. 1996) ....................................................................................................... 41 Centaur Partners, IV v. Nat’l Intergroup, Inc., 582 A.2d 923 (Del. 1990) ...................................................................................................... 41 eBay Domestic Holdings, Inc. v. Newmark, 2010 WL 3516473 (Del. Ch.) .................................................................................................. 36 Frazer v. Worldwide Energy Corp., 1987 WL 8739 (Del. Ch.) .................................................................................................. 51, 53 In re Gaylord Container Corp. S’holders Litig., 753 A.2d 462 (Del. Ch. 2000).................................................................................................. 55 In re Topps Co. S’holders Litig., 926 A.2d 58 (Del. Ch. 2007)................................................................................................ 8 n.4 Moran v. Household Int’l, Inc., 490 A.2d 1059 (Del. Ch.), aff’d, 500 A.2d 1346 (Del. 1985).............................................. 6, 54 M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790 (Del. 1999) ....................................................................................................... 27 NCR Corp. v. Am. Telephone & Tel. Co., 761 F. Supp. 475 (S.D. Ohio 1991) ......................................................................................... 46 NiSource Capital Mrkts. v. Columbia Energy Group, 1999 WL 959183 (Del. Ch.) ................................................................................................... 22 Paramount Commn’cs, Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1990) ............................................................................ 3 n.1, 6, 22, 30, 31 Phelps Dodge Corp. v. Cyprus Amax Minerals Co., 1999 WL 1054255 (Del. Ch.) .................................................................................................. 48
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Schoon v. Smith, 953 A.2d 196 (Del. 2008) .................................................................................................... 8 n.4 Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d 257 (Del. Ch. 1989).................................................................................................. 54 TW Services, Inc. v. SWT Acquisition Corp., 1989 WL 20290 (Del. Ch.) ..................................................................................................... 22 Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del. 1995) ....................................................................................... 6, 48, 49-51 Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) ................................................................. 4-5, 6, 7, 20, 26, 34, 38, 52 Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586 (Del. 2010) ............................................................................................................ 49 Wood v. Frank E. Best, Inc., 1999 WL 504779 (Del. Ch.) .................................................................................................... 27
Rules & Statutes 8 Del. C. § 141 .............................................................................................................................. 34 8 Del. C. § 203 .............................................................................................................. 4, 29, 41, 54 17 C.F.R. 240.14d-101 (2010) ............................................................................................. 23 n.13 17 C.F.R. 229.1012 (2010) ................................................................................................... 23 n.13 17 C.F.R 240.14d-11(c) ................................................................................................................ 28
Other Authorities Andrew G.T. Moore, II, The 1980s — Did We Save the Stockholders While the Corporation Burned, 70 WASH. U.L.Q. 277 (1992) ............................................................ 6 n.3 John Laide, Poison Pill M&A Premium (Aug. 30, 2005), https://www.sharkrepellent.net/pub/rs_20050830.html ........................................................... 56 J.P. Morgan & Co., Poison Pill and Acquisition Premiums (July 1997)................................. 55-56 J.P. Morgan & Co., Poison Pill and Acquisition Premiums (May 2001) ..................................... 55 - iv -
J. Travis Laster, Exorcizing the Omnipresent Specter: The Impact of Substantial Equity Ownership by Outside Directors on Unocal Analysis, 55 BUS. LAW 109 (1999) ...................................................................................................... 5 n.1 Patrick A. Gaughan, Mergers, Acquisitions, and Corporate Restructurings (5th ed. 2011) .......................................................................................................................... 55 Robert Comment & G. William Schwert, Poison or Placebo? Evidence on the Deterrence and Wealth Effects of Modern Antitakeover Measures, 39 J. FIN. ECON. 3 (1995) ......................................................................................................... 55 Ronald J. Gilson & Reiner Kraakman, Delaware’s Intermediate Standard for Defensive Tactics: Is there Substance to Proportionality Review, 44 BUS. LAW 247 (1989) .......................................................................................................... 32 Stephen M. Bainbridge, MERGERS AND ACQUISITIONS (2d ed. 2009) .................................. 56 n.26 Thomas W. Bates et al., Board classification and managerial entrenchment: Evidence from the market for corporate control, 87 J. FIN. ECON. 656 (2008) ....................... 55 A. Gilchrist Sparks, III & Helen Bowers, After Twenty-Two Years, Section 203 of the Delaware General Corporation Law Continues to Give Hostile Bidders a Meaningful Opportunity for Success, 65 BUS. LAW 761 (2010). ................................... 45 n.20 Guhan Subramanian et al., Is Delaware’s Antitakeover Statute Unconstitutional?, 65 BUS. LAW. 685 (2010)................................................................................................. 45 n.20
The Airgas defendants respectfully submit this brief in response to the Court’s request that the parties identify the issues that require resolution, the passages in prior briefs that address those issues, and the evidence adduced at the supplemental hearing that addresses those issues. For the Court’s convenience, attached as Exhibit A is a summary chart listing the issues and the pages in prior Airgas briefs discussing them. PRELIMINARY STATEMENT As will be shown below there is no basis under our existing law for the Court to order the Airgas Board to dismantle Airgas’ defenses against Air Products’ clearly inadequate $70 bid. The Airgas Board was not only justified in resisting Air Products’ inadequate offer, it was obligated to do so. At the supplemental hearing, there was no better testament to this than that given by Air Products’ lead director, William Davis: THE COURT: And so if an offer was made for Air Products that you considered to be unfair to the stockholders of Air Products, what would you consider your duty to be to do? THE WITNESS: Fiduciary duty would be to hold out for the proper price. THE COURT: And to use every legal mechanism available to you to do that? THE WITNESS: Mm-hmm. Yes, sir. Supp. Tr. 104. That directors must hold out for a proper price, a price reflecting their good faith assessment of long-term value, is not only dictated by Delaware law, it is also compelled by a simple, practical consideration: the directors know things about a corporation’s prospects that stockholders don’t, and can’t, know. Again, Air Products’ lead director put the point best: THE COURT: . . . I’m curious whether . . . you think that you know better than the average stockholder in Air Products what the value of Air Products is today?
THE WITNESS: Well, I have more information than most, than the average shareholder of Air Products probably, yes, as to what’s really happening, so I would say yes. THE COURT: So you would agree that you probably do have a better understanding of the value of Air Products than the average stockholder in Air Products. THE WITNESS: I would agree. Supp. Tr. 103 (Davis). The point is well illustrated, too, by the experience of the three Air Products nominees who now sit on Airgas’ Board. Air Products picked them, supported them, vouched for their independence, and hoped that, once in office, they would see things Air Products’ way. And indeed they were independent. They called for a “fresh look.” They demanded information. They insisted that a new investment bank be hired, and a new bank, a third, was engaged. What did the new directors and the incumbent directors all conclude? That “in light of the improving business and operating environment and based upon the report of a third investment banker, the offer was clearly inadequate.” Ex. 1063 at 10-11. What did this mean, in terms of what the Airgas directors accordingly had to do? Exactly what one of the new directors, John Clancey, told his fellow Airgas directors at their meeting on December 21: “We have to protect the pill.” Supp. Tr. 420 (emphasis added). And why did Clancey conclude that? Because “we have a company . . . that is worth, in my mind, worth in excess of 78, and I wanted, as a fiduciary, I wanted all shareholders to have an opportunity to realize that.” Supp. Tr. 421 (Clancey). In short, there can be only one answer to the ultimate legal question presented by this case: Whether the directors of an unquestionably independent board, one that has indisputably acted in good faith and upon reasonable investigation, should be branded as having breached their fiduciary duties and be ordered to violate their duties, based on clear Supreme Court precedent in effect for a generation, act in a manner they believe is contrary to the best interest of -2-
the company’s shareholders and facilitate a bid that is clearly inadequate by every relevant measure. The answer to that question must be “no.” “Let the shareholders decide,” the mantra invoked by Air Products at every turn, simply is not the law of Delaware. The fundamental power and duty to “select a time frame for achievement of corporate goals” is one that under our law “may not be delegated to stockholders,”1 and it would mean nothing if it had a clock on it. Corporate goals often take years to realize, as our courts have consistently recognized. And if a time fuse were engrafted upon them, the power and duty to resist inadequate bids would mean nothing as well. Hostile bidders would understand: no need to make your best bid, no need to share synergies, no need to pay for the value of the future stand-alone growth of the enterprise being acquired. For if you start with a low-ball offer, hang around long enough, as long as Air Products has, make minor increases to draw enough risk arbitrageurs into the stock, and finally claim “best and final,” a court will let you have the company. Negotiate with the court, not the board. And Delaware targets would know: the business judgment of the board, in the end, would become the instrument of its own demise, for each time the board communicates its views on the bid, thereby informing the shareholders, it would hasten the day that a court will strike down the board’s powers on the ground that stockholders supposedly have everything they need to know. That is not the law, and it cannot be the law. The obligations and duties of the directors of a Delaware corporation do not evaporate with the passage of time. Nor do they melt away when stockholders are claimed to have ample information upon which to make their own decisions. Under our law, stockholders have the right to decide whether to sell their own indi-
Paramount Commc’ns Inc. v. Time Inc., 571 A.2d 1140, 1154 (Del. 1990).
vidual shares, but they are not vested with the power to decide whether to sell the company as a whole. As Paramount makes clear, that power is vested in the board, and the board’s business judgment cannot be second-guessed by the courts, whether a battle for control has been going on for 14 days or 14 months. If stockholders disagree with that judgment, their remedy is not in the courts, but at the ballot box — a remedy particularly procurable here, where a third of the shareholders can call a special meeting at which two-thirds can turn the entire board out. The Airgas Board’s well-informed business judgment should be respected, and the plaintiffs’ claims dismissed. ISSUES TO BE DECIDED I. WHETHER, UNDER UNOCAL AND ITS PROGENY, THE COURT SHOULD ORDER THAT AIRGAS BE STRIPPED OF ALL ITS DEFENSES TO FACILITATE AN INADEQUATE OFFER. ANSWER: NO. The central question in this case is whether the Airgas directors have breached their fiduciary duties to the company’s stockholders and whether, to remedy that breach, the directors should be ordered to strip the company of all its defenses. This question controls plaintiffs’ claims on the rights plan, Section 203 of the DGCL, and Article 6 of Airgas’ charter, because those provisions all serve as obstacles to an acquiror gaining control of Airgas without first securing the approval of its board. The Airgas Board’s maintenance of these provisions to impede Air Products’ inadequate $70 bid must be sustained under our settled law. A. Unocal does not apply in a situation where the bidder’s nominees agree with the incumbent directors after receiving advice from a new investment banker. The sole justification for Unocal’s enhanced standard of review is “the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders.” Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985). In the absence of this specter, a board’s “obligation to determine whether [a takeover] offer is in the best interests of the corporation and its shareholders . . . is no different from -4-
any other responsibility it shoulders, and its decisions should be no less entitled to the respect they otherwise would be accorded in the realm of business judgment.” Unocal, 493 at 954. 2 Here, Airgas has presented irrefutable and overwhelming evidence going far beyond simple board independence: the independent directors who acted unanimously here included three indisputably independent directors whom Air Products had nominated to Airgas’ Board. See Airgas Post-Trial Br. 7, 41-42, 79, 83-84; Ex. 454 at 8, 41 (independence of the new directors); see also Airgas Pre-Trial Br. 5, 55-58; Airgas Post-Trial Br. 83-84 (independence of other Airgas directors). All three new directors concluded that Air Products’ offer was “clearly inadequate.” E.g., Supp. Tr. 213, 217-20 (McCausland); Supp. Tr. 417 (Clancey). Not only that, the directors acted in good-faith reliance on the advice of Airgas’ financial advisors, which included a third, brand new firm, Credit Suisse, hired at the insistence of the Air Products nominees to provide a “different perspective.” Supp. Tr. 411-14, 417 (Clancey). In short, Unocal’s heightened standard of review does not apply here, where even the theoretical specter of disloyalty does not exist. Not only does the record evidence materially enhance a finding that no breach of duty occurred, it conclusively rebuts any possible breach. The business judgment rule applies. Nor is there need to extend or enhance the scrutiny to which courts subject director conduct. If anything, there is now less justification for Unocal’s approach. Boards are more independent than they were when Unocal was decided. And stockholders are better able, through the proxy contest and other means, to keep boards in check. By way of example, since 2000, 101 Delaware companies that are or were in the Fortune 500 have de-staggered their boards by shareholder-approved proposal. Ex. 1084A; Supp. Tr. 678 (Genet). What this proves
See also J. Travis Laster, Exorcizing the Omnipresent Specter: The Impact of Substantial Equity Ownership by Outside Directors on Unocal Analysis, 55 BUS. LAW 109, 113 (1999).
is that shareholders and boards, through private ordering, have determined that for some companies, it is in the interests of the company and its shareholders to make it easier to remove a board that is not acting in accordance with the shareholders’ wishes. The rules of the road that have been in place since Moran was decided 25 years ago have worked well, quite well. B. The independent Airgas Board acted in good faith and after reasonable investigation. But even if Unocal is applied, plaintiffs have no basis for the relief they seek. For they must still show a breach of fiduciary duty by the Airgas directors, including the three Air Products nominees arising from their efforts to promote and protect the interests of their shareholders. “[T]he basic teaching of [Unocal and its progeny] is simply that the directors must act in accordance with their fundamental duties of care and loyalty. . . . If no breach of duty is found, the board’s actions are entitled to the protections of the business judgment rule.” Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989) (citations omitted). Because Unocal does not invite our courts to “substitute their business judgment for that of the directors,” Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1386 (Del. 1995) (citation omitted), plaintiffs must still show that the Airgas “board’s decision . . . was lacking in good faith or dominated by motives of either entrenchment or self-interest.” Paramount, 571 A.2d at 1153. 3 The evidence unquestionably proves that the Airgas Board has satisfied the first part of the Unocal test by demonstrating good faith and reasonable investigation. Airgas PreTrial Br. 55-57; Airgas Post-Trial Br. 81- 82. With the concurrence of the three Air Products nominees, and with the advice of three preeminent investment banks, including one hired at the
Accord, e.g., Andrew G.T. Moore, II, The 1980s — Did We Save the Stockholders While the Corporation Burned, 70 WASH. U.L.Q. 277, 287-89 (1992) (the Supreme Court’s cases governing corporate takeovers, “[a]s long as the directors adhered to their fiduciary duties, it would have been most inappropriate for any court to intrude upon a board’s business decision”).
insistence of the Air Products nominees, the Airgas Board has unanimously concluded that the $70 offer is “inadequate, does not reflect the value or prospects of Airgas, and is not in the best interests of Airgas, its shareholders and other constituencies.” Ex. 659 at 6. The evidence demonstrates that the Board reached this conclusion through a good faith and reasonable investigation. See Airgas Pre-Trial Br. 59-66; Airgas Post-Trial Br. 81-91; Ex. 659 at 5-6. 1. The new directors and Credit Suisse enhanced the already robust investigation by the Airgas Board.
