Last Monday I ventured into the belly of the beast by presenting the attached decks (available here and here) in Professor Bebchuk’s class at Harvard Law School. The class and discussion focused on short-termism, using the Airgas case as a jumping off point (see first deck available here) to the broader governance issues canvassed by the second deck (available here). Once again there were no answers given to the “inconvenient questions” listed on the two pager available here.
Posts Tagged ‘Airgas v. Air Products & Chemicals’
Here are slides on the Airgas case and slides on the underlying gating issue of long/short term perspective that drives much of the corporate governance debates and is rarely confronted by the “governistas” that advocate all sorts of standardized practices they consider to be value enhancing. I used these materials this month in a class co-taught by Lucian Bebchuk and Scott Hirst at Harvard Law School – hence, the reference to being “in the belly of the beast.” The slides are available here and here.
I wrote my comment “Delaware Court of Chancery Gets Airgas Right” (posted on the HLS Forum on March 1, 2011) before reading Professor Lucian Bebchuk’s op-ed “An Antidote for the Corporate Poison Pill” that was published in The Wall Street Journal on February 24, 2011. As such, my comment did not address Professor Bebchuk’s op-ed directly, but rather served as a counterpoint, providing another point of view. In this comment, I offer a more direct response to Professor Bebchuk’s op-ed.
The fundamental difference between Professor Bebchuk and me stems from Professor Bebchuk’s applying Athenian democracy principles to corporate governance (or, if you will, the French Revolution approach) while I favor a more Platonic representative structure (the American Revolution approach). My approach recognizes the central role of directors in corporate change-of-control transactions, regardless of their form, balanced by imposition of fiduciary duty obligations that are subject to court review. No such balance exists if unfettered power is given to shareholders, who have no such fiduciary duties as a check, whose access to information, no matter how robust the disclosure, is likely to be more limited than the board’s, and whose actions often can be controlled by a subset of shareholders with a short-term perspective.
Chancellor Chandler’s decision in Air Products and Chemicals Inc. v. Airgas, Inc. (Del. Ch., CA No. 5249-CC, 2/15/11) upholding the board’s maintenance of the company’s shareholder rights plan in the face of an unfriendly cash tender offer the board determined was inadequate has justifiably received a great deal of attention and analysis. Despite his reluctance, I believe the Chancellor got it right. By permitting the Airgas board to keep the rights plan in place under the facts of that case, he upheld the foundational director-centric model for governance of Delaware corporations and recognized the importance of long-term value creation as a critical focus for Delaware corporate enterprises.
In a major decision issued last week, William Chandler of Delaware’s Court of Chancery ruled that corporate boards may use a “poison pill”—a device designed to block shareholders from considering a takeover bid—for as long a period of time as the board deems warranted. Because Delaware law governs most U.S. publicly traded firms, the decision is important—and it represents a setback for investors and capital markets.
The ruling grew out of the epic battle between takeover target Airgas and bidder Air Products. Air Products made a takeover bid for Airgas in 2010, increased it several times, and kept it open until last week’s decision. Airgas’s directors argued that defeating the premium offer would prove, in the long run, to be in shareholders’ interests. As the Chancery Court stressed, however, the directors based their opinion solely on information publicly available to shareholders. Why should shareholders, who have powerful incentives to get it right, not be permitted to make their own choice between selling and staying independent?
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.
Almost thirty years ago, our Firm announced there was a way — the poison pill — to level the playing field between corporate raiders and a board of directors acting to protect the interests of the corporation and its shareholders. Despite great skepticism about the pill in the legal and banking communities, the Delaware Supreme Court in 1985 agreed with us and affirmed that directors, in the exercise of their business judgment, could properly use the pill to protect the corporation from hostile takeover bids.
The Program on Corporate Governance just issued our paper Staggered Boards and the Wealth of Shareholders: Evidence from a Natural Experiment.
While staggered boards are known to be negatively correlated with firm valuation, such association might be due to staggered boards either bringing about lower firm value or merely being the product of the tendency of low-value firms to have staggered boards. Our paper uses a natural experiment setting to identify how market participants view the effect of staggered boards on firm value.
In particular, we focus on two recent rulings, separated by several weeks, that had opposite effects on the antitakeover force of the staggered boards of affected companies: (i) an October 2010 ruling by the Delaware Chancery Court approving the legality of shareholder-adopted bylaws that weaken the antitakeover force of a staggered board by moving the company’s annual meeting up from later parts of the calendar year to January, and (ii) the subsequent decision by the Delaware Supreme Court to overturn the Chancery Court ruling and invalidate such bylaws.
We find evidence consistent with the hypothesis that the Chancery Court ruling increased the value of companies significantly affected by the rulings –namely, companies with a staggered board and an annual meeting in later parts of the calendar year – and that the Supreme Court ruling produced a reduction in the value of these companies that was of similar magnitude (but opposite sign) to the value increase generated by the Chancery Court ruling. The identified positive and negative effects were most pronounced for firms for which control contests are especially relevant due to low industry-adjusted Tobin’s Q, low industry-adjusted return on assets, or relatively small firm size.
Our findings are consistent with market participants’ viewing staggered boards as bringing about a reduction in firm value. The findings are thus consistent with institutional investors’ standard policies of voting in favor of proposals to repeal classified boards, and with the view that the ongoing process of board declassification in public firms will enhance shareholder value.
Below is a more detailed description of what our paper does:
In Airgas, Inc. v. Air Products and Chemicals, Inc., No. 649, 2010 (Del. Nov. 23, 2010), the Delaware Supreme Court, reversing the Chancery Court, held that a bylaw amendment moving up Airgas’s annual meeting by eight months was inconsistent with the company’s charter provision creating staggered terms for directors and permitted an improper removal of directors without cause.
Airgas has been the subject of a hostile takeover attempt by its competitor, Air Products, since October 2009. Air Products made its first tender offer for 100% of the Airgas shares at $60 per share on February 11, 2010. Between February and Airgas’s September 15, 2010 annual meeting, Air Products raised its bid twice, eventually to $65.50 per share. Each bid was rejected by the board of Airgas as undervaluing the company. As part of its takeover attempt, Air Products launched a proxy contest to gain control of Airgas’s staggered board by nominating three candidates for election at the 2010 annual meeting and proposing amendments to Airgas’s bylaws. Each of Air Products’ director nominees was elected by the Airgas stockholders at the 2010 meeting.
The Delaware Supreme Court is going to be hearing arguments soon in the case of Airgas vs. Air Products. In its briefs, as well as in oral argument before the Chancery Court, Airgas used our academic work on staggered board as evidence for its position. However, our academic articles, and the empirical evidence put forward in them, support the opposite position.
The case before the Delaware courts arose from Air Products’ unsolicited offer for Airgas. Facing opposition from Airgas to its offer, Air Products ran a competing slate for the August 2010 annual meeting and was able to replace one-third of the directors. (Airgas has a staggered board and thus only one-third of its directors came up for re-election at that annual meeting.) Air Products also succeeded in getting majority support for passing a bylaw moving up Airgas’ next annual meeting to January 2011, thus creating the possibility that another one-third of the directors could be replaced then.