Corporate Governance

Delaware Validates "Just Say Never": Air Products v. Airgas (Process and Kubuki Theater) (Part 2)

By J Robert Brown Jr.

In Airgas, Chancellor Chandler specifically disavows that he is adopting the "just say never" approach to takeovers where management is allowed to oppose a takeover by doing little more than adopting a poison pill and refusing to withdraw the pill. 

As he rhetorically asks:  Can "a board . . . 'just say never' to a hostile tender offer?"  He answers his own questions immediately.

• 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.

In fact, however, his analysis proves the point. 

In the discussion over whether boards could "just say no," the argument was not whether Delaware would validate, for example, an interested officer (say the CEO) announcing that in no circumstances would a hostile tender offer ever be allowed.  This sort of self dealing behavior would be hard even for Delaware courts to swallow.

On the other hand, the courts have long shrouded director duties in a veil of process.  As long as the process is proper, the act approved is proper.  The real issue on "just say no" is whether a board, using proper process, could indefinitely prevent a hostile acquisition, even when, objectively, the board's analysis looked problematic.  Airgas validates that approach. 

To just say no, the decision needs to be procedurally correct which means decided by independent directors through the use of outside advisors.  But often this process is kubuki theater, a formalistic and staged process that otherwise has little real meaning.  Thus, for example, the decision needs to have  been made by independent directors but as we have long noted, Delaware does not insure that in fact directors labeled "independent" really are.  This is discussed at length here: Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty. 

What about the process?  Again, kubuki theater.  The issue is whether there is enough paper in the file and a sufficient number of independent advisors.  Again its about process.  Moreover, the advisors may meet the Delaware definition of independent, but they have an economic incentive to give management what it wants.  As for the definition, if it were rigorous, why would Congress have to intervene in Dodd-Frank and essentially assign to the SEC the authority to define standards for compensation consultants? 

Airgas disavows that a board can just say never but then turns around and says a board can just say never if the process is right.  Assuming good lawyering, the process will always be right.  Because the process validates the decision, the decision will always be right.  And where management does not want the tender offer to succeed, the decision will invariably support management. 

The opinion is posted on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on February 16, 2011 (boomark / email).