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Takeover defenses
  • 1 Unocal v. Mesa Petroleum (Del. 1985)

    In this famous decision, the Delaware Supreme Court ruled that the board has the power to defend against hostile takeovers, even with discriminatory measures, and laid down the judicial standard of review for scrutinizing such defenses.

    The most important things to look for are thus:

    1. What is the threat that the board is defending against?
    2. Who is being protected?
    3. What is the standard of review? How does it relate to our two old friends: the business judgment rule and entire fairness? If it is different, why?


    1
    493 A.2d 946 (1985)
    2
    UNOCAL CORPORATION, a Delaware corporation, Defendant Below, Appellant,
    v.
    MESA PETROLEUM CO., a Delaware corporation, Mesa Asset Co., a Delaware corporation, Mesa Eastern, Inc., a Delaware corporation and Mesa Partners II, a Texas partnership, Plaintiffs Below, Appellees.
    3

    Supreme Court of Delaware.

    4
    Submitted: May 16, 1985.
    5
    Oral Decision: May 17, 1985.
    6
    Written Decision: June 10, 1985.
    7

    A. Gilchrist Sparks, III (argued), and Kenneth J. Nachbar of Morris, Nichols, Arsht & Tunnell, Wilmington, James R. Martin and Mitchell A. Karlan of Gibson, Dunn & Crutcher and Paul, Hastings, Janofsky & Walker, Los Angeles, Cal., of counsel, for appellant.

    8

    Charles F. Richards, Jr. (argued), Samuel A. Nolen, and Gregory P. Williams of Richards, Layton & Finger, Wilmington, for appellees.

    9

    Before McNEILLY and MOORE, JJ., and TAYLOR, Judge (Sitting by designation pursuant to Del. Const., Art. 4, § 12.)

    10
    [949] MOORE, Justice.
    11

    We confront an issue of first impression in Delaware — the validity of a corporation's self-tender for its own shares which excludes from participation a stockholder making a hostile tender offer for the company's stock.

    12

    The Court of Chancery granted a preliminary injunction to the plaintiffs, Mesa Petroleum Co., Mesa Asset Co., Mesa Partners II, and Mesa Eastern, Inc. (collectively "Mesa")[1], enjoining an exchange offer of the defendant, Unocal Corporation (Unocal) for its own stock. The trial court concluded that a selective exchange offer, excluding Mesa, was legally impermissible. We cannot agree with such a blanket rule. The factual findings of the Vice Chancellor, fully supported by the record, establish that Unocal's board, consisting of a majority of independent directors, acted in good faith, and after reasonable investigation found that Mesa's tender offer was both inadequate and coercive. Under the circumstances the board had both the power and duty to oppose a bid it perceived to be harmful to the corporate enterprise. On this record we are satisfied that the device Unocal adopted is reasonable in relation to the threat posed, and that the board acted in the proper exercise of sound business judgment. We will not substitute our views for those of the board if the latter's decision can be "attributed to any rational business purpose." Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971). Accordingly, we reverse the decision of the Court of Chancery and order the preliminary injunction vacated.[2]

    13
    I.
    14

    The factual background of this matter bears a significant relationship to its ultimate outcome.

    15

    On April 8, 1985, Mesa, the owner of approximately 13% of Unocal's stock, commenced a two-tier "front loaded" cash tender offer for 64 million shares, or approximately 37%, of Unocal's outstanding stock at a price of $54 per share. The "back-end" was designed to eliminate the remaining publicly held shares by an exchange of securities purportedly worth $54 per share. However, pursuant to an order entered by the United States District Court for the Central District of California on April 26, 1985, Mesa issued a supplemental proxy statement to Unocal's stockholders disclosing that the securities offered in the second-step merger would be highly subordinated, and that Unocal's capitalization would differ significantly from its present [950] structure. Unocal has rather aptly termed such securities "junk bonds".[3]

    16

    Unocal's board consists of eight independent outside directors and six insiders. It met on April 13, 1985, to consider the Mesa tender offer. Thirteen directors were present, and the meeting lasted nine and one-half hours. The directors were given no agenda or written materials prior to the session. However, detailed presentations were made by legal counsel regarding the board's obligations under both Delaware corporate law and the federal securities laws. The board then received a presentation from Peter Sachs on behalf of Goldman Sachs & Co. (Goldman Sachs) and Dillon, Read & Co. (Dillon Read) discussing the bases for their opinions that the Mesa proposal was wholly inadequate. Mr. Sachs opined that the minimum cash value that could be expected from a sale or orderly liquidation for 100% of Unocal's stock was in excess of $60 per share. In making his presentation, Mr. Sachs showed slides outlining the valuation techniques used by the financial advisors, and others, depicting recent business combinations in the oil and gas industry. The Court of Chancery found that the Sachs presentation was designed to apprise the directors of the scope of the analyses performed rather than the facts and numbers used in reaching the conclusion that Mesa's tender offer price was inadequate.

    17

    Mr. Sachs also presented various defensive strategies available to the board if it concluded that Mesa's two-step tender offer was inadequate and should be opposed. One of the devices outlined was a self-tender by Unocal for its own stock with a reasonable price range of $70 to $75 per share. The cost of such a proposal would cause the company to incur $6.1-6.5 billion of additional debt, and a presentation was made informing the board of Unocal's ability to handle it. The directors were told that the primary effect of this obligation would be to reduce exploratory drilling, but that the company would nonetheless remain a viable entity.

    18

    The eight outside directors, comprising a clear majority of the thirteen members present, then met separately with Unocal's financial advisors and attorneys. Thereafter, they unanimously agreed to advise the board that it should reject Mesa's tender offer as inadequate, and that Unocal should pursue a self-tender to provide the stockholders with a fairly priced alternative to the Mesa proposal. The board then reconvened and unanimously adopted a resolution rejecting as grossly inadequate Mesa's tender offer. Despite the nine and one-half hour length of the meeting, no formal decision was made on the proposed defensive self-tender.

    19

    On April 15, the board met again with four of the directors present by telephone [951] and one member still absent.[4] This session lasted two hours. Unocal's Vice President of Finance and its Assistant General Counsel made a detailed presentation of the proposed terms of the exchange offer. A price range between $70 and $80 per share was considered, and ultimately the directors agreed upon $72. The board was also advised about the debt securities that would be issued, and the necessity of placing restrictive covenants upon certain corporate activities until the obligations were paid. The board's decisions were made in reliance on the advice of its investment bankers, including the terms and conditions upon which the securities were to be issued. Based upon this advice, and the board's own deliberations, the directors unanimously approved the exchange offer. Their resolution provided that if Mesa acquired 64 million shares of Unocal stock through its own offer (the Mesa Purchase Condition), Unocal would buy the remaining 49% outstanding for an exchange of debt securities having an aggregate par value of $72 per share. The board resolution also stated that the offer would be subject to other conditions that had been described to the board at the meeting, or which were deemed necessary by Unocal's officers, including the exclusion of Mesa from the proposal (the Mesa exclusion). Any such conditions were required to be in accordance with the "purport and intent" of the offer.

    20

    Unocal's exchange offer was commenced on April 17, 1985, and Mesa promptly challenged it by filing this suit in the Court of Chancery. On April 22, the Unocal board met again and was advised by Goldman Sachs and Dillon Read to waive the Mesa Purchase Condition as to 50 million shares. This recommendation was in response to a perceived concern of the shareholders that, if shares were tendered to Unocal, no shares would be purchased by either offeror. The directors were also advised that they should tender their own Unocal stock into the exchange offer as a mark of their confidence in it.

    21

    Another focus of the board was the Mesa exclusion. Legal counsel advised that under Delaware law Mesa could only be excluded for what the directors reasonably believed to be a valid corporate purpose. The directors' discussion centered on the objective of adequately compensating shareholders at the "back-end" of Mesa's proposal, which the latter would finance with "junk bonds". To include Mesa would defeat that goal, because under the proration aspect of the exchange offer (49%) every Mesa share accepted by Unocal would displace one held by another stockholder. Further, if Mesa were permitted to tender to Unocal, the latter would in effect be financing Mesa's own inadequate proposal.

    22

    On April 24, 1985 Unocal issued a supplement to the exchange offer describing the partial waiver of the Mesa Purchase Condition. On May 1, 1985, in another supplement, Unocal extended the withdrawal, proration and expiration dates of its exchange offer to May 17, 1985.

    23

    Meanwhile, on April 22, 1985, Mesa amended its complaint in this action to challenge the Mesa exclusion. A preliminary injunction hearing was scheduled for May 8, 1985. However, on April 23, 1985, Mesa moved for a temporary restraining order in response to Unocal's announcement that it was partially waiving the Mesa Purchase Condition. After expedited briefing, the Court of Chancery heard Mesa's motion on April 26.

    24

    [952] On April 29, 1985, the Vice Chancellor temporarily restrained Unocal from proceeding with the exchange offer unless it included Mesa. The trial court recognized that directors could oppose, and attempt to defeat, a hostile takeover which they considered adverse to the best interests of the corporation. However, the Vice Chancellor decided that in a selective purchase of the company's stock, the corporation bears the burden of showing: (1) a valid corporate purpose, and (2) that the transaction was fair to all of the stockholders, including those excluded.

    25

    Unocal immediately sought certification of an interlocutory appeal to this Court pursuant to Supreme Court Rule 42(b). On May 1, 1985, the Vice Chancellor declined to certify the appeal on the grounds that the decision granting a temporary restraining order did not decide a legal issue of first impression, and was not a matter to which the decisions of the Court of Chancery were in conflict.

    26

    However, in an Order dated May 2, 1985, this Court ruled that the Chancery decision was clearly determinative of substantive rights of the parties, and in fact decided the main question of law before the Vice Chancellor, which was indeed a question of first impression. We therefore concluded that the temporary restraining order was an appealable decision. However, because the Court of Chancery was scheduled to hold a preliminary injunction hearing on May 8 at which there would be an enlarged record on the various issues, action on the interlocutory appeal was deferred pending an outcome of those proceedings.

    27

    In deferring action on the interlocutory appeal, we noted that on the record before us we could not determine whether the parties had articulated certain issues which the Vice Chancellor should have an opportunity to consider in the first instance. These included the following:

    28
    a) Does the directors' duty of care to the corporation extend to protecting the corporate enterprise in good faith from perceived depredations of others, including persons who may own stock in the company?
    29
    b) Have one or more of the plaintiffs, their affiliates, or persons acting in concert with them, either in dealing with Unocal or others, demonstrated a pattern of conduct sufficient to justify a reasonable inference by defendants that a principle objective of the plaintiffs is to achieve selective treatment for themselves by the repurchase of their Unocal shares at a substantial premium?
    30
    c) If so, may the directors of Unocal in the proper exercise of business judgment employ the exchange offer to protect the corporation and its shareholders from such tactics? See Pogostin v. Rice, Del. Supr., 480 A.2d 619 (1984).
    31
    d) If it is determined that the purpose of the exchange offer was not illegal as a matter of law, have the directors of Unocal carried their burden of showing that they acted in good faith? See Martin v. American Potash & Chemical Corp., 33 Del.Ch. 234, 92 A.2d 295 at 302.
    32

    After the May 8 hearing the Vice Chancellor issued an unreported opinion on May 13, 1985 granting Mesa a preliminary injunction. Specifically, the trial court noted that "[t]he parties basically agree that the directors' duty of care extends to protecting the corporation from perceived harm whether it be from third parties or shareholders." The trial court also concluded in response to the second inquiry in the Supreme Court's May 2 order, that "[a]lthough the facts, ... do not appear to be sufficient to prove that Mesa's principle objective is to be bought off at a substantial premium, they do justify a reasonable inference to the same effect."

    33

    As to the third and fourth questions posed by this Court, the Vice Chancellor stated that they "appear to raise the more fundamental issue of whether directors owe fiduciary duties to shareholders who they perceive to be acting contrary to the best interests of the corporation as a whole." While determining that the directors' decision to oppose Mesa's tender [953] offer was made in a good faith belief that the Mesa proposal was inadequate, the court stated that the business judgment rule does not apply to a selective exchange offer such as this.

    34

    On May 13, 1985 the Court of Chancery certified this interlocutory appeal to us as a question of first impression, and we accepted it on May 14. The entire matter was scheduled on an expedited basis.[5]

    35
    II.
    36

    The issues we address involve these fundamental questions: Did the Unocal board have the power and duty to oppose a takeover threat it reasonably perceived to be harmful to the corporate enterprise, and if so, is its action here entitled to the protection of the business judgment rule?

    37

    Mesa contends that the discriminatory exchange offer violates the fiduciary duties Unocal owes it. Mesa argues that because of the Mesa exclusion the business judgment rule is inapplicable, because the directors by tendering their own shares will derive a financial benefit that is not available to all Unocal stockholders. Thus, it is Mesa's ultimate contention that Unocal cannot establish that the exchange offer is fair to all shareholders, and argues that the Court of Chancery was correct in concluding that Unocal was unable to meet this burden.

    38

    Unocal answers that it does not owe a duty of "fairness" to Mesa, given the facts here. Specifically, Unocal contends that its board of directors reasonably and in good faith concluded that Mesa's $54 two-tier tender offer was coercive and inadequate, and that Mesa sought selective treatment for itself. Furthermore, Unocal argues that the board's approval of the exchange offer was made in good faith, on an informed basis, and in the exercise of due care. Under these circumstances, Unocal contends that its directors properly employed this device to protect the company and its stockholders from Mesa's harmful tactics.

    39
    III.
    40

    We begin with the basic issue of the power of a board of directors of a Delaware corporation to adopt a defensive measure of this type. Absent such authority, all other questions are moot. Neither issues of fairness nor business judgment are pertinent without the basic underpinning of a board's legal power to act.

    41

    The board has a large reservoir of authority upon which to draw. Its duties and responsibilities proceed from the inherent powers conferred by 8 Del.C. § 141(a), respecting management of the corporation's "business and affairs".[6] Additionally, the powers here being exercised derive from 8 Del.C. § 160(a), conferring broad authority upon a corporation to deal in its own stock.[7] From this it is now well established that in the acquisition of its shares a [954] Delaware corporation may deal selectively with its stockholders, provided the directors have not acted out of a sole or primary purpose to entrench themselves in office. Cheff v. Mathes, Del.Supr., 199 A.2d 548, 554 (1964); Bennett v. Propp, Del.Supr., 187 A.2d 405, 408 (1962); Martin v. American Potash & Chemical Corporation, Del.Supr., 92 A.2d 295, 302 (1952); Kaplan v. Goldsamt, Del.Ch., 380 A.2d 556, 568-569 (1977); Kors v. Carey, Del. Ch., 158 A.2d 136, 140-141 (1960).

    42

    Finally, the board's power to act derives from its fundamental duty and obligation to protect the corporate enterprise, which includes stockholders, from harm reasonably perceived, irrespective of its source. See e.g. Panter v. Marshall Field & Co., 646 F.2d 271, 297 (7th Cir.1981); Crouse-Hinds Co. v. Internorth, Inc., 634 F.2d 690, 704 (2d Cir.1980); Heit v. Baird, 567 F.2d 1157, 1161 (1st Cir.1977); Cheff v. Mathes, 199 A.2d at 556; Martin v. American Potash & Chemical Corp., 92 A.2d at 302; Kaplan v. Goldsamt, 380 A.2d at 568-69; Kors v. Carey, 158 A.2d at 141; Northwest Industries, Inc. v. B.F. Goodrich Co., 301 F.Supp. 706, 712 (M.D.Ill. 1969). Thus, we are satisfied that in the broad context of corporate governance, including issues of fundamental corporate change, a board of directors is not a passive instrumentality.[8]

    43

    Given the foregoing principles, we turn to the standards by which director action is to be measured. In Pogostin v. Rice, Del.Supr., 480 A.2d 619 (1984), we held that the business judgment rule, including the standards by which director conduct is judged, is applicable in the context of a takeover. Id. at 627. The business judgment rule is a "presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984) (citations omitted). A hallmark of the business judgment rule is that a court will not substitute its judgment for that of the board if the latter's decision can be "attributed to any rational business purpose." Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971).

    44

    When a board addresses a pending takeover bid it has an obligation to determine whether the offer is in the best interests of the corporation and its shareholders. In that respect a board's duty is no different from any other responsibility it shoulders, and its decisions should be no less entitled to the respect they otherwise would be accorded in the realm of business judgment.[9] See also Johnson v. Trueblood, 629 F.2d 287, 292-293 (3d Cir.1980). There are, however, certain caveats to a proper exercise of this function. Because of the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders, there is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred.

    45

    This Court has long recognized that:

    46
    [955] We must bear in mind the inherent danger in the purchase of shares with corporate funds to remove a threat to corporate policy when a threat to control is involved. The directors are of necessity confronted with a conflict of interest, and an objective decision is difficult.
    47

    Bennett v. Propp, Del.Supr., 187 A.2d 405, 409 (1962). In the face of this inherent conflict directors must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of another person's stock ownership. Cheff v. Mathes, 199 A.2d at 554-55. However, they satisfy that burden "by showing good faith and reasonable investigation...." Id. at 555. Furthermore, such proof is materially enhanced, as here, by the approval of a board comprised of a majority of outside independent directors who have acted in accordance with the foregoing standards. See Aronson v. Lewis, 473 A.2d at 812, 815; Puma v. Marriott, Del.Ch., 283 A.2d 693, 695 (1971); Panter v. Marshall Field & Co., 646 F.2d 271, 295 (7th Cir.1981).

    48
    IV.
    49
    A.
    50

    In the board's exercise of corporate power to forestall a takeover bid our analysis begins with the basic principle that corporate directors have a fiduciary duty to act in the best interests of the corporation's stockholders. Guth v. Loft, Inc., Del. Supr., 5 A.2d 503, 510 (1939). As we have noted, their duty of care extends to protecting the corporation and its owners from perceived harm whether a threat originates from third parties or other shareholders.[10] But such powers are not absolute. A corporation does not have unbridled discretion to defeat any perceived threat by any Draconian means available.

    51

    The restriction placed upon a selective stock repurchase is that the directors may not have acted solely or primarily out of a desire to perpetuate themselves in office. See Cheff v. Mathes, 199 A.2d at 556; Kors v. Carey, 158 A.2d at 140. Of course, to this is added the further caveat that inequitable action may not be taken under the guise of law. Schnell v. Chris-Craft Industries, Inc., Del.Supr., 285 A.2d 437, 439 (1971). The standard of proof established in Cheff v. Mathes and discussed supra at page 16, is designed to ensure that a defensive measure to thwart or impede a takeover is indeed motivated by a good faith concern for the welfare of the corporation and its stockholders, which in all circumstances must be free of any fraud or other misconduct. Cheff v. Mathes, 199 A.2d at 554-55. However, this does not end the inquiry.

    52
    B.
    53

    A further aspect is the element of balance. If a defensive measure is to come within the ambit of the business judgment rule, it must be reasonable in relation to the threat posed. This entails an analysis by the directors of the nature of the takeover bid and its effect on the corporate enterprise. Examples of such concerns may include: inadequacy of the price offered, nature and timing of the offer, questions of illegality, the impact on "constituencies" other than shareholders (i.e., creditors, customers, employees, and perhaps even the community generally), the risk of nonconsummation, and the quality of securities being offered in the exchange. See Lipton and Brownstein, Takeover Responses and Directors' Responsibilities: An Update, p. 7, ABA National Institute on the Dynamics of Corporate Control (December 8, 1983). While not a controlling factor, it also seems to us that a board may reasonably consider the basic stockholder [956] interests at stake, including those of short term speculators, whose actions may have fueled the coercive aspect of the offer at the expense of the long term investor.[11] Here, the threat posed was viewed by the Unocal board as a grossly inadequate two-tier coercive tender offer coupled with the threat of greenmail.

    54

    Specifically, the Unocal directors had concluded that the value of Unocal was substantially above the $54 per share offered in cash at the front end. Furthermore, they determined that the subordinated securities to be exchanged in Mesa's announced squeeze out of the remaining shareholders in the "back-end" merger were "junk bonds" worth far less than $54. It is now well recognized that such offers are a classic coercive measure designed to stampede shareholders into tendering at the first tier, even if the price is inadequate, out of fear of what they will receive at the back end of the transaction.[12] Wholly beyond the coercive aspect of an inadequate two-tier tender offer, the threat was posed by a corporate raider with a national reputation as a "greenmailer".[13]

    55

    In adopting the selective exchange offer, the board stated that its objective was either to defeat the inadequate Mesa offer or, should the offer still succeed, provide the 49% of its stockholders, who would otherwise be forced to accept "junk bonds", with $72 worth of senior debt. We find that both purposes are valid.

    56

    However, such efforts would have been thwarted by Mesa's participation in the exchange offer. First, if Mesa could tender its shares, Unocal would effectively be subsidizing the former's continuing effort to buy Unocal stock at $54 per share. Second, Mesa could not, by definition, fit within the class of shareholders being protected from its own coercive and inadequate tender offer.

    57

    Thus, we are satisfied that the selective exchange offer is reasonably related to the threats posed. It is consistent with the principle that "the minority stockholder shall receive the substantial equivalent in value of what he had before." Sterling v. Mayflower Hotel Corp., Del.Supr., 93 A.2d 107, 114 (1952). See also Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929, 940 (1985). This concept of fairness, while stated in the merger context, is also relevant [957] in the area of tender offer law. Thus, the board's decision to offer what it determined to be the fair value of the corporation to the 49% of its shareholders, who would otherwise be forced to accept highly subordinated "junk bonds", is reasonable and consistent with the directors' duty to ensure that the minority stockholders receive equal value for their shares.

    58
    V.
    59

    Mesa contends that it is unlawful, and the trial court agreed, for a corporation to discriminate in this fashion against one shareholder. It argues correctly that no case has ever sanctioned a device that precludes a raider from sharing in a benefit available to all other stockholders. However, as we have noted earlier, the principle of selective stock repurchases by a Delaware corporation is neither unknown nor unauthorized. Cheff v. Mathes, 199 A.2d at 554; Bennett v. Propp, 187 A.2d at 408; Martin v. American Potash & Chemical Corporation, 92 A.2d at 302; Kaplan v. Goldsamt, 380 A.2d at 568-569; Kors v. Carey, 158 A.2d at 140-141; 8 Del. C. § 160. The only difference is that heretofore the approved transaction was the payment of "greenmail" to a raider or dissident posing a threat to the corporate enterprise. All other stockholders were denied such favored treatment, and given Mesa's past history of greenmail, its claims here are rather ironic.

    60

    However, our corporate law is not static. It must grow and develop in response to, indeed in anticipation of, evolving concepts and needs. Merely because the General Corporation Law is silent as to a specific matter does not mean that it is prohibited. See Providence and Worcester Co. v. Baker, Del.Supr., 378 A.2d 121, 123-124 (1977). In the days when Cheff, Bennett, Martin and Kors were decided, the tender offer, while not an unknown device, was virtually unused, and little was known of such methods as two-tier "front-end" loaded offers with their coercive effects. Then, the favored attack of a raider was stock acquisition followed by a proxy contest. Various defensive tactics, which provided no benefit whatever to the raider, evolved. Thus, the use of corporate funds by management to counter a proxy battle was approved. Hall v. Trans-Lux Daylight Picture Screen Corp., Del.Supr., 171 A. 226 (1934); Hibbert v. Hollywood Park, Inc., Del.Supr., 457 A.2d 339 (1983). Litigation, supported by corporate funds, aimed at the raider has long been a popular device.

    61

    More recently, as the sophistication of both raiders and targets has developed, a host of other defensive measures to counter such ever mounting threats has evolved and received judicial sanction. These include defensive charter amendments and other devices bearing some rather exotic, but apt, names: Crown Jewel, White Knight, Pac Man, and Golden Parachute. Each has highly selective features, the object of which is to deter or defeat the raider.

    62

    Thus, while the exchange offer is a form of selective treatment, given the nature of the threat posed here the response is neither unlawful nor unreasonable. If the board of directors is disinterested, has acted in good faith and with due care, its decision in the absence of an abuse of discretion will be upheld as a proper exercise of business judgment.

    63

    To this Mesa responds that the board is not disinterested, because the directors are receiving a benefit from the tender of their own shares, which because of the Mesa exclusion, does not devolve upon all stockholders equally. See Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984). However, Mesa concedes that if the exclusion is valid, then the directors and all other stockholders share the same benefit. The answer of course is that the exclusion is valid, and the directors' participation in the exchange offer does not rise to the level of a disqualifying interest. The excellent discussion in Johnson v. Trueblood, 629 F.2d at 292-293, of the use of the business judgment rule in takeover contests also seems pertinent here.

    64

    [958] Nor does this become an "interested" director transaction merely because certain board members are large stockholders. As this Court has previously noted, that fact alone does not create a disqualifying "personal pecuniary interest" to defeat the operation of the business judgment rule. Cheff v. Mathes, 199 A.2d at 554.

    65

    Mesa also argues that the exclusion permits the directors to abdicate the fiduciary duties they owe it. However, that is not so. The board continues to owe Mesa the duties of due care and loyalty. But in the face of the destructive threat Mesa's tender offer was perceived to pose, the board had a supervening duty to protect the corporate enterprise, which includes the other shareholders, from threatened harm.

    66

    Mesa contends that the basis of this action is punitive, and solely in response to the exercise of its rights of corporate democracy.[14] Nothing precludes Mesa, as a stockholder, from acting in its own self-interest. See e.g., DuPont v. DuPont, 251 Fed. 937 (D.Del.1918), aff'd 256 Fed. 129 (3d Cir.1918); Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Ringling, Del.Supr., 53 A.2d 441, 447 (1947); Heil v. Standard Gas & Electric Co., Del.Ch., 151 A. 303, 304 (1930). But see, Allied Chemical & Dye Corp. v. Steel & Tube Co. of America, Del.Ch., 120 A. 486, 491 (1923) (majority shareholder owes a fiduciary duty to the minority shareholders). However, Mesa, while pursuing its own interests, has acted in a manner which a board consisting of a majority of independent directors has reasonably determined to be contrary to the best interests of Unocal and its other shareholders. In this situation, there is no support in Delaware law for the proposition that, when responding to a perceived harm, a corporation must guarantee a benefit to a stockholder who is deliberately provoking the danger being addressed. There is no obligation of self-sacrifice by a corporation and its shareholders in the face of such a challenge.

    67

    Here, the Court of Chancery specifically found that the "directors' decision [to oppose the Mesa tender offer] was made in the good faith belief that the Mesa tender offer is inadequate." Given our standard of review under Levitt v. Bouvier, Del. Supr., 287 A.2d 671, 673 (1972), and Application of Delaware Racing Association, Del.Supr., 213 A.2d 203, 207 (1965), we are satisfied that Unocal's board has met its burden of proof. Cheff v. Mathes, 199 A.2d at 555.

    68
    VI.
    69

    In conclusion, there was directorial power to oppose the Mesa tender offer, and to undertake a selective stock exchange made in good faith and upon a reasonable investigation pursuant to a clear duty to protect the corporate enterprise. Further, the selective stock repurchase plan chosen by Unocal is reasonable in relation to the threat that the board rationally and reasonably believed was posed by Mesa's inadequate and coercive two-tier tender offer. Under those circumstances the board's action is entitled to be measured by the standards of the business judgment rule. Thus, unless it is shown by a preponderance of the evidence that the directors' decisions were primarily based on perpetuating themselves in office, or some other breach of fiduciary duty such as fraud, overreaching, lack of good faith, or being uninformed, a Court will not substitute its judgment for that of the board.

    70

    In this case that protection is not lost merely because Unocal's directors have [959] tendered their shares in the exchange offer. Given the validity of the Mesa exclusion, they are receiving a benefit shared generally by all other stockholders except Mesa. In this circumstance the test of Aronson v. Lewis, 473 A.2d at 812, is satisfied. See also Cheff v. Mathes, 199 A.2d at 554. If the stockholders are displeased with the action of their elected representatives, the powers of corporate democracy are at their disposal to turn the board out. Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984). See also 8 Del.C. §§ 141(k) and 211(b).

    71

    With the Court of Chancery's findings that the exchange offer was based on the board's good faith belief that the Mesa offer was inadequate, that the board's action was informed and taken with due care, that Mesa's prior activities justify a reasonable inference that its principle objective was greenmail, and implicitly, that the substance of the offer itself was reasonable and fair to the corporation and its stockholders if Mesa were included, we cannot say that the Unocal directors have acted in such a manner as to have passed an "unintelligent and unadvised judgment". Mitchell v. Highland-Western Glass Co., Del. Ch., 167 A. 831, 833 (1933). The decision of the Court of Chancery is therefore REVERSED, and the preliminary injunction is VACATED.

    72

    [1] T. Boone Pickens, Jr., is President and Chairman of the Board of Mesa Petroleum and President of Mesa Asset and controls the related Mesa entities.

    73

    [2] This appeal was heard on an expedited basis in light of the pending Mesa tender offer and Unocal exchange offer. We announced our decision to reverse in an oral ruling in open court on May 17, 1985 with the further statement that this opinion would follow shortly thereafter. See infra n. 5.

    74

    [3]Mesa's May 3, 1985 supplement to its proxy statement states:

    75

    (i) following the Offer, the Purchasers would seek to effect a merger of Unocal and Mesa Eastern or an affiliate of Mesa Eastern (the "Merger") in which the remaining Shares would be acquired for a combination of subordinated debt securities and preferred stock; (ii) the securities to be received by Unocal shareholders in the Merger would be subordinated to $2,400 million of debt securities of Mesa Eastern, indebtedness incurred to refinance up to $1,000 million of bank debt which was incurred by affiliates of Mesa Partners II to purchase Shares and to pay related interest and expenses and all then-existing debt of Unocal; (iii) the corporation surviving the Merger would be responsible for the payment of all securities of Mesa Eastern (including any such securities issued pursuant to the Merger) and the indebtedness referred to in item (ii) above, and such securities and indebtedness would be repaid out of funds generated by the operations of Unocal; (iv) the indebtedness incurred in the Offer and the Merger would result in Unocal being much more highly leveraged, and the capitalization of the corporation surviving the Merger would differ significantly from that of Unocal at present; and (v) in their analyses of cash flows provided by operations of Unocal which would be available to service and repay securities and other obligations of the corporation surviving the Merger, the Purchasers assumed that the capital expenditures and expenditures for exploration of such corporation would be significantly reduced.

    76

    [4] Under Delaware law directors may participate in a board meeting by telephone. Thus, 8 Del.C.§ 141(i) provides:

    77

    Unless otherwise restricted by the certificate of incorporation or by-laws, members of the board of directors of any corporation, or any committee designated by the board, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this subsection shall constitute presence in person at such meeting.

    78

    [5] Such expedition was required by the fact that if Unocal's exchange offer was permitted to proceed, the proration date for the shares entitled to be exchanged was May 17, 1985, while Mesa's tender offer expired on May 23. After acceptance of this appeal on May 14, we received excellent briefs from the parties, heard argument on May 16 and announced our oral ruling in open court at 9:00 a.m. on May 17. See supra n. 2.

    79

    [6] The general grant of power to a board of directors is conferred by 8 Del.C.§ 141(a), which provides:

    80

    (a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation. (Emphasis added)

    81

    [7] This power under 8 Del.C.§ 160(a), with certain exceptions not pertinent here, is as follows:

    82

    (a) Every corporation may purchase, redeem, receive, take or otherwise acquire, own and hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise deal in and with its own shares; ...

    83

    [8] Even in the traditional areas of fundamental corporate change, i.e., charter, amendments [8 Del.C. § 242(b)], mergers [8 Del.C. §§ 251(b), 252(c), 253(a), and 254(d)], sale of assets [8 Del.C. § 271(a)], and dissolution [8 Del.C. § 275(a)], director action is a prerequisite to the ultimate disposition of such matters. See also, Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 888 (1985).

    84

    [9] This is a subject of intense debate among practicing members of the bar and legal scholars. Excellent examples of these contending views are: Block & Miller, The Responsibilities and Obligations of Corporate Directors in Takeover Contests, 11 Sec.Reg. L.J. 44 (1983); Easterbrook & Fischel, Takeover Bids, Defensive Tactics, and Shareholders' Welfare, 36 Bus.Law. 1733 (1981); Easterbrook & Fischel, The Proper Role of a Target's Management In Responding to a Tender Offer, 94 Harv.L.Rev. 1161 (1981). Herzel, Schmidt & Davis, Why Corporate Directors Have a Right To Resist Tender Offers, 3 Corp.L.Rev. 107 (1980); Lipton, Takeover Bids in the Target's Boardroom, 35 Bus.Law. 101 (1979).

    85

    [10] It has been suggested that a board's response to a takeover threat should be a passive one. Easterbrook & Fischel, supra, 36 Bus.Law. at 1750. However, that clearly is not the law of Delaware, and as the proponents of this rule of passivity readily concede, it has not been adopted either by courts or state legislatures. Easterbrook & Fischel, supra, 94 Harv.L.Rev. at 1194.

    86

    [11] There has been much debate respecting such stockholder interests. One rather impressive study indicates that the stock of over 50 percent of target companies, who resisted hostile takeovers, later traded at higher market prices than the rejected offer price, or were acquired after the tender offer was defeated by another company at a price higher than the offer price. See Lipton, supra 35 Bus.Law. at 106-109, 132-133. Moreover, an update by Kidder Peabody & Company of this study, involving the stock prices of target companies that have defeated hostile tender offers during the period from 1973 to 1982 demonstrates that in a majority of cases the target's shareholders benefited from the defeat. The stock of 81% of the targets studied has, since the tender offer, sold at prices higher than the tender offer price. When adjusted for the time value of money, the figure is 64%. See Lipton & Brownstein, supra ABA Institute at 10. The thesis being that this strongly supports application of the business judgment rule in response to takeover threats. There is, however, a rather vehement contrary view. See Easterbrook & Fischel, supra 36 Bus.Law. at 1739-1745.

