November 15, 2011
Chancellor Chandler and the M&A Course
Posted by Afra Afsharipour

Like many other corporate law academics and lawyers, I have long admired Chancellor Chandler’s work.  His contributions to the development of Delaware corporate law have enriched both my thinking and my teaching.  For purposes of this post, I will focus on my use of Chancellor Chandler’s opinions in teaching M&A.

M&A casebooks are filled with opinions from the Delaware courts.  In particular, the opinions of the Delaware Chancery court reflect sophisticated and nuanced explanations of both Delaware corporate law and the M&A deal-making process. Moreover, Delaware jurisprudence has come to dominate judicial thinking with respect to issues that often arise in M&A litigation, particularly issues related to the fiduciary duties of boards in the contexts of takeover transactions.

The strengths of the Delaware courts in carefully explaining how deals are planned and executed, what is at stake and why the law has developed in the way that it has are reflected in Chancellor Chandler’s recent 158-page opinion which upheld the right of Airgas' board to use its poison pill as a defensive mechanism against Air Products’ hostile tender offer. Chancellor Chandler started out the case with a concise summary:

This case poses the following fundamental question: Can a board of directors, acting in good faith and with a reasonable factual basis for its decision, when faced with a structurally non-coercive, all-cash, fully financed tender offer directed to the stockholders of the corporation, keep a poison pill in place so as to prevent the stockholders from making their own decision about whether they want to tender their shares—even after the incumbent board has lost one election contest, a full year has gone by since the offer was first made public, and the stockholders are fully informed as to the target board’s views on the inadequacy of the offer? If so, does that effectively mean that a board can “just say never” to a hostile tender offer?

The answer to the latter question is “no.” A board cannot “just say no” to a tender offer. Under Delaware law, it must first pass through two prongs of exacting judicial scrutiny by a judge who will evaluate the actions taken by, and the motives of, the board. Only a board of directors found to be acting in good faith, after reasonable investigation and reliance on the advice of outside advisors, which articulates and convinces the Court that a hostile tender offer poses a legitimate threat to the corporate enterprise, may address that perceived threat by blocking the tender offer and forcing the bidder to elect a board majority that supports its bid.

Like other commentators, I admire this opinion for the meticulous work that it does in laying out the facts.  Almost 65 pages of Chancellor Chandler’s opinion explains the complex twists and turns of the courtship, negotiation, battle and downright hostility that ensues in an attempted takeover transaction. A review of the opinion’s account of the factual developments of the Air Products/Airgas saga could easily take an entire class and be a useful tool for explaining the financial incentives that drive deals and the way the law frames the deal planning and execution process.

Also, like other commentators (see Professor Bainbridge here and here), I expected that Chancellor Chandler would uphold the pill. What I didn’t quite expect was Chancellor Chandler’s frank articulation of how decades of Delaware case law on the poison pill essentially gave him no choice but to reach the result that he did. As he explained:

Although I have a hard time believing that inadequate price alone (according to the target’s board) in the context of a non-discriminatory, all cash, all-shares, fully financed offer poses any “threat”—particularly given the wealth of information available to Airgas’s stockholders at this point in time—under existing Delaware law, it apparently does. Inadequate price has become a form of “substantive coercion” as that concept has been developed by the Delaware Supreme Court in its takeover jurisprudence. That is, the idea that Airgas’s stockholders will disbelieve the board’s views on value (or in the case of merger arbitrageurs who may have short-term profit goals in mind, they may simply ignore the board’s recommendations), and so they may mistakenly tender into an inadequately priced offer. Substantive coercion has been clearly recognized by our Supreme Court as a valid threat.

Trial judges are not free to ignore or rewrite appellate court decisions. Thus, for reasons explained in detail below, I am constrained by Delaware Supreme Court precedent to conclude that defendants have met their burden under Unocal to articulate a sufficient threat that justifies the continued maintenance of Airgas’s poison pill. That is, assuming defendants have met their burden to articulate a legally cognizable threat (prong 1), Airgas’s defenses have been recognized by Delaware law as reasonable responses to the threat posed by an inadequate offer—even an all-shares, all-cash offer (prong 2).

For my M&A class next semester, Chancellor Chandler’s summary of the current legal regime in Delaware will be required reading.  His summary illuminates the development of Delaware jurisprudence in this area, as well as its continued shortcomings. Hopefully from his perch as a partner at Wilson Sonsini Goodrich & Rosati, Chancellor Chandler will continue the critical discussion he undertook in the Airgas opinion. 

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