Chancellor Chandler’s monumental ruling in the Airgas case, which is available here, provides a comprehensive review and analysis of the evolution and current state of Delaware’s law concerning the use of defensive tactics and the limits to boards’ ability to “just say no.” In doing so, the opinion considers the body of academic work on the subject, and significantly engages with work done by academics affiliated with the Harvard Program on Corporate Governance, including the following:
Delaware’s Intermediate Standard for Defensive Tactics: Is there Substance to Proportionality Review? In reviewing the evolution of Delaware’s doctrine, Chancellor Chandler devotes considerable attention to this article by Reinier Kraakman (co-authored with Ronald Gilson). This article introduced the idea, subsequently incorporated into Delaware doctrine, that defensive tactics can be justified by concerns about “substantive coercion” – that is, a board’s concerns that shareholders would tender to a non-coercive offer out of “in ignorance or mistaken belief” of the value of remaining independent.
The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy: Chancellor Chandler also relies on and engages with the 2002 Stanford Law Review article by Bebchuk, Coates, and Subramanian, the first academic work to highlight and empirically demonstrate the special significance of staggered boards in the age of the pill:
- (1) Chancellor Chandler relies on the concept of an “effective staggered board” (ESB) as introduced and defined by Bebchuk, Coates, and Subramanian to refer to situations in which a firm’s governance documents do not provide shareholders and/or a bidder with ways to get around or weaken the impediments posed by a staggered board.
- (2) Chancellor Chandler explains in detail why the case before him is different from the “paradigmatic case” on which the Bebchuk-Coates-Subramanian study focused. According to Chandler, that paradigmatic case is one in which a company has a fully effective ESB and the bidder won one election on a “let the shareholders decide” platform. Chandler notes that Vice Chancellor Strine expressed openness to considering redeeming a pill in such circumstances in his Stanford response to the professors’ article, The Professorial Bear Hug: The ESB Proposal as a Conscious Effort to Make the Delaware Courts Confront the Basic “Just Say No” Question, and in Strine’s opinion in the Yucaipa case.
Bebchuk vs. Lipton on Just Say No: In a section, titled “Pills, Policy and Professors,” Chancellor Chandler reviews the debate that has taken place over the past three decades over the role of takeover defenses. Chandler comments that “two of the largest contributors to the literature are Lucian Bebchuk (who famously takes the ‘shareholder choice’ position that pills should be limited and that classified boards reduce firm value) on one side of the ring, and Marty Lipton (the founder of the poison pill, who continues to zealously defend its use) on the other.” Bebchuk and Lipton have long debated the subject in print. The most recent exchange between the two was published in the University of Chicago Law Review in 2002, when Bebchuk published The Case Against Board Veto in Corporate Takeovers, a comprehensive statement of the case against board veto in such transactions, and Lipton published a response, Pills, Polls, and Professors Redux, in which he defended such board power.
Staggered Boards and the Wealth of Shareholders: Evidence from a Natural Experiment: Chancellor Chandler notes the findings of the recent study by Bebchuk, Cohen, and Wang, which is described in this post. The study showed that Chandler’s prior ruling, which temporarily weakened the antitakeover force of staggered boards, was accompanied by abnormal stock market gains to shareholders of companies with staggered boards, and that the Delaware Supreme Court’s decision reversing Chandler’s ruling was accompanied by stock market losses to these shareholders.
Is Delaware’s Antitakeover Statute Unconstitutional? Evidence from 1998-2008: Chancellor Chandler also notes the findings of the recent study by Subramanian, Herscovici and Barbetta, which is described in this post. These findings indicate that attaining the 67% needed to remove Airgas’ board in a special meeting would be rather difficult.