    87

    [12] For a discussion of the coercive nature of a two-tier tender offer see e.g., Brudney & Chirelstein, Fair Shares in Corporate Mergers and Takeovers, 88 Harv.L.Rev. 297, 337 (1974); Finkelstein, Antitakeover Protection Against Two-Tier and Partial Tender Offers: The Validity of Fair Price, Mandatory Bid, and Flip-Over Provisions Under Delaware Law, 11 Sec.Reg. L.J. 291, 293 (1984); Lipton, supra, 35 Bus.Law at 113-14; Note, Protecting Shareholders Against Partial and Two-Tiered Takeovers: The Poison Pill Preferred, 97 Harv.L.Rev. 1964, 1966 (1984).

    88

    [13] The term "greenmail" refers to the practice of buying out a takeover bidder's stock at a premium that is not available to other shareholders in order to prevent the takeover. The Chancery Court noted that "Mesa has made tremendous profits from its takeover activities although in the past few years it has not been successful in acquiring any of the target companies on an unfriendly basis." Moreover, the trial court specifically found that the actions of the Unocal board were taken in good faith to eliminate both the inadequacies of the tender offer and to forestall the payment of "greenmail".

    89

    [14] This seems to be the underlying basis of the trial court's principal reliance on the unreported Chancery decision of Fisher v. Moltz, Del.Ch. No. 6068 (1979), published in 5 Del.J.Corp.L. 530 (1980). However, the facts in Fisher are thoroughly distinguishable. There, a corporation offered to repurchase the shares of its former employees, except those of the plaintiffs, merely because the latter were then engaged in lawful competition with the company. No threat to the enterprise was posed, and at best it can be said that the exclusion was motivated by pique instead of a rational corporate purpose.

  • 2 Moran v. Household International (Del. 1985)

    This decision approved the “rights plan” a/k/a “poison pill” invented by Martin Lipton. “Rights plan” may sound innocuous. But it completely transformed US takeover law and practice.

    The pill has only one goal: to deter the acquisition of a substantial block of shares by anyone not approved by the board. It does so by diluting, or rather threatening to dilute, the acquired block. If anyone “triggers” the pill by acquiring more than the threshold percentage of shares (usually 15%), the corporation issues additional shares to all other shareholders. The number of additional shares is generally chosen so as to reduce the acquirer’s stake by about half. Needless to say, that would be painful – arguably prohibitively painful – to any would-be acquirer.

    Question: How does the pill compare to DGCL 203 – what are their respective trigger conditions, and what are their consequences for the acquirer if triggered? (I recommend that you consult the simplified version of section 203 on simplifiedcodes.com. Note that section 203 was completely overhauled in 1988; the Moran opinion quotes the old version.)

    The pill ingeniously obscures this discriminatory mechanism in complicated warrants. The corporation declares a dividend of warrants to purchase additional stock or preferred stock. Initially, these warrants are neither tradeable nor exercisable. If anybody becomes an “acquiring person” by acquiring more than the threshold percentage, however, the warrants grant the right to buy corporate stock for prices below value. Of course, all shareholders will then rationally choose to exercise the warrant. So what is the point? The point is that by their terms, the warrants held by the acquiring person are automatically void.

    (The description of the pill in Moran may read slightly differently. The reason is that the industry standard pill has evolved since Moran. You can find a contemporary example here.)

    The pill is extraordinarily powerful. In the 30 years since Moran, only one bidder has dared triggering the pill, and that was one with a particularly low trigger of 5% (chosen to preserve a tax advantage). The exercise of the rights did not only dilute the acquirer but caused massive administrative problems (a lot of new stock had to be issued!), leading to a suspension of issuer stock from trading. The issuer, Selectica, also violated the listing rules. See here. What this shows is that the pill really is designed purely as a deterrent – it is intended never to be triggered. It’s MAD (Mutually Assured Destruction) intended to keep out the unwanted acquirer, nothing else.

    The upshot is that nowadays no Delaware corporation can be acquired unless the board agrees to sell. The pill has stopped not only hostile two-tier bids, but all hostile bids. To be sure, a would-be acquirer could attempt to replace a reluctant board through a proxy fight. But one proxy fight may not be enough, if and because the corporation has a staggered board in its charter (cf. Airgas below). In any event, the point is that board acquiescence is ultimately indispensable. The acceptance of the pill was thus a fundamental power shift from shareholders to boards in dealing with “hostile” offers (read: offers that the board doesn’t like).

    Perhaps understandably, the Moran court did not fully understand these implications. Or perhaps it didn’t want to? The SEC’s amicus brief certainly predicted as much. As it were, the Court gives mainly technical, statutory reasons for approving the pill. But as in Schnell, the Court could have brushed those aside since “[t]he answer to that contention, of course, is that inequitable action does not become permissible simply because it is legally possible.” Why didn’t it? Should it have?

    1
    500 A.2d 1346 (1985)
    2
    John A. MORAN and the Dyson-Kissner-Moran Corporation, Plaintiffs Below-Appellants, and
    Gretl Golter, individually and in a derivative capacity, Plaintiff Intervenor Below-Appellant,
    v.
    HOUSEHOLD INTERNATIONAL, INC., a Delaware Corporation, Donald C. Clark, Thomas D. Flynn, Mary Johnston Evans, William D. Hendry, Joseph W. James, Mitchell P. Kartalia, Gordon P. Osler, Arthur E. Rasmussen, George W. Rauch, James M. Tait, Miller Upton, Bernard F. Brennan and Gary G. Dillon, Defendants Below-Appellees.
    3

    Supreme Court of Delaware.
    Submitted: May 21, 1985.
    Decided: November 19, 1985.
    As Amended: November 20, 1985.

    4

    Irving S. Shapiro (argued), Rodman Ward, Jr., Stuart L. Shapiro, Stephen P. Lamb, Thomas J. Allingham II and Andrew J. Turezyn of Skadden, Arps, Slate, Meagher & Flom, Wilmington, and Michael W. Mitchell, Jeffrey Glekel, Jeremy A. Berman and Joseph A. Guglielmelli of Skadden, Arps, Slate, Meagher & Flom, New York City, for plaintiffs below-appellants.

    5

    Joseph A. Rosenthal and Norman M. Monhait of Morris and Rosenthal, P.A., Wilmington, and Marshall Patner of Orlikoff, Flamm and Patner, Chicago, Frederick Brace of Brace & O'Donnell, and Geoffrey P. Miller (argued), Chicago, Ill., of counsel, for plaintiff intervenor below-appellant.

    6

    [1348] Charles E. Richards, Jr. (argued), Donald A. Bussard, Jesse A. Finkelstein, and Gregory P. Williams of Richards, Layton & Finger, Wilmington, and George A. Katz, William C. Sterling, Jr., Michael W. Schwartz, Eric M. Roth, Warren R. Stern and Karen B. Shaer of Wachtell, Lipton, Rosen & Katz, New York City, of counsel, for defendants below-appellees.

    7

    Lawrence C. Ashby of Ashby, McKelvie & Geddes, Wilmington, Marc P. Cherno, Harvey L. Pitt, Pamela Jarvis of Fried, Frank, Harris, Shriver & Jacobson, New York City, amicus curiae, and Matthew P. Fink, Thomas D. Maher, Investment Co. Institute, Washington, D.C., of counsel, for Investment Co. Institute.

    8

    Robert J. Katzenstein and Clark W. Furlow of Lassen, Smith, Katzenstein & Furlow, Wilmington, and Kurt L. Schultz, Columbus R. Gangemi, Jr., Robert F. Wall, Jerome W. Pope of Winston & Strawn, Chicago, Ill., amicus curiae, for the United Food and Commercial Workers Intern. Union.

    9

    Joseph J. Farnan, Jr., U.S. Atty., Sue L. Robinson, Asst. U.S. Atty., Wilmington, Del., Daniel L. Goelzer, Jacob H. Stillman, Eric Summergrad, Gerard S. Citera, amicus curiae, and Paul Gonson, of counsel, for Securities and Exchange Com'n, Washington, D.C.

    10

    Before CHRISTIE, Chief Justice, and McNEILLY and MOORE, JJ.

    11
    [1347] McNEILLY, Justice:
    12

    This case presents to this Court for review the most recent defensive mechanism in the arsenal of corporate takeover weaponry— the Preferred Share Purchase Rights Plan ("Rights Plan" or "Plan"). The validity of this mechanism has attracted national attention. Amici curiae briefs have been filed in support of appellants by the Security and Exchange Commission ("SEC")[1] and the Investment Company Institute. An amicus curiae brief has been filed in support of appellees ("Household") by the United Food and Commercial Workers International Union.

    13

    In a detailed opinion, the Court of Chancery upheld the Rights Plan as a legitimate exercise of business judgment by Household. Moran v. Household International, Inc., Del.Ch., 490 A.2d 1059 (1985). We agree, and therefore, affirm the judgment below.

    14
    I
    15

    The facts giving rise to this case have been carefully delineated in the Court of Chancery's opinion. Id. at 1064-69. A review of the basic facts is necessary for a complete understanding of the issues.

    16

    On August 14, 1984, the Board of Directors of Household International, Inc. adopted the Rights Plan by a fourteen to two vote.[2] The intricacies of the Rights Plan are contained in a 48-page document entitled "Rights Agreement". Basically, the Plan provides that Household common stockholders are entitled to the issuance of one Right per common share under certain triggering conditions. There are two triggering events that can activate the Rights. The first is the announcement of a tender offer for 30 percent of Household's shares ("30% trigger") and the second is the acquisition of 20 percent of Household's shares by any single entity or group ("20% trigger").

    17

    [1349] If an announcement of a tender offer for 30 percent of Household's shares is made, the Rights are issued and are immediately exercisable to purchase 1/100 share of new preferred stock for $100 and are redeemable by the Board for $.50 per Right. If 20 percent of Household's shares are acquired by anyone, the Rights are issued and become non-redeemable and are exercisable to purchase 1/100 of a share of preferred. If a Right is not exercised for preferred, and thereafter, a merger or consolidation occurs, the Rights holder can exercise each Right to purchase $200 of the common stock of the tender offeror for $100. This "flip-over" provision of the Rights Plan is at the heart of this controversy.

    18

    Household is a diversified holding company with its principal subsidiaries engaged in financial services, transportation and merchandising. HFC, National Car Rental and Vons Grocery are three of its wholly-owned entities.

    19

    Household did not adopt its Rights Plan during a battle with a corporate raider, but as a preventive mechanism to ward off future advances. The Vice-Chancellor found that as early as February 1984, Household's management became concerned about the company's vulnerability as a takeover target and began considering amending its charter to render a takeover more difficult. After considering the matter, Household decided not to pursue a fair price amendment.[3]

    20

    In the meantime, appellant Moran, one of Household's own Directors and also Chairman of the Dyson-Kissner-Moran Corporation, ("D-K-M") which is the largest single stockholder of Household, began discussions concerning a possible leveraged buyout of Household by D-K-M. D-K-M's financial studies showed that Household's stock was significantly undervalued in relation to the company's break-up value. It is uncontradicted that Moran's suggestion of a leveraged buy-out never progressed beyond the discussion stage.

    21

    Concerned about Household's vulnerability to a raider in light of the current takeover climate, Household secured the services of Wachtell, Lipton, Rosen and Katz ("Wachtell, Lipton") and Goldman, Sachs & Co. ("Goldman, Sachs") to formulate a takeover policy for recommendation to the Household Board at its August 14 meeting. After a July 31 meeting with a Household Board member and a pre-meeting distribution of material on the potential takeover problem and the proposed Rights Plan, the Board met on August 14, 1984.

    22

    Representatives of Wachtell, Lipton and Goldman, Sachs attended the August 14 meeting. The minutes reflect that Mr. Lipton explained to the Board that his recommendation of the Plan was based on his understanding that the Board was concerned about the increasing frequency of "bust-up"[4] takeovers, the increasing takeover activity in the financial service industry, such as Leucadia's attempt to take over Arco, and the possible adverse effect this type of activity could have on employees and others concerned with and vital to the continuing successful operation of Household even in the absence of any actual bust-up takeover attempt. Against this factual background, the Plan was approved.

    23

    Thereafter, Moran and the company of which he is Chairman, D-K-M, filed this suit. On the eve of trial, Gretl Golter, the holder of 500 shares of Household, was permitted to intervene as an additional plaintiff. The trial was held, and the Court [1350] of Chancery ruled in favor of Household.[5] Appellants now appeal from that ruling to this Court.

    24
    II
    25

    The primary issue here is the applicability of the business judgment rule as the standard by which the adoption of the Rights Plan should be reviewed. Much of this issue has been decided by our recent decision in Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985). In Unocal, we applied the business judgment rule to analyze Unocal's discriminatory self-tender. We explained:

    26
    When a board addresses a pending takeover bid it has an obligation to determine whether the offer is in the best interests of the corporation and its shareholders. In that respect a board's duty is no different from any other responsibility it shoulders, and its decisions should be no less entitled to the respect they otherwise would be accorded in the realm of business judgment.
    27

    Id. at 954 (citation and footnote omitted).

    28

    Other jurisdictions have also applied the business judgment rule to actions by which target companies have sought to forestall takeover activity they considered undesirable. See Gearhart Industries, Inc. v. Smith International, 5th Cir., 741 F.2d 707 (1984) (sale of discounted subordinate debentures containing springing warrants); Treco, Inc. v. Land of Lincoln Savings and Loan, 7th Cir., 749 F.2d 374 (1984) (amendment to by-laws); Panter v. Marshall Field, 7th Cir., 646 F.2d 271 (1981) (acquisitions to create antitrust problems); Johnson v. Trueblood, 3d Cir., 629 F.2d 287 (1980), cert. denied, 450 U.S. 999, 101 S.Ct. 1704, 68 L.Ed.2d 200 (1981) (refusal to tender); Crouse-Hinds Co. v. InterNorth, Inc., 2d Cir., 634 F.2d 690 (1980) (sale of stock to favored party); Treadway v. Cane Corp., 2d Cir., 638 F.2d 357 (1980) (sale to White Knight), Enterra Corp. v. SGS Associates, E.D.Pa., 600 F.Supp. 678 (1985) (standstill agreement); Buffalo Forge Co. v. Ogden Corp., W.D.N.Y., 555 F.Supp. 892, aff'd, (2d Cir.) 717 F.2d 757, cert. denied, 464 U.S. 1018, 104 S.Ct. 550, 78 L.Ed.2d 724 (1983) (sale of treasury shares and grant of stock option to White Knight); Whittaker Corp. v. Edgar, N.D.Ill., 535 F.Supp. 933 (1982) (disposal of valuable assets); Martin Marietta Corp. v. Bendix Corp., D.Md., 549 F.Supp. 623 (1982) (PacMan defense).[6]

    29

    This case is distinguishable from the ones cited, since here we have a defensive mechanism adopted to ward off possible future advances and not a mechanism adopted in reaction to a specific threat. This distinguishing factor does not result in the Directors losing the protection of the business judgment rule. To the contrary, pre-planning for the contingency of a hostile takeover might reduce the risk that, under the pressure of a takeover bid, management will fail to exercise reasonable judgment. Therefore, in reviewing a pre-planned defensive mechanism it seems even more appropriate to apply the business judgment rule. See Warner Communications v. Murdoch, D.Del., 581 F.Supp. 1482, 1491 (1984).

    30

    Of course, the business judgment rule can only sustain corporate decision making or transactions that are within the power or authority of the Board. Therefore, before the business judgment rule can be applied it must be determined whether the Directors were authorized to adopt the Rights Plan.

    31
    [1351] III
    32

    Appellants vehemently contend that the Board of Directors was unauthorized to adopt the Rights Plan. First, appellants contend that no provision of the Delaware General Corporation Law authorizes the issuance of such Rights. Secondly, appellants, along with the SEC, contend that the Board is unauthorized to usurp stockholders' rights to receive hostile tender offers. Third, appellants and the SEC also contend that the Board is unauthorized to fundamentally restrict stockholders' rights to conduct a proxy contest. We address each of these contentions in turn.

    33
    A.
    34

    While appellants contend that no provision of the Delaware General Corporation Law authorizes the Rights Plan, Household contends that the Rights Plan was issued pursuant to 8 Del.C. §§ 151(g) and 157. It explains that the Rights are authorized by § 157[7] and the issue of preferred stock underlying the Rights is authorized by § 151.[8] Appellants respond by making several attacks upon the authority to issue the Rights pursuant to § 157.

    35

    Appellants begin by contending that § 157 cannot authorize the Rights Plan since § 157 has never served the purpose of authorizing a takeover defense. Appellants contend that § 157 is a corporate financing statute, and that nothing in its legislative history suggests a purpose that has anything to do with corporate control or a takeover defense. Appellants are unable to demonstrate that the legislature, in its adoption of § 157, meant to limit the applicability of § 157 to only the issuance of Rights for the purposes of corporate financing. Without such affirmative evidence, we decline to impose such a limitation upon the section that the legislature has not. Compare Providence & Worchester Co. v. Baker, Del.Supr., 378 A.2d 121, 124 (1977) (refusal to read a bar to protective voting provisions into 8 Del.C. § 212(a)).

    36

    As we noted in Unocal:

    37
    [O]ur corporate law is not static. It must grow and develop in response to, indeed in anticipation of, evolving concepts and needs. Merely because the General Corporation Law is silent as to a specific matter does not mean that it is prohibited.
    38

    493 A.2d at 957. See also Cheff v. Mathes, Del.Supr., 199 A.2d 548 (1964).

    39

    Secondly, appellants contend that § 157 does not authorize the issuance of sham rights such as the Rights Plan. They contend that the Rights were designed never to be exercised, and that the Plan has no economic value. In addition, they contend the preferred stock made subject to the Rights is also illusory, citing Telvest, Inc. [1352] v. Olson, Del.Ch., C.A. No. 5798, Brown, V.C. (March 8, 1979).

    40

    Appellants' sham contention fails in both regards. As to the Rights, they can and will be exercised upon the happening of a triggering mechanism, as we have observed during the current struggle of Sir James Goldsmith to take control of Crown Zellerbach. See Wall Street Journal, July 26, 1985, at 3, 12. As to the preferred shares, we agree with the Court of Chancery that they are distinguishable from sham securities invalidated in Telvest, supra. The Household preferred, issuable upon the happening of a triggering event, have superior dividend and liquidation rights.

    41

    Third, appellants contend that § 157 authorizes the issuance of Rights "entitling holders thereof to purchase from the corporation any shares of its capital stock of any class ..." (emphasis added). Therefore, their contention continues, the plain language of the statute does not authorize Household to issue rights to purchase another's capital stock upon a merger or consolidation.

    42

    Household contends, inter alia, that the Rights Plan is analogous to "anti-destruction" or "anti-dilution" provisions which are customary features of a wide variety of corporate securities. While appellants seem to concede that "anti-destruction" provisions are valid under Delaware corporate law, they seek to distinguish the Rights Plan as not being incidental, as are most "anti-destruction" provisions, to a corporation's statutory power to finance itself. We find no merit to such a distinction. We have already rejected appellants' similar contention that § 157 could only be used for financing purposes. We also reject that distinction here.

    43

    "Anti-destruction" clauses generally ensure holders of certain securities of the protection of their right of conversion in the event of a merger by giving them the right to convert their securities into whatever securities are to replace the stock of their company. See Broad v. Rockwell International Corp., 5th Cir., 642 F.2d 929, 946, cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 380 (1981); Wood v. Coastal States Gas Corp., Del.Supr., 401 A.2d 932, 937-39 (1979); B.S.F. Co. v. Philadelphia National Bank, Del.Supr., 204 A.2d 746, 750-51 (1964). The fact that the rights here have as their purpose the prevention of coercive two-tier tender offers does not invalidate them.

    44

    Fourth, appellants contend that Household's reliance upon § 157 is contradictory to 8 Del.C. § 203.[9] Section 203 is a "notice" statute which generally requires that [1353] timely notice be given to a target of an offeror's intention to make a tender offer. Appellants contend that the lack of stronger regulation by the State indicates a legislative intent to reject anything which would impose an impediment to the tender offer process. Such a contention is a non sequitur. The desire to have little state regulation of tender offers cannot be said to also indicate a desire to also have little private regulation. Furthermore, as we explain infra, we do not view the Rights Plan as much of an impediment on the tender offer process.

    45

    Fifth, appellants contend that if § 157 authorizes the Rights Plan it would be unconstitutional pursuant to the Commerce Clause and Supremacy Clause of the United States Constitution. Household counters that appellants have failed to properly raise the issues in the Court of Chancery and are, therefore, precluded from raising them. Moreover, Household counters that appellants' contentions are without merit since the conduct complained of here is private conduct of corporate directors and not state regulation.

    46

    It is commonly known that issues not properly raised in the trial court will not be considered in the first instance by this Court. Supreme Court Rule 8. We cannot conclude here that appellants have failed to adequately raise their constitutional issues in the Court of Chancery. Appellants raised the Commerce Clause and Supremacy Clause contentions in their "pretrial memo of points and authorities" and in their opening argument at trial. The fact that they did not again raise the issues in their post-trial briefing will not preclude them from raising the issues before this Court.

    47

    Appellants contend that § 157 authorization for the Rights Plan violates the Commerce Clause and is void under the Supremacy Clause, since it is an obstacle to the accomplishment of the policies underlying the Williams Act. Appellants put heavy emphasis upon the case of Edgar v. MITE Corp., 457 U.S. 624, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982), in which the United States Supreme Court held that the Illinois Business Takeover Act was unconstitutional, in that it unduly burdened interstate commerce in violation of the Commerce Clause.[10] We do not read the analysis in Edgar as applicable to the actions of private parties. The fact that directors of a corporation act pursuant to a state statute provides an insufficient nexus to the state for there to be state action which may violate the Commerce Clause or Supremacy Clause. See Data Probe Acquisition Corp. v. Datatab, Inc., 2d Cir., 722 F.2d 1, 5 (1983).

    48

    Having concluded that sufficient authority for the Rights Plan exists in 8 Del.C. § 157, we note the inherent powers of the Board conferred by 8 Del.C. § 141(a),[11] concerning the management of the corporation's "business and affairs" (emphasis added), also provides the Board additional authority upon which to enact the Rights Plan. Unocal, 493 A.2d at 953.

    49
    B.
    50

    Appellants contend that the Board is unauthorized to usurp stockholders' [1354] rights to receive tender offers by changing Household's fundamental structure. We conclude that the Rights Plan does not prevent stockholders from receiving tender offers, and that the change of Household's structure was less than that which results from the implementation of other defensive mechanisms upheld by various courts.

    51

    Appellants' contention that stockholders will lose their right to receive and accept tender offers seems to be premised upon an understanding of the Rights Plan which is illustrated by the SEC amicus brief which states: "The Chancery Court's decision seriously understates the impact of this plan. In fact, as we discuss below, the Rights Plan will deter not only two-tier offers, but virtually all hostile tender offers."

    52

    The fallacy of that contention is apparent when we look at the recent takeover of Crown Zellerbach, which has a similar Rights Plan, by Sir James Goldsmith. Wall Street Journal, July 26, 1985, at 3, 12. The evidence at trial also evidenced many methods around the Plan ranging from tendering with a condition that the Board redeem the Rights, tendering with a high minimum condition of shares and Rights, tendering and soliciting consents to remove the Board and redeem the Rights, to acquiring 50% of the shares and causing Household to self-tender for the Rights. One could also form a group of up to 19.9% and solicit proxies for consents to remove the Board and redeem the Rights. These are but a few of the methods by which Household can still be acquired by a hostile tender offer.

    53

    In addition, the Rights Plan is not absolute. When the Household Board of Directors is faced with a tender offer and a request to redeem the Rights, they will not be able to arbitrarily reject the offer. They will be held to the same fiduciary standards any other board of directors would be held to in deciding to adopt a defensive mechanism, the same standard as they were held to in originally approving the Rights Plan. See Unocol, 493 A.2d at 954-55, 958.

    54

    In addition, appellants contend that the deterence of tender offers will be accomplished by what they label "a fundamental transfer of power from the stockholders to the directors." They contend that this transfer of power, in itself, is unauthorized.

    55

    The Rights Plan will result in no more of a structural change than any other defensive mechanism adopted by a board of directors. The Rights Plan does not destroy the assets of the corporation. The implementation of the Plan neither results in any outflow of money from the corporation nor impairs its financial flexibility. It does not dilute earnings per share and does not have any adverse tax consequences for the corporation or its stockholders. The Plan has not adversely affected the market price of Household's stock.

    56

    Comparing the Rights Plan with other defensive mechanisms, it does less harm to the value structure of the corporation than do the other mechanisms. Other mechanisms result in increased debt of the corporation. See Whittaker Corp. v. Edgar, supra (sale of "prize asset"), Cheff v. Mathes, supra, (paying greenmail to eliminate a threat), Unocal Corp. v. Mesa Petroleum Co., supra, (discriminatory self-tender).

    57

    There is little change in the governance structure as a result of the adoption of the Rights Plan. The Board does not now have unfettered discretion in refusing to redeem the Rights. The Board has no more discretion in refusing to redeem the Rights than it does in enacting any defensive mechanism.

    58

    The contention that the Rights Plan alters the structure more than do other defensive mechanisms because it is so effective as to make the corporation completely safe from hostile tender offers is likewise without merit. As explained above, there [1355] are numerous methods to successfully launch a hostile tender offer.

    59
    C.
    60

    Appellants' third contention is that the Board was unauthorized to fundamentally restrict stockholders' rights to conduct a proxy contest. Appellants contend that the "20% trigger" effectively prevents any stockholder from first acquiring 20% or more shares before conducting a proxy contest and further, it prevents stockholders from banding together into a group to solicit proxies if, collectively, they own 20% or more of the stock.[12] In addition, at trial, appellants contended that read literally, the Rights Agreement triggers the Rights upon the mere acquisition of the right to vote 20% or more of the shares through a proxy solicitation, and thereby precludes any proxy contest from being waged.[13]

    61

    Appellants seem to have conceded this last contention in light of Household's response that the receipt of a proxy does not make the recipient the "beneficial owner" of the shares involved which would trigger the Rights. In essence, the Rights Agreement provides that the Rights are triggered when someone becomes the "beneficial owner" of 20% or more of Household stock. Although a literal reading of the Rights Agreement definition of "beneficial owner" would seem to include those shares which one has the right to vote, it has long been recognized that the relationship between grantor and recipient of a proxy is one of agency, and the agency is revocable by the grantor at any time. Henn, Corporations § 196, at 518. Therefore, the holder of a proxy is not the "beneficial owner" of the stock. As a result, the mere acquisition of the right to vote 20% of the shares does not trigger the Rights.

    62

    The issue, then, is whether the restriction upon individuals or groups from first acquiring 20% of shares before waging a proxy contest fundamentally restricts stockholders' right to conduct a proxy contest. Regarding this issue the Court of Chancery found:

    63
    Thus, while the Rights Plan does deter the formation of proxy efforts of a certain magnitude, it does not limit the voting power of individual shares. On the evidence presented it is highly conjectural to assume that a particular effort to assert shareholder views in the election of directors or revisions of corporate policy will be frustrated by the proxy feature of the Plan. Household's witnesses, Troubh and Higgins described recent corporate takeover battles in which insurgents holding less than 10% stock ownership were able to secure corporate control through a proxy contest or the threat of one.
    64

    Moran, 490 A.2d at 1080.

    65

    We conclude that there was sufficient evidence at trial to support the Vice-Chancellor's finding that the effect upon proxy contests will be minimal. Evidence at trial established that many proxy contests are won with an insurgent ownership of less than 20%, and that very large holdings are no guarantee of success. There was also testimony that the key variable in proxy contest success is the merit of an insurgent's issues, not the size of his holdings.

    66
    IV
    67

    Having concluded that the adoption of the Rights Plan was within the authority of the Directors, we now look to whether the Directors have met their burden under the business judgment rule.

    68

    [1356] The business judgment rule is a "presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984) (citations omitted). Notwithstanding, in Unocal we held that when the business judgment rule applies to adoption of a defensive mechanism, the initial burden will lie with the directors. The "directors must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed.... [T]hey satisfy that burden `by showing good faith and reasonable investigation....'" Unocal, 493 A.2d at 955 (citing Cheff v. Mathes, 199 A.2d at 554-55). In addition, the directors must show that the defensive mechanism was "reasonable in relation to the threat posed." Unocal, 493 A.2d at 955. Moreover, that proof is materially enhanced, as we noted in Unocal, where, as here, a majority of the board favoring the proposal consisted of outside independent directors who have acted in accordance with the foregoing standards. Unocal, 493 A.2d at 955; Aronson, 473 A.2d at 815. Then, the burden shifts back to the plaintiffs who have the ultimate burden of persuasion to show a breach of the directors' fiduciary duties. Unocal, 493 A.2d at 958.

    69

    There are no allegations here of any bad faith on the part of the Directors' action in the adoption of the Rights Plan. There is no allegation that the Directors' action was taken for entrenchment purposes. Household has adequately demonstrated, as explained above, that the adoption of the Rights Plan was in reaction to what it perceived to be the threat in the market place of coercive two-tier tender offers. Appellants do contend, however, that the Board did not exercise informed business judgment in its adoption of the Plan.

    70

    Appellants contend that the Household Board was uninformed since they were, inter alia, told the Plan would not inhibit a proxy contest, were not told the plan would preclude all hostile acquisitions of Household, and were told that Delaware counsel opined that the plan was within the business judgment of the Board.

    71

    As to the first two contentions, as we explained above, the Rights Plan will not have a severe impact upon proxy contests and it will not preclude all hostile acquisitions of Household. Therefore, the Directors were not misinformed or uninformed on these facts.

    72

    Appellants contend the Delaware counsel did not express an opinion on the flip-over provision of the Rights, rather only that the Rights would constitute validly issued and outstanding rights to subscribe to the preferred stock of the company.

    73

    To determine whether a business judgment reached by a board of directors was an informed one, we determine whether the directors were grossly negligent. Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 873 (1985). Upon a review of this record, we conclude the Directors were not grossly negligent. The information supplied to the Board on August 14 provided the essentials of the Plan. The Directors were given beforehand a notebook which included a three-page summary of the Plan along with articles on the current takeover environment. The extended discussion between the Board and representatives of Wachtell, Lipton and Goldman, Sachs before approval of the Plan reflected a full and candid evaluation of the Plan. Moran's expression of his views at the meeting served to place before the Board a knowledgeable critique of the Plan. The factual happenings here are clearly distinguishable from the actions of the directors of Trans Union Corporation who displayed gross negligence in approving a cash-out merger. Id.

    74

    In addition, to meet their burden, the Directors must show that the defensive [1357] mechanism was "reasonable in relation to the threat posed". The record reflects a concern on the part of the Directors over the increasing frequency in the financial services industry of "boot-strap" and "bust-up" takeovers. The Directors were also concerned that such takeovers may take the form of two-tier offers.[14] In addition, on August 14, the Household Board was aware of Moran's overture on behalf of D-K-M. In sum, the Directors reasonably believed Household was vulnerable to coercive acquisition techniques and adopted a reasonable defensive mechanism to protect itself.

    75
    V
    76

    In conclusion, the Household Directors receive the benefit of the business judgment rule in their adoption of the Rights Plan.

    77

    The Directors adopted the Plan pursuant to statutory authority in 8 Del.C. §§ 141, 151, 157. We reject appellants' contentions that the Rights Plan strips stockholders of their rights to receive tender offers, and that the Rights Plan fundamentally restricts proxy contests.

    78

    The Directors adopted the Plan in the good faith belief that it was necessary to protect Household from coercive acquisition techniques. The Board was informed as to the details of the Plan. In addition, Household has demonstrated that the Plan is reasonable in relation to the threat posed. Appellants, on the other hand, have failed to convince us that the Directors breached any fiduciary duty in their adoption of the Rights Plan.

    79

    While we conclude for present purposes that the Household Directors are protected by the business judgment rule, that does not end the matter. The ultimate response to an actual takeover bid must be judged by the Directors' actions at that time, and nothing we say here relieves them of their basic fundamental duties to the corporation and its stockholders. Unocal, 493 A.2d at 954-55, 958; Smith v. Van Gorkom, 488 A.2d at 872-73; Aronson, 473 A.2d at 812-13; Pogostin v. Rice, Del.Supr., 480 A.2d 619, 627 (1984). Their use of the Plan will be evaluated when and if the issue arises.

    80
    * * *
    81

    AFFIRMED.

    82

    [1] The SEC split 3-2 on whether to intervene in this case. The two dissenting Commissioners have publicly disagreed with the other three as to the merits of the Rights Plan. 17 Securities Regulation & Law Report 400; The Wall Street Journal, March 20, 1985, at 6.

    83

    [2] Household's Board has ten outside directors and six who are members of management. Messrs. Moran (appellant) and Whitehead voted against the Plan. The record reflects that Whitehead voted against the Plan not on its substance but because he thought it was novel and would bring unwanted publicity to Household.

    84

    [3] A fair price amendment to a corporate charter generally requires supermajority approval for certain business combinations and sets minimum price criteria for mergers. Moran, 490 A.2d at 1064, n. 1.

    85

    [4] "Bust-up" takeover generally refers to a situation in which one seeks to finance an acquisition by selling off pieces of the acquired company.

    86

    [5] The Vice-Chancellor did rule in favor of appellants on Household's counterclaim, but that ruling is not at issue in this appeal.

    87

    [6] The "Pac-Man" defense is generally a target company countering an unwanted tender offer by making its own tender offer for stock of the would-be acquirer. Block & Miller, The Responsibilities and Obligations of Corporate Directors in Takeover Contests, 11 Sec.Reg.L.J. 44, 64 (1983).