The presence of the new directors on the Airgas Board enhanced the already robust process and deliberations. The record is replete with evidence that the new directors insisted that the Airgas Board and its advisors take a “fresh look” at the Air Products bid, particularly when Air Products made its $70 “best and final” offer. Indeed, even before the $70 offer, the new directors engaged Skadden Arps and wrote formally to Airgas’ Chairman pushing for the retention of “a third bank to come to a decision on valuation from different perspectives, to look at things that [the new directors] didn’t feel were being addressed properly.” Supp. Tr. 411 (Clancey); see also Ex. 706; Ex. 1024. With the support of the new directors, the outside directors unanimously selected Credit Suisse, a firm whose only prior involvement with Airgas was as an advisor to the special committee opposite management in the unconsummated 2007 LBO discussions. Supp. Tr. 315-16 (DeNunzio). Credit Suisse agreed to evaluate the offer and render an opinion as to adequacy for a flat fee contingent upon neither the outcome of its analyses nor the consummation of a transaction. Supp. Tr. 317 (DeNunzio). Credit Suisse approached the engagement agnostically and advised Airgas that Credit Suisse might not reach the same conclusion that Bank of America and Goldman Sachs had reached with respect to Air Products’ prior offers. Supp. Tr. 319 (DeNunzio). There can be no doubt that Credit Suisse is a competent and independent advisor. Air
Products’ own witnesses agreed that Credit Suisse was qualified and independent. Huck Dep. 769. 4 The three new directors held separate calls with Credit Suisse without Airgas management, incumbent directors or other advisors on the line. Supp. Tr. 320-22 (DeNunzio); Supp. Tr. 414-15 (Clancey). They asked Credit Suisse to investigate, among other things, the five-year plan, the company’s SAP implementation plan and expected benefits, the comparable company set, the universe of comparable transactions, and Airgas’ ability to continue with acquisitions. Supp. Tr. 166-68 (Miller); Supp. Tr. 322-24 (DeNunzio); Supp. Tr. 415 (Clancey). Credit Suisse did all of this, and more. And it concluded that Airgas’ five-year plan was “highly credible”; that Airgas’ was “the most impressive SAP implementation plan we’ve seen”; that the potential upside of SAP is “orders of magnitude greater than what’s been assumed”;5 that the comparable transactions identified by Bank of America and Goldman Sachs
Plaintiffs will no doubt claim that early disagreement between the new directors and incumbent directors undermines the good faith of the board’s investigation. To the contrary, this disagreement and its resolution show the board’s healthy debate and seriousness in determining how to proceed. Schoon v. Smith, 953 A.2d 196, 207 (Del. 2008) (“directors may confer, debate, and resolve their differences through compromise”); In re Topps Co. S’holders Litig., 926 A.2d 58, 84 (Del. Ch. 2007) (on a record reflecting “spirited debate” between incumbent and dissident directors, the court was “not at all convinced that [the incumbent directors] were wrong to resist the Dissidents’ demand for a full auction”). In particular, the new directors’ December 7 letter to van Roden (Ex. 1027), upon which plaintiffs rely, was, in Clancey’s words, merely “meant as leverage,” “suggest[ed by] outside counsel” as a way to “prompt [the other directors] to act” on the new directors’ request for an additional financial advisor. Tr. 427 (Clancey). “We wanted a financial advisor and this was — we were trying to induce them. It’s like playing poker. We put our chips up on the table, everything we had.” Tr. 430 (Clancey). The move worked, the new directors got what they wanted, and, in the end, they were completely satisfied. The result was a process that was above reproach and more than meets the threshold of a reasonable investigation. Clancey, who has his own extensive experience with SAP, also testified that he was “very impressed with Airgas’ approach. It is slow and it’s prodigious in terms of what they have to get their arms around, but they’re taking it step by step. They’ve used every best practice. And unfortunately, the best practice is what they’ve learned by the failures of other companies. But they’ve hired subject experts and they have a solid organization, and they took me through how (footnote continued) -8-
were the most relevant; and that Airgas’ ability to acquire additional businesses would have only a small impact on the achievability of the five-year plan. Supp. Tr. 336, 337-38, 397 (DeNunzio). From what they learned from Credit Suisse, and from what they saw with their own eyes, the three new directors were entirely satisfied with the Airgas Board’s process.
Supp. Tr. 414 (Clancey) (“I was satisfied [with Credit Suisse]. . . . They’re a good firm. I know of them and I’ve seen them, you know, in action from afar, and everybody else felt, both the two new directors and the other directors, felt very comfortable with them.”). 2. The Airgas Board relied on the advice of three preeminent investment banks and on its own business judgment based on Airgas’ performance, improvements in the economic environment and several other factors.
Credit Suisse ultimately rendered an opinion that $70 was inadequate from a financial point of view. Bank of America and Goldman Sachs also concluded that the offer was inadequate. Relying on these opinions, the bankers’ presentations to the Board, Airgas’ historical and recent performance, Airgas’ strategic plan, and improvements in the overall economic environment, along with several other factors, the Board unanimously concluded that the offer is (footnote continued) far they’ve come, and I am very optimistic that they’ll be very successful.” Supp. Tr. 407-08 (Clancey). And Air Products’ CEO McGlade said at the November 4 meeting that Airgas had underestimated the cost saving achievable with SAP. Supp. Tr. 192-93 (McCausland).
clearly inadequate and that Airgas’ rights plan and other defenses should be maintained. Ex. 659 at 5-6, 17, 20, 24; Ex. 1063 at 10-11. The Airgas Board’s consideration of these factors, and its reliance on the advice of expert financial advisors, fully satisfies its obligation to conduct a reasonable and good faith investigation of Air Products’ offer. See Airgas Post-Trial Br. 84-86. Even Air Products concedes that the new directors have not breached their fiduciary duties. Supp. Tr. 80 (Davis) (“I don’t believe that they have breached their fiduciary duties, no.”); Supp. Tr. 115 (McGlade) (the three new directors have acted in accordance with their fiduciary duties). If these new directors have not breached their fiduciary duties, then neither have the incumbent directors, who received the same information and reached the same conclusion. See Supp. Tr. 80-81, 102 (Davis) (“I have no knowledge of anything going on inside the Airgas boardroom that would suggest that there is an issue.”). As noted earlier, Air Products director Davis conceded that if an offer were made for Air Products, his “[f]iduciary duty would be to hold out for the proper price.” Supp. Tr. 104. That is exactly what his Airgas counterparts are doing here. 3. Plaintiffs did not prove that the Board’s reliance on expert advice and Airgas’ five-year plan was unreasonable.
In their post-trial briefs and at trial, plaintiffs launched two main attacks upon the Airgas Board’s decision-making: first, that Airgas’ five-year plan improperly relies on macroeconomic conditions beyond Airgas’ control; and, second, that Airgas did not consider what might happen if the economy suffers a “double-dip” recession. Neither of these challenges was borne out at trial. 6
Air Products counsel might also resurrect its cynical claim that the November 4 meeting between Airgas and Air Products representatives was a “sham designed by Airgas in order to en(footnote continued) - 10 -
The claim that Airgas’ ability to meet its projections depends in part on the overall economic environment is a meaningless truism. The fortunes of every business depend in part on the overall economy. If macroeconomic uncertainty rendered business plans inherently unreliable, then no board could ever rely on management projections. That cannot be — and is not — the law. Under our law, boards are entitled to rely on management projections. See Air(footnote continued) hance Defendants’ position before this Court, rather than a real attempt to negotiate a higher price.” Air Products Post-Trial Reply Br. 1. However, the evidence from all sides strongly vindicates Airgas’ good faith and belies counsel’s rhetoric. Supp. Tr. 81-86 (Davis) (all of the parties acted in good faith during the November 4th meeting); Supp. Tr. 86-87 (Davis) (van Roden called Davis the next day to reiterate why Airgas was worth more than Air Products was offering and that Air Products should raise its offer); Davis Dep. 57 (“I thought that this meeting would probably lead to further negotiations.”); Supp. Tr. 121 (McGlade) (“I believed that [Airgas] believed they had a good faith basis for their views.”); Supp. Tr. 121-22 (McGlade) (agreeing that he believes that “representatives from Air Products and Airgas acted in a business-like manner and in good faith during the November 4th meeting”); Supp. Tr. 33-35 (Huck) (believed at the time that “the Airgas participants acted in good faith”); Supp. Tr. 166 (Miller) (“Mr. van Roden called me to report that he had gotten some good feedback from the — independent director from Air Products, Mr. Davis, and that he expected to hear back from him”); Supp. Tr. 410-11 (Clancey) (Airgas reached out to Air Products to see if they could get a deal done). Nor does the fact that the parties agreed to a joint disclosure that no further meetings were planned at that time somehow turn the November 4 meeting into a sham. See Ex. 1016 (reflecting disclosure agreed upon by parties). As McCausland testified, (a) both parties agreed not to disclose the substance of the meeting so as to avoid a media circus; (b) McCausland brought with him to the November 4 meeting three statements reflecting different possible outcomes; (c) McCausland placed those three statements on the table at the end of the meeting; (d) McCausland handed the statement that he thought best reflected where the parties were to Huck; and (e) Air Products agreed to the statement that no further meetings were planned at that time. Supp. Tr. 196-98; Ex. 1013 at ARG00050707-09 (showing three prepared statements). Airgas honored its agreement not to reveal the substance of the meeting or seek to use it for tactical advantage. All Airgas did was provide the Court with a copy of a public, SEC filing noting that the meeting had occurred and argued that the Court should not pull the rights plan because, among other things, the end stage of the takeover battle had not been reached. And before doing so, Airgas asked Air Products’ Delaware counsel if they objected. They did not and the disclosure was added to the record. Ex. 652. It was only later, when Air Products sought to strengthen its litigating position by making its false accusations, that the claim that the meeting had been a staged event was made.
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gas Post-Trial Br. 85-86, 88. Davis, an Air Products director, himself testified that he believes it is reasonable for the Airgas Board to rely on the projections provided by Airgas management. Supp. Tr. 82 (Davis). And Air Products’ witnesses testified that no one knows Airgas better than Airgas directors. Supp. Tr. 82 (Davis); Supp. Tr. 120, 134 (McGlade). In any event, plaintiffs’ challenge to the macroeconomic assumptions of Airgas’ five-year plan is meritless. Airgas assumes GDP growth of
See Airgas Post-Trial Br. 13-14. Airgas’ financial advisor Filip Rensky of Bank of America, Airgas’ expert Professor Hubbard and now Credit Suisse have all reviewed the macroeconomic assumptions in the five-year plan and have found them to be reasonable. Airgas Post-Trial Br. 11-15, 87-88; Supp. Tr. 380-81, 387, 391-92 (DeNunzio). And the Airgas directors brought their own experience and business judgment to their assessment of the five-year plan and found the plan to be reasonable. Supp. Tr. 172 (Miller); Supp. Tr. 408-409 (Clancey). Beyond this, Airgas’ projections are consistent with its historical performance.
DeNunzio testified that he expected Airgas management to refresh the five-year plan. Supp. (footnote continued) - 12 -
Not only that, the reasonableness of Airgas’ projections has been confirmed by its actual performance in 2010. A year has passed since the November 2009 five-year plan was presented to Airgas management. During that time, Airgas has emerged from the great recession, grown EPS ahead of schedule
. As for plaintiffs’ refrain about the possibility of a double-dip recession,
Ex. 1063 at 5; see also Ex. 1064 at 5. The directors’ own business judgment confirmed this view; as John Clancey testified, “double-dip recessions are very rare. I don’t see any indication of a double-dip recession.” Supp. Tr. 409 (Clancey); Supp. Tr. 181 (Miller); Supp. Tr. 234-35 (McCausland). Indeed, just four days before the supplemental hearing, Air Products’ CFO Huck publicly stated, “I don’t see a double dip either, so I see long, good, steady, solid growth going forward here for the economy.” Ex. 1086A at 7.
