Ten days ago, Mason Capital Management encouraged the board of directors of Airgas to forget litigation with Air Products and come to terms, but the board of Airgas is forging ahead in the Delaware Court of Chancery. In the wake of last week's activity, Steve Davidoff is wondering about the Airgas board. I am wondering, too.

On September 6, 2010, Air Products offered to acquire shares of Airgas at $65.50 per share. The board of directors of Airgas decided unanimously that this price was "grossly inadequate," and after a November board meeting, the Airgas board issued a letter stating, "the board has unanimously concluded that it believes that the value of Airgas in a sale is at least $78 per share." Last week, a fight broke out among the Airgas directors about what they meant by this statement.

Three Airgas directors who were nominated by Air Products and elected by the Airgas stockholders at the 2010 annual meeting (Messrs. Clancey, Lumpkins and Miller) claimed that the $78 price was an invitation to Air Products to negotiate. In a letter released late last week, Clancey, Lumpkins and Miller offered this account of the November board meeting:

[W]e expressed our beliefs that proposing a price (any price, within reason) would be more likely to generate a constructive dialogue between the two companies and potentially result in an increased offer from Air Products than would a figurative "stiff arm." It was in that context, and only in that context, that we agreed to communicate a $78 price to Air Products. To be clear, at no time did any of us take the position that a $78 offer price was the price of admission to having any discussions with Air Products, nor did we agree that $78 was the minimum per share price at which Airgas might be purchased.

The Chairman of Airgas, John van Roden, denied this account, arguing that the $78 was stated as a minimum value for Airgas. 

At the Board’s November 1-2 meeting, the suggestion was made by one or more of you that a letter be sent to Air Products expressing both a willingness to meet and specifying a minimum value of Airgas in a sale. Following discussion, all of the directors agreed with that view. At the November 1 portion of the Board meeting, the price to be included in the letter was actively discussed by the entire Board, including each of you. The company’s financial and legal advisors were present for and contributed to the discussion. At no time did any of you suggest at that meeting that the company’s advisors were conflicted or biased. In fact, one of you suggested a price of at least $80 per share. Ultimately the price of at least $78 was reached as the Board’s unanimous view.

Ok, so the directors of Airgas are bickering about price. Does this dispute matter? Maybe.

In his response to the three unhappy directors, Chairman van Roden asserted that "[n]one of your claimed grievances has any bearing on the issues that are now pending before the Court." After Chairman van Roden made this assertion, however, Air Products announced a "best and final offer" to acquire all of the outstanding shares of Airgas, Inc. for $70 per share. The Airgas board has not yet expressed an opinion on this new offer, but by questioning Airgas' price resolve, Messrs. Clancey, Lumpkins and Miller not only laid the groundwork for an internal board debate about this new offer, but also provided litigation fodder for Air Products, assuming the issues in the case are not mooted by the new offer. (For an argument that the new offer makes the litigation moot, see the brief filed by Airgas last Friday.)

The main issue in the litigation is whether Airgas can maintain a shareholder rights plan in the face of the Air Products offer, and price is central to the the resolution of this issue. Indeed, in his December 2 letter asking for supplemental briefing, Chancellor Chandler observed, "this dispute appears to be about price and price alone." The reason for this focus on price is that maintenance of the poison pill is justified only if the Air Products offer can be characterized as a "threat" to Airgas stockholders under the famous Unocal standard. An all-cash offer of the type proposed by Air Products is threatening to the Airgas stockholders only if the price is inadequate. In questioning the November statement of the Airgas board of directors, Messrs. Clancey, Lumpkins and Miller raise some doubt about the adequacy of the subsequent $70 bid.

Steve Davidoff prognosticates:

The Airgas board is still likely to unanimously reject the Air Products offer, but watch to see whether there is split in terms of willingness to negotiate and whether the board again terms the offer "grossly inadequate" or something less.

Air Products will also try to make hay of this disagreement with Chancellor Chandler, to buttress its effort to pull the poison pill. It may even try to make a motion for rehearing in the Delaware Supreme Court claiming that the court’s decision was on an unsound basis – namely that the board was unanimous. Such a maneuver would likely be for public relations value as any motion for a rehearing is likely to be quickly denied as the decision was ultimately decided on other grounds.

Excellent stuff.

Last Friday, Messrs. Clancey, Lumpkins and Miller issued a statement denying reports of division on the Airgas board, but the release of the dueling letters shows that the directors are having vigorous price discussions (as they should).

Also last Friday, Airgas filed a brief with the Delaware Court of Chancery in response to Chancellor Chandler's letter. We are still waiting for disclosure of the Air Products filing on the same day, and when that is released, we may get a better sense of where this litigation is headed.

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