    88

    [7] The power to issue rights to purchase shares is conferred by 8 Del.C. § 157 which provides in relevant part:

    89

    Subject to any provisions in the certificate of incorporation, every corporation may create and issue, whether or not in connection with the issue and sale of any shares of stock or other securities of the corporation, rights or options entitling the holders thereof to purchase from the corporation any shares of its capital stock of any class or classes, such rights or options to be evidenced by or in such instrument or instruments as shall be approved by the board of directors.

    90

    [8] 8 Del.C. § 151(g) provides in relevant part:

    91

    When any corporation desires to issue any shares of stock of any class or of any series of any class of which the voting powers, designations, preferences and relative, participating, optional or other rights, if any, or the qualifications, limitations or restrictions thereof, if any, shall not have been set forth in the certificate of incorporation or in any amendment thereto but shall be provided for in a resolution or resolutions adopted by the board of directors pursuant to authority expressly vested in it by the provisions of the certificate of incorporation or any amendment thereto, a certificate setting forth a copy of such resolution or resolutions and the number of shares of stock of such class or series shall be executed, acknowledged, filed, recorded, and shall become effective, in accordance with § 103 of this title.

    92

    [9] 8 Del.C. § 203 provides in relevant part:

    93

    (a) No offeror shall make a tender offer unless:

    (1) Not less than 20 nor more than 60 days before the date the tender offer is to be made, the offeror shall deliver personally or by registered or certified mail to the corporation whose equity securities are to be subject to the tender offer, at its registered office in this State or at its principal place of business, a written statement of the offeror's intention to make the tender offer....

    (2) The tender offer shall remain open for a period of at least 20 days after it is first made to the holders of the equity securities, during which period any stockholder may withdraw any of the equity securities tendered to the offeror, and any revised or amended tender offer which changes the amount or type of consideration offered or the number of equity securities for which the offer is made shall remain open at least 10 days following the amendment; and

    (3) The offeror and any associate of the offeror will not purchase or pay for any tendered equity security for a period of at least 20 days after the tender offer is first made to the holders of the equity securities, and no such purchase or payment shall be made within 10 days after an amended or revised tender offer if the amendment or revision changes the amount or type of consideration offered or the number of equity securities for which the offer is made. If during the period the tender offer must remain open pursuant to this section, a greater number of equity securities is tendered than the offeror is bound or willing to purchase, the equity securities shall be purchased pro rata, as nearly as may be, according to the number of shares tendered during such period by each equity security holder.

    94

    [10] Justice White, joined by Chief Justice Burger and Justice Blackman also concluded that the Illinois Business Takeover Act was pre-empted by the Williams Act. Edgar, 457 U.S. at 630, 102 S.Ct. at 2634.

    95

    [11] 8 Del.C. § 141(a) provides:

    96

    (a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.

    97

    [12] Appellants explain that the acquisition of 20% of the shares trigger the Rights, making them non-redeemable, and thereby would prevent even a future friendly offer for the ten-year life of the Rights.

    98

    [13] The SEC still contends that the mere acquisition of the right to vote 20% of the shares through a proxy solicitation triggers the rights. We do not interpret the Rights Agreement in that manner.

    99

    [14] We have discussed the coercive nature of two-tier tender offers in Unocal, 493 A.2d at 956, n. 12. We explained in Unocal that a discriminatory self-tender was reasonably related to the threat of two-tier tender offers and possible greenmail.

  • 3 Revlon v. MacAndrews & Forbes (Del. 1986)

    As you have just read, in 1985, Unocal and Moran approved boards’ use of powerful, discriminatory defensive tactics. You will now read Revlon, the 1986 decision that drew the line at playing favorites: if the board decides to sell or break up the company, then it can no longer defend selectively against some bidders but not others. Does this distinction make sense? Where would you draw the line?

    1
    506 A.2d 173 (1986)
    2
    REVLON, INC., a Delaware corporation, Michel C. Bergerac, Simon Aldewereld, Sander P. Alexander, Jay I. Bennett, Irving J. Bottner, Jacob Burns, Lewis L. Glucksman, John Loudon, Aileen Mehle, Samuel L. Simmons, Ian R. Wilson, Paul P. Woolard, Ezra K. Zilkha, Forstmann Little & Co., a New York limited partnership, and Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-II, a New York limited partnership, Defendants Below, Appellants,
    v.
    MacANDREWS & FORBES HOLDINGS, INC., a Delaware corporation, Plaintiff Below, Appellee.
    3

    Supreme Court of Delaware.
    Submitted: October 31, 1985.
    Oral Decision: November 1, 1985.
    Written Opinion: March 13, 1986.

    4

    A. Gilchrist Sparks, III (argued), Lawrence A. Hamermesh, and Kenneth Nachbar, of Morris, Nichols, Arsht & Tunnell, Wilmington, and Herbert M. Wachtell, Douglas S. Liebhafsky, Kenneth B. Forrest, and Theodore N. Mirvis, of Wachtell, Lipton, Rosen & Katz, New York City, of counsel, for appellant Revlon.

    5

    Michael D. Goldman, James F. Burnett, Donald J. Wolfe, Jr., Richard L. Horwitz, of Potter, Anderson & Corroon, Wilmington, and Leon Silverman (argued), and Marc P. Cherno, of Fried, Frank, Harris, Shriver & Jacobson, New York City, of counsel, for appellant Forstmann Little.

    6

    Bruce M. Stargatt (argued), Edward B. Maxwell, 2nd, David C. McBride, Josy W. Ingersoll, of Young, Conaway, Stargatt & Taylor, Wilmington, and Stuart L. Shapiro (argued), Stephen P. Lamb, Andrew J. Turezyn, and Thomas P. White, of Skadden, Arps, Slate, Meagher & Flom, Wilmington, and Michael W. Mitchell (New York City) and Marc B. Tucker, Washington, D.C., of Skadden, Arps, Slate, Meagher & Flom, for appellee.

    7

    Before McNEILLY and MOORE, JJ., and BALICK, Judge (Sitting by designation pursuant to Del. Const., Art. IV, § 12.).

    8
    [175] MOORE, Justice:
    9

    In this battle for corporate control of Revlon, Inc. (Revlon), the Court of Chancery enjoined certain transactions designed to thwart the efforts of Pantry Pride, Inc. (Pantry Pride) to acquire Revlon.[1] The defendants are Revlon, its board of directors, and Forstmann Little & Co. and the latter's affiliated limited partnership (collectively, Forstmann). The injunction barred consummation of an option granted Forstmann to purchase certain Revlon assets (the lockup option), a promise by Revlon to deal exclusively with Forstmann in the face of a takeover (the no-shop provision), and the payment of a $25 million cancellation fee to Forstmann if the transaction was aborted. The Court of Chancery found that the Revlon directors had breached their duty of care by entering into the foregoing transactions [176] and effectively ending an active auction for the company. The trial court ruled that such arrangements are not illegal per se under Delaware law, but that their use under the circumstances here was impermissible. We agree. See MacAndrews & Forbes Holdings, Inc. v. Revlon, Inc., Del. Ch., 501 A.2d 1239 (1985). Thus, we granted this expedited interlocutory appeal to consider for the first time the validity of such defensive measures in the face of an active bidding contest for corporate control.[2] Additionally, we address for the first time the extent to which a corporation may consider the impact of a takeover threat on constituencies other than shareholders. See Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946, 955 (1985).

    10

    In our view, lock-ups and related agreements are permitted under Delaware law where their adoption is untainted by director interest or other breaches of fiduciary duty. The actions taken by the Revlon directors, however, did not meet this standard. Moreover, while concern for various corporate constituencies is proper when addressing a takeover threat, that principle is limited by the requirement that there be some rationally related benefit accruing to the stockholders. We find no such benefit here.

    11

    Thus, under all the circumstances we must agree with the Court of Chancery that the enjoined Revlon defensive measures were inconsistent with the directors' duties to the stockholders. Accordingly, we affirm.

    12
    I.
    13

    The somewhat complex maneuvers of the parties necessitate a rather detailed examination of the facts. The prelude to this controversy began in June 1985, when Ronald O. Perelman, chairman of the board and chief executive officer of Pantry Pride, met with his counterpart at Revlon, Michel C. Bergerac, to discuss a friendly acquisition of Revlon by Pantry Pride. Perelman suggested a price in the range of $40-50 per share, but the meeting ended with Bergerac dismissing those figures as considerably below Revlon's intrinsic value. All subsequent Pantry Pride overtures were rebuffed, perhaps in part based on Mr. Bergerac's strong personal antipathy to Mr. Perelman.

    14

    Thus, on August 14, Pantry Pride's board authorized Perelman to acquire Revlon, either through negotiation in the $42-$43 per share range, or by making a hostile tender offer at $45. Perelman then met with Bergerac and outlined Pantry Pride's alternate approaches. Bergerac remained adamantly opposed to such schemes and conditioned any further discussions of the matter on Pantry Pride executing a standstill agreement prohibiting it from acquiring Revlon without the latter's prior approval.

    15

    On August 19, the Revlon board met specially to consider the impending threat of a hostile bid by Pantry Pride.[3] At the meeting, Lazard Freres, Revlon's investment [177] banker, advised the directors that $45 per share was a grossly inadequate price for the company. Felix Rohatyn and William Loomis of Lazard Freres explained to the board that Pantry Pride's financial strategy for acquiring Revlon would be through "junk bond" financing followed by a break-up of Revlon and the disposition of its assets. With proper timing, according to the experts, such transactions could produce a return to Pantry Pride of $60 to $70 per share, while a sale of the company as a whole would be in the "mid 50" dollar range. Martin Lipton, special counsel for Revlon, recommended two defensive measures: first, that the company repurchase up to 5 million of its nearly 30 million outstanding shares; and second, that it adopt a Note Purchase Rights Plan. Under this plan, each Revlon shareholder would receive as a dividend one Note Purchase Right (the Rights) for each share of common stock, with the Rights entitling the holder to exchange one common share for a $65 principal Revlon note at 12% interest with a one-year maturity. The Rights would become effective whenever anyone acquired beneficial ownership of 20% or more of Revlon's shares, unless the purchaser acquired all the company's stock for cash at $65 or more per share. In addition, the Rights would not be available to the acquiror, and prior to the 20% triggering event the Revlon board could redeem the rights for 10 cents each. Both proposals were unanimously adopted.

    16

    Pantry Pride made its first hostile move on August 23 with a cash tender offer for any and all shares of Revlon at $47.50 per common share and $26.67 per preferred share, subject to (1) Pantry Pride's obtaining financing for the purchase, and (2) the Rights being redeemed, rescinded or voided.

    17

    The Revlon board met again on August 26. The directors advised the stockholders to reject the offer. Further defensive measures also were planned. On August 29, Revlon commenced its own offer for up to 10 million shares, exchanging for each share of common stock tendered one Senior Subordinated Note (the Notes) of $47.50 principal at 11.75% interest, due 1995, and one-tenth of a share of $9.00 Cumulative Convertible Exchangeable Preferred Stock valued at $100 per share. Lazard Freres opined that the notes would trade at their face value on a fully distributed basis.[4] Revlon stockholders tendered 87 percent of the outstanding shares (approximately 33 million), and the company accepted the full 10 million shares on a pro rata basis. The new Notes contained covenants which limited Revlon's ability to incur additional debt, sell assets, or pay dividends unless otherwise approved by the "independent" (nonmanagement) members of the board.

    18

    At this point, both the Rights and the Note covenants stymied Pantry Pride's attempted takeover. The next move came on September 16, when Pantry Pride announced a new tender offer at $42 per share, conditioned upon receiving at least 90% of the outstanding stock. Pantry Pride also indicated that it would consider buying less than 90%, and at an increased price, if Revlon removed the impeding Rights. While this offer was lower on its face than the earlier $47.50 proposal, Revlon's investment banker, Lazard Freres, described the two bids as essentially equal in view of the completed exchange offer.

    19

    The Revlon board held a regularly scheduled meeting on September 24. The directors rejected the latest Pantry Pride offer and authorized management to negotiate with other parties interested in acquiring Revlon. Pantry Pride remained determined in its efforts and continued to make cash bids for the company, offering $50 per share on September 27, and raising its bid to $53 on October 1, and then to $56.25 on October 7.

    20

    [178] In the meantime, Revlon's negotiations with Forstmann and the investment group Adler & Shaykin had produced results. The Revlon directors met on October 3 to consider Pantry Pride's $53 bid and to examine possible alternatives to the offer. Both Forstmann and Adler & Shaykin made certain proposals to the board. As a result, the directors unanimously agreed to a leveraged buyout by Forstmann. The terms of this accord were as follows: each stockholder would get $56 cash per share; management would purchase stock in the new company by the exercise of their Revlon "golden parachutes";[5] Forstmann would assume Revlon's $475 million debt incurred by the issuance of the Notes; and Revlon would redeem the Rights and waive the Notes covenants for Forstmann or in connection with any other offer superior to Forstmann's. The board did not actually remove the covenants at the October 3 meeting, because Forstmann then lacked a firm commitment on its financing, but accepted the Forstmann capital structure, and indicated that the outside directors would waive the covenants in due course. Part of Forstmann's plan was to sell Revlon's Norcliff Thayer and Reheis divisions to American Home Products for $335 million. Before the merger, Revlon was to sell its cosmetics and fragrance division to Adler & Shaykin for $905 million. These transactions would facilitate the purchase by Forstmann or any other acquiror of Revlon.

    21

    When the merger, and thus the waiver of the Notes covenants, was announced, the market value of these securities began to fall. The Notes, which originally traded near par, around 100, dropped to 87.50 by October 8. One director later reported (at the October 12 meeting) a "deluge" of telephone calls from irate noteholders, and on October 10 the Wall Street Journal reported threats of litigation by these creditors.

    22

    Pantry Pride countered with a new proposal on October 7, raising its $53 offer to $56.25, subject to nullification of the Rights, a waiver of the Notes covenants, and the election of three Pantry Pride directors to the Revlon board. On October 9, representatives of Pantry Pride, Forstmann and Revlon conferred in an attempt to negotiate the fate of Revlon, but could not reach agreement. At this meeting Pantry Pride announced that it would engage in fractional bidding and top any Forstmann offer by a slightly higher one. It is also significant that Forstmann, to Pantry Pride's exclusion, had been made privy to certain Revlon financial data. Thus, the parties were not negotiating on equal terms.

    23

    Again privately armed with Revlon data, Forstmann met on October 11 with Revlon's special counsel and investment banker. On October 12, Forstmann made a new $57.25 per share offer, based on several conditions.[6] The principal demand was a lock-up option to purchase Revlon's Vision Care and National Health Laboratories divisions for $525 million, some $100-$175 million below the value ascribed to them by Lazard Freres, if another acquiror got 40% of Revlon's shares. Revlon also was required to accept a no-shop provision. The Rights and Notes covenants had to be removed as in the October 3 agreement. There would be a $25 million cancellation fee to be placed in escrow, and released to Forstmann if the new agreement terminated or if another acquiror got more than 19.9% of Revlon's stock. Finally, there would be no participation by Revlon management in the merger. In return, Forstmann agreed to support the par value [179] of the Notes, which had faltered in the market, by an exchange of new notes. Forstmann also demanded immediate acceptance of its offer, or it would be withdrawn. The board unanimously approved Forstmann's proposal because: (1) it was for a higher price than the Pantry Pride bid, (2) it protected the noteholders, and (3) Forstmann's financing was firmly in place.[7] The board further agreed to redeem the rights and waive the covenants on the preferred stock in response to any offer above $57 cash per share. The covenants were waived, contingent upon receipt of an investment banking opinion that the Notes would trade near par value once the offer was consummated.

    24

    Pantry Pride, which had initially sought injunctive relief from the Rights plan on August 22, filed an amended complaint on October 14 challenging the lock-up, the cancellation fee, and the exercise of the Rights and the Notes covenants. Pantry Pride also sought a temporary restraining order to prevent Revlon from placing any assets in escrow or transferring them to Forstmann. Moreover, on October 22, Pantry Pride again raised its bid, with a cash offer of $58 per share conditioned upon nullification of the Rights, waiver of the covenants, and an injunction of the Forstmann lock-up.

    25

    On October 15, the Court of Chancery prohibited the further transfer of assets, and eight days later enjoined the lock-up, no-shop, and cancellation fee provisions of the agreement. The trial court concluded that the Revlon directors had breached their duty of loyalty by making concessions to Forstmann, out of concern for their liability to the noteholders, rather than maximizing the sale price of the company for the stockholders' benefit. MacAndrews & Forbes Holdings, Inc. v. Revlon, Inc., 501 A.2d at 1249-50.

    26
    II.
    27

    To obtain a preliminary injunction, a plaintiff must demonstrate both a reasonable probability of success on the merits and some irreparable harm which will occur absent the injunction. Gimbel v. Signal Companies, Del.Ch., 316 A.2d 599, 602 (1974), aff'd, Del.Supr., 316 A.2d 619 (1974). Additionally, the Court shall balance the conveniences of and possible injuries to the parties. Id.

    28
    A.
    29

    We turn first to Pantry Pride's probability of success on the merits. The ultimate responsibility for managing the business and affairs of a corporation falls on its board of directors. 8 Del.C. § 141(a).[8] In discharging this function the directors owe fiduciary duties of care and loyalty to the corporation and its shareholders. Guth v. Loft, Inc., 23 Del.Supr. 255, 5 A.2d 503, 510 (1939); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984). These principles apply with equal force when a board approves a corporate merger pursuant to 8 Del.C. § 251(b);[9] Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 873 (1985); and of course they are the bedrock of our law regarding corporate takeover issues. Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984); Unocal Corp. v. Mesa [180] Petroleum Co., Del.Supr., 493 A.2d 946, 953, 955 (1985); Moran v. Household International, Inc., Del.Supr., 500 A.2d 1346, 1350 (1985). While the business judgment rule may be applicable to the actions of corporate directors responding to takeover threats, the principles upon which it is founded — care, loyalty and independence — must first be satisfied.[10] Aronson v. Lewis, 473 A.2d at 812.

    30

    If the business judgment rule applies, there is a "presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson v. Lewis, 473 A.2d at 812. However, when a board implements anti-takeover measures there arises "the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders ..." Unocal Corp. v. Mesa Petroleum Co., 493 A.2d at 954. This potential for conflict places upon the directors the burden of proving that they had reasonable grounds for believing there was a danger to corporate policy and effectiveness, a burden satisfied by a showing of good faith and reasonable investigation. Id. at 955. In addition, the directors must analyze the nature of the takeover and its effect on the corporation in order to ensure balance — that the responsive action taken is reasonable in relation to the threat posed. Id.

    31
    B.
    32

    The first relevant defensive measure adopted by the Revlon board was the Rights Plan, which would be considered a "poison pill" in the current language of corporate takeovers — a plan by which shareholders receive the right to be bought out by the corporation at a substantial premium on the occurrence of a stated triggering event. See generally Moran v. Household International, Inc., Del.Supr., 500 A.2d 1346 (1985). By 8 Del.C. §§ 141 and 122(13),[11] the board clearly had the power to adopt the measure. See Moran v. Household International, Inc., 500 A.2d at 1351. Thus, the focus becomes one of reasonableness and purpose.

    33

    The Revlon board approved the Rights Plan in the face of an impending hostile takeover bid by Pantry Pride at $45 per share, a price which Revlon reasonably concluded was grossly inadequate. Lazard Freres had so advised the directors, and had also informed them that Pantry Pride was a small, highly leveraged company bent on a "bust-up" takeover by using "junk bond" financing to buy Revlon cheaply, sell the acquired assets to pay the [181] debts incurred, and retain the profit for itself.[12] In adopting the Plan, the board protected the shareholders from a hostile takeover at a price below the company's intrinsic value, while retaining sufficient flexibility to address any proposal deemed to be in the stockholders' best interests.

    34

    To that extent the board acted in good faith and upon reasonable investigation. Under the circumstances it cannot be said that the Rights Plan as employed was unreasonable, considering the threat posed. Indeed, the Plan was a factor in causing Pantry Pride to raise its bids from a low of $42 to an eventual high of $58. At the time of its adoption the Rights Plan afforded a measure of protection consistent with the directors' fiduciary duty in facing a takeover threat perceived as detrimental to corporate interests. Unocal, 493 A.2d at 954-55. Far from being a "show-stopper," as the plaintiffs had contended in Moran, the measure spurred the bidding to new heights, a proper result of its implementation. See Moran, 500 A.2d at 1354, 1356-67.

    35

    Although we consider adoption of the Plan to have been valid under the circumstances, its continued usefulness was rendered moot by the directors' actions on October 3 and October 12. At the October 3 meeting the board redeemed the Rights conditioned upon consummation of a merger with Forstmann, but further acknowledged that they would also be redeemed to facilitate any more favorable offer. On October 12, the board unanimously passed a resolution redeeming the Rights in connection with any cash proposal of $57.25 or more per share. Because all the pertinent offers eventually equalled or surpassed that amount, the Rights clearly were no longer any impediment in the contest for Revlon. This mooted any question of their propriety under Moran or Unocal.

    36
    C.
    37

    The second defensive measure adopted by Revlon to thwart a Pantry Pride takeover was the company's own exchange offer for 10 million of its shares. The directors' general broad powers to manage the business and affairs of the corporation are augmented by the specific authority conferred under 8 Del.C. § 160(a), permitting the company to deal in its own stock.[13] Unocal, 493 A.2d at 953-54; Cheff v. Mathes, 41 Del.Supr. 494, 199 A.2d 548, 554 (1964); Kors v. Carey, 39 Del.Ch. 47, 158 A.2d 136, 140 (1960). However, when exercising that power in an effort to forestall a hostile takeover, the board's actions are strictly held to the fiduciary standards outlined in Unocal. These standards require the directors to determine the best interests of the corporation and its stockholders, and impose an enhanced duty to abjure any action that is motivated by considerations other than a good faith concern for such interests. Unocal, 493 A.2d at 954-55; see Bennett v. Propp, 41 Del.Supr. 14, 187 A.2d 405, 409 (1962).

    38

    The Revlon directors concluded that Pantry Pride's $47.50 offer was grossly inadequate. In that regard the board acted in good faith, and on an informed basis, with reasonable grounds to believe that there existed a harmful threat to the corporate enterprise. The adoption of a defensive measure, reasonable in relation to the threat posed, was proper and fully accorded with the powers, duties, and responsibilities conferred upon directors under our law. Unocal, 493 A.2d at 954; Pogostin v. Rice, 480 A.2d at 627.

    39
    [182] D.
    40

    However, when Pantry Pride increased its offer to $50 per share, and then to $53, it became apparent to all that the break-up of the company was inevitable. The Revlon board's authorization permitting management to negotiate a merger or buyout with a third party was a recognition that the company was for sale. The duty of the board had thus changed from the preservation of Revlon as a corporate entity to the maximization of the company's value at a sale for the stockholders' benefit. This significantly altered the board's responsibilities under the Unocal standards. It no longer faced threats to corporate policy and effectiveness, or to the stockholders' interests, from a grossly inadequate bid. The whole question of defensive measures became moot. The directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.

    41
    III.
    42

    This brings us to the lock-up with Forstmann and its emphasis on shoring up the sagging market value of the Notes in the face of threatened litigation by their holders. Such a focus was inconsistent with the changed concept of the directors' responsibilities at this stage of the developments. The impending waiver of the Notes covenants had caused the value of the Notes to fall, and the board was aware of the noteholders' ire as well as their subsequent threats of suit. The directors thus made support of the Notes an integral part of the company's dealings with Forstmann, even though their primary responsibility at this stage was to the equity owners.

    43

    The original threat posed by Pantry Pride — the break-up of the company — had become a reality which even the directors embraced. Selective dealing to fend off a hostile but determined bidder was no longer a proper objective. Instead, obtaining the highest price for the benefit of the stockholders should have been the central theme guiding director action. Thus, the Revlon board could not make the requisite showing of good faith by preferring the noteholders and ignoring its duty of loyalty to the shareholders. The rights of the former already were fixed by contract. Wolfensohn v. Madison Fund, Inc., Del.Supr., 253 A.2d 72, 75 (1969); Harff v. Kerkorian, Del.Ch., 324 A.2d 215 (1974). The noteholders required no further protection, and when the Revlon board entered into an auction-ending lock-up agreement with Forstmann on the basis of impermissible considerations at the expense of the shareholders, the directors breached their primary duty of loyalty.

    44

    The Revlon board argued that it acted in good faith in protecting the noteholders because Unocal permits consideration of other corporate constituencies. Although such considerations may be permissible, there are fundamental limitations upon that prerogative. A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders. Unocal, 493 A.2d at 955. However, such concern for non-stockholder interests is inappropriate when an auction among active bidders is in progress, and the object no longer is to protect or maintain the corporate enterprise but to sell it to the highest bidder.

    45

    Revlon also contended that by Gilbert v. El Paso Co., Del. Ch., 490 A.2d 1050, 1054-55 (1984), it had contractual and good faith obligations to consider the noteholders. However, any such duties are limited to the principle that one may not interfere with contractual relationships by improper actions. Here, the rights of the noteholders were fixed by agreement, and there is nothing of substance to suggest that any of those terms were violated. The Notes covenants specifically contemplated a waiver to permit sale of the company at a fair price. The Notes were accepted by the holders on that basis, including the risk of an adverse market effect stemming from a waiver. Thus, nothing remained for Revlon [183] to legitimately protect, and no rationally related benefit thereby accrued to the stockholders. Under such circumstances we must conclude that the merger agreement with Forstmann was unreasonable in relation to the threat posed.

    46

    A lock-up is not per se illegal under Delaware law. Its use has been approved in an earlier case. Thompson v. Enstar Corp., Del. Ch., ___ A.2d ___ (1984). Such options can entice other bidders to enter a contest for control of the corporation, creating an auction for the company and maximizing shareholder profit. Current economic conditions in the takeover market are such that a "white knight" like Forstmann might only enter the bidding for the target company if it receives some form of compensation to cover the risks and costs involved. Note, Corporations-Mergers — "Lock-up" Enjoined Under Section 14(e) of Securities Exchange Act — Mobil Corp. v. Marathon Oil Co., 669 F.2d 366 (6th Cir.1981), 12 Seton Hall L.Rev. 881, 892 (1982). However, while those lock-ups which draw bidders into the battle benefit shareholders, similar measures which end an active auction and foreclose further bidding operate to the shareholders' detriment. Note, Lock-up Options: Toward a State Law Standard, 96 Harv. L. Rev. 1068, 1081 (1983).[14]

    47

    Recently, the United States Court of Appeals for the Second Circuit invalidated a lock-up on fiduciary duty grounds similar to those here.[15] Hanson Trust PLC, et al. v. ML SCM Acquisition Inc., et al., 781 F.2d 264 (2nd Cir.1986). Citing Thompson v. Enstar Corp., supra, with approval, the court stated:

    48
    In this regard, we are especially mindful that some lock-up options may be beneficial to the shareholders, such as those that induce a bidder to compete for control of a corporation, while others may be harmful, such as those that effectively preclude bidders from competing with the optionee bidder. 781 F.2d at 274.
    49

    In Hanson Trust, the bidder, Hanson, sought control of SCM by a hostile cash tender offer. SCM management joined with Merrill Lynch to propose a leveraged buy-out of the company at a higher price, and Hanson in turn increased its offer. Then, despite very little improvement in its subsequent bid, the management group sought a lock-up option to purchase SCM's two main assets at a substantial discount. The SCM directors granted the lock-up without adequate information as to the size of the discount or the effect the transaction would have on the company. Their action effectively ended a competitive bidding situation. The Hanson Court invalidated the lock-up because the directors failed to fully inform themselves about the value of a transaction in which management had a strong self-interest. "In short, the Board appears to have failed to ensure that negotiations for alternative bids were conducted by those whose only loyalty was to the shareholders." Id. at 277.

    50

    The Forstmann option had a similar destructive effect on the auction process. Forstmann had already been drawn into the contest on a preferred basis, so the result of the lock-up was not to foster bidding, but to destroy it. The board's stated reasons for approving the transactions were: (1) better financing, (2) noteholder [184] protection, and (3) higher price. As the Court of Chancery found, and we agree, any distinctions between the rival bidders' methods of financing the proposal were nominal at best, and such a consideration has little or no significance in a cash offer for any and all shares. The principal object, contrary to the board's duty of care, appears to have been protection of the noteholders over the shareholders' interests.

    51

    While Forstmann's $57.25 offer was objectively higher than Pantry Pride's $56.25 bid, the margin of superiority is less when the Forstmann price is adjusted for the time value of money. In reality, the Revlon board ended the auction in return for very little actual improvement in the final bid. The principal benefit went to the directors, who avoided personal liability to a class of creditors to whom the board owed no further duty under the circumstances. Thus, when a board ends an intense bidding contest on an insubstantial basis, and where a significant by-product of that action is to protect the directors against a perceived threat of personal liability for consequences stemming from the adoption of previous defensive measures, the action cannot withstand the enhanced scrutiny which Unocal requires of director conduct. See Unocal, 493 A.2d at 954-55.

    52

    In addition to the lock-up option, the Court of Chancery enjoined the no-shop provision as part of the attempt to foreclose further bidding by Pantry Pride. MacAndrews & Forbes Holdings, Inc. v. Revlon, Inc., 501 A.2d at 1251. The no-shop provision, like the lock-up option, while not per se illegal, is impermissible under the Unocal standards when a board's primary duty becomes that of an auctioneer responsible for selling the company to the highest bidder. The agreement to negotiate only with Forstmann ended rather than intensified the board's involvement in the bidding contest.

    53

    It is ironic that the parties even considered a no-shop agreement when Revlon had dealt preferentially, and almost exclusively, with Forstmann throughout the contest. After the directors authorized management to negotiate with other parties, Forstmann was given every negotiating advantage that Pantry Pride had been denied: cooperation from management, access to financial data, and the exclusive opportunity to present merger proposals directly to the board of directors. Favoritism for a white knight to the total exclusion of a hostile bidder might be justifiable when the latter's offer adversely affects shareholder interests, but when bidders make relatively similar offers, or dissolution of the company becomes inevitable, the directors cannot fulfill their enhanced Unocal duties by playing favorites with the contending factions. Market forces must be allowed to operate freely to bring the target's shareholders the best price available for their equity.[16] Thus, as the trial court ruled, the shareholders' interests necessitated that the board remain free to negotiate in the fulfillment of that duty.

    54

    The court below similarly enjoined the payment of the cancellation fee, pending a resolution of the merits, because the fee was part of the overall plan to thwart Pantry Pride's efforts. We find no abuse of discretion in that ruling.

    55
    IV.
    56

    Having concluded that Pantry Pride has shown a reasonable probability of success on the merits, we address the issue of irreparable harm. The Court of Chancery ruled that unless the lock-up and other aspects of the agreement were enjoined, Pantry Pride's opportunity to bid for Revlon was lost. The court also held that the need for both bidders to compete [185] in the marketplace outweighed any injury to Forstmann. Given the complexity of the proposed transaction between Revlon and Forstmann, the obstacles to Pantry Pride obtaining a meaningful legal remedy are immense. We are satisfied that the plaintiff has shown the need for an injunction to protect it from irreparable harm, which need outweighs any harm to the defendants.

    57
    V.
    58

    In conclusion, the Revlon board was confronted with a situation not uncommon in the current wave of corporate takeovers. A hostile and determined bidder sought the company at a price the board was convinced was inadequate. The initial defensive tactics worked to the benefit of the shareholders, and thus the board was able to sustain its Unocal burdens in justifying those measures. However, in granting an asset option lock-up to Forstmann, we must conclude that under all the circumstances the directors allowed considerations other than the maximization of shareholder profit to affect their judgment, and followed a course that ended the auction for Revlon, absent court intervention, to the ultimate detriment of its shareholders. No such defensive measure can be sustained when it represents a breach of the directors' fundamental duty of care. See Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 874 (1985). In that context the board's action is not entitled to the deference accorded it by the business judgment rule. The measures were properly enjoined. The decision of the Court of Chancery, therefore, is

    59

    AFFIRMED.

    60

    [1] The nominal plaintiff, MacAndrews & Forbes Holdings, Inc., is the controlling stockholder of Pantry Pride. For all practical purposes their interests in this litigation are virtually identical, and we hereafter will refer to Pantry Pride as the plaintiff.

    61

    [2] This appeal was heard on an expedited basis in light of the pending Pantry Pride offer and the Revlon-Forstmann transactions. We accepted the appeal on Friday, October 25, 1985, received the parties' opening briefs on October 28, their reply briefs on October 29, and heard argument on Thursday, October 31. We announced our decision to affirm in an oral ruling in open court at 9:00 a.m. on Friday, November 1, with the proviso that this more detailed written opinion would follow in due course.

    62

    [3] There were 14 directors on the Revlon board. Six of them held senior management positions with the company, and two others held significant blocks of its stock. Four of the remaining six directors were associated at some point with entities that had various business relationships with Revlon. On the basis of this limited record, however, we cannot conclude that this board is entitled to certain presumptions that generally attach to the decisions of a board whose majority consists of truly outside independent directors. See Polk v. Good & Texaco, Del.Supr., ___ A.2d ___, ___ (1986); Moran v. Household International, Inc., Del.Supr., 500 A.2d 1346, 1356 (1985); Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946, 955 (1985); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812, 815 (1984); Puma v. Marriott, Del. Ch., 283 A.2d 693, 695 (1971).

    63

    [4] Like bonds, the Notes actually were issued in denominations of $1,000 and integral multiples thereof. A separate certificate was issued in a total principal amount equal to the remaining sum to which a stockholder was entitled. Likewise, in the esoteric parlance of bond dealers, a Note trading at par ($1,000) would be quoted on the market at 100.

    64

    [5] In the takeover context "golden parachutes" generally are understood to be termination agreements providing substantial bonuses and other benefits for managers and certain directors upon a change in control of a company.