Ex. 1064 at 30.
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Thus, it was perfectly appropriate for Airgas management to present a single case — with no double-dip — in its five-year plan. See Airgas Post-Trial Br. 55-57. As DeNunzio testified, bankers expect to receive management’s “best estimates of what is most likely to happen in terms of their future performance.” Supp. Tr. 386-87 (DeNunzio). And as Miller explained, in the real world of business “you do forecasts in a range based on the facts and circumstances you understand at the time. And the question’s been asked about double-dip recession. And I mean, you could . . . . pick the midpoint between the reasonable range and Armageddon. That’s not the real world, so I don’t know how else to answer that question.” Supp. Tr. 172 (Miller). In any event, in addition to the sensitivities analysis provided to the directors as part of the five-year plan itself, Credit Suisse presented DCF sensitivities analyses to the Board that included the impact if Airgas missed its projected EBITDA margins by 200 basis points. Ex. 1066 at 25. A 200 basis point miss would take approximately $100 million a year out of the EBITDA projections in perpetuity. That is a greater loss than the one-year $81 million decrease in EBITDA Airgas suffered during the depths of the great recession. See Ex. 1047 at 3. As DeNunzio testified, “the best way to think about” this analysis is as a $100 million “bucket of money that is either subtracted or added to the company’s annual earnings or cash flow going forward . . . . from whatever source.” Supp. Tr. 345-46 (DeNunzio).
In short, the record presents no basis upon which to dispute that the Airgas Board acted in good faith and upon reasonable investigation.
The discount range of the DCF also captures “risk” to Airgas’ projections. See Airgas PostTrial Br. 56.
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The Airgas Board reasonably concluded that the $70 offer constitutes a threat. The evidence at the supplemental hearing demonstrates that the directors reasona-
bly concluded that the $70 Air Products offer represents a threat for several reasons: its inadequacy; its opportunistic timing; the impediment it presents to Airgas’ business plan; the coercion caused by Air Products’ successful effort to drive shares into arbitrageurs’ hands; the coercion that results from stockholders’ lack of access to critical nonpublic information; and the fact that the Airgas Board has reasonably concluded that what Air Products calls its “best and final” bid may not, in fact, be best and final. 1. The $70 offer is clearly inadequate.
The law is clear that an inadequate offer is, in and of itself, a threat that a board has a duty to resist. Airgas Pre-Trial Br. 51-54, 74-80; Airgas Post-Trial Br. 92-93; Airgas Supp. Br. 5. 9 The evidence at the supplemental hearing amply demonstrates that Air Products’ $70 offer is inadequate. Three of the top investment banks in the country have so advised the Airgas Board. As Credit Suisse told the Board, it had “pretty easily concluded that the $70 a share was inadequate from a financial point of view” and that its bankers “didn’t think it was a close call.” Supp. Tr. 349 (DeNunzio). The three new directors agree. Indeed, at the December 21 meeting, Clancey urged that “in light of the improving business and operating environment and based on the report of a third investment banker, the offer was clearly inadequate and that
Air Products might once again contend that price inadequacy is a “mild” threat. As addressed in Airgas’ Post-Trial brief, the concept of a “mild” threat is far too slender a reed to support the weight Air Products attempts to make it bear. Airgas Post-Trial Br. 100-01. As discussed below, even if the threat is characterized as mild (which it is not), the law is clear that a rights plan is a proportional response to an inadequate offer. Moreover, Air Products’ $70 offer is so far below full and fair value that it cannot fairly be termed a “mild” threat.
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that language be used to describe the Air Products offer.” With advice from its financial advisors, the Airgas Board unanimously agreed and also reiterated its unanimous view that “the value of Airgas in a sale, at this time, is at least $78 per share, in light of the Board’s view of relevant valuation metrics.” Ex. 1063 at 10-11; Ex. 659 at 3. Notably, Air Products offered no evidence at the supplemental hearing challenging the Board’s and its advisors’ unanimous view that $70 is inadequate. Not from J.P. Morgan, not from Perella Weinberg, and not from Professor Fischel. The shareholder plaintiffs, likewise, decided to leave their experts home. And Huck admitted on the stand that he couldn’t identify any recent analyst report that even comes close to supporting the Air Products’ valuation that Air Products claims justifies its bid — its claim that Airgas, on a stand-alone basis, is worth only $51 a share. Supp. Tr. 133. The evidence overwhelmingly proves the point, and Air Products made no effort at the Supplemental Hearing to prove otherwise. Air Products’ $70 offer is inadequate by every measure: Discounted Cash Flow (Ex. 1064 at 22; Ex. 1066 at 24, 25, 28) —
As DeNunzio testified in response to the Court’s questioning, his personal view is that the DCF implies a fair value range in the “mid to high seventies, and well into the mid eighties.” Supp. Tr. 393-94 (DeNunzio).
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Ex. 1063 at 6. 10 Future Stock Price (Ex. 1064 at 21; Ex. 1066 at 26) —
Unaffected Stock Price (Ex. 1064 at 20, 23-24; Ex. 1066 at 20) —
At these prices, Air Products’ offer implies a meager premium far below those paid in recent transactions. Supp. Tr. 347-48 (DeNunzio).
See Airgas Post-Trial Br. 73, 89, 91 n.49.
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. Selected Precedent Transactions (Ex. 1064 at 25; Ex. 1066 at 21, 22, 28) —
Within the selected precedent transactions, Credit Suisse highlighted a half-dozen large strategic transactions as “more determinative of a company like Airgas, given its market position, its scale and that sort of thing.” Supp. Tr. 335 (DeNunzio). The multiples in those transactions that Credit Suisse considered particularly relevant were “generally north of 11.” Supp. Tr. 335-36 (DeNunzio). DeNunzio advised the Airgas Board that “because of Airgas’ leading market share position, its scarcity value, if you will, the limited number of large scale players in their business in the United States — you know, a change of control transaction for Airgas ought to be closer to the high end of that range rather than the low end of that range.” Supp Tr. 342-43, see also Supp. Tr. 335-36, 348 (DeNunzio).
Ex. 1066 at 22.
As Rensky testified at the trial in October, based on Airgas’ position in the U.S. packaged gas market, Airgas’ EBITDA growth, and the potential synergies in a merger with Air Products, Airgas should be priced at a multiple in at least the middle or higher end of the range. Tr. 973-75, 977 (Rensky).
Ex. 1064 at 3. Air Products’ Offer Has Not Kept Up With The Market (Ex. 1064 at 17; Ex. 1066 at 20, 28) —
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Analyst Reports (Ex. 1064 at 19) — In October, Air Products told Airgas it should consider analyst reports. Ex. 649 at 2. Recent analyst commentary reflects stand-alone target prices for Airgas stock ranging from the mid $60s to mid $70s. Accretion Analysis (Ex. 1064 at 26, 27) —
LBO Analysis (Ex. 1064 at 28; Ex. 1066 at 30-34) —
Ex. 1063 at 6. Thus, this analysis reinforces that Air Products’ $70 offer does not fully and fairly compensate Airgas shareholders for their contribution to the significant synergies Air Products anticipates achieving. The LBO analysis also showed that Airgas shareholders will be better off if Airgas continues to follow its strategic plan than if it is sold in a purely financial transaction at this time. As McCausland testified, “the conclusion was that selling [to] private equity did not com-
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pete well with running the business for the long-term through execution of the management plan.” Supp. Tr. 282-83; see also Supp. Tr. 306-07 (McCausland). 12 2. The offer is opportunistic and came at a time when it would be disadvantageous to sell the company.
In Unocal, the Supreme Court expressly recognized that the “nature and timing” of an offer are valid considerations when assessing whether an offer poses a threat. Airgas PostTrial Br. 93-94. Air Products’ witnesses have continued to concede that Air Products’ goal is to acquire Airgas for the lowest price at which it can get 50%of the shares tendered. Supp. Tr. 17, 46 (Huck); Supp. Tr. 76 (Davis); Supp. Tr. 125 (McGlade). See also Airgas Post-Trial Br. 9394. Indeed, Air Products launched its offer at a time when Airgas’ last twelve months’ EBITDA, EPS, and revenue were in the trough of the most severe recession since the Great Depression. Ex. 1118 at 3; Ex. 907. As Air Products’ director Davis conceded, the trading price of Airgas’ stock was lower than it would have been had the economy not been in the middle of a recession. Supp. Tr. 76-77. After he had an opportunity to learn about the company and its strategic plans, Airgas’ new director Clancey agreed with the testimony that McCausland gave at the
Air Products suggested through its questioning that Airgas is worth $70, and no more than $70, because no other bidder has emerged that is willing to pay more. Supp. Tr. 135-36 (McGlade); Supp. Tr. 739 (Morrow). This circular reasoning fails. Indeed, by this logic, Airgas should have been sold for $60 in February 2010 because that was the only offer outstanding at the time. As DeNunzio testified, any public company always “can achieve a premium in a sale,” but “[t]hat doesn’t mean the company should be sold on any given day.” Supp. Tr. 354. The issue is one of timing. Here the record is unrebutted that Airgas has a fair value “in the mid to high seventies, and well into the mid eighties.” Supp. Tr. 394 (DeNunzio). And “at another time, in another market environment . . . [Airgas] could do substantially in excess of the 70, even accounting for time value of money in the intervening period.” Supp. Tr. 398 (DeNunzio); see also Supp. Tr. 304-05 (McCausland). For this reason, no principle of Delaware law compels a board of directors to accept a clearly inadequate offer simply because — for the moment — it is the only offer on the table. Airgas Post-Trial Br. 104-07; Dec. 10 Airgas Supp. Br. 11-13.
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first trial: now is not the right time to sell. Supp. Tr. 419-20 (Clancey); see Tr. 673-74 (McCausland); Ex. 249 at 16 (“it is a terrible time for Airgas stockholders to sell their company”). Air Products’ witnesses have also conceded that its “best and final” $70 offer was opportunistically timed to influence this Court. Huck admitted that Air Products increased its offer in response to this Court’s letter of December 2, that Air Products would not have increased its offer “but for” the Court’s letter, and that Air Products believed that raising the price to $70 and labeling it best and final would strengthen its legal position and give it “the best chance to win.” Supp Tr. 38-39. At his deposition, Davis candidly admitted that Air Products believed it was “negotiating with the Judge . . . because he’s going to rule on the poison pill.” Supp. Tr. 99. The Airgas directors believe that, despite Air Products’ “best and final” claim, Air Products or another bidder could ultimately offer more than $70. Supp. Tr. 218-20, 304-05 (McCausland); 418-19 (Clancey); see also Supp. Tr. 331, 397-98 (DeNunzio); Ex. 1063 at 1011. Thus, the Airgas Board believes that the $70 offer is opportunistically timed to try to win control of Airgas in court and that if the Airgas defenses are upheld, Air Products or another bidder will be back later with a better offer. Supp. Tr. 304-05 (McCausland); Supp. Tr. 331, 397-98 (DeNunzio). Most importantly, the Board is confident that Airgas’ stand-alone performance will deliver value to shareholders in excess of $70. Ex. 1063 at 10; Supp. Tr. at 307 (McCausland); Supp. Tr. 419-20 (Clancey). 3. Consummation of the offer will interfere with the execution of Airgas’ corporate plan.
The board of a Delaware company has no obligation to “abandon an in-place plan of corporate development in order to provide its shareholders with the option to elect and realize an immediate control premium,” and has no “fiduciary duty to jettison its plan and put the corporation’s future in the hands of its shareholders.” Paramount, 571 A.2d at 1149-50; see also TW Services, Inc. v. SWT Acquisition Corp., 1989 WL 20290, at *8, *11 (Del. Ch.) (directors have - 21 -
no duty to maximize “current share value” even when so desired by “holders of some 88% of the [c]ompany’s stock”). “Directors are not obliged to abandon a deliberately conceived corporate plan for a short-term profit unless there is clearly no basis to sustain the corporate strategy.” Paramount, 571 A.2d at 1154; see Airgas Post-Trial Br. 104-105; see also NiSource Capital Mrkts. v. Columbia Energy Group, 1999 WL 959183, at *2 (Del. Ch.) (board of directors may reasonably perceive that offer “threaten the target's long-term business plan”). To pursue a deliberately conceived corporate plan is exactly what Airgas’ Board has chosen to do here, and there clearly is a basis to sustain that plan. Key elements of Airgas’ plan include: (i) expansion into bulk gases; (ii) SAP; (iii) Strategic Accounts and segmentation of Airgas’ sales force by vertical markets; and (iv) $2.5 billion in capital investments made over the past 3 years. Tr. 644-45 (McCausland); Tr. 748-50 (McLaughlin); Tr. 865-69 (Molinini); Ex. 64 at 5; Ex. 499. The Airgas Board made the business judgment in November 2009 that Airgas’ corporate plan would provide greater benefits to Airgas shareholders than the $60 per share Air Products was offering at the time. Ex. 249 at 18 (“The Airgas Board is confident that Airgas will, consistent with its history, deliver greater value to its stockholders by executing its strategic plan than would be obtained under the Offer.”). Each time Air Products adjusted its offer, the Airgas Board revisited its decision, and each time it came to the same conclusion — that Airgas would be better off by pursuing its plan for expansion and improvement. As reflected in Airgas’ 14D-9 response to Air Products’ $70 offer, the Airgas Board most recently considered (among other things): its knowledge of and its experience with the Company and its view of the Company’s business, earnings, financial condition, prospects and strategic plans; the Company’s strategic plan, including its updated strategic plan reflecting actual financial performance through November 30, 2010 . . . estimates of future SAP costs and benefits, and its views as to Airgas’ future prospects;
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that Airgas had made substantial capital investments since the last recessionary period, including nearly $2.5 billion in the period since 2007 alone, and considered its view of the potential benefits of such investments; Airgas’ scarcity value as the only remaining independent gas company of scale in the world and its view of the underlying value of Airgas’ assets, operations and strategic plan, including its industry-leading position, more than one million customers, unrivaled platform and future growth prospects. Ex. 659 at 5-6; see also Ex. 1063 at 2-4, 10-11; Supp. Tr. 307 (McCausland). 13 4. The $70 offer is particularly coercive given the successful execution of Air Products’ plan to drive shares into the hands of arbitrageurs.