    65

    [6] Forstmann's $57.25 offer ostensibly is worth $1 more than Pantry Pride's $56.25 bid. However, the Pantry Pride offer was immediate, while the Forstmann proposal must be discounted for the time value of money because of the delay in approving the merger and consummating the transaction. The exact difference between the two bids was an unsettled point of contention even at oral argument.

    66

    [7] Actually, at this time about $400 million of Forstmann's funding was still subject to two investment banks using their "best efforts" to organize a syndicate to provide the balance. Pantry Pride's entire financing was not firmly committed at this point either, although Pantry Pride represented in an October 11 letter to Lazard Freres that its investment banker, Drexel Burnham Lambert, was highly confident of its ability to raise the balance of $350 million. Drexel Burnham had a firm commitment for this sum by October 18.

    67

    [8] The pertinent provision of the statute is:

    68

    (a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. 8 Del.C. § 141(a).

    69

    [9] The statute provides in pertinent part:

    70

    (b) The board of directors of each corporation which desires to merge or consolidate shall adopt a resolution approving an agreement of merger or consolidation. 8 Del.C. § 251(b).

    71

    [10] One eminent corporate commentator has drawn a distinction between the business judgment rule, which insulates directors and management from personal liability for their business decisions, and the business judgment doctrine, which protects the decision itself from attack. The principles upon which the rule and doctrine operate are identical, while the objects of their protection are different. See Hinsey, Business Judgment and the American Law Institute's Corporate Governance Project: The Rule, the Doctrine and the Reality, 52 Geo. Wash. L.Rev. 609, 611-13 (1984). In the transactional justification cases, where the doctrine is said to apply, our decisions have not observed the distinction in such terminology. See Polk v. Good & Texaco, Del.Supr., ___ A.2d ___, ___ (1986); Moran v. Household International, Inc., Del. Supr., 500 A.2d 1346, 1356 (1985); Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946, 953-55 (1985); Rosenblatt v. Getty Oil Co., Del. Supr., 493 A.2d 929, 943 (1985). Under the circumstances we do not alter our earlier practice of referring only to the business judgment rule, although in transactional justification matters such reference may be understood to embrace the concept of the doctrine.

    72

    [11] The relevant provision of Section 122 is:

    73

    Every corporation created under this chapter shall have power to:

    (13) Make contracts, including contracts of guaranty and suretyship, incur liabilities, borrow money at such rates of interest as the corporation may determine, issue its notes, bonds and other obligations, and secure any of its obligations by mortgage, pledge or other encumbrance of all or any of its property, franchises and income, ...". 8 Del.C. § 122(13).

    74

    See Section 141(a) in n. 8, supra. See also Section 160(a), n. 13, infra.

    75

    [12] As we noted in Moran, a "bust-up" takeover generally refers to a situation in which one seeks to finance an acquisition by selling off pieces of the acquired company, presumably at a substantial profit. See Moran, 500 A.2d at 1349, n. 4.

    76

    [13] The pertinent provision of this statute is:

    77

    (a) Every corporation may purchase, redeem, receive, take or otherwise acquire, own and hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise deal in and with its own shares. 8 Del.C. § 160(a).

    78

    [14] For further discussion of the benefits and detriments of lock-up options, also see: Nelson, Mobil Corp. v. Marathon Oil Co. — The Decision and Its Implications for Future Tender Offers, 7 Corp. L.Rev. 233, 265-68 (1984); Note, Swallowing the Key to Lock-up Options: Mobil Corp. v. Marathon Oil Co., 14 U.Tol.L.Rev. 1055, 1081-83 (1983).

    79

    [15] The federal courts generally have declined to enjoin lock-up options despite arguments that lock-ups constitute impermissible "manipulative" conduct forbidden by Section 14(e) of the Williams Act [15 U.S.C. § 78n(e)]. See Buffalo Forge Co. v. Ogden Corp., 717 F.2d 757 (2nd Cir.1983), cert. denied, 464 U.S. 1018, 104 S.Ct. 550, 78 L.Ed.2d 724 (1983); Data Probe Acquisition Corp. v. Datatab, Inc., 722 F.2d 1 (2nd Cir.1983); cert. denied 465 U.S. 1052, 104 S.Ct. 1326, 79 L.Ed.2d 722 (1984); but see Mobil Corp. v. Marathon Oil Co., 669 F.2d 366 (6th Cir.1981). The cases are all federal in nature and were not decided on state law grounds.

    80

    [16] By this we do not embrace the "passivity" thesis rejected in Unocal. See 493 A.2d at 954-55, nn. 8-10. The directors' role remains an active one, changed only in the respect that they are charged with the duty of selling the company at the highest price attainable for the stockholders' benefit.

  • 4 Beyond the Trilogy

    The Delaware Takeover Trilogy: Unocal, Moran, and Revlon

    Unocal established the principle that “the board ha[s] both the power and duty to oppose a bid it perceive[s] to be harmful to the corporate enterprise.” In recognition of the possibility of board entrenchment, however, the Delaware Supreme Court formulated an “intermediate scrutiny” standard of review for defensive actions:

    “Because of the omnipresent specter that a board [defending against a takeover] may be acting primarily in its own interests [of keeping its job], rather than those of the corporation and its shareholders, there is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred.  . . . If a defensive measure is to come within the ambit of the business judgment rule, it must be reasonable in relation to the threat posed.” (emphasis added)

    Unocal explicitly blessed discriminatory defensive measures — measures that treat the bidder differently from other shareholders. The SEC subsequently prohibited the particular defense used by Unocal Corp. against Mesa, a discriminatory self-tender (cf. SEC rule 13e-4(f)(8)(i)). But this prohibition turned out to be without consequence for hostile bids because Moran approved the one discriminatory defense that made all others unnecessary: the “rights plan,” a/k/a the “poison pill.”

    Revlon announced the main limit to these defenses. If the board is set to sell, it must simply get the highest price for shareholders; it cannot use defenses to play favorites between bidders or to protect some non-shareholder constituency. In the words of the Court:

    “[W]hen . . . it became apparent to all that the break-up of the company was inevitable [and] that the company was for sale . . . [t]he duty of the board . . . changed from the preservation of [the] corporate entity to the maximization of the company's value at a sale for the stockholders' benefit. This significantly altered the board's responsibilities under the Unocal standards. It no longer faced threats to corporate policy and effectiveness, or to the stockholders' interests, from a grossly inadequate bid. The whole question of defensive measures became moot. The directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.” (emphasis added)

    In particular, the Court explicitly held that the board breached its duty of loyalty to shareholders when it favored one bidder over another out of concern for certain non-shareholder constituents — the note-holders. “Instead, obtaining the highest price for the benefit of the stockholders should have been the central theme guiding director action.”

    A Brief Critical Intermission

    The Delaware trilogy is now firmly established law, and fundamental change is highly unlikely. Nevertheless, it is worth pausing for a brief moment to note some irony in the Delaware Supreme Court’s reasoning.

    Both Unocal and Moran argue that defenses are necessary to protect shareholders from the coercive nature of front-loaded two-tiered bids. But the defenses that the Court endorses are themselves coercive. In Unocal, the Court approved a partial self-tender that any individual shareholder will rationally tender into (because the price offered is higher than the share value) even if that shareholder believes the self-tender is a bad idea for the shareholders collectively. Similarly, the poison pill approved in Moran relies on the fact that all shareholders will rationally exercise their rights once they become exercisable, regardless of the collective effect of such exercise. Additionally, the board adopts the pill unilaterally without approval from the shareholders.

    Moreover, the Delaware Supreme Court could have easily shut down coercive two-tiered bids. All it had to do was remind shareholders and deal-makers that the demanding “entire fairness” standard also applied to the consideration offered in the second tier squeeze-out merger. Recall that “coercion” emanates from the lower consideration expected in the second tier squeeze-out: shareholders tender in the first tier because they fear they will otherwise only receive low value in the second tier squeeze-out. But the merger consideration in the squeeze-out is subject to fiduciary duty review. In fact, it is subject to the exacting “entire fairness” standard because the bidder will be a controlling stockholder at the time of the squeeze-out. It seems quite straightforward to argue that any second tier (merger) consideration less than the first tier (tender) consideration is presumptively unfair.

    Finally, coercive two-tiered bids entirely disappeared after the 1980s. As we will see in the next section, however, the Court’s attitude towards defenses became, if anything, more permissive. As a result, Delaware boards are now allowed to deploy unilateral, coercive defenses against even non-coercive bids.

    Rather than allowing coercive defenses against coercive bids, the Court could have attempted to suppress all coercive devices, no matter who deploys them. It could have attempted to facilitate uncoerced shareholder choice to decide the merits of a takeover bid. UK law (surveyed later in the course) employs such an approach. However, that is not Delaware law and presumably never will be.

    Refinements of the Trilogy

    Countless decisions have interpreted the Delaware trilogy, driven by deal-makers probing its limits.

    The Power of the Pill

    The poison pill is now all but ubiquitous and defines the playing field for any takeover contest. It is not necessary for a corporation to formally adopt a “rights plan” because such a plan can be adopted on very short notice in the face of a threat. Thus, all Delaware corporations have a “shadow pill,” and a bidder must plan accordingly.

    While some technical details have changed over time, the basic design and idea of the pill has remained the same, and it is as deadly as ever. In the 30 years since Moran, only one bidder has dared to trigger the pill. Thus, practically speaking, the only way to take over a Delaware corporation is by replacing the board. The so-called “dead-hand pill” attempted to eliminate even this possibility. It provided that only the existing board could redeem the poison pill “rights.” That is, if a bidder succeeded in electing a new board, the “rights” would cease to be redeemable. In Quickturn Design Systems v. Mentor Graphics (1998), the Delaware Supreme Court ruled that this “scorched earth” strategy violated DGCL 141(a), as it deprived the new board of its power to “manage” the “business and affairs” of the corporation.

    Unocal – Anything Left?

    Unocal could have placed important limits on the use of the pill. But subsequent decisions interpreted both cognizable “threats” and “reasonable” defensive measures extremely broadly.

    In Paramount v. Time (1989, a/k/a “Time-Warner”) and even more clearly in Unitrin v. American General (1995), the Delaware Supreme Court confirmed that inadequacy of price was a sufficient threat, at least in conjunction with the risk that “shareholders might elect to tender into [the] offer in ignorance or a mistaken belief” about the alternative. Such threats have been labeled “substantive coercion.”

    As to the “reasonableness” of the defense, the Time-Warner decision blessed the restructuring of a deal for the sole purpose of avoiding a shareholder vote (remember Schnell?).

    Cynics have argued that this has provided Delaware boards with the power to “just say no” to any takeover bid. In response, Delaware courts have pointed out that the board still has to lay out an argument for why it thinks the offer is inadequate. The excerpt from Airgas below references this debate.

    Revlon Duties
    "Revlon Land"

    With Unocal review weak at best, the boundary to “Revlon land” assumes great importance. When does the board’s duty shift to maximization of the sale price?

    Revlon duties are clearly triggered in a break-up or sale for cash. But what about “stock-for-stock deals,” i.e., deals in which the shareholders of both merging corporations become shareholders of the surviving corporation? In these situations, it may not even be obvious who is “the buyer” and who is “the seller.”

    In the aforementioned Time-Warner (1989) and in Paramount v. QVC (1994), the Delaware Supreme Court ruled that a stock deal triggered Revlon duties only if there was a change of control. In particular, Time-Warner held that Revlon duties were not triggered if the corporation is not broken up and was widely held both before and after the merger. By contrast, the Court found a change of control in Paramount v. QVC because the other constituent corporation had a controlling stockholder who would also control the surviving corporation. Control of the corporation would thus pass from the “fluid aggregation of unaffiliated stockholders” to the controlling stockholder of the merger partner.

    Deal protections

    Even in “Revlon land,” however, some defensive measures are permissible. The reason is that some protections granted to certain buyers at certain times may actually increase price. Clearly, the target has to be able to commit to a deal at some point, or else buyers would never be willing to engage in the transaction in the first place. Perhaps most obviously, if the board runs a genuine auction, it must be able to promise the winner a deal without further “bid jumping” (based on later information, etc.). Otherwise, bidders would rationally not bid top dollar.

    More generally, a board may need to give some “deal protections” to friendly bidders to entice them to come forward. For example, an early bidder may risk being a “stalking horse”— an initial bidder who attracts superior bids by others —only if it receives in exchange a promise of a termination fee if another bidder later tops the first bidder’s price. Consequently, courts and deal-makers have been engaging in a subtle balancing act of enticing (initial) bidders without stifling possible bidding competition (or, as far as deal-makers are concerned, drawing the ire of the courts). For example, there has been a debate about the maximum percentage of deal price that could be promised as a termination fee. Section 6.02 of the 3G / Burger King agreement is an example of deal-makers handling this issue. The details belong to a specialized M&A course.

    Liability

    Finally and importantly, Unocal and Revlon are not generally available to support a claim for monetary damages. Under Corwin v. KKR Financial Holdings LLC (Del. 2015), "when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies." Chief Justice Strine's opinion nicely captures the attitude of the Delaware courts:

    Unocal and Revlon are primarily designed to give stockholders and the Court of Chancery the tool of injunctive relief to address important M & A decisions in real time, before closing. They were not tools designed with post-closing money damages claims in mind, the standards they articulate do not match the gross negligence standard for director due care liability under Van Gorkom, and with the prevalence of exculpatory charter provisions, due care liability is rarely even available. … [W]hen a transaction is not subject to the entire fairness standard, the long-standing policy of our law has been to avoid the uncertainties and costs of judicial second-guessing when the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction for themselves. There are sound reasons for this policy. When the real parties in interest — the disinterested equity owners — can easily protect themselves at the ballot box by simply voting no, the utility of a litigation-intrusive standard of review promises more costs to stockholders in the form of litigation rents and inhibitions on risk-taking than it promises in terms of benefits to them. The reason for that is tied to the core rationale of the business judgment rule, which is that judges are poorly positioned to evaluate the wisdom of business decisions and there is little utility to having them second-guess the determination of impartial decision-makers with more information (in the case of directors) or an actual economic stake in the outcome (in the case of informed, disinterested stockholders).

  • 5 3G / Burger King merger agreement: Section 6.02 ("go shop")

    In reading Revlon, did you wonder how the Burger King board discharged its duty of “getting the best price for the stockholders” in its acquisition by 3G? Section 6.02 tells you how. Such a “go shop” provision is now a standard feature in merger agreements with Delaware corporations.

    1. Do you think buyers like these provisions?
    2. What about sellers? (Hint: it may matter at what point in time you ask them.)

    Section 6.02  Solicitation; Takeover Proposals; Change of Recommendation.  

    (a) Solicitation.  Notwithstanding any other provision of this Agreement to the contrary, during the period beginning on the date of this Agreement and continuing until 11:59 p.m, New York City time, on October 12, 2010 (the “No-Shop Period Start Date”), the Company may, directly or through its Representatives: (i) solicit, initiate or encourage, whether publicly or otherwise, any Takeover Proposals, including by way of providing access to non-public information; provided, however, that the Company shall only permit such non-public information related to the Company to be provided pursuant to an Acceptable Confidentiality Agreement, and provided further that (A) the Company shall promptly provide to Parent any non-public information concerning the Company or its Subsidiaries to which any person is provided such access and which was not previously provided to Parent, and (B) the Company shall withhold such portions of documents or information, or provide pursuant to customary “clean-room” or other appropriate procedures, to the extent relating to any pricing or other matters that are highly sensitive or competitive in nature if the exchange of such information (or portions thereof) could reasonably be likely to be harmful to the operation of the Company in any material respect; and (ii) engage in and maintain discussions or negotiations with respect to any inquiry, proposal or offer that constitutes or may reasonably be expected to lead to any Takeover Proposal or otherwise cooperate with or assist or participate in, or facilitate any such inquiries, proposals, offers, discussions or negotiations or the making of any Takeover Proposal.

     The term “Takeover Proposal” means any inquiry, proposal or offer from any person or group providing for (a) any direct or indirect acquisition or purchase, in a single transaction or a series of related transactions, of (1) 20% or more (based on the fair market value, as determined in good faith by the Company Board) of assets (including capital stock of the Subsidiaries of the Company) of the Company and its Subsidiaries, taken as a whole, or (2)(A) shares of Company Common Stock, which together with any other shares of Company Common Stock beneficially owned by such person or group, would equal to 20% or more of the outstanding shares of Company Common Stock, or (B) any other equity securities of the Company or any of its Subsidiaries, (b) any tender offer or exchange offer that, if consummated, would result in any person or group owning, directly or indirectly, 20% or more of the outstanding shares of Company Common Stock or any other equity securities of the Company or any of its Subsidiaries, (c) any merger, consolidation, business combination, binding share exchange or similar transaction involving the Company or any of its Subsidiaries pursuant to which any person or group (or the shareholders of any person) would own, directly or indirectly, 20% or more of the aggregate voting power of the Company or of the surviving entity in a merger or the resulting direct or indirect parent of the Company or such surviving entity, or (d) any recapitalization, liquidation, dissolution or any other similar transaction involving the Company or any of its material operating Subsidiaries, other than, in each case, the transactions contemplated by this Agreement.

     Wherever the term “group” is used in this Section 6.02, it is used as defined in Rule 13d-3 under the Exchange Act.

     (b) No Solicitation.  From the No-Shop Period Start Date until the Effective Time, or, if earlier, the termination of this Agreement in accordance with Section 9.01, the Company shall not, nor shall it permit any Representative of the Company to, directly or indirectly, (i) solicit, initiate or knowingly encourage (including by way of providing information) the submission or announcement of any inquiries, proposals or offers that constitute or would reasonably be expected to lead to any Takeover Proposal, (ii) provide any non-public information concerning the Company or any of its Subsidiaries related to, or to any person or group who would reasonably be expected to make, any Takeover Proposal, (iii) engage in any discussions or negotiations with respect thereto, (iv) approve, support, adopt, endorse or recommend any Takeover Proposal, or (v) otherwise cooperate with or assist or participate in, or knowingly facilitate any such inquiries, proposals, offers, discussions or negotiations. Subject to Section 6.02(c), at the No-Shop Period Start Date, the Company shall immediately cease and cause to be terminated any solicitation, encouragement, discussion or negotiation with any person or groups (other than a Qualified Go-Shop Bidder) conducted theretofore by the Company, its Subsidiaries or any of their respective Representatives with respect to any Takeover Proposal and shall use reasonable best efforts to require any other parties (other than a Qualified Go-Shop Bidder) who have made or have indicated an intention to make a Takeover Proposal to promptly return or destroy any confidential information previously furnished by the Company, any of its Subsidiaries or any of their respective Representatives.

     The term “Qualified Go-Shop Bidder” means any person or group from whom the Company or any of its Representatives has received a Takeover Proposal after the execution of this Agreement and prior to the No-Shop Period Start Date that the Company Board determines, prior to or as of the No-Shop Period Start Date, in good faith, after consultation with its financial advisor and outside legal counsel, constitutes or could reasonably be expected to result in a Superior Proposal.

     The term “Superior Proposal” means any bona fide, written Takeover Proposal that if consummated would result in a person or group (or the shareholders of any person) owning, directly or indirectly, (a) 75% or more of the outstanding shares of Company Common Stock or (b) 75% or more of the assets of the Company and its Subsidiaries, taken as a whole, in either case which the Company Board determines in good faith (after consultation with its financial advisor and outside legal counsel) (x) is reasonably likely to be consummated in accordance with its terms, and (y) if consummated, would be more favorable to the stockholders of the Company from a financial point of view than the Offer and the Merger, in each case taking into account all financial, legal, financing, regulatory and other aspects of such Takeover Proposal (including the person or group making the Takeover Proposal) and of this Agreement (including any changes to the terms of this Agreement proposed by Parent pursuant to Section 6.02(f).

    (c) Response to Takeover Proposals.  Notwithstanding anything to the contrary contained in Section 6.02(b) or any other provisions of this Agreement, if at any time following the No-Shop Period Start Date and prior to the earlier to occur of the Offer Closing and obtaining the Stockholder Approval, (i) the Company has received a bona fide, written Takeover Proposal from a third party that did not result from a breach of this Section 6.02, and (ii) the Company Board determines in good faith, after consultation with its financial advisor and outside legal counsel, that such Takeover Proposal constitutes or could reasonably be expected to result in a Superior Proposal, then the Company may (A) furnish information with respect to the Company and its Subsidiaries to the person making such Takeover Proposal pursuant to an Acceptable Confidentiality Agreement and the other restrictions imposed by clause (A) and (B) of Section 6.02(a)related to the sharing of information, or (B) engage in discussions or negotiations with the person making such Takeover Proposal regarding such Takeover Proposal. The Company shall be permitted prior to the earlier to occur of the Offer Closing and obtaining the Stockholder Approval to take the actions described in clauses (A) and (B) above with respect to any Qualified Go-Shop Bidder.

     (d) Notice to Parent of Takeover Proposals.  The Company shall promptly (and, in any event, within one (1) business day) notify Parent in the event that the Company or any of its Representatives receives any Takeover Proposal, or any initial request for non-public information concerning the Company or any of its Subsidiaries related to, or from any person or group who would reasonably be expected to make any Takeover Proposal, or any initial request for discussions or negotiations related to any Takeover Proposal (including any material changes related to the foregoing), and in connection with such notice, provide the identity of the person or group making such Takeover Proposal or request and the material terms and conditions thereof (including, if applicable, copies of any written requests, proposals or offers, including proposed agreements), and thereafter the Company shall keep Parent reasonably informed of any material changes to the terms thereof.

    (e) Prohibited Activities.  Neither the Company Board nor any committee thereof shall (i) withdraw or rescind (or modify in a manner adverse to Parent), or publicly propose to withdraw (or modify in a manner adverse to Parent), the Recommendation or the findings or conclusions of the Company Board referred to in Section 4.04(b), (ii) approve or recommend the adoption of, or publicly propose to approve, declare the advisability of or recommend the adoption of, any Takeover Proposal, (iii) or cause or permit the Company or any of its Subsidiaries to execute or enter into, any letter of intent, memorandum of understanding, agreement in principle, merger agreement, acquisition agreement or other similar agreement related to any Takeover Proposal, other than any Acceptable Confidentiality Agreement referred to in Section 6.02(a) or 6.02(c) (an “Acquisition Agreement”), or (iv) publicly proposed or announced an intention to take any of the foregoing actions (any action described in clauses (i), (ii), (iii) or (iv) being referred to as an “Adverse Recommendation Change”).

     (f) Change of Recommendation.  Notwithstanding any provision of Section 6.02(e), at any time prior to the earlier to occur of the Offer Closing and obtaining the Stockholder Approval, the Company Board may effect an Adverse Recommendation Change only if the Company Board determines in good faith (after consultation with its outside legal counsel) that the failure to take such action would be inconsistent with its fiduciary duties under applicable Law. ...

  • 6 Current US Debate (2016)

    So where are we now?

    The Airgas excerpt below summarizes the current state of Delaware fiduciary law for takeover defenses. A board can maintain a poison pill for as long as it likes and for the mere reason that it believes the offer price to be inadequate. This means that the only way to overcome determined resistance by an incumbent board is to replace it in a proxy fight.

    Until recently, most large corporations’ charters did not permit replacing a majority of the board in a single annual meeting. Their boards were staggered, i.e., only a third of the directors were up for reelection each year (re-read DGCL 141(d), (k)(1)!). Consequently, an acquirer had to win proxy fights at two successive annual meetings to replace the majority of an intransigent board. This takes at a minimum one year and a couple months, and the acquirer would have had to keep the tender offer open (and capital tied up etc.) during that entire time. Hardly any challenger was willing to attempt this. Airgas is about one of the very few exceptions.

    In recent years, however, the incidence of staggered boards has declined precipitously among the largest U.S. corporations. By 2012, only a fourth of the corporations in the S&P 500 index had staggered boards. Between 2012 and 2014, most of these hold-outs “destaggered” as well. The impetus came from a law school clinic, the Shareholder Rights Project (SRP) based at Harvard Law School. Acting on behalf of several institutional shareholders, the SRP submitted precatory destaggering proposals (why not binding proposals?) for the corporations' annual meetings. Under rule 14a-8, the targeted corporations had to include these proposals on their proxies. Other shareholders generally supported these proposals, and most recipient corporations soon agreed to destagger. At the same time, staggered boards remain the norm in IPO charters — the charters of corporations selling their stock to the public for the first time.

    1. Most observers believe that staggered boards have important consequences for corporate governance and thus ultimately the value of these very large firms. In other words, hundreds of billions are at stake. Other shareholders generally supported destaggering. Why did it take a law school clinic to bring about this change?

    2. Why do institutional investors vote against staggered boards in established corporations but continue buying staggered IPO firms? Put differently, why do IPO charters still include staggered boards?

    Opinions are sharply divided about the desirability of takeover defenses in general, and of staggered boards in particular. Managers and their advisors argue that defenses allow boards to focus on long-term value creation rather than on catering to short-term pressures from the stock market. Opponents claim that defenses shield slack and prevent efficient reallocations of productive assets.

    3. The accountability argument for takeovers is easy to understand. What about the short-termism counterargument? Why would stock markets exert short-termist pressures on boards?

    4. Many are concerned that the rules on poison pills, as policed by Delaware courts, allow management and boards to entrench themselves against shareholder interest, but also believe that the pill can be a valuable tool in the hands of a well-motivated management and board. Distinguishing good and bad uses of the pill in a charter or bylaw provision is probably impossible. What other governance device might align use of the poison pill with shareholder interest?

    • 6.1 Airgas (Del. Ch. 2011)

      Airgas (Del. Ch. 2011)

      1

      16 A.3d 48 (2011)

      2
      AIR PRODUCTS AND CHEMICALS, INC., Plaintiff,
      v.
      AIRGAS, INC., Peter McCausland, James W. Hovey, Paula A. Sneed, David M. Stout, Ellen C. Wolf, Lee M. Thomas and John C. van Roden, Jr., Defendants.
      In re Airgas Inc. Shareholder Litigation.

      Civil Action Nos. 5249-CC, 5256-CC.

      3

      Court of Chancery of Delaware.

      Submitted: February 8, 2011.
      Decided: February 15, 2011.

      4

      [53] Kenneth J. Nachbar, Jon E. Abramczyk, William M. Lafferty, John P. DiTomo, Eric S. Wilensky, John A. Eakins, Ryan D. Stottmann and S. Michael Sirkin, of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; Of Counsel: Thomas G. Rafferty, David R. Marriott and Gary A. Bornstein, of Cravath, Swaine & Moore LLP, New York, New York, Attorneys for Plaintiff Air Products and Chemicals, Inc.

      5

      Pamela S. Tikellis, Robert J. Kriner, Jr., A. Zachary Naylor and Scott M. Tucker, of Chimicles & Tikellis LLP, Wilmington, Delaware; Of Counsel: Jeffrey W. Golan, M. Richard Komins and Julie B. Palley, of Barrack, Rodos & Bacine, Philadelphia, Pennsylvania; Mark Lebovitch, Amy Miller and Jeremy Friedman, of Bernstein Litowitz Berger & Grossman LLP, New York, New York; Randall J. Baron, A. Rick Atwood, Jr. and David T. Wissbroecker, of Robbins Geller Rudman & Dowd LLP, San Diego, California; Leslie R. Stern, of Berman Devalerio, Boston, Massachusetts; Joseph E. White III, of Saxena White P.A., Boca Raton, Florida, Attorneys for Shareholder Plaintiffs.

      6

      Donald J. Wolfe, Jr., Kevin R. Shannon, Berton W. Ashman, Jr. and Ryan W. Browning, of Potter Anderson & Corroon LLP, Wilmington, Delaware; Of Counsel: Kenneth B. Forrest, Theodore N. Mirvis, Eric M. Roth, Marc Wolinsky, George T. Conway III, Joshua A. Naftalis, Bradley R. Wilson, Jasand Mock and Charles D. Cording, of Wachtell, Lipton, Rosen & Katz, New York, New York, Attorneys for Defendants.

      7
      OPINION
      8
      CHANDLER, Chancellor.
      9

      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?

      10

      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.

      11

      In essence, this case brings to the fore one of the most basic questions animating all of corporate law, which relates to the allocation of power between directors and stockholders. That is, "when, if ever, will a board's duty to `the corporation and its shareholders' require [the board] to abandon concerns for `long term' values (and other constituencies) and enter a current share value maximizing mode?"[1] More to the point, in the context of a hostile tender offer, who gets to decide when and if the corporation is for sale?

      12

      [55] Since the Shareholder Rights Plan (more commonly known as the "poison pill") was first conceived and throughout the development of Delaware corporate takeover jurisprudence during the twenty-five-plus years that followed, the debate over who ultimately decides whether a tender offer is adequate and should be accepted—the shareholders of the corporation or its board of directors—has raged on. Starting with Moran v. Household International, Inc.[2] in 1985, when the Delaware Supreme Court first upheld the adoption of the poison pill as a valid takeover defense, through the hostile takeover years of the 1980s, and in several recent decisions of the Court of Chancery and the Delaware Supreme Court,[3] this fundamental question has engaged practitioners, academics, and members of the judiciary, but it has yet to be confronted head on.

      13

      For the reasons much more fully described in the remainder of this Opinion, I conclude that, as Delaware law currently stands, the answer must be that the power to defeat an inadequate hostile tender offer ultimately lies with the board of directors. As such, I find that the Airgas board has met its burden under Unocal to articulate a legally cognizable threat (the allegedly inadequate price of Air Products' offer, coupled with the fact that a majority of Airgas's stockholders would likely tender into that inadequate offer) and has taken defensive measures that fall within a range of reasonable responses proportionate to that threat. I thus rule in favor of defendants. Air Products' and the Shareholder Plaintiffs' requests for relief are denied, and all claims asserted against defendants are dismissed with prejudice.[4]

      14
      INTRODUCTION
      15

      This is the Court's decision after trial, extensive post-trial briefing, and a supplemental evidentiary hearing in this long-running takeover battle between Air Products & Chemicals, Inc. ("Air Products") and Airgas, Inc. ("Airgas"). The now very public saga began quietly in mid-October 2009 when John McGlade, President and CEO of Air Products, privately approached Peter McCausland, founder and CEO of Airgas, about a potential acquisition or combination. After McGlade's private advances were rebuffed, Air Products went hostile in February 2010, launching a public tender offer for all outstanding Airgas shares.

      16

      Now, over a year since Air Products first announced its all-shares, all-cash tender offer, the terms of that offer (other than price) remain essentially unchanged.[5] After several price bumps and extensions, the offer currently stands at $70 per share and is set to expire today, February 15, 2011—Air Products' stated "best and final" offer. The Airgas board unanimously rejected that offer as being "clearly inadequate."[6] The Airgas board has repeatedly [56] expressed the view that Airgas is worth at least $78 per share in a sale transaction—and at any rate, far more than the $70 per share Air Products is offering.

      17

      So, we are at a crossroads. Air Products has made its "best and final" offer—apparently its offer to acquire Airgas has reached an end stage. Meanwhile, the Airgas board believes the offer is clearly inadequate and its value in a sale transaction is at least $78 per share. At this stage, it appears, neither side will budge. Airgas continues to maintain its defenses, blocking the bid and effectively denying shareholders the choice whether to tender their shares. Air Products and Shareholder Plaintiffs now ask this Court to order Airgas to redeem its poison pill and other defenses that are stopping Air Products from moving forward with its hostile offer, and to allow Airgas's stockholders to decide for themselves whether they want to tender into Air Products' (inadequate or not) $70 "best and final" offer.

      18

      A week-long trial in this case was held from October 4, 2010 through October 8, 2010. Hundreds of pages of post-trial memoranda were submitted by the parties. After trial, several legal, factual, and evidentiary questions remained to be answered. In ruling on certain outstanding evidentiary issues, I sent counsel a Letter Order on December 2, 2010 asking for answers to a number of questions to be addressed in supplemental post-trial briefing. On the eve of the parties' submissions to the Court in response to that Letter Order, Air Products raised its offer to the $70 "best and final" number. At that point, defendants vigorously opposed a ruling based on the October trial record, suggesting that the entire trial (indeed, the entire case) was moot because the October trial predominantly focused on the Airgas board's response to Air Products' then-$65.50 offer and the board's decision to keep its defenses in place with respect to that offer. Defendants further suggested that any ruling with respect to the $70 offer was not ripe because the board had not yet met to consider that offer.

      19

      I rejected both the mootness and ripeness arguments.[7] As for mootness, Air Products had previously raised its bid several times throughout the litigation but the core question before me—whether Air Products' offer continues to pose a threat justifying Airgas's continued maintenance of its poison pill—remained, and remains, the same. And as for ripeness, by the time of the December 23 Letter Order the Airgas board had met and rejected Air Products' revised $70 offer. I did, however, allow the parties to take supplemental discovery relating to the $70 offer. A supplemental evidentiary hearing was held from January 25 through January 27, 2011, in order to complete the record on the $70 offer. Counsel presented closing arguments on February 8, 2011.

      20

      Now, having thoroughly read, reviewed, and reflected upon all of the evidence presented to me, and having carefully considered the arguments made by counsel, I conclude that the Airgas board, in proceeding as it has since October 2009, has not breached its fiduciary duties owed to the Airgas stockholders. I find that the board has acted in good faith and in the honest belief that the Air Products offer, at $70 per share, is inadequate.

      21

      Although I have a hard time believing that inadequate price alone (according to the target's board) in the context of a nondiscriminatory, all-cash, all-shares, fully financed offer poses any "threat"—particularly given the wealth of information available to Airgas's stockholders at this point [57] 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.

      22

      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).

      23

      In my personal view, Airgas's poison pill has served its legitimate purpose. Although the "best and final" $70 offer has been on the table for just over two months (since December 9, 2010), Air Products' advances have been ongoing for over sixteen months, and Airgas's use of its poison pill—particularly in combination with its staggered board—has given the Airgas board over a full year to inform its stockholders about its view of Airgas's intrinsic value and Airgas's value in a sale transaction. It has also given the Airgas board a full year to express its views to its stockholders on the purported opportunistic timing of Air Products' repeated advances and to educate its stockholders on the inadequacy of Air Products' offer. It has given Airgas more time than any litigated poison pill in Delaware history—enough time to show stockholders four quarters of improving financial results,[8] demonstrating that Airgas is on track to meet its projected goals. And it has helped the Airgas board push Air Products to raise its bid by $10 per share from when it was first publicly announced to what Air Products has now represented is its highest offer. The record at both the October trial and the January supplemental evidentiary hearing confirm that Airgas's stockholder base is sophisticated and well-informed, and that essentially all the information they would need to make an informed decision is available to them. In short, there seems to be no threat here—the stockholders know what they need to know (about both the offer and the Airgas board's opinion of the offer) to make an informed decision.

      24

      That being said, however, as I understand binding Delaware precedent, I may not substitute my business judgment for that of the Airgas board.[9] The Delaware Supreme Court has recognized inadequate price as a valid threat to corporate policy and effectiveness.[10] The Delaware Supreme Court has also made clear that the [58] "selection of a time frame for achievement of corporate goals . . . may not be delegated to the stockholders."[11] Furthermore, in powerful dictum, the Supreme Court has stated that "[d]irectors are not obliged to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy."[12] Although I do not read that dictum as eliminating the applicability of heightened Unocal scrutiny to a board's decision to block a non-coercive bid as underpriced, I do read it, along with the actual holding in Unitrin, as indicating that a board that has a good faith, reasonable basis to believe a bid is inadequate may block that bid using a poison pill, irrespective of stockholders' desire to accept it.

      25

      Here, even using heightened scrutiny, the Airgas board has demonstrated that it has a reasonable basis for sustaining its long term corporate strategy—the Airgas board is independent, and has relied on the advice of three different outside independent financial advisors in concluding that Air Products' offer is inadequate. Air Products' own three nominees who were elected to the Airgas board in September 2010 have joined wholeheartedly in the Airgas board's determination, and when the Airgas board met to consider the $70 "best and final" offer in December 2010, it was one of those Air Products Nominees who said, "We have to protect the pill."[13] Indeed, one of Air Products' own directors conceded at trial that the Airgas board members had acted within their fiduciary duties in their desire to "hold out for the proper price,"[14] and that "if an offer was made for Air Products that [he] considered to be unfair to the stockholders of Air Products . . . [he would likewise] use every legal mechanism available" to hold out for the proper price as well.[15] Under Delaware law, the Airgas directors have complied with their fiduciary duties. Thus, as noted above, and for the reasons more fully described in the remainder of this Opinion, I am constrained to deny Air Products' and the Shareholder Plaintiffs' requests for relief.

      26
      I. FACTS
      27

      These are the facts as I find them after trial, several rounds of post-trial briefing, and the supplemental evidentiary hearing.[16] Because facts material to this dispute continued to unfold after the October trial had ended, I first describe the general background facts leading up to Air Products' $70 "best and final" offer. The facts developed in the supplemental evidentiary hearing specifically necessary to determine whether Air Products' $70 offer presents a cognizable threat and whether Airgas's defensive measures are reasonable in relation to that threat are set forth beginning in Section I.P (under the heading "Facts Developed at the Supplemental Evidentiary Hearing").

      28
      BACKGROUND FACTS
      29

      For ease of understanding, I begin with a list of some of the key players with [59] leading roles at the October trial.[17]

      30

      From Air Products:

      31

      • John McGlade: Air Products' CEO, President, and Chairman of the board.

      • Paul Huck: Air Products' CFO and Senior Vice President.

      From Airgas:

      • Peter McCausland: Airgas's founder and CEO. McCausland also served as Chairman of the Airgas board from May 1987 until September 15, 2010.

      • Robert McLaughlin: Airgas's CFO and Senior Vice President.

      • Michael Molinini: Airgas's Chief Operating Officer and Executive Vice President.

      • Lee Thomas: Airgas director.

      • Richard Ill: Airgas former director who lost his board seat at the September 15, 2010 annual meeting.

      The Financial Advisors:

      • Filip Rensky: Investment banker from Bank of America Merrill Lynch, one of Airgas's outside financial advisors.

      • Michael Carr: Investment banker from Goldman Sachs, Airgas's other outside financial advisor.

      32

      With those players in mind,[18] here are the facts as I find them after trial.

      33
      A. The Parties
      34
      1. Air Products
      35

      Plaintiff Air Products is a Delaware corporation headquartered in Allentown, Pennsylvania that serves technology, energy, industrial and healthcare customers globally. It offers a unique portfolio of products, services and solutions that include [60] atmospheric gases, process and specialty gases, performance materials, equipment and services.[19] Air Products is the world's largest supplier of hydrogen and helium, and it has also built leading positions in growth markets.[20] Founded in 1940 on the concept of "on-site" production and sale of industrial gases, Air Products revolutionized the sale of industrial gases by building gas generating facilities adjacent to large-volume gas users, thereby reducing distribution costs.[21] Today, with annual revenues of $8.3 billion and approximately 18,900 employees, the company provides a wide range of services and operates in over forty countries around the world.[22] Air Products currently owns approximately 2% of Airgas's outstanding common stock.

      36
      2. Shareholder Plaintiffs
      37

      The Shareholder Plaintiffs are Airgas stockholders. Together, they own 15,159 shares of Airgas common stock,[23] and purport to represent all other stockholders of Airgas who are similarly situated.

      38
      3. Airgas Defendants
      39

      Airgas is a Delaware corporation headquartered in Radnor, Pennsylvania. Founded in 1982 by Chief Executive Officer Peter McCausland, it is a domestic supplier and distributor of industrial, medical and specialty gases and related hardgoods.[24] Built on an aggressive acquisition strategy (over 400 acquisitions in twenty-seven years), Airgas today operates in approximately 1,100 locations with over 14,000 employees and is the premier packaged gas company in the U.S.[25] The core of Airgas's business is "packaged" gas—delivering small volumes of gas in cylinders or bottles.[26] In the last five years or so, Airgas has been moving more into the bulk business as well.[27] In addition to the gas supply business, about 35% of Airgas's business is comprised of "hardgoods," which includes the products and equipment necessary to consume the gases, as well as welding and safety materials.[28]

      40

      Before its September 15, 2010 annual meeting, Airgas was led by a nine-member staggered board of directors, divided into three equal classes with one class (three directors) up for election each year.[29] Other than McCausland, the rest of the board members are independent outside directors.[30] At the time of the September 15 annual meeting (and at the time this [61] lawsuit was initiated), the eight outside directors were: W. Thacher Brown; James W. Hovey; Richard C. Ill; Paula A. Sneed; David M. Stout; Lee M. Thomas; John C. van Roden, Jr. and Ellen C. Wolf[31] (together with McCausland, "director defendants," and collectively with Airgas, "defendants").[32]

      41

      At the 2010 annual meeting, three Airgas directors (McCausland, Brown, and Ill) lost their seats on the board when three Air Products nominees were elected.[33] On September 23, 2010, Airgas expanded the size of its board to ten members and reappointed McCausland to fill the new seat.[34] Thus, Airgas is now led by a ten-member staggered board of directors, nine of whom are independent. To be clear, references to the Airgas board in the section of this Opinion discussing the factual background from October 2009 through September 15, 2010 means the entire Airgas board as it was constituted before the September 15 annual meeting. After the September 15, 2010 meeting, I will discuss in detail the facts relating to Air Products' $70 offer and the actions of the "new" Airgas board, including the three Air Products nominees.

      42

      As of the record date for the 2010 annual meeting, Airgas had 83,629,731 shares outstanding. From October 2009 (when Air Products privately approached Airgas about a potential deal) until today, Airgas's stock price has ranged from a low of $41.64[35] to a high of $71.28.[36] For historical perspective, before then it had been trading in the $40s and $50s (with a brief stint in the $60s) through most of 2007-2008, until the financial crisis hit in late 2008. The stock price dropped as low as $27 per share in March of 2009, but quickly recovered and jumped back into the mid-$40s. In the board's unanimous view, the company is worth at least $78 in a sale transaction at this time ($60-ish unaffected stock price plus a 30% premium), and left alone, most of the Airgas directors "would say the stock will be worth north of $70 by next year."[37] In the professional opinion of one of Airgas's independent financial advisors, the fair value of Airgas as of January 26, 2011 is "in the mid to high seventies, and well into the mid eighties."[38] McCausland currently owns approximately 9.5% of Airgas common stock. The other directors collectively own less than 2% of the outstanding Airgas stock. Together, the ten current Airgas directors own approximately 11% of Airgas's outstanding stock.

      43
      [62] B. Airgas's Anti-Takeover Devices
      44

      As a result of Airgas's classified board structure, it would take two annual meetings to obtain control of the board. In addition to its staggered board, Airgas has three main takeover defenses: (1) a shareholder rights plan ("poison pill") with a 15% triggering threshold,[39] (2) Airgas has not opted out of Delaware General Corporation Law ("DGCL") § 203, which prohibits business combinations with any interested stockholder for a period of three years following the time that such stockholder became an interested stockholder, unless certain conditions are met,[40] and (3) Airgas's Certificate of Incorporation includes a supermajority merger approval provision for certain business combinations. Namely, any merger with an "Interested Stockholder" (defined as a stockholder who beneficially owns 20% or more of the voting power of Airgas's outstanding voting stock) requires the approval of 67% or more of the voting power of the then-outstanding stock entitled to vote, unless approved by a majority of the disinterested directors or certain fair price and procedure requirements are met.[41]

      45

      Together, these are Airgas's takeover defenses that Air Products and the Shareholder Plaintiffs challenge and seek to have removed or deemed inapplicable to Air Products' hostile tender offer.

      46
      C. Airgas's Five-Year Plan
      47

      In the regular course of business, Airgas prepares a five-year strategic plan approximately every eighteen months, forecasting the company's financial performance over a five year horizon.[42] In the fall of 2007, Airgas developed a five-year plan predicting the company's performance through fiscal year 2012. The 2007 plan included two scenarios: a strong economy case and a weakening economy case.[43] Airgas generally has a history of meeting or beating its strategic plans, but it fell behind its 2007 plan when the great recession hit.[44] At the time of the October trial, Airgas was running about six months behind the weakening economy case, and about a year and a half behind the strong economy case.[45]

      48

      In the summer of 2009, Airgas management was already working on an updated five-year plan.[46] The 2009 plan included only a single scenario: a "base" case or "slow and steady recovery in the economy."[47] The 2009 five-year plan was completed [63] and distributed to the Airgas directors before November 2009, and the plan was formally presented to the board at its November 2009 strategic planning retreat.[48]

      49
      D. Air Products Privately Expresses Interest in Airgas
      50
      1. The $60 all-stock offer
      51

      Air Products first became interested in a transaction with Airgas in 2007,[49] but did not pursue a transaction at that time because Airgas's stock price was too high.[50] Then the global recession hit, and in the spring or summer of 2009, Air Products' interest in Airgas was reignited.[51] On September 17, 2009, the Air Products board of directors authorized McGlade to approach McCausland and discuss a possible transaction between the two companies.[52] The codename for the project was "Flashback," because Air Products had previously been in the packaged gas business and wanted to "flash back" into it.[53]

      52

      On October 15, 2009, McGlade and McCausland met at Airgas's headquarters.[54] At the meeting, McGlade conveyed Air Products' interest in a potential business combination with Airgas and proposed a $60 per share all equity deal.[55] After the meeting, McCausland reported the substance of his conversation with McGlade to Les Graff, Airgas's Senior Vice President for Corporate Development, who took typewritten notes which he called "Thin Air."[56] As Graff's notes corroborate, during the meeting McGlade communicated Air Products' views on the strategic benefits and synergies that a transaction could yield, noting that a combination would be immediately accretive.[57] [64] McCausland told McGlade that it was "not a good time" to sell the company[58] but that he would nevertheless convey the proposal to the Airgas board.[59]

      53

      Shortly thereafter, McCausland telephoned Thacher Brown, Airgas's then-presiding director, to inform him of the offer and ask whether he thought it was necessary to call a special meeting of the board to consider Air Products' proposal.[60] Brown said he did not think so, since the entire board was already scheduled to meet a few weeks later for its strategic planning retreat.[61] McCausland suggested that he would reach out to Airgas's legal and financial advisors to solicit their advice, which Brown thought was a good idea.[62]

      54

      At its three-day strategic planning retreat from November 5-7, 2009, in Kiawah, South Carolina, the full board first learned of Air Products' proposal.[63] In advance of the retreat, the board had received copies of the five-year strategic plan, which served as the basis for the board's consideration of the $60 offer.[64] The board also relied on a "discounted future stock price analysis" (the "McCausland Analysis") that had been prepared by management at McCausland's request to show the value of Airgas in a change-of-control transaction.[65]

      55

      After reviewing the numbers, the board's view on the inadequacy of the offer was not even a close call. The board agreed that $60 was "just so far below what we thought fair value was" that it would be harmful to Airgas's stockholders [65] if the board sat down with Air Products.[66] In the board's view, the offer was so "totally out of the range" of what might be reasonable that beginning negotiations at that price would send the wrong message—that Airgas would be willing to sell the company at a price that is well below its fair value.[67] Thus, the board unanimously concluded that Airgas was "not interested in a transaction."[68] No one on the Airgas board thought it made sense to have any further discussions with Air Products at that point.[69] On November 11, McCausland called McGlade to inform him of the board's decision.[70]

      56

      On November 20, 2009, McGlade sent a letter to McCausland essentially putting in writing the offer they had been discussing over the last month—that is, Air Products offered to acquire all of Airgas's outstanding shares for $60 per share on an all-stock basis.[71] The letter suggested that the $60 offer was negotiable and requested a meeting with Airgas to explore additional sources of value.[72] The letter also requested a "formal response."[73]

      57
      2. Airgas Formally Rejects the Offer
      58

      Perhaps annoyed at the request for a formal response to the same offer the board had already rejected, McCausland had his secretary circulate to the Airgas board and its advisors and management team his response letter to McGlade, written with a derogatory salutation.[74] This letter was not sent, but McCausland did send a real letter to McGlade that day informing him that the Airgas board would meet in early December to consider the proposal.[75]

      59

      The board held a special telephonic meeting on December 7, 2009.[76] In the hour-long call, Graff presented a detailed [66] financial analysis of the offer.[77] McCausland advised the board that management had "spent a great deal of time . . . meeting with [Airgas's] financial advisors and legal team, studying valuation and related issues," and that the management team recommended that the board reject the offer.[78] Brown stated his belief that "nothing had changed since November, that the proposal should be rejected and that attention should be turned to next steps."[79] The board then unanimously supported management's recommendation to reject the offer and to decline Air Products' request for a meeting.[80]

      60

      Accordingly, McCausland sent a letter to McGlade the following day conveying the board's formal response to the November 20 proposal: "We are not interested in pursuing your company's proposal and do not believe that any purpose would be served by a meeting."[81]

      61
      3. The $62 cash-stock offer
      62

      On December 17, 2009, McGlade sent McCausland a revised proposal, raising Air Products' offer to an implied value of $62 per share in a cash-and-stock transaction, and reiterating Air Products' "continued strong interest in a business combination with Airgas."[82] McGlade explained that Air Products' original proposal of structuring a potential combination as an all-stock deal was intended to allow Airgas's stockholders to share in the "expected appreciation of Air Products' stock as the synergies of the combined companies are realized."[83] Nonetheless, to address Airgas's concern that Air Products' stock was an "unattractive currency" for a potential transaction, Air Products was "prepared to offer cash for up to half of the $62 per share" they were offering.[84]

      63

      McGlade again expressed Air Products' willingness to try to negotiate with Airgas on price and requested a meeting between the two companies, writing:

      64

      If you believe there is incremental value above and beyond our increased offer, we stand willing to listen and to understand your points on value with a view to sharing increased value appropriately with the Airgas shareholders . . . . Our teams should meet at this point in the process to move forward in a manner that best serves the interest of our respective shareholders. To that end, we and our advisors are formally requesting to meet with you and your advisors as soon as possible to explore additional sources of value in Airgas and to move expeditiously to consummate a transaction.[85]

      65

      The Airgas board held a two-part meeting to consider this revised proposal. First, a special telephonic meeting was [67] held on December 21, 2009.[86] Graff discussed the financial aspects of the $62 offer.[87] He noted that the offer price remained low,[88] and explained that with a 50/50 cash-stock split, Air Products could bid well into the $70s and still maintain its credit rating.[89] The call lasted about thirty-five minutes.[90] The board reconvened (again, by telephone) on January 4, 2010 and the discussion resumed.[91] Again, Graff presented financial analyses of the December 17 proposal based on discussions he and other members of management had had with Airgas's investment bankers.[92] He advised the board that the bankers agreed the offer was inadequate and well below the company's intrinsic value,[93] and the board unanimously agreed with management's recommendation to reject the offer.[94]

      66

      On January 4, 2010, McCausland sent a letter to McGlade communicating the Airgas board's view that Air Products' offer "grossly undervalues Airgas."[95] The letter continued: "[T]he [Airgas] Board is not interested in pursuing your company's proposal and continues to believe there is no reason to meet."[96]

      67

      On January 5, 2010, McCausland exercised 300,000 stock options, half of which were set to expire in May 2010, and half of which were set to expire in May 2011.[97]

      68
      [68] E. Air Products Goes Public
      69

      By late January 2010, it was becoming clear that Air Products' private attempts to negotiate with the Airgas board were going nowhere. The Airgas board felt that it was "precisely the wrong time"[98] to sell the company and thus it continued to reject Air Products' advances. So, Air Products decided to take its offer directly to the Airgas stockholders. On January 20, 2010, McGlade sent a letter to the Air Products board expressing his belief that:

      70

      [N]ow is the time to acquire Flashback—their business has yet to recover, the pricing window is favorable, and our ability (should we so choose) to offer an all-cash deal would be viewed very favorably in this market. To take advantage of the situation, we believe we will have to go public with our intentions if we are to get serious consideration by Flashback's board.[99]

      71

      Shortly thereafter, Air Products did just that. On February 4, 2010, Air Products sent a public letter to the Airgas board announcing its intention to proceed with a fully-financed, all-cash offer to acquire all outstanding shares of Airgas for $60 per share.[100] The letter closed with McGlade again reiterating Air Products' full commitment to completing a transaction with Airgas, and emphasizing Air Products' "willingness to reflect in our offer any incremental value you can demonstrate."[101]

      72

      On February 8-9, 2010, the Airgas board met in Philadelphia, Pennsylvania.[102] [69] The board's financial advisors from Goldman Sachs and Bank of America Merrill Lynch provided written materials and made presentations to the board regarding Air Products' proposal.[103] The bankers reviewed Airgas management's financial projections, research analysts' estimates for Airgas, discounted cash flow valuations of Airgas using various EBITDA multiples and discount rates, historical stock prices, and the fact that Airgas generally emerges later from economic recessions than Air Products.[104] At the meeting, the board unanimously agreed that the $60 price tag was too low, and that it "significantly undervalued Airgas and its future prospects."[105] The board also unanimously authorized McCausland to convey the board's decision to reject the offer to McGlade,[106] which he did the following day.[107]

      73
      F. The $60 Tender Offer
      74

      On February 11, 2010, Air Products launched its tender offer for all outstanding shares of Airgas common stock on the terms announced in its February 4 letter—$60 per share, all-cash, structurally noncoercive, non-discriminatory, and backed by secured financing.[108] The tender offer is conditioned, among other things, upon the following:

      75

      (1) a majority of the total outstanding shares tendering into the offer;

      (2) the Airgas board redeeming its rights plan or the rights otherwise having been deemed inapplicable to the offer;

      (3) the Airgas board approving the deal under DGCL § 203 or DGCL § 203 otherwise having been deemed inapplicable to the offer;

      (4) the Airgas board approving the deal under Article VI of Airgas's charter or Article VI otherwise being inapplicable to the offer;

      (5) certain regulatory approvals having been met;[109] and

      [70] (6) the Airgas board not taking certain action (i.e., entering into a third-party agreement or transaction) that would have the effect of impairing Air Products' ability to acquire Airgas.[110]

      76

      Air Products' stated purpose in commencing its tender offer is "to acquire control of, and the entire equity interest in, Airgas."[111] To that end, it is Air Products' current intention, "as soon as practicable after consummation of the Offer," to seek to have Airgas consummate a proposed merger with Air Products valued at an amount in cash equal to the highest price per share paid in the offer.[112] Air Products also announced its intention to run a proxy contest to nominate a slate of directors for election to Airgas's board at the Airgas 2010 annual meeting.[113]

      77

      On February 20, 2010, the Airgas board held another special telephonic meeting to discuss Air Products' tender offer.[114] Airgas's financial advisors from Goldman Sachs and Bank of America Merrill Lynch reviewed the bankers' presentations with the board,[115] which were similar to the presentations that had been made to the board on February 8, and concluded that the offer "was inadequate from a financial point of view."[116]

      78

      In a 14D-9 filed with the SEC on February 22, 2010, Airgas recommended that its shareholders not tender into Air Products' offer because it "grossly undervalues Airgas."[117] In explaining its reasons for recommending that shareholders not accept Air Products' offer, Airgas's filing stated that the timing of the offer was "extremely opportunistic . . . in light of the depressed value of the Airgas Common shares prior to the announcement of the Offer," so while the timing was excellent for Air Products, it was disadvantageous to Airgas.[118] The filing went on to explain that Airgas had received inadequacy opinions from its financial advisors, Goldman Sachs and Bank of America Merrill Lynch.[119] In addition, Airgas expressed its view that the offer was highly uncertain and subject to significant regulatory concerns.[120] Finally, attached to the filing was a fifty-page slide presentation entitled "Our Rejection of Air Products' Proposals."[121]

      79
      [71] G. The Proxy Contest
      80

      On March 13, 2010, Air Products nominated its slate of three independent directors for election at the Airgas 2010 annual meeting.[122] The three Air Products nominees were:

      81

      • John P. Clancey;[123]

      • Robert L. Lumpkins;[124] and

      • Ted B. Miller, Jr.[125] (together, the "Air Products Nominees").

      82

      [72] Air Products made clear in its proxy materials that its nominees to the Airgas board were independent and would act in the Airgas stockholders' best interests. Air Products told the Airgas stockholders that "the election of the Air Products Nominees . . . will establish an Airgas Board that is more likely to act in your best interests."[126] Air Products actively promoted the independence of its slate, saying that its three nominees:

      83

      • "are independent and do not have any prior relationship with Airgas or its founder, Chairman and Chief Executive Officer, Peter McCausland:"[127]

      • "will consider without any bias [the Air Products] Offer;"[128]

      • "will be willing to be outspoken in the boardroom about their views on these issues;"[129] and

      • "are highly qualified to serve as directors on the Airgas Board."[130]

      84

      In addition to its proposed slate of directors, Air Products also announced that it was seeking approval by Airgas stockholders of three bylaw proposals that would:

      85

      (1) Amend Airgas's bylaws to require Airgas to hold its 2011 annual meeting and all subsequent annual shareholder meetings in the month of January;

      (2) Amend Airgas' bylaws to limit the Airgas Board's ability to reseat directors not elected by Airgas shareholders at the annual meeting (excluding the CEO); and

      (3) Repeal all bylaw amendments adopted by the Airgas Board after April 7, 2010.[131]

      86

      Over the next several months leading up to Airgas's 2010 annual meeting, both Air Products and Airgas proceeded to engage in a protracted "high-visibility proxy contest widely covered by the media,"[132] during which the parties aggressively made their respective cases to the Airgas stockholders. Both Airgas and Air Products made numerous SEC filings, press releases and public statements regarding their views on the merits of Air Products' offer.[133]

      87
      [73] H. Airgas Delays Annual Meeting
      88

      In April 2010, the Airgas board amended Article II of the company's bylaws (which addressed the timing of Airgas's annual meetings), giving the board the ability to push back Airgas's 2010 annual meeting.[134] Previously, the bylaws required that the annual meeting be held within five months of the end of Airgas's fiscal year—March—which would make August the annual meeting deadline. The amendment allowed the meeting to be held "on such date as the Board of Directors shall fix."[135] In other words, the board gave itself full discretion to set the date of the annual meeting as it saw fit.[136] As it turns out, the reason the board pushed back the meeting date was to buy itself more time to "provide information to stockholders" before the annual meeting, as well as more time to "demonstrate performance of the company."[137] The annual meeting was scheduled for September 15, 2010.[138]

      89
      I. The $63.50 Offer
      90

      On July 8, 2010, Air Products raised its offer to $63.50.[139] Other than price, all other material terms of the offer remained unchanged.[140] The following day, McGlade sent a letter to the Airgas board reiterating (once again) Air Products' willingness to negotiate, and inviting the Airgas board and its advisors to sit down with Air Products "to discuss completing the transaction in the best interests of the shareholders of [74] both companies."[141]

      91

      The Airgas board held two special telephonic meetings to consider the revised $63.50 offer. The first was held on July 15, 2010.[142] McLaughlin updated the board on Airgas's performance for the first quarter of fiscal year 2011[143] and the financial advisors provided updated financial analyses.[144] On the second call, held on July 20, 2010, Rensky and Carr each described their respective opinions that the $63.50 offer was "inadequate to the [Airgas] stockholders from a financial point of view,"[145] and the financial advisors issued written inadequacy opinions to that effect.

      92

      The next day, McCausland sent a public letter to McGlade rejecting Air Products' revised offer and invitation to meet because $63.50 "is not a sensible starting point for any discussions or negotiations."[146] Also on July 21, 2010, Airgas filed an amendment to its 14D-9, rejecting the $63.50 offer as "grossly inadequate" and recommending that Airgas stockholders not tender their shares.[147] In this filing, Airgas set out many of the reasons for its recommendation, including its view that the offer "grossly undervalue[d]" Airgas because it did not reflect the value of Airgas's future prospects and strategic plans, the fact that Airgas tends to lag in entering into, and emerging from, economic recessions, Airgas's extraordinary historical results, Airgas's unrivaled platform in the packaged gas business, the "extremely opportunistic" timing of Air Products' offer, the inadequacy opinions provided to the board by Airgas's financial advisors, and many other reasons.[148] The financial advisors' written inadequacy opinions were attached to the filing.[149] Airgas also released another slide presentation (33 pages this time), entitled "It's All About Value," containing (among other things) updated projections and earnings guidance, board plans for cost savings, and information about Airgas's implementation of its SAP system,[150] and explaining [75] why Airgas presents "significant strategic value" to a potential acquiror.[151] Two days later, on July 23, 2010, Airgas filed its definitive proxy statement for the September annual meeting, urging stockholders to vote against the three Air Products Nominees and the bylaw amendments and to wait until "Airgas's growth potential can be fully demonstrated and reflected in its results."[152]

      93
      J. Tension Builds Before the Annual Meeting
      94

      Air Products filed its definitive proxy statement on July 29, 2010.[153] Air Products was explicit in its proxy materials that its proposed bylaws were directly related to its pending tender offer, telling stockholders that by voting in favor of its nominees and bylaw proposals, they would be "send[ing] a message to the Airgas Board and management that . . . Airgas stockholders want the Airgas Board to take action to eliminate the obstacles to the consummation of the [Air Products] Offer."[154] At the same time, Airgas heavily lobbied its stockholders to vote against the proposed bylaws, urging them not to fall for Air Products' "tactics," and telling them that the Air Products offer was well below the fair value of their shares and that, by shortening the time it would take for Air Products to gain control of the board, voting in favor of the January meeting bylaw would help facilitate Air Products' grossly inadequate offer.[155] As part of its efforts to dissuade stockholders from voting for Air Products' nominees and the proposed bylaw requiring annual meetings to be held in January, Airgas promised its stockholders that it would hold a special meeting on June 21, 2011 where the stockholders would have the opportunity to elect a majority of the Airgas board by a plurality vote—but only if Air Products' bylaw proposal did not receive a majority of votes at the 2010 annual meeting.[156]

      95
      [76] K. The $65.50 Offer
      96

      On September 6, 2010, Air Products further increased its offer to $65.50 per share.[157] Again, the rest of the terms and conditions of the February 11, 2010 offer remained the same.[158] In connection with this increased offer, Air Products threatened to walk if the Airgas stockholders did not elect the three Air Products Nominees to the Airgas board and vote in favor of Air Products' proposed bylaw amendments at the 2010 annual meeting.[159]

      97

      The next day, the Airgas board met to consider Air Products' revised offer.[160] The board received updated analyses from McLaughlin and inadequacy opinions from its bankers.[161] The board unanimously rejected the $65.50 offer as inadequate,[162] saying that it was "not an appropriate value or a sensible starting point for negotiations to achieve such a value."[163] Airgas also filed an amendment to its Schedule 14D-9 on September 8, 2010, recommending that stockholders reject the offer and not tender their shares.[164]

      98
      L. "With $65.50 on the table, the stockholders wanted the parties to engage."[165]
      99

      On September 10, in advance of the annual meeting, McCausland, Thomas, and Brown (along with Airgas's financial advisors, Rensky and Carr, and representatives of Airgas's proxy solicitor, Innisfree) held a series of meetings with about 25-30 Airgas stockholders—mostly arbs, hedge funds, and institutional holders.[166] At every meeting, the sentiment was the same, "Why don't you guys go negotiate, sit down with Air Products."[167] The answer was simple: the offer was unreasonably low; it was not a place to begin any serious negotiations about fair value. If Air Products "were to offer $70, with an indication that they were ready to sit down and have a full and fair discussion about real value and negotiate from that, what we both could agree was fair value for the company, [Thomas], for one, would be prepared to have that sit-down discussion."[168] Brown and McCausland said the same thing.[169] During the course of two days of meetings with stockholders, McCausland expressed this view to "[m]aybe a hundred" [77] people—he expected word to get back to Air Products.[170]

      100

      Although none of the stockholders attending these meetings said that they wanted Airgas to do a deal with Air Products at $65.50,[171] the general sentiment was not, "Hell, no, we don't want you to even talk to these people if they're at 65.50"—rather, the "clear message [was:] With 65.50 on the table, the stockholders wanted the parties to engage."[172]

      101

      Rather than engaging with each other directly (i.e. McGlade and McCausland), Air Products' financial advisors at J.P Morgan (Rodney Miller) and Perella Weinberg (Andrew Bednar) called Airgas's financial advisors (Rensky and Carr). Word had gotten back to Bednar and Miller that some Airgas board members had indicated that there might be "reason to sit down together" if Air Products made an offer at "$70 with the willingness to negotiate upwards from there."[173] Airgas's advisors welcomed a revised offer, but over that weekend before the annual meeting, none came. Air Products' bankers at that point "could not get to $70 a share . . . Air Products was not at that number."[174]

      102

      Counsel for Air Products (James Woolery) met with Carr and Rensky during Airgas's annual meeting on September 15. Woolery asked for assurance that if Air Products offered $70 per share, Airgas would agree to a deal at that price.[175] Airgas's bankers could not give Woolery the assurance he was looking for, and discussions stalled.[176]

      103
      M. The Annual Meeting
      104

      On September 15, 2010, Airgas's 2010 annual meeting was held. The Airgas stockholders elected all three of the Air Products Nominees to the board, and all three of Air Products' bylaw proposals were adopted by a majority of the shares voted.[177] On September 23, 2010, John van Roden was unanimously appointed Chairman of the Airgas board, and McCausland was unanimously reappointed to the board.[178]

      105
      N. The Bylaw Question
      106

      After the annual meeting results were preliminarily calculated, Airgas immediately filed suit against Air Products in the Delaware Court of Chancery to invalidate the January meeting bylaw. Briefing was completed on an expedited basis, and oral arguments on cross-motions for summary judgment were heard on October 8, 2010. That afternoon, the Court issued its decision upholding the validity of the January meeting bylaw.[179] Airgas appealed, and ultimately the Delaware Supreme Court reversed the decision, invalidating the bylaw and holding that annual meetings must be spaced "approximately" one year [78] apart.[180] Airgas's current expectation is that its 2011 annual meeting will be held in August or early September 2011.[181]

      107
      O. The October Trial
      108

      As a result of both sides having aggressively campaigned for months leading up to Airgas's 2010 annual meeting, the evidence presented at the October trial made clear that, at the time of the September annual meeting, the Airgas stockholders had all of the information they needed to evaluate Air Products' $65.50 offer. The testimony from Airgas's own directors and management demonstrated as much:

      109

      McCausland:

      Q. You believe the stockholders have enough information to decide whether to accept the $65.50 offer; right?

      A. Yes.[182]

      * * *

      Q. Are you aware, as you sit here today, Mr. McCausland, of any information that you would like to impart or present to the shareholders that they don't already have?

      A. [N]o, I'm not aware of any, except there could be some business strategy things that it would damage the company to present them to the shareholders.

      Q. But you feel you have met your duty in providing all the information necessary for the shareholders to make a decision; right?

      A. Yes.[183]

      McLaughlin:

      Q. Now, you would also agree with me that prior to the recent meeting of Airgas'[s] stockholders, stockholders have all the information they needed to make an informed decision about whether to accept or reject Air Products' offer; right?

      A. That is correct.[184]

      Thomas:

      Q. In your mind, do [the Airgas stockholders] have every piece of information that's available that's necessary for a reasonable stockholder to decide whether to tender?

      A. I think they do.

      * * *

      Q. And the market knows what the Airgas board thinks Airgas can achieve over the course of the next 18 months or two years or so, isn't that right?

      A. I think they do.

      * * *

      Q. And you believe that the average Airgas stockholder is competent to understand the available information that's been publicly disseminated regarding the tender offer, as well as Airgas and its business and the Airgas board's view as to value; correct?

      A. I do.[185]

      [79] Ill: Q. [O]ver the last year Airgas has given its shareholders the information necessary to make an informed judgment about Air Products' offers; correct?