Airgas has previously shown that Air Products’ successful effort to manipulate the Airgas shareholder base and maximize the percentage of shares held by arbitrageurs has significantly increased the threat that shareholders will be coerced into tendering into an inadequate offer. See Airgas Post-Trial Br. 95-98; Dec. 10 Airgas Supp. Br. 15-20. The record established at the supplemental hearing further demonstrates that the substantial ownership of Airgas stock by these short-term, deal-driven investors poses a threat to the company and its shareholders. Huck reaffirmed his faith in the arbitrageurs at the supplemental hearing, when he acknowledged that it was “Air Products’ expectation that the arbs would support Air Products . . . because they came into the stock to get a deal done.” Supp. Tr. 45. Air Products’ board was on the same page as management. Davis testified that Air Products’ board actively considered the fact that “much of the Airgas stock was owned by arbs that had acquired their stock at a price
It should be noted that Schedule 14D-9 requires only disclosure of a target board’s recommendation to its shareholders and the reasons for that recommendation. See 17 C.F.R. 240.14d101 (2010) (Rule 14d-101 (Item 4)); 17 C.F.R. 229.1012 (2010) (Reg. M-A (Item 1012)) (“state whether the filing person is advising holders of the subject securities to accept or reject the tender offer . . . . State the reasons for the position . . .”). Thus, Airgas’ 14D-9 is neither meant nor required to describe the reasons why the Board determined to maintain Airgas’ rights plan and other defenses.
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under 70” at its December 9 meeting and that the board “believed [the arbs] would support a $70 offer.” Supp. Tr. 86-88 (Davis). Airgas’ expert witness, Peter Harkins, described the simple logic of Air Products’ strategy. Harkins testified that “arbitrageurs have typically purchased their shares at elevated levels in order to profit by realizing the spread between the price they paid and the deal price” and that, as a consequence, “[i]f the offer fails and the stock returns to pre-bid levels or to anticipated post-trading levels, the arbitrageurs . . . would suffer huge losses.” Supp. Tr. 567; see also Supp. Tr. 201 (McCausland). Those losses are magnified when arbitrageurs have used leverage to buy their positions, as they customarily do. Supp. Tr. 750 (Morrow); Ex. 1081 at 12. As Harkins explained, while an arbitrageur might threaten to withhold its shares if the bidder refused to increase the price, “[o]n the expiration date of the offer, . . . in what is tantamount to a game of chicken, they don’t have a choice. They have to tender by virtue of what they are and how they do it.” Supp. Tr. 563. Harkins’ testimony that arbitrageurs have skewed incentives is hardly controversial. Supp. Tr. 654. Huck, McGlade and the Air Products board all share Harkins’ perspective. Supp. Tr. 45 (Huck); Supp. Tr. 87-88 (Davis); see also Tr. 63-64 (Huck); Tr. 151-52 (McGlade). 14 ISS agrees, too: The risk arbitrage business model is often described as “picking up pennies in front of a steam-roller.” Because of the de minimis margin with which they often play, one wrong trade can easily wipe out most of the profits they have made, given the asymmetric risk/reward profile of their investments. As such, risk arbs — at least once they have bought into a position — are more likely to be risk averse than risk loving (although risk tolerance will also vary depending upon the size of the firm, investment strategies, etc.).
Air Products’ expert witness, Joseph Morrow, seems to agree as well. Morrow acknowledged that arbitrageurs will generally tender if they believe the risk that the target’s stock price will drop if the bidder’s offer is withdrawn is too great. See Supp. Tr. 748-49.
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Ex. 1034A at 2 (Dec. 10, 2010 M&A Edge Note). According to ISS, this “decision bias” — a willingness to “leave some money on the table in exchange for an earlier and more certain payout” — “can make arbs a hostile acquirer’s best ally.” Ex. 1034A at 2. Of course, that is what Air Products has been banking on from the beginning. The substantial concentration of shares in the hands of arbitrageurs significantly compounds the threat faced by the Airgas shareholders. If Airgas’ poison pill were redeemed, arbitrageurs would buy additional shares, raising their holdings to more than 50% of the outstanding stock. Supp. Tr. 551-52 (Harkins). Even if they did not, the arbitrageurs who control a near-majority of Airgas’ outstanding stock would tender into Air Products’ “best and final” offer for the reasons discussed above. As a result, as Harkins explained, “a shareholder who . . . agrees with the incumbent board’s view regarding this offer, is still faced with the dilemma where they know that owners of the majority of the outstanding shares are compelled to accept the offer because of the investment methodology they employ.” Supp. Tr. 572. Airgas shareholders who believe $70 is an inadequate price could not rationally decline to tender under these circumstances, “know[ing] everyone else, a majority, is going to tender . . . and control of the company will trade at that one time.” Supp. Tr. 572-73. Both Harkins and Morrow agreed that once the Air Products tender offer closes, unless a shareholder successfully asserted its appraisal rights (an extraordinarily problematic scenario discussed below), the non-tendering shareholders would never receive more than $70 for their shares. Supp. Tr. 564-65 (Harkins); Supp. Tr. 729-30 (Morrow). At best, these nontendering shareholders would receive the same $70 price later on down the road in connection with a second-step merger, consideration that “by definition” would be “worth less than getting it on the expiration” because of the time value of money. Supp. Tr. 564-65 (Harkins); Ex. 1081 at 7-8.
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Air Products’ own expert, Morrow, recognized that this would not be a palatable option for Airgas’ shareholders: Q. If I’m a professional investor and I know my upside is capped at the $70 deal price, wouldn’t I prefer to cash out as soon as possible and redeploy my funds in a new investment? A. If you could.
Supp. Tr. 736 (Morrow). These non-tendering shareholders would also assume the risk that a second-step merger would never occur, leaving them as minority shareholders in a company controlled by Air Products. See Supp. Tr. 568 (Harkins); Ex. 1081 at 7. As Morrow noted, Air Products’ own tender offer filings recognize this possibility and spell out adverse consequences for non-tendering shareholders, including the risks of delisting and deregistration of their shares. Supp. Tr. 726-34; Ex. 222 at 10, 20. At bottom, if Airgas is stripped of all of its defenses, the Airgas shareholders will be left with no choice at all. In Harkins’ words, in the circumstances of this case, “you’re forced to accept something less than what you think you should receive and what your fiduciary has told you you should receive.” Supp. Tr. 565. That is a threat posed by the Air Products offer. The coercive nature of Air Products’ clearly inadequate offer is unquestionably a threat for Unocal purposes 5. The possibility of an appraisal remedy, the majority shareholder’s fiduciary duties to the minority shareholders, and the possibility of a subsequent offering period do not diminish the coercive nature of the $70 offer.
The threat posed by the $70 offer’s coerciveness is not diminished by the possible availability of an appraisal or of a subsequent offering period. As for an appraisal: the right to seek appraisal will not arise unless and until a second-step merger is consummated, and there is thus no certainty that non-tendering shareholders will ever have appraisal rights. But in any event, the availability of an appraisal proceeding in the future is simply not the same as receiving - 26 -
full value in a change of control transaction. As the Court is well aware, appraisal proceedings take a long time and can be extremely expensive — particularly for individual shareholders who must pay all of the fees and costs associated with the proceeding. Moreover, the fair value as determined in an appraisal does not factor in the synergies associated with the transaction itself. M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 797 (Del. 1999). In this case, the cost synergies alone are estimated to be $20 to $30 per Airgas share. Supp. Tr. 199 (McCausland); see also Ex. 511 at 49. There are also considerable risks and uncertainties associated with appraisal proceedings, in which the determination of fair value will depend on expert testimony and the court’s resolution of numerous disputed issues. There is still another and more fundamental problem with Air Products’ position that the appraisal remedy sufficiently protects Airgas’ shareholders from Air Products’ coercive tender offer. Under Delaware law, directors may not abdicate their fiduciary duties based on the premise that shareholders may have a later opportunity to seek a judicial appraisal. See Airgas Post-Trial Br. 73; see also Wood v. Frank E. Best, Inc., 1999 WL 504779, at *5 (Del. Ch.) (Ex. B hereto). Air Products next suggests that the threat posed by its offer is obviated by the fact that a second-step merger would be subject to review for entire fairness. This argument fares no better. Air Products’ McGlade was resolute that the second-step merger would be done at the same price as the first step, i.e., at $70 per share. Supp. Tr. 111 (McGlade). Davis said the same thing. Supp. Tr. 104-106. Thus, all the minority shareholders would really have in that circumstance would be a lawsuit. And in any event, again, Delaware law does not permit the Airgas Board to abdicate its fiduciary duties and subject its shareholders to an inadequate and coercive tender offer simply because, if at some future date a second-step merger occurs, a new Airgas Board appointed by Air Products will have a duty to ensure that the price paid in the merger is fair. Likewise, a majority shareholders’ fiduciary obligations are cold comfort to shareholders left holding stock in a controlled corporation. See Airgas Post-Trial Br. 96-97. - 27 -
Nor does Air Products’ courthouse proffer of a subsequent offering period solve the problem. Air Products’ initial Schedule TO clearly stated that Air Products did not intend to include a subsequent offering period, and it is undisputed that, even now, Air Products has not amended its offer to include a subsequent offering period. Ex. 222 at 13. The question for the Court is whether the Airgas Board breached its fiduciary duties in connection with its consideration of the $70 offer at the December 21 Board meeting. The fact that Air Products’ offer did not include a subsequent offering period at that time is therefore dispositive. See Supp. Tr. 142–44 (McGlade) (Q: “At the time that the Airgas board considered Air Products’ best and final offer of $70, had Air Products suggested that it would include a subsequent offering period?”; A: “I don’t believe so.”). Air Products’ suggestion that it would now be willing to commit to a subsequent offering period in exchange for an order removing Airgas’ defenses, see Supp. Tr. 147 (McGlade) — in what amounts to still another attempt to negotiate the terms of its offer with the Court — is as inappropriate as it is irrelevant. Moreover, a subsequent offering period would do nothing to alleviate the coercive nature of the offer. The subsequent offering period only comes into play under the SEC rules after the initial offering period expires and the bidder accepts the tendered shares for payment. Supp. Tr. 569 (Harkins); 17 C.F.R 240.14d-11(c). At that point, as both Harkins and Morrow testified, Airgas shareholders who believed the offer is inadequate would still be compelled to accept $70 for their shares, whether in the subsequent offering period or in a second-step merger. Supp. Tr. 572-73 (Harkins); Supp. Tr. 739-41 (Morrow). 15 As Morrow put it, even with a sub-
Airgas shareholders would also have the option of selling their shares in the open market, but as Morrow conceded, once Air Products has bought 50%-plus-one of the shares for $70 at the initial expiration date, the selling shareholders are not going to get $78 in the open market. Supp. Tr. 740-41 (Morrow).
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sequent offering period, “[i]f there was ever a chance that it could be worth 78, yes. It’s gone forever.” Supp. Tr. 741. Nor could Airgas shareholders who believe the offer is inadequate engage in effective collective bargaining with Air Products in an attempt to extract more value. As Harkins testified, target company shareholders have a collective action problem. Supp. Tr. 603, 633, 667. The problem stems from a variety of factors, including the disclosure requirement imposed by Section 13(d), individual investors’ specific investment restrictions, and the fact that target company shareholders are a diverse group with diverse investment objectives and considerations. Ex. 1081 at 9-10. The third factor is especially significant here, as a near-majority of Airgas’ shares are held by arbitrageurs who are acutely sensitive to the risk of missing out on Air Products’ “best and final” bid and would therefore be unwilling to forgo the offer — even if they believe it is inadequate — and wait for the realization of the company’s long-term value. Ex. 1081 at 11-12. Under these circumstances, only the Airgas Board equipped with the pill can effectively negotiate with Air Products to receive maximum value on behalf of all shareholders. Ex. 1081 at 14-15. As John Clancey said at the Board’s December 21 meeting, the directors must “protect the pill.” Ex. 1063 at 10. In sum, if the poison pill is redeemed and Article 6 and § 203 are rendered nugatory, Airgas shareholders will be compelled to tender into an offer that the Airgas Board — including the three new directors — has unanimously determined to be inadequate based on the advice of its three financial advisors. For this additional reason, the Airgas Board’s determination that the offer constituted a threat was reasonable. 16
Contrary to Air Products’ repeated claim that the threat of coercion is all some sort of litigation construct, the Airgas Board has long been keenly focused on the fact that arbitrageurs were building a substantial ownership position and the threat that this posed. At Board meetings throughout 2010, the Airgas directors received updates on the percentage of shares held by arbi(footnote continued) - 29 -
The offer is substantively coercive.