      A. That's correct.[186]

      * * *

      Q. You would agree with me that Airgas has not failed to provide shareholders anything that shareholders need in order to make an informed decision with respect to the Air Products' offer; correct?

      A. In my opinion, that information has been forthcoming from Airgas.[187]

      Molinini:

      Q. With this disclosure [JX 499 (the August 31, 2010 Airgas press release regarding SAP implementation[188])], you believe that the stockholders have all the information they would need to make a decision on anything they wanted to make a decision on. Isn't that correct, sir?

      A. That is correct[189]

      110

      The evidence at trial also incontrovertibly demonstrated that $65.50 was not as high as Air Products was willing to go. As Huck unequivocally stated, "65.50 is not our best and final offer."[190] And as McGlade testified:

      111

      Q. Now, the current 65.50 offer is not Air Products' best and final offer; correct?

      A. We've been clear about that.

      Q. That it's not the best?

      A. It is not.

      112

      In addition, Air Products made clear that if Airgas were stripped of its defenses at that point, Air Products would seek to close on that $65.50 offer.[191] So Air Products was moving forward with an offer that admittedly was not its highest and aggressively seeking to remove Airgas's defensive impediments standing in its way. At the same time, Airgas's stockholders arguably knew all of this, and knew whatever information they needed to know in order to make an informed decision on whether they wanted to tender into Air Products' "grossly inadequate" and not-yet-best offer.[192]

      113
      FACTS DEVELOPED AT THE SUPPLEMENTAL EVIDENTIARY HEARING
      114

      I pause briefly to introduce some additional players who joined the story mid-game. In addition to McGlade and Huck (Air Products), and McCausland (Airgas), the following individuals featured prominently in the supplemental evidentiary hearing.

      115

      [80] From Air Products: William L. Davis, Air Products' Presiding Director. From Airgas: John Clancey and Ted Miller, two of the Air Products Nominees elected to the Airgas board at the September 15, 2010 annual meeting. The new financial advisor: David DeNunzio, the investment banker from Credit Suisse, Airgas's recently-retained third outside financial advisor. Finally, the experts: Peter Harkins resumed his role as Airgas's "proxy expert,"[193] and Joseph J. Morrow was put on as Air Products' rebuttal "proxy expert."[194] I will discuss the expert testimony in the analysis section of this Opinion.

      116
      P. Representatives from Airgas and Air Products Meet
      117

      On October 26, 2010, after announcing strong second-quarter earnings earlier that day,[195] Airgas Chairman John van Roden sent a letter to McGlade. In the letter, van Roden reiterated that each of Airgas's ten directors—including the three newly-elected Air Products Nominees—"is of the view that the current Air Products offer of $65.50 per share is grossly inadequate."[196] Indeed, the board viewed the current offer price as not even close to the right price for a sale of the company.[197] Nevertheless, the letter showed signs that the Airgas board was willing to negotiate with Air Products:

      118

      [The Airgas] Board is also unanimous in its views regarding negotiations between Air Products and Airgas . . . . Each member of our Board believes that the value of Airgas in any sale is meaningfully in excess of $70 per share. We are writing to let you know that our Board is unanimous in its willingness to authorize negotiations with Air Products if Air Products provides us with sufficient reason to believe that those negotiations will lead to a transaction at a price that is consistent with that valuation.[198]

      119

      McGlade responded enthusiastically to the letter, writing back to van Roden in a letter dated October 29, 2010:

      120

      Dear John:

      We appreciate your letter of earlier this week. We are prepared to negotiate in good faith immediately. We welcome any information Airgas may wish to provide us on value in any meeting between our two teams.[199]

      121

      Finally, the companies seemed to be making progress toward a potential friendly transaction. Airgas's board authorized van Roden to respond to McGlade's letter, which he did on November 2, 2010.[200] The letter opened by saying that the Airgas board was "certainly prepared to meet with [Air Products] if there is a reasonable [81] opportunity to obtain an appropriate value for the Airgas shareholders."[201] Van Roden continued:

      122

      In our last letter, we indicated that our board of directors was of the unanimous view that the value of Airgas in any sale is meaningfully in excess of $70 per share. To provide greater clarity, the board has unanimously concluded that it believes that the value of Airgas in a sale is at least $78 per share, in light of our view of relevant valuation metrics.

      We would like to meet with you to provide our perspective on the value of Airgas and are prepared to do so at any time.[202]

      123

      Later that day, Air Products accepted the invitation to meet despite its view that $78 per share is not "a realistic valuation for Airgas, nor ... anywhere near what [Air Products is] prepared to pay," because it nevertheless viewed any meeting to be "in the best interest of both companies."[203] On November 4, 2010, principals from both companies met in person to discuss their views on the value of Airgas.[204] The Airgas representatives and the Air Products representatives had differences of opinion regarding some of the assumptions each other had made underlying their respective valuations of Airgas.[205] The meeting lasted for an hour and a half.[206] At the conclusion of the meeting, the parties issued a disclosure stating that "no further meetings are planned."[207] Although perhaps not the result the parties had hoped for, I conclude based on the evidence presented at the supplemental hearing that the November 4 meeting was in fact a legitimate attempt between the parties to reach some sort of meeting of the minds despite their disagreements over Airgas's value (as opposed to a litigation sham designed by defendants), and that both sides acted in good faith.[208]

      124
      [82] Q. More Post-Trial Factual Developments
      125

      On November 23, 2010, the Supreme Court issued its decision on the bylaw issue, reversing the ruling of this Court that Airgas's next annual meeting could take place in January 2011.[209] In a December 2 Letter Order ruling on certain outstanding evidentiary issues, I asked the parties if, in light of the Supreme Court's decision and the fact that now Airgas's 2011 annual meeting would under Delaware law be held approximately eight months later than it would have been had the January meeting bylaw been upheld, counsel believed the ruling had any effect on the fundamental issue remaining to be decided.[210] I also asked counsel to provide supplemental briefing responding to several questions.[211]

      126

      Counsel's responses were due on or before December 10, 2010. Meanwhile, there had been a flurry of recent activity on the boards of both Airgas and Air Products that subsequently came to light, as the newly-elected Air Products Nominees acquainted themselves with the Airgas board, and as Air Products continued to pursue a deal and consider its strategic options.

      127
      1. The Air Products Nominees and the November 1-2 Airgas Board Meeting
      128

      At the supplemental evidentiary hearing, John Clancey, one of the Air Products Nominees, explained his views coming onto the Airgas board following the 2010 annual meeting.[212] Without any other information, his initial impression of Airgas's position with respect to Air Products' offer was that, quite simply, "[i]t was no."[213] Back during the course of the proxy contest, Clancey had met with ISS, who had asked what he would do if elected to the Airgas board, focusing on who he thought he would represent and what skills he would bring to the table.[214] "[I]f I was elected," he told them, "I would immediately represent all the shareholders of Airgas."[215] His perspective from the outset [83] was that there was a lot of information he wanted to drill down on. He wanted the benefit of meeting with management and hearing from the financial advisors working on the situation to inform his understanding, but he came to the board with no agenda other than wanting to see if a deal could be done.[216]

      129

      A new-director orientation session for Clancey was held on November 1, 2010. New director orientation for Lumpkins and Miller was held on September 23, 2010. The newly-elected Air Products Nominees were given written materials in advance of their orientation sessions.[217] Clancey came at the board at all different angles at the November 1 orientation.[218] He challenged the board's economic assumptions in its five-year plan, probed Molinini about the SAP implementation, and asked other questions he felt were important to fully understand the situation.[219] In the end, he was "very impressed."[220] He concluded:

      130

      I was very impressed with the depth that [the Airgas board] could go to in answering the questions.... [T]hey knew their business. They had achieved their numbers consistently. I thought they were very conservative, looking out.[221]

      131

      With respect to the SAP implementation, he said:

      132

      The benefits of SAP are enormous, and you'll finally get there.... I was very impressed with Airgas's approach. It is slow and it's prodigious in terms of what they have to get their arms around, but they're taking it step by step. They've used every best practice ... and I am very optimistic that they'll be very successful.[222]

      133

      And as far as the reasonableness of the macroeconomic assumptions in the Airgas plan, in Clancey's view, "[t]hey were reasonable."[223] As noted above, at the November 1-2, 2010 meeting, the board agreed to reach out to Air Products to see if they could get a deal done. Also at that meeting, the Air Products Nominees discussed with the board the possibility of forming a special negotiating committee, and they raised the subject of obtaining independent legal counsel and getting a third independent financial advisor to take a fresh look at the valuation and five-year plan, but no such action was taken at that time.[224]

      134
      [84] 2. December 7-8 Airgas Board Letters
      135

      On December 7, 2010, the three new directors sent a letter to van Roden formally requesting the Airgas board to authorize their retention of independent outside legal counsel and financial advisors of their choice to assist them in the event Air Products raised its offer.[225] The letter also suggested that statements about the "unanimous" views of the board on issues relating to Air Products' offer may have "become misleading."[226]

      136

      Specifically, the three Air Products Nominees sought to clarify their view regarding the statement in the November 2, 2010 letter from van Roden to McGlade that "the [Airgas] board has unanimously concluded that it believes that the value of Airgas in a sale is at least $78 per share."[227] The Air Products Nominees explained:

      137

      We do not believe that such an unequivocal statement is accurate. Any discussion about the $78 valuation must be framed in the context in which that number was actually discussed at the November, 2010 board meeting. Specifically, in the context of a board discussion about what should be the next steps in responding to Air Products, we 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, and it would be wrong for you to insinuate otherwise to the Court.[228]

      138

      Van Roden responded by letter to the three Air Products Nominees the next day, stating that all of the statements that Airgas has made to the Court and publicly have been accurate.[229] The letter also stated that while all of the other directors were satisfied with the analyses performed by Airgas's two outside financial advisors, the board agreed to the retention of a third independent financial advisor to advise the Airgas board, to be selected by the nine independent directors.[230]

      139

      The evidence at the supplemental evidentiary hearing revealed that the December 7 letter from the three newly-elected board members was "meant as leverage" in their efforts to prompt the rest of the board to act on their request for a third independent financial advisor.[231] Clancey explained, "We wanted a financial advisor and [] we were trying to induce [the other directors]. It's like playing poker. We put our chips up on the table, everything [85] we had."[232]

      140

      The play worked—on December 10, the Airgas board (minus McCausland) held a telephonic meeting. The nine independent directors unanimously agreed to retain Credit Suisse as a third independent financial advisor to represent the full board.[233] The three new directors were satisfied with the choice of Credit Suisse,[234] and Air Products' own representatives harbored no reason to doubt Credit Suisse's qualifications or independence.[235] In addition, the Air Products Nominees retained their own independent counsel—Skadden, Arps, Slate, Meagher & Flom, LLP—and the board agreed to reimburse the reasonable costs of Skadden's past work for the new directors and to pay Skadden's fees going forward.[236]

      141

      Moreover, the Air Products Nominees publicly disavowed any real disagreement that may have allegedly existed on the board before the November 2, 2010 letter to Air Products. The December 7 and December 8 letters were made publicly available on December 13, 2010, along with a statement by the three new directors:

      142

      In response to reports of division on the Airgas Board of Directors, we the newly elected directors of Airgas, affirm that the Board is functioning effectively in the discharge of its duties to Airgas stockholders. We deny the charges of division on the Board, we condemn the spread of unproductive rumors, and we strongly disagree with the notion that we were unaware of the November 2nd letter to Air Products.[237]

      143

      In any event, as will be explained in greater detail below, by December 21, 2010 the new Air Products Nominees seem to have changed their tune and fully support the view that Airgas is worth at least $78 in a sale transaction.[238]

      144
      R. The $70 "Best and Final" Offer
      145

      Meanwhile, over at Air Products, the board was considering its position with respect to its outstanding tender offer, and on December 9, 2010, the board met to discuss its options.[239] Specifically, question 1 in the Court's December 2 Letter asked: "Is $65.50 per share the price that Air Products wants this Court to rely upon in addressing the `threat' analysis under Unocal?" The Court also recognized that Air Products had made clear that $65.50 was not its best offer—it was a "floor" from which Air Products was willing to negotiate higher.[240]

      146

      [86] After reviewing recent events with the board (including the Supreme Court's reversal on the bylaw issue) and noting the looming December 10 response deadline to my December 2 letter, Huck explained Air Products' options at that point:

      147

      (1) withdraw the tender offer and walk away;

      (2) seek to call a special meeting of the Airgas stockholders to remove the board; or

      (3) "[b]ring the issues around removal of the poison pill to a head by making the Company's best and final offer."[241]

      148

      Huck walked the board through each of the three alternatives, noting that the first would effectively eliminate any possibility of a transaction, and the second was "as a practical matter impossible" (and could take several months as well).[242] As for the third, Huck said that "while most of the record [in this case] was fully developed, increasing the offer to the Company's best and final price could strengthen the case for removal of the poison pill."[243] Accordingly, on December 9, 2010—the day before the parties filed their Supplemental Post-Trial Briefs in response to the Court's December 2 Letter—Air Products made its "best and final" offer for Airgas, raising its offer price to $70 per share.[244]

      149

      In its filing and related press release, Air Products said:

      150

      This is Air Products' best and final offer for Airgas and will not be further increased. It provides a 61% premium to Airgas' closing price on February 4, 2010, the day before Air Products first announced an offer to acquire Airgas.

      John E. McGlade, Air Products chairman, president and chief executive officer, said, "It is time to bring this matter to a conclusion, and we are today making our best and final offer for Airgas. The Air Products Board has determined that it is not in the best interests of Air Products shareholders to pursue this transaction indefinitely, and Airgas shareholders should be aware that Air Products will not pursue this offer to another Airgas shareholder meeting, whenever it may be held."[245]

      151

      The Airgas board, in initially considering the $70 offer, did not really believe that $70 was actually Air Products' "best and final" offer, despite Air Products' public statements saying as much.[246] Accordingly, in the post-trial discovery window before the supplementary evidentiary hearing, defendants tried to take discovery into Air Products' internal valuations and analyses of Airgas to determine whether Air Products might in fact be willing to pay higher than $70 per share. Relying on [87] business strategy privilege, Air Products refused to produce its internal analyses.[247] In light of that, defendants filed a motion in limine several days before the supplementary evidentiary hearing began to preclude Air Products from offering testimony or documentary evidence in support of its assertion that $70 is its "best and final" offer. In denying that request, I held:

      152

      Air Products is not required to demonstrate the fairness of its offer; nor is it required to demonstrate that its offer is less than, equal to, or greater than what it has independently and internally determined is the value of Airgas. Having publicly announced that its $70 offer is its "final" offer, however, Air Products has now effectively and irrevocably represented to this Court that there will be no further requests for judicial relief with respect to any other offer (should there ever be one).[248]

      153

      Air Products has repeatedly represented, both in publicly available press releases, public filings with the SEC, and submissions to this Court, that $70 per share is its "best and final" offer.[249] The testimony offered by representatives of Air Products at the supplementary evidentiary hearing regarding the $70 offer provides further evidence to this Court that Air Products' offer is now, as far as this Court is concerned, at its end stage.[250]

      154

      When asked what Air Products meant by "best and final," McGlade responded, "$70 is the maximum number that we're prepared to pay."[251] Huck concurred: "It is the best and final price which we're willing to offer in this deal"[252] and "[t]here is no other offer to come."[253] McGlade further explained:

      155

      I wanted to be very clear [to the Air Products board at the December 9 meeting] that best and final meant best and final. We had a discussion around our other alternatives and ... our need to move forward on behalf of our shareholders, 15 months into this or 14 months into this at this time. It was really time to get a decision, positive or negative, and then take the outcome of what that decision was.[254]

      156

      In response to questioning by defendants' counsel as to why, at the December 9 meeting, there was no discussion as to specifically what the words "best and final" meant, Huck responded, "Right. I trust our board can understand words."[255] The message had resonated. In Davis's words, it was "made clear" at the December 9 [88] meeting that $70 was Air Products' best and final offer for Airgas.[256] All of the Air Products board members were equally supportive of the decision to make the best and final offer.[257]

      157

      Huck testified that the board's decision to make its best and final offer was based on a cash flow analysis along with the board's judgment of the risks and rewards with respect to this deal.[258] Whether or not Air Products has the financial ability to pay more is not what the board based its "best and final" price on—nor does it have to be.

      158

      In fact, Airgas itself has argued in this litigation that "Air Products' own internal DCF analysis is not relevant to evaluating the reasonableness of the Airgas Board's determination. Rather, the appropriate focus should be on the analyses and opinions of Airgas' financial advisors."[259] I agree. Thus, for purposes of my analysis and the context of this litigation, based on the representations made in public filings and under oath to this Court, I treat $70, as a matter of fact, as Air Products' "best and final" offer.

      159
      S. The Airgas Board Unanimously Rejects the $70 Offer
      160

      As noted above, the Airgas board met on December 10, 2010 to discuss the Air Products Nominees' request for independent legal advisors and a third outside financial advisor. The board did not discuss or make a determination with respect to Air Products' revised $70 offer at the December 10 meeting.

      161

      On December 21, the Airgas board met to consider Air Products' "best and final" offer.[260] Management kicked off the meeting by presenting an updated five-year plan to the board. McCausland gave an overview of the refreshed plan, and then McLaughlin addressed key financial highlights.[261] Molinini and Graff discussed other aspects of the company's growth.[262] This was followed by presentations by the three financial advisors.[263] Carr went first, then Rensky. Both Bank of America Merrill Lynch and Goldman Sachs "were of the opinion that the Air Products' $70 offer was inadequate from a financial point of view."[264]

      162

      Then they turned the floor over to David DeNunzio of Credit Suisse, Airgas's newly-retained third independent financial advisor. DeNunzio explained how Credit Suisse had performed its analysis, and how its analysis differed from that of Goldman Sachs and Bank of America Merrill Lynch. He observed that "Airgas's SAP plan is the most detailed plan he and his team had come across in 25-30 years."[265] In summary, DeNunzio said that Air Products' offer "was only slightly above what [Airgas] should trade at, was below most selected transactions and was well below the value of the Company on the basis of a DCF analysis, which was the analysis to which Credit Suisse gave the most [89] weight."[266] In the end, Credit Suisse "easily concluded that the $70 offer was inadequate from a financial point of view."[267]

      163

      After considering Airgas's updated five-year plan and the inadequacy opinions of all three of the company's financial advisors, the Airgas board unanimously—including the Air Products Nominees—rejected the $70 offer.[268] Interestingly, the Air Products Nominees were some of the most vocal opponents to the $70 offer. After the bank presentations, John Clancey, one of the three Air Products Nominees concluded that "the offer was not adequate,"[269] and that even "an increase to an amount which was well below a $78 per share price was not going to `move the needle.'"[270] He said to the rest of the board, "We have to protect the pill."[271] When asked what he meant by that comment, Clancey testified:

      164

      That we have a company ... that is worth, in my mind, worth in excess of 78, and I wanted, as a fiduciary, I wanted all shareholders to have an opportunity to realize that. [Protecting the pill was important to achieve that objective because] I don't believe 70 is the correct number. And if there was no pill, it is always feasible, possible, that 51 percent of the people tender, and the other 49 percent don't have a lot of latitude.

      165

      This was Air Products' own nominee saying this. The other two Air Products Nominees—Lumpkins and Miller—have expressed similar views on what Airgas would be worth in a sale transaction.[272] So what changed their minds? Why do they now all believe that the $70 offer is so inadequate? In McCausland's words:

      166

      [I]t doesn't reflect the fundamental value—intrinsic value of the company. Airgas can create tremendous value for its shareholders through executing its management plan—value that's far superior to the offer on the table. That's one. I would say that I also, you know, listened to three investment bankers, including Credit Suisse, who came in and took a fresh look. And every one of those bankers has opined that the offer is inadequate. The undisturbed stock price that we just talked about in the low to mid sixties—and that's not some wishful thinking, that's just applying our average five-year multiples, comparing what other companies in our peer group are doing vis-a-vis their five-year multiples. And if you were to apply an appropriate premium for a strategic acquisition like this, in the 35 to 40 percent range, you would end up with a price in the mid to high eighties. There's the DCF valuations that the bankers presented to us. I mean, there's a lot of [90] reasons why this bid is inadequate.[273]

      167

      McCausland testified that he and the rest of the board are "[a]bsolutely not" opposed to a sale of Airgas—but they are opposed to $70 because it is an inadequate bid.[274]

      168

      The next day, December 22, 2010, Airgas filed another amendment to its 14D-9, announcing the board's unanimous rejection of Air Products' $70 offer as "clearly inadequate" and recommending that Airgas stockholders not tender their shares.[275] The board reiterated once more that the value of Airgas in a sale is at least $78 per share.[276] In this filing, Airgas listed numerous reasons for its recommendation, in two pages of easy-to-read bullet points.[277] These reasons included the Airgas board's knowledge and experience in the industry; the board's knowledge of Airgas's financial condition and strategic plans, including current trends in the business and the expected future benefits of SAP and returns on other substantial capital investments that have yet to be realized; Airgas's historical trading prices and strong position in the industry; the potential benefits of the transaction for Air Products, including synergies and accretion; the board's consideration of views expressed by various stockholders; and the inadequacy opinions of its financial advisors.[278] All three of the outside financial advisors' written inadequacy opinions were attached to the filing.[279]

      169

      Once again, the evidence presented at the supplemental evidentiary hearing was that the Airgas stockholders are a sophisticated group,[280] and that they had an extraordinary amount of information available to them with which to make an informed decision about Air Products' offer. Although a few of the directors expressed the view that they understood the potential benefits of SAP and the details of the five-year plan better than stockholders could, the material information underlying management's assumptions has been released to stockholders through SEC filings and is reflected in public analysts' reports as well.[281] Airgas has issued four earnings releases since the time Air Products first announced its tender offer in February 2010.[282] McCausland has appeared in print, on the radio, and on television, and has met with numerous stockholders individually[283] to tell them that Air Products' offer is inadequate:

      170

      [91] Q. You've said that [the $70 offer is inadequate] hundreds, if not thousands of times. You've said it in print. You've said it on radio, on television. Is there any place you haven't said it, sir?

      A. I can't think of any.

      Q. Is there any doubt in your mind that an Airgas shareholder, who cares to know what you and your board and your management think, is by now fully aware of your position that $70 is inadequate? ... Do you have any doubt that your shareholders know that Peter McCausland, his fellow directors, all ten of them, the management team at Airgas and their outside advisors all believe that this offer is inadequate?

      A. [I] think that we've gotten the point across.

      Q. Is there anything you could think of that you've neglected to do to convey that message to the shareholders?

      A. [...] We've made that clear, that the offer is inadequate and that our shareholders should not tender.[284]

      171

      The testimony of other Airgas directors and financial advisors provides further support. John van Roden could not think of any other information he believed Airgas could provide to its stockholders to convince them as to the accuracy of the board's view on value that the stockholders don't already know.[285] Miller could not think of any facts about Airgas's business strategy or Air Products' offer that would make Airgas's stockholders incapable of properly making an economic judgment about the tender offer.[286] When I asked David DeNunzio, Airgas's financial advisor from Credit Suisse, what more an Airgas stockholder needs to know than they already do know in order to make an informed judgment about accepting an offer at $70 or some other price, he responded "I think you have to conclude that this shareholder base is quite well-informed."[287]

      172

      In addition, numerous independent analysts' reports on Airgas are publicly available (and the numbers are very similar to Airgas's projections). Stockholders can read those reports; they can read the testimony presented during the October trial and the January supplementary hearing. They can read DeNunzio's testimony that in his professional opinion, the fair value of Airgas is in the "mid to high seventies, and well into the mid eighties."[288] They can read Robert Lumpkins' opinion (one of the Air Products Nominees) that Airgas, "on its own, its own business will be worth $78 or more in the not very distant future because of its own earnings and cash flow prospects ... as a standalone company."[289] They can read the three inadequacy opinions of the independent financial advisors. In short, "[a]ll the information they could ever want is available."[290]

      173
      II. STANDARD OF REVIEW
      174
      A. The Unocal Standard
      175

      Because of the "omnipresent specter" of entrenchment in takeover situations, [92] it is well-settled that when a poison pill is being maintained as a defensive measure and a board is faced with a request to redeem the rights, the Unocal standard of enhanced judicial scrutiny applies.[291] Under that legal framework, to justify its defensive measures, the target board must show (1) that it had "reasonable grounds for believing a danger to corporate policy and effectiveness existed" (i.e., the board must articulate a legally cognizable threat) and (2) that any board action taken in response to that threat is "reasonable in relation to the threat posed."[292]

      176

      The first hurdle under Unocal is essentially a process-based review: "Directors satisfy the first part of the Unocal test by demonstrating good faith and reasonable investigation."[293] Proof of good faith and reasonable investigation is "materially enhanced, as here, by the approval of a board comprised of a majority of outside independent directors."[294]

      177

      But the inquiry does not end there; process alone is not sufficient to satisfy the first part of Unocal review— "under Unocal and Unitrin the defendants have the burden of showing the reasonableness of their investigation, the reasonableness of their process and also of the result that they reached."[295] That is, the "process" has to lead to the finding of a threat. Put differently, no matter how exemplary the board's process, or how independent the board, or how reasonable its investigation, to meet their burden under the first prong of Unocal defendants must actually articulate some legitimate threat to corporate policy and effectiveness.[296]

      178

      Once the board has reasonably perceived a legitimate threat, Unocal prong 2 engages the Court in a substantive review of the board's defensive actions: Is the board's action taken in response to that threat proportional to the threat posed?[297] In other words, "[b]ecause of the omnipresent specter that directors could use a rights plan improperly, even when acting subjectively in good faith, Unocal and its progeny require that this Court also review the use of a rights plan objectively."[298] This proportionality review asks first whether the board's actions were "draconian, by being either preclusive or coercive."[299] If the board's response was not draconian, the Court must then determine whether it fell "within a range of [93] reasonable responses to the threat" posed.[300]

      179
      B. Unocal—Not the Business Judgment Rule—Applies Here
      180

      Defendants argue that "Unocal does not apply in a situation where the bidder's nominees agree with the incumbent directors after receiving advice from a new investment banker."[301] This, they say, is because the "sole justification for Unocal's enhanced standard of review is the `omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders,'"[302] and that in "the absence of this specter, a board's `obligation to determine whether [a takeover] offer is in the best interests of the corporation and its shareholders ... is no different from any other responsibility it shoulders, and its decisions should be no less entitled to the respect they otherwise would be accorded in the realm of business judgment.'"[303] Thus, they argue, because Airgas has presented overwhelming evidence that the directors—particularly now including the three new Air Products Nominees—are independent and have acted in good faith, the "theoretical specter of disloyalty does not exist" and therefore "Unocal's heightened standard of review does not apply here."[304]

      181

      That is simply an incorrect statement of the law. What the Supreme Court actually said in Unocal, without taking snippets of quotes out of context, was the following:

      182

      When a board addresses a pending takeover bid it has an obligation to determine whether the offer is in the best interests of the corporation and its shareholders. In that respect a board's duty is no different from any other responsibility it shoulders, and its decisions should be no less entitled to the respect they otherwise would be accorded in the realm of business judgment. There are, however, certain caveats to a proper exercise of this function. Because of the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders, there is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred.[305]

      183

      Because the Airgas board is taking defensive action in response to a pending takeover bid, the "theoretical specter of disloyalty" does exist— indeed, it is the very reason the Delaware Supreme Court in Unocal created an intermediate standard of review applying enhanced scrutiny to board action before directors would be entitled to the protections of the business judgment rule. In articulating this intermediate standard, the Supreme Court in Unocal continued:

      184

      [Even when] a defensive measure to thwart or impede a takeover is indeed motivated by a good faith concern for the welfare of the corporation and its stockholders, which in all circumstances must be free of any fraud or other misconduct... this does not end the inquiry. A further aspect is the element of balance. If a defensive measure is to come within the ambit of the business [94] judgment rule, it must be reasonable in relation to the threat posed.[306]

      185

      The idea that boards may be acting in their own self-interest to perpetuate themselves in office is, in and of itself, the "omnipresent specter" justifying enhanced judicial scrutiny. There is "no doubt that the basis for the omnipresent specter is the interest of incumbent directors, both insiders and outsiders, in retaining the `powers and perquisites' of board membership."[307] To pass muster under this enhanced scrutiny, those directors bear the burden of proving that they were acting in good faith and have articulated a legally cognizable threat and that their actions were reasonable in response to that perceived threat—not simply that they were independent and acting in good faith.[308] To wit:

      186

      In Time, [the Delaware Supreme Court] expressly rejected the proposition that `once the board's deliberative process has been analyzed and found not to be wanting in objectivity, good faith or deliberativeness, the so-called `enhanced' business judgment rule has been satisfied and no further inquiry is undertaken.[309]

      187

      Accordingly, defendants are wrong. The Unocal standard of enhanced judicial scrutiny—not the business judgment rule—is the standard of review that applies to a board's defensive actions taken in response to a hostile takeover. This is how Delaware has always interpreted the Unocal standard. There has never been any doubt about this, and as recently as four months ago the Delaware Supreme Court reaffirmed this understanding in Selectica.[310]

      188
      C. A Brief Poison Pill Primer—Moran and its Progeny
      189

      This case unavoidably highlights what former-Chancellor Allen has called "an anomaly" in our corporation law.[311] The [95] anomaly is that "[p]ublic tender offers are, or rather can be, change in control transactions that are functionally similar to merger transactions with respect to the critical question of control over the corporate enterprise."[312] Both tender offers and mergers are "extraordinary" transactions that "threaten[] equivalent impacts upon the corporation and all of its constituencies including existing shareholders."[313] But our corporation law statutorily views the two differently—under DGCL § 251, board approval and recommendation is required before stockholders have the opportunity to vote on or even consider a merger proposal, while traditionally the board has been given no statutory role in responding to a public tender offer.[314] The poison pill was born "as an attempt to address the flaw (as some would see it) in the corporation law" giving boards a critical role to play in the merger context but no role to play in tender offers.[315]

      190

      These "functionally similar forms of change in control transactions," however, have received disparate legal treatment— on the one hand, a decision not to pursue a merger proposal (or even a decision not to engage in negotiations at all) is reviewed under the deferential business judgment standard, while on the other hand, a decision not to redeem a poison pill in the face of a hostile tender offer is reviewed under "intermediate scrutiny" and must be "reasonable in relation to the threat posed" by such offer.[316]

      191

      In Moran v. Household International, Inc., written shortly after the Unocal decision in 1985, the Delaware Supreme Court first upheld the legality of the poison pill as a valid takeover defense.[317] Specifically, in Moran, the Household board of directors "react[ed] to what it perceived to be the threat in the market place of coercive two-tier tender offers" by adopting a stockholder rights plan that would allow the corporation to protect stockholders by issuing securities as a way to ward off a hostile bidder presenting a structurally coercive offer.[318] The Moran Court held that the adoption of such a rights plan was within the board's statutory authority and thus was not per se illegal under Delaware law. But the Supreme Court cabined the use of the rights plan as follows:

      192

      [T]he Rights Plan is not absolute. When the Household Board of Directors is faced with a tender offer and a request to redeem rights, they will not be able to arbitrarily reject the offer. They will be held to the same fiduciary standards any other board of directors would be held to in deciding to adopt a defensive mechanism, the same standard they were held to in originally approving the Rights Plan.[319]

      193

      The Court went on to say that "[t]he Board does not now have unfettered discretion in refusing to redeem the Rights. [96] The Board has no more discretion in refusing to redeem the Rights than it does in enacting any defensive mechanism."[320] Accordingly, while the Household board's adoption of the rights plan was deemed to be made in good faith, and the plan was found to be reasonable in relation to the threat posed by the "coercive acquisition techniques" that were prevalent at the time, the pill at that point was adopted merely as a preventive mechanism to ward off future advances. The "ultimate response to an actual takeover," though, would have to be judged by the directors' actions taken at that time, and the board's "use of the Plan [would] be evaluated when and if the issue [arose]."[321]

      194

      Notably, the pill in Moran was considered reasonable in part because the Court found that there were many methods by which potential acquirors could get around the pill.[322] One way around the pill was the "proxy out"—bidders could solicit consents to remove the board and redeem the rights. In fact, the Court did "not view the Rights Plan as much of an impediment on the tender offer process" at all.[323] After all, the board in Moran was not classified, and so the entire board was up for reelection annually[324]— meaning that all of the directors could be replaced in one fell swoop and the acquiror could presumably remove any impediments to its tender offer fairly easily after that.

      195

      So, the Supreme Court made clear in Moran that "coercive acquisition techniques" (i.e. the well-known two-tiered front-end-loaded hostile tender offers of the 1980s) were a legally cognizable "threat," and the adoption of a poison pill was a reasonable defensive measure taken in response to that threat. At the time Moran was decided, though, the intermediate standard of review was still new and developing, and it remained to be seen "what [other] `threats' from hostile bidders, apart from unequal treatment for non-tendering shareholders, [would be] sufficiently grave to justify preclusive defensive tactics without offering any transactional alternative at all."[325]

      196

      Two scholars at the time penned an article suggesting that there were three types of threats that could be recognized under Unocal: (1) structural coercion— "the risk that disparate treatment of non-tendering shareholders might distort shareholders' tender decisions"[326] (i.e., the situation involving a two-tiered offer where the back end gets less than the front end); (2) opportunity loss—the "dilemma that a hostile offer might deprive target shareholders of the opportunity to select a superior alternative offered by target management;"[327] and (3) substantive coercion— "the risk that shareholders will mistakenly accept an underpriced offer because they disbelieve management's representations of intrinsic value."[328]

      197

      Recognizing that substantive coercion was a "slippery concept" that had the potential to be abused or misunderstood, the professors explained:

      198

      [97] To note abstractly that management might know shareholder interests better than shareholders themselves do cannot be a basis for rubber-stamping management's pro forma claims in the face of market skepticism and the enormous opportunity losses that threaten target shareholders when hostile offers are defeated. Preclusive defensive tactics are gambles made on behalf of target shareholders by presumptively self-interested players. Although shareholders may win or lose in each transaction, they would almost certainly be better off on average if the gamble were never made in the absence of meaningful judicial review. By minimizing management's ability to further its self-interest in selecting its response to a hostile offer, an effective proportionality test can raise the odds that management resistance, when it does occur, will increase shareholder value.[329]

      199

      Gilson & Kraakman believed that, if used correctly, an effective proportionality test could properly incentivize management, protect stockholders and ultimately increase value for stockholders in the event that management does resist a hostile bid—but only if a real "threat" existed. To demonstrate the existence of such a threat, management must show (in detail) how its plan is better than the alternative (the hostile deal) for the target's stockholders. Only then, if management met that burden, could it use a pill to block a "substantively coercive," but otherwise non-coercive bid.