The $70 offer also poses a threat of “substantive coercion” — which, as the Supreme Court has recognized, is “the risk that shareholders will mistakenly accept an underpriced offer because they disbelieve management’s representations of intrinsic value.” Paramount, 571 A.2d at 1153 n.17 (internal quotes and citations omitted); see also Airgas Pre-Trial Br. 75-76; Airgas Post-Trial Br. 94-95. The record here perfectly illustrates what the Court in Paramount was talking about. At the supplemental hearing, Air Products’ own witnesses conceded that the Airgas shareholders do not and cannot know as much about the company and its prospects as the Airgas Board. Supp. Tr. 33 (Huck); Supp. Tr. 103 (Davis). Even Air Products’ expert Morrow agreed. Supp. Tr. 754. Air Products’ own witnesses also conceded that Airgas management is in the best position to make projections for the future financial performance of the company. Supp. Tr. 82 (Davis); Supp. Tr. 120 (McGlade). And the parties are in accord that the Board, not the share-
(footnote continued) trageurs or similarly incentivized short-term investors, see Ex. 245A at 2; Ex. 328A at 31; Ex. 415A at 4; Ex. 1008A at 4; Ex. 1011 at 5; Ex. 1051A at 8, and the percentage was again discussed at the Board’s December 21 meeting. Supp. Tr. 369 (DeNunzio). The significance of the substantial concentration of arbitrageurs in the stock, and its bearing on the likelihood of success of Air Products’ offer was not lost on Airgas’ directors. As one of the new directors to the Airgas board testified: “Certainly, I understand the situation [the arbs] are in.” Supp. Tr. 439 (Clancey). The Airgas directors are hardly babes in the woods. Moreover, the directors reviewed and authorized the filing of a brief with the Court that addressed this very issue, a brief that discussed the high concentration of arbs and their short-term investment horizon and noted that “[w]hile these shareholders are largely sophisticated, they face a collective action problem if the pill is pulled.” Ex. 1031 at 15-16. And it noted that as a result “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.” Ex. 1031 at 16. Indeed, it was for this reason that Clancey stated at the December 21 board meeting: “the Company had to protect the pill.” Ex. 1063 at 10; Supp. Tr. 420-21. As Miller testified, protecting the pill “was implicit in everything we were doing.” Supp. Tr. 160.
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holders, is in the best position to understand the intrinsic value of the company. See Supp. Tr. 138 (McGlade); Supp. Tr. 188-89 (McCausland). And there can be no dispute about it: stockholders simply do not have all the information about the company’s business plans and prospects that is available to the Airgas Board. As McCausland elaborated: Well, we — we’re the industry leader in packaged gases. We know a lot about what’s going on in our business that even our shareholders don’t know. We know about our strategies on acquisitions, we know about current negotiations, we know about negotiations on sourcing product, on building air separation plants and CO2 plants. We know what our pricing strategies are. We know about all of our sales strategies and where we’re going to put our resources. We know what we’re doing in E-commerce. You know, we just have a wealth of information about the company, and it’s our job, as directors, to do that. Supp. Tr. 189. DeNunzio concurred: there are “a number of upsides that aren’t reflected in the plan.” Supp. Tr. 397. And the magnitude of these undisclosed benefits is substantial. For instance, Airgas has not disclosed the full expected range of benefits from SAP implementation, which is “orders of magnitude greater than what’s been assumed and which would give substantially higher values.” Supp. Tr. 397-98 (DeNunzio). Shareholders also lack the detailed valuation information available to the Airgas Board. Airgas has not disclosed its full five-year plan. Supp. Tr. 32 (Huck); Supp. Tr. 190 (McCausland); Ex. 1047 (refreshed five-year plan produced on Litigators Eyes Only basis). And it has not disclosed the investment bankers’ analyses. Ex. 1064 (Goldman Sachs/Bank of America book produced on Litigators Eyes Only basis); Ex. 1065 (Credit Suisse book produced on Litigators Eyes only basis). As Huck agreed, the discounted cash flow analysis contained in these books “is the most important for valuing Airgas” and Airgas stockholders don’t have it. Supp. Tr. 32. Stockholders have not seen, and will not see, this critical data. Nor could Airgas simply cure the problem by disclosing all of this highly sensitive competitive and strategic information to the market. Disclosing the numbers without the - 31 -
rationale behind them or business developments without any detail would only leave shareholders guessing whether the information was reliable. Supp. Tr. 585-86 (Harkins). Indeed, the doctrine is premised on the notion that shareholders may “mistakenly accept an underpriced offer because they disbelieve management’s representation of intrinsic value.” Ronald J. Gilson & Reiner Kraakman, Delaware’s Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review, 44 BUS. LAW 247, 267 (1989), cited in Paramount, 571 A.2d at 1153 n.17. If the shareholders are not told how the company will meet its projections, they have no good reason other than “trust me” to believe them. And as McCausland testified, and as common sense confirms, disclosing the strategic plans and considerations that justify the projections in the five-year plan would risk enormous harm to the business: Well, for instance, if we told everyone that we were negotiating with ABC company, to build a CO2 plant, or an air separation plant, then all of our competitors would rush in. If we told everyone we were negotiating with XYZ company for a strategic account covering 26 facilities in the U.S., the competitors would all jump in and probably cut the prices. Supp. Tr. 190-91. For this very reason, target boards and management, which are tasked with the responsibility of running the business during the pendency of a hostile offer, retain legitimate interests in preserving the confidentiality of such information. Supp. Tr. 585 (Harkins). Any rule to the contrary would harm the shareholders. It certainly would be terrible policy to oblige target company to disclose highly sensitive competitive and strategic information simply because a bidder (here a competitor itself) has made an inadequate offer. Nor does it suffice to say that stockholders are in the same position as the Board to evaluate the financial adequacy of the offer because management’s projections are close to the analyst projections and the analyst projections are available to the market. Supp. Tr. 395-96 (DeNunzio); Supp. Tr. 453 (Clancey). Analyst projections only go out to FY 2013; Airgas’ projections and the bankers’ DCF analysis include FY 2014 through FY 2016. Compare Ex. 1047 - 32 -
at 3, Ex. 1064 at 35, Ex. 1065 at 2, with Ex. 1061 at 10, and Ex. 1058 at 4. (Airgas will not realize the full annual benefits of SAP until FY . Ex. 457.)
Even to the extent certain information has been disclosed to the market, shareholders lack the insight of the Airgas directors in evaluating that information. Shareholders do not attend Board meetings. They do not get individual access to management and the company’s advisors to raise questions or to assess the credibility of their projections and analyses. Supp. Tr. 164 (Miller). Plus, as McCausland explained: “[T]he management and the board have — they’re in a better position to evaluate the information because they have experience in the industry and experience with Airgas.” Supp. Tr. 190. In this regard, the experience of John Clancey, one of the new directors, is instructive. Based on the information made publicly available during the proxy contest, Clancey’s initial perspective was that Airgas was just saying no. Supp. Tr. 403. But after receiving substantial amounts of nonpublic information, attending one-on-one briefing sessions with management on the five-year plan and consulting with the company’s advisors, Clancey’s perspective changed. Supp. Tr. 417. This is evidence of substantive coercion in action. Even though Clancey believes that all the information shareholders could want is available (Supp. Tr. 452-53), it was not until he gained access to nonpublic information, joined in the Board’s process of evaluating that information, and heard from Credit Suisse that he fully accepted management’s view on value. And the same holds true for the other two new directors, Miller and Lumpkins. It was not until they joined the board and gained access to “all the information at its disposal” that they fully believed the company’s position on value. Supp. Tr. 163, 164 (Miller); Ex. 1063 at 10-12. There is simply no way Airgas could replicate that process with each of its thousands of shareholders holding the 84 million shares outstanding. Supp. Tr. 701 (Morrow).
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That is why plaintiffs’ oft-repeated mantra of “let the shareholders decide” is misguided and unrealistic. E.g., Shareholder Plaintiffs Post-Trial Br. 51-56; Air Products Post-Trial Reply Br. 34, 39. The rhetoric glosses over the crucial point that the role of the board is not simply to act as a conduit of information so the shareholders can make decisions themselves. Directors manage the affairs of the corporation through the exercise of their independent business judgment. 8 Del. C. § 141(a). And at no time is this responsibility more important than when control of the company is at stake. Dec. 10 Airgas Supp. Br. 10-14. When the board elects to sell the company, the decision forces out the shareholders who do not want to sell. That is why change of control decisions are, in the first instance, decisions of the board that cannot be delegated to the shareholders. While shareholders are free to sell their shares to serve their own interests, the board is charged with making control decisions because it has both the power and the duty to protect the company and all of its shareholders from perceived harms. So long as the board acts in good faith and with due care, its judgments cannot be second-guessed by our courts. Airgas Post-Trial Br. 72-73, 75, 77, 94, 98, 105; Dec. 10 Airgas Supp. Br. 5, 10-14, 20. As Airgas director Ted Miller observed: “That’s why they elect us to the board. Otherwise, why have boards? Why have a board?” Supp. Tr. 163. 7. The Board reasonably concluded that Air Products has not necessarily made its best and final offer and the company’s defenses therefore still provide the Board with a valuable negotiating tool.
Air Products claims that $70 is its “best and final” offer. Supp. Tr. 5 (Huck); Supp. Tr. 104 (Davis); Supp. Tr. 108 (McGlade). But the Airgas Board determined that further increases are possible, and reasonably concluded that it should still press for a higher price. Under Unocal, it is this reasonable belief of the Airgas Board that controls. 493 A.2d at 955. The minutes of the December 21 meeting reflect that the directors, clearly of the view that there was more than $70 to be had, continued to focus on how to get a higher price for - 34 -
The Board unanimously approved including the $78 sale price in the Schedule 14D-9 on this very basis. Ex. 1063 at 11; Ex. 659 at 3 (Schedule 14D-9 filed with SEC). The consensus of the Airgas Board was clear: “[A]s a practical matter, I don’t think anyone in that room really believed it was best and final.” Supp. Tr. 218-19 (McCausland). As new director John Clancey explained the Board’s reasoning at trial: Q: There was some discussion at the December 21st board meeting about the term best and final. Did you express any views on that? A. Yes. I’m not bashful about best and final. We do 90 percent of our business on contracts. We play best and final. Our customers play best and final. The governments play best and final. Best and final is normally a cliché that gets you into the finals so that you can take your price up or take your price down, and it’s meant to force a situation. And in the commercial world, I think it’s being used less and less. Supp. Tr. 418. In addition, Credit Suisse concluded that in different market conditions, “there may be other acquirers of the company at higher prices than what Air Products is offering today,” which could lead to a sale of the company at a price above $70 per share to a third-party or prompt a topping bid by Air Products. Supp. Tr. 398. As McCausland explained, Airgas has not pursued an alternative transaction because Air Products’ offer was so low; bidders might be discouraged by Air Products’ head start with the FTC; and the because “some of the industrial, big industrial gas companies, are in Europe. And Europe is still in difficulty.” Supp. Tr. 30405.DeNunzio made the additional point that European bidders prefer to negotiate transactions out of the lime light. Supp. Tr. 331. - 35 -
In sum, based on decades of experience with business negotiations generally and months of dealing with Air Products in particular, the Airgas Board made a business judgment that Air Products could return with a bid above $70, if not now, then later. Supp. Tr. 418-19 (Clancey); Ex. 1063 at 9. That business judgment is reserved to the Board: under settled Delaware law, a target board may properly use a pill under such circumstances to preserve negotiating leverage. See Airgas Post-Trial Br. 2 (quoting eBay Domestic Holdings, Inc. v. Newmark, 2010 WL 3516473, at *19 (Del. Ch.)); Ex. 1081 at 13-15 (Second Supp. Harkins Rep.). The testimony of the Air Products witnesses only confirms that Air Products’ offer is not necessarily “best and final” — and that this formulation was a litigation tactic. When asked if “Air Products believed that, by raising its price to 70 and labeling it best and final, that it would strengthen its position on the removal of the pill,” Huck responded: “Yes, we did.” Supp. Tr. 38. And, as noted above, rather than negotiate with the Airgas Board, Air Products, having waited 14 months, thought it was now “negotiating with the Judge,” as Davis candidly admitted at deposition and was forced to concede on cross-examination at trial. Supp. Tr. 98-99. At its December 9, 2010 meeting, the Air Products Board did not receive financial information from its investment bankers about the $70 offer. Nor did it consider how accretive/dilutive an acquisition would be at various price points, information that would be essential to any board in determining its highest bid. Instead, the Board’s focus was on the litigation.