      200

      The test proposed by the professors was taken up, and was more or less adopted, by then-Chancellor Allen in City Capital Associates v. Interco.[330] There, the board of Interco had refused to redeem a pill that was in place as a defense against an unsolicited tender offer to purchase all of Interco's shares for $74 per share. The bid was non-coercive (structurally), because the offer was for $74 both on the front and back end, if accepted. As an alternative to the offer, the board of Interco sought to effect a restructuring that it claimed would be worth at least $76 per share.

      201

      After pointing out that every case in which the Delaware Supreme Court had, to that point, addressed a defensive corporate measure under Unocal involved a structurally coercive offer (i.e. a threat to voluntariness), the Chancellor recognized that "[e]ven where an offer is noncoercive, it may represent a `threat' to shareholder interests" because a board with the power to refuse the proposal and negotiate actively may be able to obtain higher value from the bidder, or present an alternative transaction of higher value to stockholders.[331] Although he declined to apply the term "substantive coercion" to the threat potentially posed by an "inadequate" but non-coercive offer, Chancellor Allen clearly addressed the concept. Consciously eschewing use of the Orwellian term "substantive coercion,"[332] the Chancellor determined that, based on the facts presented to him, there was no threat of stockholder [98] "coercion"—instead, the threat was to stockholders' economic interests posed by a "non-coercive" offer that the board deemed to be "inadequate."[333] As Gilson & Kraakman had suggested, the Chancellor then held that, assuming the board's determination was made in good faith, such a determination could justify leaving a poison pill in place for some period of time while the board protects stockholder interests (either by negotiating with the bidder, or looking for a white knight, or designing an alternative to the offer). But "[o]nce that period has closed ... and [the board] has taken such time as it required in good faith to arrange an alternative value-maximizing transaction, then, in most instances, the legitimate role of the poison pill in the context of a noncoercive offer will have been fully satisfied."[334] The only remaining function for the pill at that point, he concluded, is to preclude a majority of the stockholders from making their own determination about whether they want to tender.

      202

      The Chancellor held that the "mild threat" posed by the tender offer (a difference of approximately $2 per share, when the tender offer was for all cash and the value of management's alternative was less certain) did not justify the board's decision to keep the pill in place, effectively precluding stockholders from exercising their own judgment—despite the board's good faith belief that the offer was inadequate and keeping the pill in place was in the best interests of stockholders.

      203

      In Paramount Communications, Inc. v. Time, Inc., however, the Delaware Supreme Court explicitly rejected an approach to Unocal analysis that "would involve the court in substituting its judgment as to what is a `better' deal for that of a corporation's board of directors."[335] Although not a "pill case," the Supreme Court in Paramount addressed the concept of substantive coercion head on in determining whether an all-cash, all-shares tender offer posed a legally cognizable threat to the target's stockholders.

      204

      As the Supreme Court put it, the case presented them with the following question: "Did Time's board, having developed a [long-term] strategic plan ... come under a fiduciary duty to jettison its plan and put the corporation's future in the hands of its stockholders?"[336] Key to the Supreme Court's ruling was the underlying pivotal question in their mind regarding the Time board's specific long-term plan—its proposed merger with Warner—and whether by entering into the proposed merger, Time had essentially "put itself up for sale."[337] This was important because, so long as the company is not "for sale," then Revlon duties do not kick in and the board "is not under any per se duty to maximize shareholder value in the short term, even in the context of a takeover."[338] The Supreme Court held that the Time board had not abandoned its long-term strategic plans; thus Revlon duties were not triggered and Unocal alone applied to the board's actions.[339]

      205

      [99] In evaluating the Time board's actions under Unocal, the Supreme Court embraced the concept of substantive coercion, agreeing with the Time board that its stockholders might have tendered into Paramount's offer "in ignorance or a mistaken belief of the strategic benefit which a business combination with Warner might produce."[340] Stating in no uncertain terms that "in our view, precepts underlying the business judgment rule militate against a court's engaging in the process of attempting to appraise and evaluate the relative merits of a long-term versus a short-term investment goal for shareholders"[341] (as to do so would be "a distortion of the Unocal process"), the Supreme Court held that Time's response was proportionate to the threat of Paramount's offer. Time's defensive actions were not aimed at "cramming down" a management-sponsored alternative to Paramount's offer, but instead, were simply aimed at furthering a pre-existing long-term corporate strategy.[342] This, held the Supreme Court, comported with the board's valid exercise of its fiduciary duties under Unocal.

      206

      Five years later, the Supreme Court further applied the "substantive coercion" concept in Unitrin, Inc. v. American General Corp.[343] There, a hostile acquirer (American General) wanted Unitrin (the target corporation) to be enjoined from implementing a stock repurchase and poison pill adopted in response to American General's "inadequate" all-cash offer. Recognizing that previous cases had held that "inadequate value" of an all-cash offer could be a valid threat (i.e. Interco), the Court also reiterated its conclusion in Paramount that inadequate value is not the only threat posed by a non-coercive, all-cash offer. The Unitrin Court recited that "the Time board of directors had reasonably determined that inadequate value was not the only threat that Paramount's all cash for all shares offer presented, but was also reasonably concerned that the Time stockholders might tender to Paramount in ignorance or based upon a mistaken belief, i.e., yield to substantive coercion."[344]

      207

      Relying on that line of reasoning, the Unitrin Court determined that the Unitrin board "reasonably perceived risk of substantive coercion, i.e., that Unitrin's shareholders might accept American General's inadequate Offer because of `ignorance or mistaken belief' regarding the Board's assessment of the long-term value of Unitrin's stock."[345] Thus, perceiving a valid threat under Unocal, the Supreme Court then addressed whether the board of Unitrin's response was proportional to the threat.

      208

      Having determined that the Unitrin board reasonably perceived the American General offer to be inadequate, and Unitrin's poison pill adoption to be a proportionate response, the Court of Chancery had found that the Unitrin board's decision to authorize its stock repurchase program was disproportionate because it was "unnecessary" to protect the Unitrin stockholders from an inadequate bid since the board already had a pill in place. The Court of Chancery here was sensitive to [100] how the stock buy back would make it extremely unlikely that American General could win a proxy contest. The Supreme Court, however, held that the Court of Chancery had "erred by substituting its judgment, that the Repurchase Program was unnecessary, for that of the board,"[346] and that such action, if not coercive or preclusive, could be valid if it fell within a range of reasonableness.

      209

      At least one of the professors, it seems, is unhappy with how the Supreme Court has apparently misunderstood the concept of substantive coercion as he had envisioned it, noting that "only the phrase and not the substance captured the attention of the Delaware Supreme Court" such that the "mere incantation" of substantive coercion now seems sufficient to establish a threat justifying a board's defensive strategy.[347]

      210

      More recent cases decided by the Court of Chancery have attempted to cut back on the now-broadened concept of "substantive coercion." The concept, after all, was originally (as outlined by Professors Gilson & Kraakman) intended to be a very carefully monitored "threat" requiring close judicial scrutiny of any defensive measures taken in response to such a threat. In Chesapeake v. Shore, Vice Chancellor Strine stated:

      211

      One might imagine that the response to this particular type of threat might be time-limited and confined to what is necessary to ensure that the board can tell its side of the story effectively. That is, because the threat is defined as one involving the possibility that stockholders might make an erroneous investment or voting decision, the appropriate response would seem to be one that would remedy that problem by providing the stockholders with adequate information.[348]

      212

      Once the stockholders have access to such information, the potential for stockholder "confusion" seems substantially lessened. At that point, "[o]ur law should [] hesitate to ascribe rube-like qualities to stockholders. If the stockholders are presumed competent to buy stock in the first place, why are they not presumed competent to decide when to sell in a tender offer after an adequate time for deliberation has been afforded them?"[349]

      213

      That is essentially how former-Chancellor Allen first attempted to apply the concept of substantive coercion in Interco. Chancellor Allen found it "significant" that the question of the board's responsibility to redeem or not to redeem the poison pill in Interco arose at the "end-stage" of the takeover contest.[350] He explained:

      214

      [T]he negotiating leverage that a poison pill confers upon this company's board will, it is clear, not be further utilized by the board to increase the options available to shareholders or to improve the terms of those options. Rather, at this stage of this contest, the pill now serves the principal purpose of ... precluding the shareholders from choosing an alternative... that the board finds less valuable to shareholders.[351]

      215

      Similarly, here, the takeover battle between Air Products and Airgas seems to [101] have reached an "end stage."[352] Air Products has made its "best and final" offer. Airgas deems that offer to be inadequate. And we're not "talking nickels and quarters here"[353]—an $8 gulf separates the two. The Airgas stockholders know all of this. At this stage, the pill is serving the principal purpose of precluding the shareholders from tendering into Air Products' offer. As noted above, however, the Supreme Court rejected the reasoning of Interco in Paramount. Thus, while I agree theoretically with former-Chancellor Allen's and Vice Chancellor Strine's conception of substantive coercion and its appropriate application, the Supreme Court's dictum in Paramount (which explicitly disapproves of Interco) suggests that, unless and until the Supreme Court rules otherwise, that is not the current state of our law.

      216
      D. A Note on TW Services
      217

      TW Services, Inc. v. SWT Acquisition Corp.[354] is an often overlooked case that is, in my view, an illuminating piece in this takeover puzzle. The case was another former-Chancellor Allen decision, decided just after Interco and Pillsbury, and right before Paramount. Indeed, it appears to be cited approvingly in Paramount in the same sentence where "Interco and its progeny" were rejected as not in keeping with proper Unocal analysis.[355] In other words, according to the Supreme Court, in TW Services (as opposed to Interco), Chancellor Allen did not substitute his "judgment as to what is a `better' deal for that of a corporation's board of directors."[356] But it is important to look at why this was so.

      218

      As noted above, TW Services essentially teed up the very question I am addressing in this Opinion, but then declined to answer it in light of the particular facts of that case. Specifically, Chancellor Allen raised front and center the question when, if ever, must a board abandon its long-run strategy in the face of a hostile tender offer. He declined to answer it because he decided the case on other grounds and did not ultimately need to reach the question.[357] In doing so, however, he provided insightful commentary on two key points: (1) a board's differing duties when under the Revlon versus Unocal standards of review,[358] and (2) Interco and its progeny.

      219

      First, as the Supreme Court later did in Paramount, Chancellor Allen grappled [102] with the following "critical question[:] when is a corporation in a Revlon [Inc. v. MacAndrews & Forbes Holdings, 506 A.2d 173 (1986)] mode?"[359] It is not until the board is under Revlon that its duty "narrow[s]" to getting the best price reasonably available for stockholders in a sale of the company.[360] The reason the board's duty shifts at that point to maximizing shareholder value is simple: "In such a setting, for the present shareholders, there is no long run."[361] This is not so when the board is under Unocal, the company is not for sale, and the board is instead pursuing long run corporate interests. Accordingly, the Chancellor asked,

      220

      But what of a situation in which the board resists a sale? May a board find itself thrust involuntarily into a Revlon mode in which is it required to take only steps designed to maximize current share value and in which it must desist from steps that would impede that goal, even if they might otherwise appear sustainable as an arguable step in the promotion of "long term" corporate or share values?[362]

      221

      Chancellor Allen does not directly answer the question. Instead, he continues with another follow-up question: Does a director's duty of loyalty to "the corporation and its shareholders" require a board—in light of the fact that a majority of shares may wish to tender into a current share value maximizing transaction now—to enter into Revlon mode? Again, he leaves the answer for another day and another case. But the most famous quote from TW Services was embedded in a footnote following that last question. Namely, in considering whether the duty of loyalty could force a board into Revlon mode, the Chancellor mused:

      222

      Questions of this type call upon one to ask, what is our model of corporate governance? "Shareholder democracy" is an appealing phrase, and the notion of shareholders as the ultimate voting constituency of the board has obvious pertinence, but that phrase would not constitute the only element in a well articulated model. While corporate democracy is a pertinent concept, a corporation is not a New England town meeting; directors, not shareholders, have responsibilities to manage the business and affairs of the corporation, subject however to a fiduciary obligation.[363]

      223

      Second, Chancellor Allen shed light on two then-recent cases where the Court of Chancery had attempted to order redemption of a poison pill. He noted that the boards in those cases (i.e., Pillsbury[364] and Interco[365]) had "elected to pursue a defensive restructuring that in form and effect was (so far as the corporation itself was concerned) a close approximation of and an alternative to a pending all cash tender [103] offer for all shares."[366] In other words, in Pillsbury and Interco, the boards were responding to a hostile offer by proposing "a management endorsed breakup transaction that, realistically viewed, constituted a functional alternative to the resisted sale."[367] Importantly, "[t]hose cases did not involve circumstances in which a board had in good faith ... elected to continue managing the enterprise in a long term mode and not to actively consider an extraordinary transaction of any type."[368] The issue presented by a board that responds to a tender offer with a major restructuring or recapitalization is fundamentally different than that posed by a board which "just says no" and maintains the status quo.

      224

      Thus, it seemed, the Chancellor endorsed the view that so long as a corporation is not for sale, it is not in Revlon mode and is free to pursue its long run goals. In essence, TW Services appeared to support the view that a well-informed board acting in good faith in response to a reasonably perceived threat may, in fact, be able to "just say no" to a hostile tender offer.

      225

      The foregoing legal framework describes what I believe to be the current legal regime in Delaware. With that legal superstructure in mind, I now apply the Unocal standard to the specific facts of this case.

      226
      III. ANALYSIS
      227
      A. Has the Airgas Board Established That It Reasonably Perceived the Existence of a Legally Cognizable Threat?
      228
      1. Process
      229

      Under the first prong of Unocal, defendants bear the burden of showing that the Airgas board, "after a reasonable investigation ... determined in good faith, that the [Air Products offer] presented a threat ... that warranted a defensive response."[369] I focus my analysis on the defendants' actions in response to Air Products' current $70 offer, but I note here that defendants would have cleared the Unocal hurdles with greater ease when the relevant inquiry was with respect to the board's response to the $65.50 offer.[370]

      230

      In examining defendants' actions under this first prong of Unocal, "the presence of a majority of outside independent directors coupled with a showing of reliance on advice by legal and financial advisors, `constitute[s] a prima facie showing of good faith and reasonable investigation.'"[371] Here, it is undeniable that the Airgas board meets this test.

      231

      First, it is currently comprised of a majority of outside independent directors— including the three recently-elected insurgent directors who were nominated to the board by Air Products. Air Products does not dispute the independence of the Air [104] Products Nominees,[372] and the evidence at trial showed that the rest of the Airgas board, other than McCausland, are outside, independent directors who are not dominated by McCausland.[373]

      232

      Second, the Airgas board relied on not one, not two, but three outside independent financial advisors in reaching its conclusion that Air Products' offer is "clearly inadequate."[374] Credit Suisse, the third outside financial advisor—as described in Section I.Q.2—was selected by the entire Airgas board, was approved by the three Air Products Nominees, and its independence and qualifications are not in dispute.[375] In addition, the Airgas board has relied on the advice of legal counsel,[376] and the three Air Products Nominees have retained their own additional independent legal counsel (Skadden, Arps). In short, the Airgas board's process easily passes the smell test.

      233
      2. What is the "Threat?"
      234

      Although the Airgas board meets the threshold of showing good faith and reasonable investigation, the first part of Unocal review requires more than that; it requires the board to show that its good faith and reasonable investigation ultimately gave the board "grounds for concluding that a threat to the corporate enterprise existed."[377] In the supplemental evidentiary hearing, Airgas (and its lawyers) attempted to identify numerous threats posed by Air Products' $70 offer: It is coercive. It is opportunistically timed.[378] It presents the stockholders with a "prisoner's dilemma." It undervalues Airgas—it is a "clearly inadequate" price. The merger arbitrageurs who have bought into Airgas need to be "protected from themselves."[379] The arbs are a "threat" to the minority.[380] The list goes on.

      235

      [105] The reality is that the Airgas board discussed essentially none of these alleged "threats" in its board meetings, or in its deliberations on whether to accept or reject Air Products' $70 offer, or in its consideration of whether to keep the pill in place. The board did not discuss "coercion" or the idea that Airgas's stockholders would be "coerced" into tendering.[381] The board did not discuss the concept of a "prisoner's dilemma."[382] The board did not discuss Air Products' offer in terms of any "danger" that it posed to the corporate enterprise.[383] In the October trial, Airgas had likewise failed to identify threats other than that Air Products' offer undervalues Airgas.[384] In fact, there has been no specific board discussion since the October trial over whether to keep the poison pill in place (other than Clancey's "protect the pill" line).[385]

      236

      Airgas's board members testified that the concepts of coercion, threat, and the decision whether or not to redeem the pill were nonetheless "implicit" in the board's discussions due to their knowledge that a large percentage of Airgas's stock is held by merger arbitrageurs who have short-term interests and would be willing to tender into an inadequate offer.[386] But the only threat that the board discussed—the threat that has been the central issue since the beginning of this case—is the inadequate price of Air Products' offer. Thus, inadequate price, coupled with the fact that a majority of Airgas's stock is held by merger arbitrageurs who might be willing to tender into such an inadequate offer, is [106] the only real "threat" alleged. In fact, Airgas directors have admitted as much. Airgas's CEO van Roden testified:

      237

      Q. [O]ther than the price being inadequate, is there anything else that you deem to be a threat?

      A. No.[387]

      238

      In the end, it really is "All About Value."[388] Airgas's directors and Airgas's financial advisors concede that the Airgas stockholder base is sophisticated and well-informed, and that they have all the information necessary to decide whether to tender into Air Products' offer.[389]

      239
      a. Structural Coercion
      240

      Air Products' offer is not structurally coercive. A structurally coercive offer involves "the risk that disparate treatment of non-tendering shareholders might distort shareholders' tender decisions."[390] Unocal, for example, "involved a two-tier, highly coercive tender offer" where stock-holders who did not tender into the offer risked getting stuck with junk bonds on the back end.[391] "In such a case, the threat is obvious: shareholders may be compelled to tender to avoid being treated adversely in the second stage of the transaction."[392]

      241

      Air Products' offer poses no such structural threat. It is for all shares of Airgas, with consideration to be paid in all cash.[393] The offer is backed by secured financing.[394] There is regulatory approval.[395] The front end will get the same consideration as the back end, in the same currency, as quickly as practicable. Air Products is committed to promptly paying $70 in cash for each and every share of Airgas and has no interest in owning less than 100% of Airgas.[396] Air Products would seek to acquire any non-tendering shares "[a]s quick[ly] as the law would allow."[397] It is willing to commit to a subsequent offering period.[398] In light of that, any stockholders who believe [107] that the $70 offer is inadequate simply would not tender into the offer—they would risk nothing by not tendering because if a majority of Airgas shares did tender, any non-tendering shares could tender into the subsequent offering period and receive the exact same consideration ($70 per share in cash) as the front end.[399] In short, if there were an antonym in the dictionary for "structural coercion," Air Products' offer might be it.

      242

      As former-Vice Chancellor, now Justice Berger noted, "[c]ertainly an inadequate [structurally] coercive tender offer threatens injury to the stockholders ... [but i]t is difficult to understand how, as a general matter, an inadequate all cash, all shares tender offer, with a back end commitment at the same price in cash, can be considered a continuing threat under Unocal."[400] I agree. As noted above, though, the Supreme Court has recognized other "threats" that can be posed by an inadequately priced offer. One such potential continuing threat has been termed "opportunity loss," which appears to be a time-based threat.

      243
      b. Opportunity Loss
      244

      Opportunity loss is the threat that a "hostile offer might deprive target stockholders of the opportunity to select a superior alternative offered by target management or ... offered by another bidder."[401] As then-Vice Chancellor Berger (who was also one of the Justices in Unitrin) explained in Shamrock Holdings:

      245

      An inadequate, non-coercive offer may [] constitute a threat for some reasonable period of time after it is announced. The target corporation (or other potential bidders) may be inclined to provide the stockholders with a more attractive alternative, but may need some additional time to formulate and present that option. During the interim, the threat is that the stockholders might choose the inadequate tender offer only because the superior option has not yet been presented.... However, where there has been sufficient time for any alternative to be developed and presented and for the target corporation to inform its stockholders of the benefits of retaining their equity position, the "threat" to the stockholders of an inadequate, non-coercive offer seems, in most circumstances, to be without substance.[402]

      246

      As such, Air Products' offer poses no threat of opportunity loss. The Airgas board has had, at this point, over sixteen months to consider Air Products' offer and to explore "strategic alternatives going forward as a company."[403] After all that time, there is no alternative offer currently on the table, and counsel for defendants represented during the October trial that "we're not asserting that we need more [108] time to explore a specific alternative."[404] The "superior alternative" Airgas is pursuing is simply to "continue[] on its current course and execute[] its strategic [five year, long term] plan."[405]

      247
      c. Substantive Coercion
      248

      Inadequate price and the concept of substantive coercion are inextricably related. The Delaware Supreme Court has defined substantive coercion, as discussed in Section II.C, as "the risk that [Airgas's] stockholders might accept [Air Products'] inadequate Offer because of `ignorance or mistaken belief' regarding the Board's assessment of the long-term value of [Airgas's] stock."[406] In other words, if management advises stockholders, in good faith, that it believes Air Products' hostile offer is inadequate because in its view the future earnings potential of the company is greater than the price offered, Airgas's stockholders might nevertheless reject the board's advice and tender.

      249

      In the article that gave rise to the concept of "substantive coercion," Professors Gilson and Kraakman argued that, in order for substantive coercion to exist, two elements are necessary: (1) management must actually expect the value of the company to be greater than the offer—and be correct that the offer is in fact inadequate, and (2) the stockholders must reject management's advice or "believe that management will not deliver on its promise."[407] Both elements must be present because "[w]ithout the first element, shareholders who accept a structurally non-coercive offer have not made a mistake. Without the second element, shareholders will believe management and reject underpriced offers."[408]

      250

      Defendants' argument involves a slightly different take on this threat, based on the particular composition of Airgas's stockholders (namely, its large "short-term" base). In essence, Airgas's argument is that "the substantial ownership of Airgas stock by these short-term, deal-driven investors poses a threat to the company and its shareholders"—the threat that, because it is likely that the arbs would support the $70 offer, "shareholders will be coerced into tendering into an inadequate offer."[409] The threat of "arbs" is a new facet of substantive coercion, different from the substantive coercion claim recognized in Paramount.[410] There, the hostile tender offer was purposely timed to confuse the [109] stockholders. The terms of the offer could cause stockholders to mistakenly tender if they did not believe or understand (literally) the value of the merger with Warner as compared with the value of Paramount's cash offer. The terms of the offer introduced uncertainty. In contrast, here, defendants' claim is not about "confusion" or "mistakenly tendering" (or even "disbelieving" management)—Air Products' offer has been on the table for over a year, Airgas's stockholders have been barraged with information, and there is no alternative offer to choose that might cause stockholders to be confused about the terms of Air Products' offer. Rather, Airgas's claim is that it needs to maintain its defensive measures to prevent control from being surrendered for an unfair or inadequate price. The argument is premised on the fact that a large percentage (almost half) of Airgas's stockholders are merger arbitrageurs—many of whom bought into the stock when Air Products first announced its interest in acquiring Airgas, at a time when the stock was trading much lower than it is today—who would be willing to tender into an inadequate offer because they stand to make a significant return on their investment even if the offer grossly undervalues Airgas in a sale. "They don't care a thing about the fundamental value of Airgas."[411] In short, the risk is that a majority of Airgas's stockholders will tender into Air Products' offer despite its inadequate price tag, leaving the minority "coerced" into taking $70 as well.[412] The defendants do not appear to have come to grips with the fact that the arbs bought their shares from long-term stockholders who viewed the increased market price generated by Air Products' offer as a good time to sell.[413]

      251

      The threat that merger arbs will tender into an inadequately priced offer is only a legitimate threat if the offer is indeed inadequate.[414] "The only way to protect [110] stockholders [from a threat of substantive coercion] is for courts to ensure that the threat is real and that the board asserting the threat is not imagining or exaggerating it."[415] Air Products and Shareholder Plaintiffs attack two main aspects of Airgas's five year plan—(1) the macroeconomic assumptions relied upon by management, and (2) the fact that Airgas did not consider what would happen if the economy had a "double-dip" recession.

      252

      Plaintiffs argue that reasonable stockholders may disagree with the board's optimistic macroeconomic assumptions. McCausland did not hesitate to admit during the supplemental hearing that he is "very bullish" on Airgas. "It's an amazing company," he said. He testified that the company has a shot at making its 2007 five year plan "despite the fact that the worst recession since the Great Depression landed right in the middle of that period. [W]e're in a good business, and we have a unique competitive advantage in the U.S. market."[416] And it's not just Airgas that McCausland is bullish about—he's "bullish on the United States [] economy" as well.[417]

      253

      So management presented a single scenario in its revised five-year plan—no double dip recession; reasonably optimistic macroeconomic growth assumptions. Everyone at trial agreed that "reasonable minds can differ as to the view of future value."[418] But nothing in the record supported a claim that Airgas fudged any of its numbers, nor was there evidence that the board did not act at all times in good faith and in reasonable reliance on its outside advisors.[419] The Air Products Nominees [111] found the assumptions to be "reasonable."[420] They do not see "any indication of a double-dip recession."[421]

      254

      The next question is, if a majority of stockholders want to tender into an inadequately priced offer, is that substantive coercion? Is that a threat that justifies continued maintenance of the poison pill? Put differently, is there evidence in the record that Airgas stockholders are so "focused on the short-term" that they would "take a smaller harvest in the swelter of August over a larger one in Indian Summer"?[422] Air Products argues that there is none whatsoever. They argue that there is "no evidence in the record that [Airgas's short-term] holders [i.e., arbitrageurs and hedge funds] would not [] reject the $70 offer if it was viewed by them to be inadequate.... Defendants have not demonstrated a single fact supporting their argument that a threat to Airgas stockholders exists because the Airgas stock is held by investors with varying time horizons."[423]

      255

      But there is at least some evidence in the record suggesting that this risk may be real.[424] Moreover, both Airgas's expert and well as Air Products' own expert testified that a large number—if not all—of the arbitrageurs who bought into Airgas's stock at prices significantly below the $70 offer price would be happy to tender their shares at that price regardless of the potential long-term value of the company.[425] Based on the testimony of both expert witnesses, I find sufficient evidence that a majority of stockholders might be willing to tender their shares regardless of whether the price is adequate or not—thereby ceding control of Airgas to Air Products. This is a clear "risk" under the teachings [112] of TW Services[426] and Paramount[427] because it would essentially thrust Airgas into Revlon mode.

      256

      Ultimately, it all seems to come down to the Supreme Court's holdings in Paramount and Unitrin. In Unitrin, the Court held: "[T]he directors of a Delaware corporation have the prerogative to determine that the market undervalues its stock and to protect its stockholders from offers that do not reflect the long-term value of the corporation under its present management plan."[428] When a company is not in Revlon mode, a board of directors "is not under any per se duty to maximize shareholder value in the short term, even in the context of a takeover."[429] The Supreme Court has unequivocally "endorse[d the] conclusion that it is not a breach of faith for directors to determine that the present stock market price of shares is not representative of true value or that there may indeed be several market values for any corporation's stock."[430] As noted above, based on all of the facts presented to me, I find that the Airgas board acted in good faith and relied on the advice of its financial and legal advisors in coming to the conclusion that Air Products' offer is inadequate. And as the Supreme Court has held, a board that in good faith believes that a hostile offer is inadequate may "properly employ[] a poison pill as a proportionate defensive response to protect its stockholders from a `low ball' [113] bid."[431]

      257
      B. Is the Continued Maintenance of Airgas's Defensive Measures Proportionate to the "Threat" Posed by Air Products' Offer?
      258

      Turning now to the second part of the Unocal test, I must determine whether the Airgas board's defensive measures are a proportionate response to the threat posed by Air Products' offer. Where the defensive measures "are inextricably related, the principles of Unocal require that [they] be scrutinized collectively as a unitary response to the perceived threat."[432] Defendants bear the burden of showing that their defenses are not preclusive or coercive, and if neither, that they fall within a "range of reasonableness."[433]

      259
      1. Preclusive or Coercive
      260

      A defensive measure is coercive if it is "aimed at `cramming down' on its shareholders a management-sponsored alternative."[434] Airgas's defensive measures are certainly not coercive in this respect, as Airgas is specifically not trying to cram down a management sponsored alternative, but rather, simply wants to maintain the status quo and manage the company for the long term.

      261

      A response is preclusive if it "makes a bidder's ability to wage a successful proxy contest and gain control [of the target's board] ... `realistically unattainable.'"[435] Air Products and Shareholder Plaintiffs argue that Airgas's defensive measures are preclusive because they render the possibility of an effective proxy contest realistically unattainable. What the argument boils down to, though, is that Airgas's defensive measures make the possibility of Air Products obtaining control of the Airgas board and removing the pill realistically unattainable in the very near future, because Airgas has a staggered board in place. Thus, the real issue posed is whether defensive measures are "preclusive" if they make gaining control of the board realistically unattainable in the short term (but still realistically attainable sometime in the future), or if "preclusive" actually means "preclusive"—i.e. forever unattainable. In reality, or perhaps I should say in practice, these two formulations ("preclusive for now" or "preclusive forever") may be one and the same when examining the combination of a staggered board plus a poison pill, because no bidder to my knowledge has ever successfully stuck around for two years and waged two successful proxy contests to gain control of a classified board in order to remove a pill.[436] So does that make the combination of a [114] staggered board and a poison pill preclusive?

      262

      This precise question was asked and answered four months ago in Versata Enterprises, Inc. v. Selectica, Inc. There, Trilogy (the hostile acquiror) argued that in order for the target's defensive measures not to be preclusive: (1) a successful proxy contest must be realistically attainable, and (2) the successful proxy contest must result in gaining control of the board at the next election. The Delaware Supreme Court rejected this argument, stating that "[i]f that preclusivity argument is correct, then it would apply whenever a corporation has both a classified board and a Rights Plan.... [W]e hold that the combination of a classified board and a Rights Plan do not constitute a preclusive defense."[437]

      263

      The Supreme Court explained its reasoning as follows:

      264

      Classified boards are authorized by statute and are adopted for a variety of business purposes. Any classified board also operates as an antitakeover defense by preventing an insurgent from obtaining control of the board in one election. More than a decade ago, in Carmody [v. Toll Brothers, Inc.], the Court of Chancery noted "because only one third of a classified board would stand for election each year, a classified board would delay—but not prevent—a hostile acquiror from obtaining control of the board, since a determined acquiror could wage a proxy contest and obtain control of two thirds of the target board over a two year period, as opposed to seizing control in a single election."[438]

      265

      The Court concluded: "The fact that a combination of defensive measures makes it more difficult for an acquirer to obtain control of a board does not make such measures realistically unattainable, i.e., preclusive."[439] Moreover, citing Moran, the Supreme Court noted that pills do not fundamentally restrict proxy contests, explaining that a "Rights Plan will not have a severe impact upon proxy contests and it will not preclude all hostile acquisitions of Household."[440] Arguably the combination of a staggered board plus a pill is at least more preclusive than the use of a rights plan by a company with a pill alone (where all directors are up for election annually, as in Gaylord Container and Moran, because the stockholders could replace the entire board at once and redeem the pill). In any event, though, the Supreme Court [115] in Selectica suggests that this is a distinction without a significant difference, and very clearly held that the combination of a classified board and a Rights Plan is not preclusive, and that the combination may only "delay—but not prevent—a hostile acquiror from obtaining control of the board."[441]

      266

      The Supreme Court reinforced this holding in its Airgas bylaw decision related to this case, when it ruled that directors on a staggered board serve "three year terms" and Airgas could thus not be forced to push its annual meeting from August/September 2011 up to January 2011.[442] There, the Supreme Court cited approvingly to the "historical understanding" of the impact of staggered boards:

      267

      "By spreading the election of the full board over a period of three years, the classified board forces the successful [tender] offeror to wait, in theory at least, two years before assuming working control of the board of directors."[443]

      * * *

      "A real benefit to directors on a [staggered] board is that it would take two years for an insurgent to obtain control in a proxy contest."[444]

      268

      In addition, the Supreme Court cited its Selectica decision where, as noted above, it had held that "`a classified board would delay—but not prevent—a hostile acquiror from obtaining control of the board, since a determined acquiror could wage a proxy contest and obtain control of two thirds of the target board over a two year period, as opposed to seizing control in a single election."[445]

      269

      I am thus bound by this clear precedent to proceed on the assumption that Airgas's defensive measures are not preclusive if they delay Air Products from obtaining control of the Airgas board (even if that delay is significant) so long as obtaining control at some point in the future is realistically attainable. I now examine whether the ability to obtain control of Airgas's board in the future is realistically attainable.

      270

      Air Products has already run one successful slate of insurgents. Their three independent nominees were elected to the Airgas board in September. Airgas's next annual meeting will be held sometime around September 2011. Accordingly, if Airgas's defensive measures remain in place, Air Products has two options if it wants to continue to pursue Airgas at this time:[446] (1) It can call a special meeting and remove the entire board with a supermajority vote of the outstanding shares, or (2) It can wait until Airgas's 2011 annual meeting to nominate a slate of directors. I [116] will address the viability of each of these options in turn.