Ex. 1033 at 2.
Ex. 1033 at 4.
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At the supplemental hearing, Huck hedged his bet on “best and final” testifying that Air Products never determined $70 was its highest offer regardless of future circumstances. Supp. Tr. 49, 50 (Huck). Davis went even further, testifying that, if Airgas made a counterproposal, the Air Products board would need to hold another meeting because management needed authority to go above $70. Supp. Tr. 93. In fact, Davis testified that he believed that Air Products’ $70 best and final offer would elicit a counteroffer from Airgas that would lead to a “discussion of value.” Supp. Tr. 93. Davis further testified that he specifically inquired of Huck or McGlade whether “70 would be the absolute end or would it be possible that Airgas would go higher” and he understood that “Air Products might go higher to put the deal over the top.” Supp. Tr. 93-94. And in January, Huck told the Wall Street firm of Dominick & Dominick that if the Airgas shareholders decided to change the board, Air Products would bid again. Ex. 1077 at 4. That Huck has admitted that Air Products’ litigation-driven “best and final” offer is really not best and final is understandable given that Airgas “fills a major missing hole in Air Products’ U.S. business model.” Supp. Tr. 77 (Davis). In short, the Airgas Board has reasonably concluded that Air Products needs Airgas, and that accordingly “best and final” likely means nothing more than “best and final” for now. 17 And if there were any doubt about the reasonableness of that business judgment, it would be erased by history: this would not be the first time that a hostile bidder came back with a higher offer after being rebuffed by the target board at what was nominally its best price. As DeNunzio advised one of the Airgas directors, regarding the strikingly similar situation involv17
The Airgas Board’s skepticism that $70 represents Air Products’ “best and final” is not surprising given that, prior to the October trial, Huck and McGlade had publicly stated, more than once, that Air Products would not bid against itself or raise its offer price in the absence of competing bidders, but it nonetheless twice proceeded to do so, raising the price from an original $60 to $65.50. Supp. Tr. 49 (Huck), Supp. Tr. 127-28 (McGlade); see also, e.g., Ex. 309 at 1, Ex. 322 at 1.
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ing CF’s bid for Terra Industries: “[S]urprise, surprise. The original bidder came roaring back with a much higher proposal that was, you know, much more than nickels and dimes.” Supp. Tr. 328-31. There are indeed numerous examples of a bidder making a “best and final” offer and then making another offer at a higher price. Exs. 1001A-F. Target Bidder “Best& Final” Offer 1/12/2007 $30.00 11/28/2005 $33.00 11/1/2004 $24.00 Subsequent Offer 5/2/2007 $36.26 4/3/2006 $36.50 12/13/2004 $26.50 % Change
Cablevision Systems Corp. Vincor International, Inc PeopleSoft, Inc.
Dolan Family Group Constellation Brands, Inc. Oracle Corp.
For all of these reasons, and because the Board in the exercise of its business judgment with advice from qualified independent advisors has concluded that Airgas is worth at least $78 per share in a sale, the Airgas Board has reasonably concluded that the $70 Air Products bid represents a threat. D. The Airgas Board’s response is reasonable in relation to the threat posed. The evidence at the supplemental hearing demonstrates that the proportionality prong of Unocal has been met as well. The Board’s actions have done nothing more than prevent a sale at an inadequate price — and allowed Airgas to pursue its pre-existing plan to maximize shareholder value — while leaving the door open for a sale at the right price. And the Board has done nothing to change the company. And assuming that Air Products is not willing to make an offer that would be attractive to the current directors, Air Products can appeal directly to the shareholders and, with a 67% vote at either a special meeting or at an annual meeting, remove the entire Board. - 38 -
The Board is willing to sell.
The Airgas Board’s maintenance of the company’s existing defenses in response to Air Products’ $70 inadequate offer is within the range of reasonableness because the Airgas Board is willing to sell the company. Airgas Post-Trial Br. 83-84. Airgas’ directors have not forsworn a sale, and do not seek to entrench themselves; rather, they have discussed repeatedly their willingness to sell and would embrace a sale at a full and fair price. Indeed, as previously noted, the Airgas Board tried to sell the company in 2008. Airgas Pre-Trial Br. 5-6; Airgas PostTrial Br. 83-84; Tr. 519, 532-35 (Thomas); Tr. at 621-29 (McCausland). The supplemental hearing testimony confirms that the continuing Airgas directors remain willing to sell — but, again, only at a full and fair price. Airgas Post-Trial Br. 83-84; Supp. Tr. 217 (McCausland) (Q. Mr. McCausland, are you opposed to a sale of Airgas? A. Absolutely not.). And of course, the new directors embrace a sale at a full and fair price as well. Supp. Tr. 171 (Miller) (“[I]f the price offered is a value that the board believes is worth selling the company, the company will be sold. Forget the pill.”). The Airgas Board’s willingness to do a deal with Air Products is demonstrated by the Airgas Board’s October 26 and November 2 letters, which culminated in the November 4 meeting between the companies. Exs. 646, 651. At the urging of the new Airgas directors, Airgas met with Air Products without preconditions. Ex. 650; Supp. Tr. 118-19 (McGlade); Supp. Tr. 192 (McCausland). Airgas and Air Products had a constructive meeting and made their respective cases on valuation. Exs. 1013, 1014; Supp. Tr. 192-96 (McCausland). Airgas left the meeting “with a feeling of optimism” about the negotiations. Supp. Tr. 192, 199 (McCausland). Van Roden called Davis the next day to continue the discussions and go over the key valuation assumptions, and Davis said, I read you “loud and clear.” Ex. 1015; Supp. Tr. 84 (Davis). Davis expected that Air Products would get back to Airgas after its Board met the following week. Supp. Tr. 85-86 (Davis). And van Roden called Airgas’ di- 39 -
rectors to let them know he thought there had been a breakthrough. Supp. Tr. 166 (Miller). Negotiations ended only after Air Products made the false accusation that the meeting was a charade. Ex. 1018; Ex. 655.
For this reason too, the Board’s maintenance of the company’s existing defenses is well within the range of reasonableness and its business judgment should be respected. 2. The effect of the Board’s actions is to require Air Products to proceed in accordance with the company’s pre-existing corporate governance structure, a structure that is authorized by Delaware law.
The reasonableness of Airgas’ response to the $70 offer is confirmed by the fact that all the Airgas Board is doing is relying on a corporate governance structure that has been in place for decades. Every piece of this liberal governance regime is authorized by Delaware law. Airgas Post-Trial Br. 77-78; Dec. 10 Airgas Supp. Br. 1-3; Dec. 21 Airgas Supp. Br. 3-5. Airgas’ shareholders — its long-term shareholders, its short-term shareholders and Air Products — bought their shares with the understanding of Airgas’ governance structure. And in responding to Air Products’ offer, the Airgas Board has simply and reasonably relied on the company’s pre-existing defenses. Airgas Post-Trial Br. 101-104, 109-113; Dec. 10 Airgas Supp. Br. 1-3, 8-14; Airgas Pre-Trial Br. 72-73, 83-84. As shown at trial, of the 86 Delaware companies in the Fortune 500 with staggered Boards, only six (including Airgas) have charter provisions that permit shareholders to remove directors without cause between annual meetings
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(that is, at a special meeting and/or by written consent). Supp. Tr. 679 (Genet); Ex. 1084A; Dec. 21 Airgas Supp. Br. 5 & n.1. The fact that Airgas’ charter permits shareholders to seek to remove directors at any time makes Airgas’ response to the offer all the more reasonable. Air Products can call a special meeting to try to dismantle Airgas’ pre-existing defenses whenever it wants; it doesn’t have to wait for two annual meetings. The Airgas Board’s reliance on its pre-existing defenses is reasonable for the further reason that Airgas’ corporate governance structure — specifically Article 6 of Airgas’ charter and Section 203 — promises that minority shareholders are protected during a takeover attempt. Pre-Trial Br. 84-85 n.36. See Centaur Partners, IV v. Nat’l Intergroup, Inc., 582 A.2d 923, 927 (Del. 1990) (“fair price” or “high vote requirement may protect a minority shareholder against squeeze-out techniques employed by insurgents able to command a bare majority of votes.”); see also id. (citing Berlin v. Emerald Partners, 552 A.2d 482, 489 n.8 (Del. 1988) (“Supermajority vote provisions were originally formulated as antitakeover devices. By requiring a greater percentage of stockholders to approve a proposed action, stockholders are given more power to defeat actions adverse to their interests.”)). Airgas shareholders relied on these statutory and charter protections in buying their stock, and reasonably expected that the Board would use them in the event of the takeover. Cf. Broz v. Cellular Info. Sys., 673 A.2d 148, 159 (Del. 1996) (“[W]e note that certainty and predictability are values to be promoted in our corporation law.”). In sum, Airgas’ rules of the road were written long ago. That the Airgas Board is following them in defense of Air Products’ takeover, and that Air Products must follow them as well, is the mildest of responses, and well within a range of reasonableness.
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Removing the Airgas Board by obtaining a 67% vote at a special meeting is “realistically attainable.”
The evidence at the first trial established that the 67% removal provision gives Air Products a “realistically attainable” means of circumventing all of Airgas’ defenses. See Dec. 10 Airgas Supp. Br. at 6-7; Dec. 21 Airgas Supp. Br. 3-8. The evidence adduced at the supplemental evidentiary hearing overwhelmingly reinforces this conclusion. 18 Indeed, Air Products’ witnesses conceded that the 67% vote could be obtained at the right price. E.g., Supp. Tr. 40-44 (Huck). Air Products, however, does not want to increase its offer to the price necessary to secure support of 67% of the Airgas shareholders — indeed, that would be inconsistent with its admitted strategy to acquire Airgas at the lowest price necessary to obtain the tender of 50% of the Airgas shareholders. Supp. Tr. 17, 43-44 (Huck); Supp. Tr. 76 (Davis); Supp. Tr. 113, 140 (McGlade). Certainly, Air Products cannot succeed in establishing that a 67% vote is “realistically unattainable” or “mathematically impossible” simply because it is not willing to raise its offer price above the lowest amount at which it can obtain the tender of a bare majority of Airgas shares. Moreover, Airgas’ expert witness, Peter Harkins, opined not only that Air Products could “realistically attain 67 percent of the outstanding shares at a special meeting to remove the Airgas directors in furtherance of a sufficiently attractive bid,” but that Air Products “could easily do that.” Supp. Tr. 456, 457, 483. The point of Harkins’ analysis was not to pre18
Air Products has another readily available means of circumventing Airgas’ takeover defenses — running another proxy contest at Airgas’ next annual meeting. See Dec. 10 Airgas Supp. Br. 1-2. There is nothing in Morrow’s testimony, or any of the other evidence presented by Air Products at the supplemental evidentiary hearing, to suggest that Air Products would not have a realistic chance of succeeding in a second proxy contest. If Air Products were willing to keep its offer open (or make a new offer) in conjunction with the next Airgas annual meeting, a second group of Air Products nominees could be elected to the Airgas Board. It is settled law that a board’s decision to maintain its defenses under these circumstances is not preclusive. See Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586, 604 (Del. 2010).
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dict that an offer at $70 per share (or any other price) would result in a 67% vote to remove the Airgas Board, but to show that Air Products could realistically attain such a vote, even without the support of the Airgas Board. Supp. Tr. 507 (Harkins). Harkins predicated his opinion on a “bottoms-up analysis, which is the only proper way to do this kind of a projection.” Supp. Tr. 466. Using the same methodology that he uses in advising clients, Harkins created a vote projection model — an assessment of who can vote, who will vote (turnout) and how they will vote (for or against/abstain) at a special meeting in favor of an Air Products proposal to remove the Airgas Board. Supp. Tr. 457, 508, 510. The starting point for his analysis was an investor relations report presented at the Airgas Board meeting of December 21, 2010, that specified the percentage of Airgas stock held by each of nine categories of shareholders as of December 9, 2010 (the day Air Products raised its bid to $70 per share). Supp. Tr. 457-58 (Harkins); Ex. 1051A at 8. On a category-by-category basis, Harkins then applied “reasonable assumptions” regarding both the turnout and support level from each category based on his “career experience, [his] own skills, and [his] assessment of the . . . particular facts and circumstances of this case, including [his] review of the votes cast at the 2010 annual meeting.” Supp. Tr. 465; see also Supp. Tr. 470-82. 19
Thus, with respect to the Company Employee Plans, Harkins made the “conservative assumption” that 95 percent of their votes would be cast against the Air Products proposal because that is the “highest level . . . that [he has] seen in [his] career of employee support for an incumbent’s position in opposition for an to the insurgent.” Supp. Tr. 470. With respect to the Retail (Individual Investors) category, his turnout assumption of 24% was the same level of turnout this category demonstrated at the annual meeting, and the 20% support assumption reflected the level of support that, in his experience, bidders had garnered from retail investors when soliciting proxies in aid of a premium bid. Supp. Tr. 470-71 (referencing GE Capital-Kemper and Kansas City Power & Light deals). As to the Arbitrageurs and Event-Driven Investors category, Harkins conservatively assumed a 95% turnout, which is “actually less than the 99.2 or .3 percent that [he] observed at the annual meeting.” Supp. Tr. 473. As to the category Institutional Investors Subscribing to ISS, which consists of the “hard-line followers” of ISS who either “subcontract[ ] their vote-decision making to ISS” or “rely heavily upon the voting recommendations of ISS” — (footnote continued) - 43 -
Harkins’ vote projection model, Exhibit 912, demonstrates that, based upon these reasonable assumptions, Air Products would be readily able to achieve a 67% vote to remove the Airgas directors in furtherance of a sufficiently appealing bid. To do so, Air Products would only need to obtain 51.3% of the shares voted by shareholders in the “Other Institutional Investors” category (the variable for which Harkins’ model was designed to solve): % of Outstanding Voting for Air Products 0.0% 0.1 0.2 2.0 0.5 43.7 9.4 6.7 4.4 67.0%
Shareholder Category Officers and Directors..................................... Company Employee Plans .............................. Retail (Individual Investors) ........................... Air Products .................................................... Long/Short Hedge Funds ................................ Arbitrageurs and Event-Driven Investors ....... Institutional Investors Subscribing to ISS ...... Large Index Funds (Vanguard, BlackRock, State Street) ...................................... Other Institutional Investors ........................... Total....................................................
% Voting 100.0% 83.3 24.0 100.0 50.0 95.0 90.0 100.0 85.0 89.8%
% Voting for Air Products 0.0% 5.0 20.0 100.0 50.0 100.0 95.0 67.0 X = 51.3 75.0%
(footnote continued) whose former lead M&A analyst is on record as saying that once a target company has had “sufficient time to convince its shareholders why the offer is not in the shareholders’ best interests, it is shareholders which should have the right to accept or reject an offer without interference by the board” (Ex. 1001G; Supp. Tr. 477) — Harkins projected a 90% turnout and a 95% support level to “conservatively give effect to the possible erosion of some support, even amongst the ISS hard-liners.” Supp. Tr. 480. As to the three Large Index Funds, Harkins assumed they would “vote all of their shares at they did at the annual meeting” and that two-thirds of their shares would be voted for the Air Products proposal; at the annual meeting, one of the three (State Street) voted for Air Products and a second (Vanguard) split its vote, and the investment policies for all three funds states that “they seek to maximize value for their portfolio.” Supp. Tr. 480-82, 532-33. Finally, as to the category called Other Institutional Investors, Harkins estimated that 85% of the shares would turn out, “at the low end of what [he] would expect them to do.” Supp. Tr. 482.
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Moreover as Harkins explained, shareholder profiles are not static. Supp. Tr. 488. Had Air Products coupled the announcement of its “best and final” bid with a solicitation for the purpose of calling a special meeting to vote on a proposal to remove the Airgas Board, “still more shares would have poured into the hands of merger arbitrage firms and hedge funds . . . being shown a clear path to consummation of a transaction with Air Products.” Supp. Tr. 488 (Harkins). Since NYSE rules require that at least ten calendar days’ notice be given of a record date for a special meeting, the arbitrage community would have “more than enough time” to purchase an additional, “substantial block of Airgas shares” if it found Air Products’ offering price sufficiently appealing. Supp. Tr. 489-90. Indeed, Harkins testified that, in that circumstance, he would expect arbitrage and hedge fund holdings to “easily grow to 56 percent . . . [over] a majority of the outstanding shares.” Supp. Tr. 551-52. Air Products’ rebuttal expert, Joseph Morrow, offered the conclusory assertion that it was not realistically possible for Air Products to obtain a 67% vote at a special meeting called to remove Airgas directors. Supp. Tr. 692. Morrow’s superficial analysis did not withstand scrutiny and should not be credited. Morrow did not do a bottoms-up analysis of the turnout and support levels from each of the Airgas shareholder constituencies. Supp. Tr. 692. His opinion boiled down to the proposition that Air Products would have to win roughly 86% of the votes cast by participating non-management holders and that this represented an “unrealistic margin to attain.” Supp. Tr. 693. 20 Thus, Morrow’s opinion was nothing more than ipse dixit, which cannot remotely be
Air Products may argue that victory at a special meeting is unattainable in light of a recent article arguing on the basis of a review of 60 hostile or unsolicited takeovers for Delaware companies between 1988 and 2008 that bidders had rarely increased their stake in the target company from less than 15% to more than 85% in a single tender offer. See Guhan Subramanian et al., Is Delaware’s Antitakeover Statute Unconstitutional?, 65 BUS. LAW. 685 (2010). That study’s methodology and its conclusions have been strongly criticized. A. Gilchrist Sparks, III & Helen (footnote continued) - 45 -
compared to the detailed vote projection Harkins offered in support of his opinion. Cf. NCR Corp. v. Am. Telephone & Telegraph Co., 761 F. Supp. 475, 494 n.11 (S.D. Ohio 1991) (crediting Morrow’s opinion that AT&T had a “realistic chance of achieving victory at the special meeting” by achieving an 80% vote because Morrow “provided a detailed basis for [his] conclusions,” while NCR’s expert’s conclusions were “unexplained and, therefore, suspect”). At his deposition and at trial, Morrow was asked to perform the bottoms-up analysis of the Airgas shareholder profile that he had failed to do before. It is telling that once Morrow’s assumptions regarding turnout and vote support (to the extent Morrow was willing to supply them) were incorporated into Harkins’ model, it was actually easier to achieve the 67% vote at Airgas than it was using Harkins’ assumptions alone. With Morrow’s assumptions incorporated, Harkins’ model determined that Air Products would only need to obtain 47.1% of the shares voted by shareholders in the “Other Institutional Investors” category to prevail at a special meeting. Supp. Tr. 490-506; Ex. 913. This result strongly reinforces the conclusion that a 67% vote is realistically attainable. 21 (footnote continued) Bowers, After Twenty-Two Years, Section 203 of the Delaware General Corporation Law Continues to Give Hostile Bidders a Meaningful Opportunity for Success, 65 BUS. LAW 761 (2010). Among other criticisms, Sparks and Bowers have observed that the Subramanian study fails to account for the fact that “with the leverage of the poison pill and consistent with their obligations [under Delaware law], boards in the past twenty years frequently have negotiated with bidders to achieve the best result attainable in those circumstances where it appeared that an unsolicited offer would ultimately achieve an 85% threshold.” Sparks & Bowers at 767.
Morrow adhered to the assumptions he gave at deposition during his examination by Airgas’ counsel at the hearing (Supp. Tr. 711-23), but on examination by Air Products’ counsel, offered opinions at variance with his prior hearing and deposition testimony. Thus at deposition and at the hearing Morrow testified that he had no opinion as to how arbitrageurs and hedge funds would vote at a special meeting to remove Airgas directors, stating that he would never predict how they were going to vote “until the game is over.” Supp. Tr. 723. But Morrow then testified in response to Air Products’ counsel’s questioning that there was “no way” Air Products could get 100% of the vote from arbitrageurs and hedge funds at the special meeting. Supp. Tr. 760; (footnote continued) - 46 -
Indeed, both on direct and cross-examination, Morrow conceded that if Air Products could convince shareholders that “best and final” really was “best and final,” Air Products could get a 67% vote. Supp. Tr. 759, 769-70. These concessions were elicited during the course of Morrow’s attempt to explain away the testimony he gave in the AT&T/NCR litigation. AT&T was soliciting proxies from shareholders of NCR to replace a majority of the company’s board in furtherance of AT&T’s unsolicited takeover bid. Supp. Tr. 702-03. NCR’s charter required the vote of 80% of the outstanding shares to replace a majority of its staggered board, and the turnout at each of the four previous NCR shareholder meetings had been less than 80%. Supp. Tr. 703, 707. Morrow nevertheless opined that AT&T had a “realistic chance” of getting the 80% vote and achieving victory if NCR’s leveraged ESOP was not permitted to vote. Supp. Tr. 708. Finding that Morrow had provided a “detailed basis” for his conclusions at trial and that his analysis was “reasonable,” the Ohio federal court concluded that an 80% vote was realistically attainable by AT&T. Supp. Tr. 708-10. Morrow tried to explain away his testimony in the AT&T case with the observation that, after the Ohio court issued its decision, AT&T failed to attain the 80% vote at NCR. Supp. Tr. 756-58. According to Morrow, up until the end of the contest, about half or more of the arbitrageurs were willing to elect an AT&T-supported minority slate to the NCR board. But then, at the last minute, arbitrageur support evaporated because the arbs believed that if they gave AT&T full control of the NCR board, the bidding would end at AT&T’s initial price of $90 per share. Supp. Tr. 757-58. Indeed, contemporaneous media reports show (and Morrow conceded) that negotiations between the two companies continued up until the eve of the vote, and (footnote continued) see also Supp. Tr. 761 (“Definitely not. I don’t believe you’re going to get anywhere near a 100 percent vote from the arbs.”). Ultimately, Morrow provided no cogent explanation for his eleventh-hour conversion to Air Products’ theory of the case.
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the investment community widely believed that AT&T had not made it best and final bid. Supp. Tr. 763-68; Ex. 1129. Morrow acknowledged — in response to questioning by Air Products’ counsel — that if AT&T had been able to convince the arbitrageurs that $90 was “as far as [it’s] willing to go,” then obtaining an 80% percent vote was “a possibility.” Supp. Tr. 759, 770. Morrow concluded: “If [the arbs are] convinced on it, you know, maybe.” Supp. Tr. 759. 22 Morrow made the same admission on cross-examination. Supp. Tr. 769-70. Morrow thus conceded — on direct and cross-examination — that if Air Products were able to convince the arbitrageurs that $70 was truly its “best and final” offer, then a 67% percent vote at a special meeting was reasonably attainable. 23 While neither Morrow nor Harkins opined that Air Products would, in fact, receive 67% of the vote at a price of $70 per share (or at any other price), that hardly means that 67% is not “realistically attainable.” Much like a standard proxy contest in aid of a hostile bid, Air Products’ success or failure at a special meeting would ultimately turn on the price that Air Products offered to the Airgas shareholders. See Unitrin, 651 A.2d at 1383 (“If American General presented an attractive price as the cornerstone of a proxy contest, it could prevail, irrespec-
Morrow’s testimony in this respect was consistent with Harkins’ view that, while it is generally easier to prompt investors to support a minority slate than it is a controlling slate, as more time elapses and more facts are known, electing a controlling slate does not “pose as much of a problem.” Supp. Tr. 521-22; see also Supp. Tr. 644 (“it can be easier to elect a controlling slate, if there is a sufficiently appealing platform”). Morrow’s conclusory opinion that a 67% vote is not realistically attainable should be discredited for several additional and independent reasons. First, Morrow is hardly a disinterested expert. Though it did not retain him to handle the proxy fight at Airgas’ annual meeting, Air Products has been a client of Morrow’s firm for some 25 years and he is hopeful of maintaining the relationship. Supp. Tr. 688-89. Second, though Morrow has some 46 years’ experience as a proxy solicitor, his current responsibilities are principally supervisory; he was unable to identify a single proxy solicitation or unsolicited tender offer in which he had been personally involved in the last five years. Supp. Tr. 685, 689.
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tive of whether the shareholder directors’ absolute voting power was 23% or 28%.”); see also Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586, 603 (Del. 2010) (“The key variable in a proxy contest would be the merit of the bidder’s proposal and not the magnitude of its stockholdings.”). As Harkins explained, “you’re not guaranteed to win a vote any time you go to solicit proxies for something. . . . [T]here’s no statutory right to win. There’s a right to have a realistic — something that’s realistically attainable under the circumstances.” Supp. Tr. 529-30. As previously noted, Air Products further argument, that a 67% vote is not realistically attainable because it is not willing to pay the price that would be needed to receive such a vote, misses the point. Air Products does not deny that there is some price at which it could prevail at a special meeting; its claim is simply that victory cannot be achieved at $70 per share. See Supp. Tr. 40-41 (Huck) (“I am sure that at some price that you could get it. . . . It was our judgment, along with our advisors, that our best and final price — that there was no chance of winning — of winning an election to remove the board . . . .”). “[S]tockholders are presumed to act in their own best economic interests when they vote in a proxy contest.” Unitrin, 651 A.2d at 1380-81. If Air Products is not willing to pay the price that the shareholders would require to get a 67% majority, the problem is with Air Products, not the shareholders. Delaware law does not require that a hostile bidder be guaranteed victory at its chosen price. 24 But Air Products has no idea what price would be required to garner a 67% vote because it has not even attempted to pursue the option of calling a special meeting to remove the
Air Products’ suggested through its questioning that even if it replaced the entire board through a special meeting, the new board might not support the offer. Not only is that an unrealistic suggestion, if Air Products succeeds in replacing the entire Airgas Board and the new board rejects the offer and keeps the company’s defenses in place, the problem is with the offer, not with the board.
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Airgas directors. And Air Products admits that its view that $70 is not enough to prevail at a special meeting is unsupported by any written analysis. Supp. Tr. 40-41 (Huck). Of course, Air Products need not resort to “speculation upon price.” Supp. Tr. 41 (Huck). As Harkins testified, were Air Products to commence the process of soliciting Airgas’ shareholders in advance of a special meeting (an action that requires a mere one-third approval), it would quickly get a sense of whether $70 was a sufficient price and, if necessary, Air Products “could raise their offer price.” Supp. Tr. 647-48. Quite obviously, a bidder like Air Products cannot be heard to maintain that success at the ballot box is not realistic because its bid is too low. Air Products also continues to complain that pursuing a special meeting is an unrealistic alternative because it would take too long. See Supp. Tr. 48 (Huck). Of course, the timing of a special meeting is and always has been exclusively within Air Products’ control. See Dec. 21 Airgas Supp. Br. 5. Nothing prevented Air Products from calling for a special meeting when it first made its tender offer in February 2010, or on November 23 when it lost the appeal on its January meeting bylaw in the Supreme Court, or at any other time. Air Products took fourteen months from when it made its first offer to get to its supposed “best and final” $70; it ought not be heard to complain about delay now. Indeed, as Huck admitted, had Air Products commenced the process of soliciting consents to call a special meeting in early December, when it raised its offer to $70, the special meeting could have occurred in March or April. Supp. Tr. 48. If Air Products were to win at the trial court, there will be an appeal that would not be decided before sometime in March at the earliest. So assuming there is an appeal here, the difference between a litigation victory and a victory at the ballot box is not about timing. It is about money. Air Products has put a bid on the
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table that it believes will attract the tender of 50% of the shares plus one. Supp. Tr. 17 (Huck), 76 (Davis). It does not want to pay the price it would take to get 67%. 25 II. WHETHER EQUITABLE PRINCIPLES SUPPORT THE ENTRY OF A PERMANENT INJUNCTION. ANSWER: NO. The Court must also decide whether the equities weigh in favor of the mandatory injunction that plaintiffs seek. Airgas Post-Trial Br. 81; Dec. 10 Airgas Supp. Br. 21-22. A. Plaintiffs have failed to demonstrate that, absent an injunction, they will suffer irreparable harm. As already noted, the evidence adduced at the supplemental hearing demonstrates that, if Air Products were to make an offer for Airgas at an attractive price, it could realistically obtain control of Airgas’ Board by obtaining a 67% vote at a special meeting. Through this route, Air Products retains the “viable alternative to turn the [Airgas] Board out in a proxy contest,” Unitrin, 651 A.2d at 1388 n.39. In light of this readily available self-help measure plaintiffs cannot demonstrate any need for this Court’s intervention. Phelps Dodge Corp. v. Cyprus Amax Minerals Co., 1999 WL 1054255, at *2 (Del. Ch.) (“When . . . self-help measures are clearly available . . . it is not for this Court to ride to [plaintiffs’] rescue.”) (Ex. C hereto). That Air Products would prefer to have Airgas’ pill redeemed by court order rather than pursue these alternatives does not render irreparable the harm of which it now complains. Frazer v. Worldwide Energy Corp., 1987 WL 8739, at *6 (Del. Ch.) (discounting harm of plaintiff’s “own making”) (Ex. D hereto).
Air Products also ignores that, if the pill is pulled, it will have to run a proxy contest to install a board that would approve the second step, whether it is long-form or short-form.
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The equities do not favor entry of a mandatory permanent injunction. The evidence at the supplemental hearing demonstrates further that the balance of
the equities does not support plaintiffs’ request for mandatory injunctive relief. After this Court asked Air Products whether “$65.50 per share [was] the price that Air Products want[ed] this Court to rely upon in addressing the ‘threat’ analysis under Unocal,” Letter of Dec. 2, 2010 at 2, Air Products raised its offer to $70 per share. Air Products did not do so because it believed $70 reflected Airgas’ intrinsic value. To the contrary, the supplemental hearing confirmed that Air Products is still seeking to acquire Airgas at the lowest possible price. Supp. Tr. 17 (Huck); Supp. Tr. 76 (Davis). Air Products raised its bid to $70 for a very simple reason. In Davis’s words, Air Products had decided to bypass Airgas’ Board and was “negotiating with [the Court] who had taken over that process because he’s going to rule on the poison pill.” Supp. Tr. 98-99 (Davis). See also Supp. Tr. 36-39 (Huck) (Air Products raised its bid in response to the Court’s letter); Supp. Tr. 56 (Huck) (in implementing strategy to acquire Airgas, Huck told Airgas shareholders to write letters to the Court); Supp. Tr. 143 (McGlade) (McGlade “would . . . commit to the Court that [Air Products] would go for the minority shares at $70 if that was a condition” of the pill being pulled). Air Products did not have to take this approach. It could have offered a full and fair price to Airgas’ Board, which, all along, has been willing to sell Airgas. Ex. 646 at 1. Or it could have pursued another proxy contest at a special or annual meeting. The balance of the equities thus tilts significantly in favor of Airgas. First, as noted in Airgas’ December 10 submission to this Court, “Air Products can pay $78 and still have a transaction that would be 17.9% accretive on a cash basis.” Dec. 10 Airgas Supp. Br. 21. Air Products has not rebutted this point at trial. See Supp. Tr. 17-18 (Huck) (transaction at $70 is “immediately accretive to Air Products”); Supp. Tr. 113-14 (McGlade) (same). - 52 -
Second, Air Products does not have a legally protected interest in acquiring Airgas at an inadequate price. Airgas can sell itself only once, and its stockholders can receive a control premium only once. Air Products has offered no evidence even suggesting that $70 per share reflects Airgas’ intrinsic value. The Court’s injunctive power should not force the Airgas Board to allow a bare and transitory majority of stockholders to force a sale of the corporation at an inadequate price, when the superiority of the target’s long-term prospects on a stand-alone basis remains clear, and when the company’s shareholders and Air Products have a viable, nonjudicial means for overturning the good faith judgment of the shareholders’ elected representatives. Air Products asserts the process has taken 14 months, and the pill has served its purpose. Supp. Tr. 136 (McGlade). But Air Products made its best-and-final offer on December 9, 2010 — less than two months ago. Supp. Tr. 136 (McGlade). Moreover, although Air Products asserts that the process of calling a special meeting would now take “too long,” see Supp. Tr. 48 (Huck), Air Products could have called the meeting long ago. Instead of making a full and fair offer, and rather than engaging in a constructive dialogue with the Airgas Board that would result in an acceptable price, Air Products made a tactical decision to try to force through two “annual meetings” in the space of four months. The reason why Air Products did this is obvious: it recognized that it would cost more to get a 67% supermajority vote than a 50-plus one share vote or tender and that the Board’s view of value would not jibe with that of Huck and the other members of Air Products management. Now that its original, lowball-offer strategy has failed, Air Products is asking this Court to assist it in forcing through the result that it was denied by the Supreme Court, strategically raising its offer just to the point at which it believes it can get a bare majority tendered and to a level that this Court would find acceptable in the negotiati[on] that Davis testified to. Supp. Tr. 98-99 (Davis). But having elected to pursue a strategy that the Supreme Court rejected, Air Products cannot now be heard to say that the process of obtaining a 67% vote will take too long. See Frazer, 1987 WL 8739, at *6. - 53 -
Third, Airgas’ stockholders do not have a right to accept tender offers that their Board, in good faith, determines to be clearly inadequate. Moran v. Household Int’l, Inc., 490 A.2d 1059, 1070 (Del. Ch. 1985) (“shareholders do not possess a contractual right to receive takeover bids. The shareholders’ ability to gain premiums through takeover activity is subject to the good faith business judgment of the board of directors in structuring defensive tactics.”), aff’d, 500 A.2d 1346 (Del.); Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d 257, 272 (Del. Ch. 1989) (same). The shareholders who are now in the stock want to be in the stock. They, bought their shares knowing that Airgas’ corporate-governance structure included a rights plan, a 67% removal provision, and a fair price provision in Article 6 of the charter and that Airgas had not opted out of § 203. Those stockholders who would prefer that Airgas not be sold at $70 had every expectation that those defenses would protect Airgas against inadequate bids, such as Air Products’ offer, aimed at garnering the tender a bare majority of the company’s shares. See Supp. Tr. 76 (Davis) (Air Products’ strategy was to make an offer that appealed to 50% of the stockholders); Supp. Tr. 17, 43-44 (Huck) (same); Supp. Tr. 125 (McGlade) (same). The risk arbitrageurs too understood that there was a risk that the deal would not go through; they had no right or reason to expect that this Court would sidestep decades of precedent and take the “risk” out of “risk arbitrage.” There is thus no inequity in denying the shareholder plaintiffs’ request for an injunction. Fourth, to date, the only Airgas stockholders to have testified are Airgas’ directors and employees. Thus, it remains the case that the only Airgas stockholders to have testified in this Court have opposed Air Products’ request to have the pill redeemed. Moreover, McGlade acknowledged that “in [his] discussions with the Airgas shareholders, many of them suggested that Air Products should pay more than 70.” Supp. Tr. 137 (McGlade). Entry of a permanent injunction would carry the substantial risk that these shareholders would be unable to resist Air Products’ bid, and be forced to lose not only their ability to own the stock of a high-performing - 54 -
corporation, but also their one-time opportunity to obtain a lucrative control premium. See Supp. Tr. 202 (McCausland) (“The tender offer would succeed if the pill were pulled. I have no doubt about that.”). Fifth, the public interest does not favor entry of a permanent injunction. As Harkins testified, an injunction in this case would give every would-be acquirer the blueprint for acquiring Delaware corporations on the cheap: make an opportunistic, low-ball bid, make vague allusions to an impending price increase to draw more arbs into the stock, raise the offer to a still inadequate level but call it “best and final,” and wait around long enough for a court to intercede and overrule the board. See Supp. Tr. 579-80 (Harkins). Air Products thus invites this Court to adopt a rule that would disable target boards from acting as effective negotiators once it has been judicially determined that a takeover has gone on “long enough.” The public interest would be disserved by such a rule. Air Products’ approach, by putting an expiration date on every rights plan, eviscerates the well recognized benefits of such plans. As our courts have observed, empirical research has consistently demonstrated that stockholders of a target will enjoy higher premiums in change-of-control transactions if the target is able to employ a pill in an effective manner. In re Gaylord Container Corp. S’holders Litig., 753 A.2d 462, 482 n.72 (Del. Ch. 2000); see Patrick A. Gaughan, Mergers, Acquisitions, and Corporate Restructurings (5th ed. 2011), at 193-96 (discussing scholarship); Thomas W. Bates et al., Board classification and managerial entrenchment: Evidence from the market for corporate control, 87 J. FIN. ECON. 656, 659 (2008) (“[P]oison pill provisions do not systematically deter bids but do increase the premiums received by target shareholders” (citing Robert Comment & G. William Schwert, Poison or Placebo? Evidence on the Deterrence and Wealth Effects of Modern Antitakeover Measures, 39 J. FIN. ECON. 3 (1995))); J.P. Morgan & Co., Poison Pill and Acquisition Premiums (May 2001) (“[O]ur analysis,” covering 400 acquisitions since 1997, “continues to support the conclusion that shareholders of firms with pills in place receive higher takeover premiums than those with- 55 -
out pills”); J.P. Morgan & Co., Poison Pill and Acquisition Premiums (July 1997) (For the 300 U.S. transactions from 1993 through June 1997, “the median takeover premium at firms that had a poison pill in place was nearly 10 percent higher than for companies that did not have one.”); see also John Laide, Poison Pill M&A Premium (Aug. 30, 2005), https://www.sharkrepellent.net/pub/rs_20050830.html (documenting, on basis of “all transactions for at least a majority of a company’s outstanding stock completed between January 1, 2002 and June 30, 2005,” a premium received by stockholders of companies with a poison pill in place). 26 III. WHETHER McCAUSLAND’S OPTION EXERCISE WAS PROPER. ANSWER: YES. Finally, the Court must determine whether there is any merit to plaintiffs’ claims that McCausland “misappropriated . . . confidential information belonging to Airgas” when he exercised 300,000 stock options on January 5, 2010, and that the Airgas Board breached its fiduciary duties by not stopping him. Am. Compl. ¶ 62. For the reasons previously given, these allegations should be rejected, and Airgas should be awarded the fees of Airgas’ executive compensation expert David Gordon. Airgas Pre-Trial Br. 87-90; Airgas Post-Trial Br. 114-117.
Accord Stephen M. Bainbridge, MERGERS AND ACQUISITIONS 192 (2d ed. 2009) (without effective “[t]akeover defenses,” the bidder can simply “bypass the target board and make an offer directly to the target’s shareholders”). Stockholders, then facing tremendous collective-action problems, will be incapable of coordinating a unified response to the bidder’s offer, making it unlikely that the stockholders will be able to extract from the bidder its best offer. See id. at 160 (“[C]ollective action problems preclude the hard bargaining needed to extract a full share of the gains.”).
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CONCLUSION Plaintiffs should be denied any relief, their claims should be dismissed with prejudice, and Airgas should be awarded affirmative relief on Air Products’ allegations concerning McCausland’s lawful option exercises. 27
POTTER ANDERSON & CORROON LLP By /s/ Kevin R. Shannon OF COUNSEL: Kenneth B. Forrest Theodore N. Mirvis Eric M. Roth Marc Wolinsky George T. Conway III Joshua A. Naftalis Bradley R. Wilson Jasand Mock Charles D. Cording WACHTELL, LIPTON, ROSEN & KATZ 51 West 52nd Street New York, New York 10019 (212) 403-1000 Dated: February 2, 2011
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
If the Court concludes that a permanent mandatory injunction is warranted in this case — which it should not — Airgas will promptly file a motion seeking an appropriate stay.
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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)
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