      271
      a. Call a Special Meeting to Remove the Airgas Board by a 67% Supermajority Vote
      272

      Airgas's charter allows for 33% of the outstanding shares to call a special meeting of the stockholders, and to remove the entire board without cause by a vote of 67% of the outstanding shares.[447] Defendants make much of the fact that "[o]f the 85 Delaware companies in the Fortune 500 with staggered boards, only six (including Airgas) have charter provisions that permit shareholders to remove directors without cause between annual meetings (i.e., at a special meeting and/or by written consent)."[448] This argument alone is not decisive on the issue of preclusivity, although it does distinguish the particular facts of this case from the typical case of a company with a staggered board.[449] Ultimately, though, it does not matter how many or how few companies in the Fortune 500 with staggered boards allow shareholders to remove directors by calling a special meeting; what matters is the "realistic attainability" of actually achieving a 67% vote of the outstanding Airgas shares in the context of Air Products' hostile tender offer (which equates to achieving approximately 85-86% of the unaffiliated voting shares),[450] or whether, instead, Airgas's continued use of its defensive measures is preclusive because it is a near "impossible task."[451]

      273

      The fact that something might be a theoretical possibility does not make it "realistically attainable." In other words, what the Supreme Court in Unitrin and Selectica meant by "realistically attainable" must be something more than a mere "mathematical possibility" or "hypothetically conceivable chance" of circumventing a poison pill. One would think a sensible understanding of the phrase would be that an insurgent has a reasonably meaningful or real world shot at securing the support of enough stockholders to change the target board's composition and remove the obstructing defenses.[452] It does not mean that the insurgent has a right to win or that the insurgent must have a highly probable chance or even a 50-50 chance of prevailing. But it must be more than just a theoretical possibility, given the required vote, the timing issues, the shareholder profile, the issues presented by the insurgent and the surrounding circumstances.

      274

      The real-world difficulty of a judge accurately assessing the "realistically attainable" factor, however, was made painfully [117] clear during the January supplemental evidentiary hearing through the lengthy and contentious testimony of two "proxy experts." Airgas offered testimony from Peter C. Harkins, the President and CEO of D.F. King & Co. Inc. and Air Products presented testimony by Joseph J. Morrow, the founder and CEO of Morrow & Co., LLC.[453] Both experts have extensive experience advising corporate clients in contested proxy solicitations and corporate takeover contests, as well as extensive (and lucrative) experience opining in courtrooms as experts on stockholder voting and investment behavior.[454] Ultimately, and despite Harkins' pseudo-scientific "bottoms-up analysis" and Morrow's anecdotal approach, I found both experts' testimony essentially unhelpful and unconvincing on the fundamental question whether a 67% vote of Airgas stockholders at a special meeting is realistically attainable. Morrow concluded that it is not realistically attainable, because the margin needed to attain 67% is so high given the percentage of unaffiliated stockholders likely to vote. Airgas's officers and directors own 11% of Airgas stock. In addition, 12% of Airgas stock did not vote in the September 2010 contested election (which is fairly typical, even in contested elections). That equals 23% of Airgas's outstanding stock that is arguably "not available" to Air Products' solicitation at a special stockholder meeting. Add to this 23% number the 2% that Air Products itself owns, and you are left with an "available pool" of 75% of the outstanding Airgas stock from which Air Products would need to garner 65% (which, added to its own 2%, would yield the required 67% of outstanding shares). Thus, following this reasoning, Air Products would need to attract the support of about 85% of the 75% of unaffiliated and likely to vote shares in order to reach the 67% vote required to oust the incumbent Airgas directors.[455] According to Morrow, this margin (85% of the unaffiliated and voting shares) has never been achieved in any contested election that he can recall in his 46 years in this business.[456] Harkins likewise could not give a real world example where an insurgent garnered that margin of votes in a contested election.[457]

      275

      Harkins, on the other hand, based his opinion that 67% is "easily" achievable (again, despite the glaring lack of any real world instance where an insurgent has ever achieved such a supermajority in a contested election) on his "bottoms-up" analysis of various categories of Airgas stockholders and their "likely" voting behavior, based in part on the Airgas stockholder voting patterns in the September 2010 election.[458] Although Harkins's categorical computations have a certain scientific or mathematical patina, they are all ultimately based on assumptions, guesses and speculation—albeit "educated" assumptions and guesses. For example, Harkins assumed that 100% of the voting arbitrageurs and event-driven investors will vote for Air Products' nominees at a special election, despite the fact that only 90% voted for Air Products nominees at the September 2010 contested short slate election and despite the absence of any historical instance where a bidder received [118] unanimous support from this stockholder category.[459] Similar flaws infect other categorical assumptions in Harkins' "bottoms-up" methodology, including his assumptions about the likely vote by index funds (where his prediction again is unsupported by the actual index fund votes in September 2010),[460] about the likely vote of "dual" stockholders who own stock in both Airgas and Air Products, and about the probability that proxy advisory firm ISS will support an effort to remove an entire slate of directors. If one of these key "assumptions" is incorrect, Harkins' model collapses and the "easy" 67% vote becomes mathematically impossible.

      276

      To cite one easy example, Harkins' "bottoms-up" analysis is based on Airgas's stockholder profile as of December 9, 2010.[461] The largest category of voting stockholders in the chart (by far) is the "arbitrageurs and event-driven investors" group, accounting for 46% of the total outstanding shares. Harkins assumes that 95% of them will vote, and as noted above, that 100% of those voting will vote in favor of Air Products' nominees at a special election. This gives a total of 43.7% of the outstanding shares voting for Air Products—a large chunk of the total required to get to 67%.[462] Even plugging in Morrow's [119] "assumption" that only 92.5% (rather than 95%) of this group will vote, and 100% of them vote in favor of Air Products, that still totals 42.5% of the total outstanding.[463] But Airgas's stockholder profile, as Harkins admitted, is "continuously changing."[464] McCausland testified that the arb concentration is down from 46% to 41%.[465] That single assumption alone (a difference that equates to almost 5% of the total outstanding that Harkins assumes would vote in favor of Air Products under either Harkins' or Morrow's voting assumptions) essentially renders the rest of the numbers in Harkins' chart meaningless—they do not add up to 67% unless he re-solves for "X" (the percentage of "Other Institutional Investors" needed to vote in favor of Air Products). It may be that additional arbs would swarm in upon the announcement of a special meeting.[466] It may not. And in the end, I guess, he can always just re-solve for "X." What this shows, though, is that the entire exercise does not answer the "realistic attainability" question one way or the other—it is a game of speculation.

      277

      Thus, the expert opinions proffered on how stockholders are likely to vote at a special meeting called to remove the entire Airgas board were unhelpful and not persuasive. The expert witnesses neither took the time nor made the effort to speak with any Airgas stockholders—whether retail, index, institutional investors who subcontract voting to ISS, long or short hedge funds, dual stockholders or event-driven stockholders—about how they might vote if such a special stockholder meeting were actually convened.[467] To that extent, each expert failed to support his conclusions in a manner that a judge would find reliable. In short, I am not persuaded by Harkins that 67% is realistically attainable, especially given the absence of any historical instance where a bidder achieved such a [120] margin in a contested election.[468] Both experts essentially admitted, moreover, that one cannot really know how an election will turn out until it is held and that, generally speaking, it is easier to obtain investor support for electing a minority insurgent slate than for a controlling slate of directors.[469]

      278

      In the end, however, the most telling aspect of the expert testimony was the statement that Air Products could certainly achieve 67% of the vote if its offer was "sufficiently appealing."[470] Harkins explained that he was "not predicting that a $70 offer will result in a 67 percent vote to remove the board."[471] He was simply predicting that, with an appealing enough offer or platform, a 67% vote is possible, but he was not providing his opinion (nor did he have one) on how appealing $70 is, or whether it would make victory at a special election attainable.[472] The following final, tautological insight by the expert just about sums up the usefulness of this particular day in the life of a trial judge:

      279

      Q. [So w]hat is a sufficiently appealing offer?

      A. An offer that will garner 67 percent of the vote, I suppose.[473]

      280

      But what seems clear to me, quite honestly, is that a poison pill is assuredly preclusive in the everyday common sense meaning of the word; indeed, its rasion d'etre is preclusion—to stop a bid (or this bid) from progressing. That is what it is intended to do and that is what the Airgas pill has done successfully for over sixteen months. Whether it is realistic to believe that Air Products can, at some point in the future, achieve a 67% vote necessary to remove the entire Airgas board at a special meeting is (in my opinion) impossible to predict given the host of variables in this setting, but the sheer lack of historical examples where an insurgent has ever achieved such a percentage in a contested control election must mean something. Commentators who have studied actual hostile takeovers for Delaware companies have, at least in part, essentially corroborated this common sense notion that such a victory is not realistically attainable.[474] Nonetheless, while the special meeting may not be a realistically attainable mechanism for circumventing the Airgas defenses, that assessment does not end the analysis under existing precedent.

      281
      b. Run Another Proxy Contest
      282

      Even if Air Products is unable to achieve the 67% supermajority vote of the outstanding shares necessary to remove the board in a special meeting, it would only need a simple majority of the voting stockholders to obtain control of the board at next year's annual meeting. Air Products has stated its unwillingness to wait around for another eight months until Airgas's 2011 annual meeting.[475] There are [121] legitimately articulated reasons for this— Air Products' stockholders, after all, have been carrying the burden of a depressed stock price since the announcement of the offer.[476] But that is a business determination by the Air Products board. The reality is that obtaining a simple majority of the voting stock is significantly less burdensome than obtaining a supermajority vote of the outstanding shares, and considering the current composition of Airgas's stockholders (and the fact that, as a result of that shareholder composition, a majority of the voting shares today would likely tender into Air Products' $70 offer[477]), if Air Products and those stockholders choose to stick around, an Air Products victory at the next annual meeting is very realistically attainable.

      283

      Air Products certainly realized this. It had actually intended to run an insurgent slate at Airgas's 2011 annual meeting— when everyone thought that meeting was going to be held in January. The Supreme Court has now held, however, that each annual meeting must take place "approximately" one year after the last annual meeting.[478] If Air Products is unwilling to wait another eight months to run another slate of nominees, that is a business decision of the Air Products board, but as the Supreme Court has held, waiting until the next annual meeting "delay[s]—but [does] not prevent—[Air Products] from obtaining control of the board."[479] I thus am constrained to conclude that Airgas's defensive [122] measures are not preclusive.[480]

      284
      2. Range of Reasonableness
      285

      "If a defensive measure is neither coercive nor preclusive, the Unocal proportionality test requires the focus of enhanced judicial scrutiny to shift to the range of reasonableness."[481] The reasonableness of a board's response is evaluated in the context of the specific threat identified—the "specific nature of the threat [] `sets the parameters for the range of permissible defensive tactics' at any given time."[482]

      286

      Here, the record demonstrates that Airgas's board, composed of a majority of outside, independent directors, acting in good faith and with numerous outside advisors[483] concluded that Air Products' offer clearly undervalues Airgas in a sale transaction. The board believes in good faith that the offer price is inadequate by no small margin. Thus, the board is responding to a legitimately articulated threat.

      287

      This conclusion is bolstered by the fact that the three Air Products Nominees on the Airgas board have now wholeheartedly joined in the board's determination—what is more, they believe it is their fiduciary duty to keep Airgas's defenses in place. And Air Products' own directors have testified that (1) they have no reason to believe that the Airgas directors have breached their fiduciary duties,[484] (2) even though plenty of information has been made available to the stockholders, they "agree that Airgas management is in the best position to understand the intrinsic value of the company,"[485] and (3) if the shoe were on the other foot, they would act in the same way as Airgas's directors have.[486]

      288

      [123] In addition, Air Products made a tactical decision to proceed with its offer for Airgas in the manner in which it did. First, Air Products made a choice to launch a proxy contest in connection with its tender offer. It could have—at that point, in February 2010—attempted to call a special meeting to remove the entire board. The 67% vote requirement was a high hurdle that presented uncertainty, so it chose to proceed by launching a proxy contest in connection with its tender offer.

      289

      Second, Air Products chose to replace a minority of the Airgas board with three independent directors who promised to take a "fresh look." Air Products ran its nominees expressly premised on that independent slate. It could have put up three nominees premised on the slogan of "shareholder choice." It could have run a slate of nominees who would promise to remove the pill if elected.[487] It could have gotten three directors elected who were resolved to fight back against the rest of the Airgas board.

      290

      Certainly what occurred here is not what Air Products expected to happen. Air Products ran its slate on the promise that its nominees would "consider without any bias [the Air Products] Offer," and that they would "be willing to be outspoken in the boardroom about their views on these issues."[488] Air Products got what it wanted. Its three nominees got elected to the Airgas board and then questioned the directors about their assumptions. (They got answers.) They looked at the numbers themselves. (They were impressed.) They requested outside legal counsel. (They got it.) They requested a third outside financial advisor. (They got it.) And in the end, they joined in the board's view that Air Products' offer was inadequate. John Clancey, one of the Air Products Nominees, grabbed the flag and championed Airgas's defensive measures, telling the rest of the board, "We have to protect the pill."[489] David DeNunzio, Airgas's new independent financial advisor from Credit Suisse who was brought in to take a "fresh look" at the numbers, concluded in his professional opinion that the fair value of Airgas is in the "mid to high seventies, and well into the mid eighties."[490] In Robert Lumpkins' opinion (one of the Air Products Nominees), "the company on its own, its own business will be worth $78 or more in the not very distant future because of its own earnings and cash flow prospects ... as a standalone company."[491]

      291

      [124] The Supreme Court has clearly held that "the `inadequate value' of an all cash for all shares offer is a `legally cognizable threat.'"[492] Moreover, "[t]he fiduciary duty to manage a corporate enterprise includes the selection of a time frame for achievement of corporate goals. That duty may not be delegated to the stockholders."[493] The Court continued, "Directors are not obligated to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy."[494] Based on all of the foregoing factual findings, I cannot conclude that there is "clearly no basis" for the Airgas board's belief in the sustainability of its long-term plan.

      292

      On the contrary, the maintenance of the board's defensive measures must fall within a range of reasonableness here. The board is not "cramming down" a management-sponsored alternative—or any company-changing alternative.[495] Instead, the board is simply maintaining the status quo, running the company for the long-term, and consistently showing improved financial results each passing quarter.[496] The board's actions do not forever preclude Air Products, or any bidder, from acquiring Airgas or from getting around Airgas's defensive measures if the price is right. In the meantime, the board is preventing a change of control from occurring at an inadequate price. This course of action has been clearly recognized under Delaware law: "directors, when acting deliberately, in an informed way, and in the good faith pursuit of corporate interests, may follow a course designed to achieve long-term [125] value even at the cost of immediate value maximization."[497]

      293

      Shareholder plaintiffs argue in their Post-Supplemental Hearing brief that Delaware law adequately protects any non-tendering shareholders in the event a majority of Airgas shareholders did tender into Air Products' offer because, as a result of McCausland and the Airgas board and management's ownership positions in Airgas, there is no way that Air Products would be able to effect a short-form merger under DGCL § 253 at the inadequate $70 price.[498] They argue that when Air Products would then seek to effect a long-form merger on the back end—as it has stated is its intention—any deal would be subject to entire fairness and claims for appraisal rights.

      294

      But this protection may not be adequate for several reasons. First, despite Air Products' stated intention to consummate a merger "as soon as practicable" by acquiring any non-tendered shares "as quick as the law would allow,"[499] there are no guarantees; there is a risk that no back end deal will take place. Second, and more importantly, on the back end, control will have already been conveyed to Air Products.[500] The enormous value of synergies will not be factored into any appraisal.[501] Additionally, much of the projected [126] value in Airgas's five year plan is based on the expected returns from substantial investments that Airgas has already made— e.g., substantial capital investments, the SAP implementation. There is no guarantee (in fact it is unlikely) a fair value appraisal today would account for that projected value—value which Airgas's newest outside financial advisor describes as "orders of magnitude greater than what's been assumed and which would give substantially higher values."[502]

      295
      C. Pills, Policy and Professors (and Hypotheticals)
      296

      When the Supreme Court first upheld the use of a rights plan in Moran, it emphasized that "[t]he Board does not now have unfettered discretion in refusing to redeem the Rights."[503] And in the most recent "pill case" decided just this past year, the Supreme Court reiterated its view that, "[a]s we held in Moran, the adoption of a Rights Plan is not absolute."[504] The poison pill's limits, however, still remain to be seen.

      297

      The merits of poison pills, the application of the standards of review that should apply to their adoption and continued maintenance, the limitations (if any) that should be imposed on their use, and the "anti-takeover effect" of the combination of classified boards plus poison pills have all been exhaustively written about in legal academia.[505] Two of the largest contributors [127] 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.[506]

      298

      The contours of the debate have morphed slightly over the years, but the fundamental questions have remained. Can a board "just say no"? If so, when? How should the enhanced judicial standard of review be applied? What are the pill's limits? And the ultimate question: Can a board "just say never"? In a 2002 article entitled Pills, Polls, and Professors Redux, Lipton wrote the following:

      299

      As the pill approaches its twentieth birthday, it is under attack from [various] groups of professors, each advocating a different form of shareholder poll, but each intended to eviscerate the protections afforded by the pill. ... Upon reflection, I think it fair to conclude that the [] schools of academic opponents of the pill are not really opposed to the idea that the staggered board of the target of a hostile takeover bid may use the pill to "just say no." Rather, their fundamental disagreement is with the theoretical possibility that the pill may enable a staggered board to "just say never." However, as ... almost every [situation] in which a takeover bid was combined with a proxy fight show, the incidence of a target's actually saying "never" is so rare as not to be a real-world problem. While [the various] professors' attempts to undermine the protections of the pill is argued with force and considerable logic, none of their arguments comes close to overcoming the cardinal rule of public policy—particularly applicable to corporate law and corporate finance—"If it ain't broke, don't fix it."[507]

      300

      Well, in this case, the Airgas board has continued to say "no" even after one proxy fight. So what Lipton has called the "largely theoretical possibility of continued resistance after loss of a proxy fight" is now a real-world situation.[508] Vice Chancellor Strine recently posed Professor Bebchuk et al.'s Effective Staggered Board ("ESB")[509] hypothetical in Yucaipa:

      301

      [128] [T]here is a plausible argument that a rights plan could be considered preclusive, based on an examination of real world market considerations, when a bidder who makes an all shares, structurally non-coercive offer has: (1) won a proxy contest for a third of the seats of a classified board; (2) is not able to proceed with its tender offer for another year because the incumbent board majority will not redeem the rights as to the offer; and (3) is required to take all the various economic risks that would come with maintaining the bid for another year.[510]

      302

      At that point, it is argued, it may be appropriate for a Court to order redemption of a poison pill. That hypothetical, however, is not exactly the case here for two main reasons. First, Air Products did not run a proxy slate running on a "let the shareholders decide" platform. Instead, they ran a slate committed to taking and independent look and deciding for themselves afresh whether to accept the bid. The Air Products Nominees apparently "changed teams" once elected to the Airgas board (I use that phrase loosely, recognizing that they joined the Airgas board on an "independent" slate with no particular mandate other than to see if a deal could be done). Once elected, they got inside and saw for themselves why the Airgas board and its advisors have so passionately and consistently argued that Air Products' offer is too low (the SAP implementation, the as-yet-unrealized benefits from recent significant capital expenditures, the timing in which Airgas historically has emerged from recessions, the intrinsic value of this company, etc.). The incumbents now share in the rest of the board's view that Air Products' offer is inadequate—this is not a case where the insurgents want to redeem the pill but they are unable to convince the majority. This situation is different from the one posited by Vice Chancellor Strine and the three professors in their article, and I need not and do not address that scenario.

      303

      Second, Airgas does not have a true "ESB" as articulated by the professors. As discussed earlier, Airgas's charter allows for 33% of the stockholders to call a special meeting and remove the board by a 67% vote of the outstanding shares.[511] Thus, according to the professors, no court intervention would be necessary in this case.[512] This factual distinction also further differentiates this case from the Yucaipa hypothetical.

      304
      CONCLUSION
      305

      Vice Chancellor Strine recently suggested that:

      306

      The passage of time has dulled many to the incredibly powerful and novel device that a so-called poison pill is. That device has no other purpose than to give the board issuing the rights the leverage to prevent transactions it does not favor by diluting the buying proponent's interests.[513]

      307

      [129] There is no question that poison pills act as potent anti-takeover drugs with the potential to be abused. Counsel for plaintiffs (both Air Products and Shareholder Plaintiffs) make compelling policy arguments in favor of redeeming the pill in this case—to do otherwise, they say, would essentially make all companies with staggered boards and poison pills "takeover proof."[514] The argument is an excellent sound bite, but it is ultimately not the holding of this fact-specific case, although it does bring us one step closer to that result.

      308

      As this case demonstrates, in order to have any effectiveness, pills do not—and can not—have a set expiration date. To be clear, though, this case does not endorse "just say never." What it does endorse is Delaware's long-understood respect for reasonably exercised managerial discretion, so long as boards are found to be acting in good faith and in accordance with their fiduciary duties (after rigorous judicial fact-finding and enhanced scrutiny of their defensive actions). The Airgas board serves as a quintessential example.

      309

      Directors of a corporation still owe fiduciary duties to all stockholders—this undoubtedly includes short-term as well as long-term holders. At the same time, a board cannot be forced into Revlon mode any time a hostile bidder makes a tender offer that is at a premium to market value. The mechanisms in place to get around the poison pill—even a poison pill in combination with a staggered board, which no doubt makes the process prohibitively more difficult—have been in place since 1985, when the Delaware Supreme Court first decided to uphold the pill as a legal defense to an unwanted bid. That is the current state of Delaware law until the Supreme Court changes it.

      310

      For the foregoing reasons, Air Products' and the Shareholder Plaintiffs' requests for relief are denied, and all claims asserted against defendants are dismissed with prejudice. The parties shall bear their own costs.

      311

      An Order has been entered that implements the conclusions reached in this Opinion.

      312

      [1] TW Servs., Inc. v. SWT Acquisition Corp., 1989 WL 20290, at *8 (Del.Ch. Mar. 2, 1989).

      313

      [2] 490 A.2d 1059 (Del.Ch.1985).

      314

      [3] See, e.g., Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310, 351 n. 229 (Del.Ch. 2010); eBay Domestic Holdings, Inc. v. Newmark, 2010 WL 3516473 (Del.Ch. Sept. 9, 2010); Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586 (Del.2010).

      315

      [4] Defendants have also asked the Court to order Air Products to pay the witness fees and expenses incurred by defendants in connection with the expert report and testimony of David E. Gordon in defense against Count I of Air Products' Amended Complaint, alleging breach of fiduciary duties in connection with Peter McCausland's January 5, 2010 exercise of Airgas stock options. That request is denied. The parties shall bear all of their own fees and expenses.

      316

      [5] See Section I.F. (The $60 Tender Offer) for details about the terms of the offer.

      317

      [6] JX 659 (Airgas Schedule 14D-9 (Dec. 22, 2010)) at Ex. (a)(111).

      318

      [7] Dec. 23, 2010 Letter Order.

      319

      [8] See JX 304; JX 433; JX 645; JX 1086.

      320

      [9] Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140, 1154 (Del. 1990); see City Capital Assocs. Ltd. P'ship v. Interco, Inc., 551 A.2d 787 (Del.Ch. 1988); Grand Metro. Pub. Ltd. Co. v. Pillsbury Co., 558 A.2d 1049 (Del. Ch.1988).

      321

      [10] See Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1384 (Del. 1995) ("This Court has held that the `inadequate value' of an all cash for all shares offer is a `legally cognizable threat.'") (quoting Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140, 1153 (Del. 1990)).

      322

      [11] Paramount, 571 A.2d at 1154.

      323

      [12] Id.

      324

      [13] SEH Tr. 420 (Clancey).

      325

      [14] SEH Tr. 104 (Davis).

      326

      [15] Id.

      327

      [16] References to the October trial transcript are cited as "Trial Tr. [####]." References to the January supplemental evidentiary hearing transcript are cited as "SEH Tr. [###]." For both the trial transcript and the supplementary evidentiary hearing transcript cites, the name of the particular witness speaking is indicated in parentheses. Citations to trial exhibits from both the October trial and the January hearing are referred to as "JX [###]."

      328

      [17] In addition to the listed players, the parties each presented expert witnesses who testified about the valuation of Airgas—from defendants' side, to show that management's assumptions in reaching its valuation conclusions about the company were reasonable; from plaintiffs' side, to rebut those assumptions and numbers. The experts were: Robert Reilly (Shareholder Plaintiffs' valuation expert) (see JX 642 (Expert Report of Robert Reilly (Aug. 20, 2010))); Professor Daniel Fischel (Air Products' valuation expert) (see JX 639 (Expert Report of Daniel Fischel (Aug. 20, 2010))); 639A (updated exhibits); and Professor Glenn Hubbard (Airgas's valuation expert) (see JX 640 (Expert Report of Glenn Hubbard (Sept. 3, 2010))). All three experts were credible witnesses on the limited topics that they were asked to opine on, who ultimately reached different conclusions. Reilly testified that the McCausland Analysis and inadequacy opinions from the financial advisors were not sufficient to provide a basis for Airgas to find Air Products' offers "grossly inadequate" and not worthy of discussion. Fischel and Hubbard both testified as to the macroeconomic assumptions underlying Airgas's five-year plan. Finding Airgas's assumptions overly optimistic, Fischel opined that the inadequacy opinions of Airgas's financial advisors are not supported by the economic evidence. Hubbard, on the other hand, testified that Airgas's macroeconomic assumptions were reasonable, and convincingly and persuasively explained why. Ultimately, I found Professor Hubbard to be the most persuasive expert witness on valuation, but this decision does not turn so much on who won the battle of the experts as it does on the special circumstances surrounding the conduct of the Air Products Nominees to the Airgas board.

      329

      [18] Two additional experts played minor roles at the October trial. Defendants presented "proxy expert" Peter Harkins (see JX 638 (Expert Report of Peter Harkins (Aug. 20, 2010))); JX 638A (Supplemental Expert Report of Peter Harkins (Sept. 26, 2010)). Harkins also testified at the January hearing, and his testimony is discussed in greater detail later in this Opinion. Finally, defendants also presented "tax expert" David Gordon, to provide his expert opinion on a discrete issue relating to McCausland's exercise of stock options, but his testimony has no bearing on the core issue before me. See infra note 97.

      330

      [19] Joint Pre-Trial Stip. ¶ 1; JX 86 (Air Products Form 10-K (Nov. 25, 2009)).

      331

      [20] JX 86 at 3.

      332

      [21] JX 583 (A Brief History of Air Products).

      333

      [22] JX 583 at 1; JX 86 at 7, 9; see also Trial Tr. 9-10 (Huck).

      334

      [23] Joint Pre-Trial Stip. ¶ 12.

      335

      [24] JX 334 (Airgas Form 10-K (May 27, 2010)) at 4.

      336

      [25] See Trial Tr. 642-45 (McCausland).

      337

      [26] See Trial Tr. 862-65 (Molinini).

      338

      [27] Id.

      339

      [28] Trial Tr. 864 (Molinini) ("[Thirty-five] percent of our business, which we call hardgoods, [includes] all the products that are not gases but that customers use when they consume the gases that they need to regulate pressure, they need to conduct flow, they need to protect themselves from the cryogenic temperatures, all of those others products."); JX 248 (Airgas Presentation (Feb. 22, 2010)) at 17.

      340

      [29] See JX 3 (Airgas Amended and Restated Certificate of Incorporation) at Art. V, § 1; JX 296 (Airgas Amended and Restated Bylaws (amended through April 7, 2010)) at Art. III, § 1.

      341

      [30] JX 449 (Airgas Schedule 14A (July 23, 2010)) at 13-14.

      342

      [31] Id.

      343

      [32] The parties stipulated to dismiss Brown and Ill from this action as they lost their seats in the September 15, 2010 annual meeting and thus no longer serve as members of Airgas's board. See Order and Stipulation of Dismissal Without Prejudice (granted Jan. 6, 2011).

      344

      [33] See JX 565A (certified results of inspector of elections).

      345

      [34] JX 565B (Airgas press release (Sept. 23, 2010)); Trial Tr. 505-06 (Thomas).

      346

      [35] Jan. 29, 2010. As of today, Airgas's 52-week low is $59.26.

      347

      [36] Nov. 2, 2010.

      348

      [37] Closing Argument Tr. 169 (Wolinsky). See SEH Tr. 65 (Clancey) ("Q. [At the December 21, 2010 Airgas board meeting,] did you reach any conclusions as to where you think this company's stock will be trading in a year? A. I think the company's stock, when and if this is behind us, will be trading in the 70s."); SEH Tr. 206 (McCausland) (testifying that Airgas stock could easily trade in the range of $72-$76 sometime in the next 12 months, "barring some major upset in the economy or the stock market"). Independent analysts' reports are in line with those numbers as well.

      349

      [38] SEH Tr. 393-94 (DeNunzio).

      350

      [39] JX 11 (Airgas Form 8-K (May 10, 2007) (Shareholder Rights Agreement)).

      351

      [40] See 8 Del. C. § 203.

      352

      [41] JX 3 (Airgas Amended and Restated Certificate of Incorporation) at Art. VI, §§ 1-3.

      353

      [42] Trial Tr. 613-14 (McCausland).

      354

      [43] Trial Tr. 656 (McCausland).

      355

      [44] Trial Tr. 729-30 (McLaughlin).

      356

      [45] Trial Tr. 656 (McCausland). At the January supplemental hearing, McCausland testified that Airgas now has "a good shot of making that 2007 five-year plan despite the fact that the worst recession since the Great Depression landed right in the middle of that period.") SEH 303 (McCausland).

      357

      [46] Trial Tr. 731 (McLaughlin).

      358

      [47] Trial Tr. 746 (McLaughlin); Trial Tr. 788 (McLaughlin). Shareholder Plaintiffs argue that the 2009 plan represented an "optimistic" plan including "aggressive assumptions," while Air Products calls the assumptions in the 2009 plan "highly optimistic" and "unreasonable"—particularly the macroeconomic assumptions and failure to consider the possibility of a double-dip recession. While the parties may call the assumptions different names (i.e., "strong," "mild," "aggressive," "slow"), everyone agrees that reasonable minds can differ as to what may lie ahead, and no one disputes that the company's ability to meet its projections depends in large part on growth in the U.S. economy as a whole. What is clear, however, is that no one at Airgas tweaked the plan at the direction of McCausland or changed any of their numbers in light of Air Products' offer. Trial Tr. 767 (McLaughlin); Trial Tr. 697 (McCausland). In addition, Airgas relied on its financial advisors at Bank of America Merrill Lynch and Goldman Sachs to review the plan, and the bankers were satisfied with the assumptions in the model. Trial Tr. 960 (Rensky).

      359

      [48] Trial Tr. 672 (McCausland); see JX 64 (Nov. 2009 Five Year Strategic Financial Plan).

      360

      [49] Trial Tr. 110 (McGlade).

      361

      [50] Trial Tr. 47 (Huck).

      362

      [51] Trial Tr. 111-12 (McGlade).

      363

      [52] JX 27 (Air Products Minutes of Meeting of Board of Directors (Sept. 17, 2009)) at 9.

      364

      [53] Trial Tr. 47 (Huck); see also Trial Tr. 10 (Huck) (explaining why Air Products had sold its packaged gas business to Airgas in 2002).

      365

      [54] Trial Tr. 659 (McCausland). The meeting lasted in the range of half an hour to fortyfive minutes. McCausland Dep. 39.

      366

      [55] Trial Tr. 115 (McGlade). In other words, Air Products would acquire all outstanding Airgas shares for $60 per share in an all-stock transaction.

      367

      [56] JX 37 (Typewritten notes of Les Graff re conversation with Peter McCausland).

      368

      [57] Trial Tr. 660-61 (McCausland); JX 37 at 1. Graff's notes also indicate that, according to McCausland, McGlade promised twice during that meeting that Air Products would "never go hostile." See Trial Tr. 663-64 (McCausland) ("I said, `John, you have to assure me that you will never go hostile or this conversation's going to be very short.' And he said, `Peter, we have no intention of going hostile.'"). McGlade claims otherwise. Trial Tr. 119 (McGlade) ("I never made a promise we wouldn't go hostile."); Trial Tr. 140-41 (McGlade) ("I did not promise to not go hostile. I told him at the time that I was here to discuss a collaborative transaction."). In any event, McGlade said that he does not specifically recall what he said and concedes that his response to McCausland might have been "subject to interpretation." Trial Tr. 141 (McGlade). Accordingly, I credit McCausland's testimony on this particular factual point, although I also believe McGlade's testimony that at that point in time he did not intend to go hostile but rather met with McCausland in the hopes of reaching a friendly deal, which turned out to be a fruitless exercise.

      369

      [58] JX 37 at 1.

      370

      [59] Trial Tr. 665 (McCausland).

      371

      [60] Trial Tr. 665-66 (McCausland).

      372

      [61] Id. Before the November retreat, Brown suggested that perhaps the independent directors should meet to discuss the offer outside of McCausland's presence (Brown Dep. 52-53), but ultimately the board agreed that McCausland did not have a conflict of interest, that because of his substantial stockholdings his interests were aligned with the Airgas shareholders, and that an executive session of the board to consider the offer was not necessary. Trial Tr. 501-02 (Thomas). Nevertheless, the independent directors did (later, in April) meet to discuss the offer outside of McCausland's presence, and came to the same conclusion as they did in his presence—that the offer was "grossly inadequate." Trial Tr. 503 (Thomas); Brown Dep. 126-27.

      373

      [62] Trial Tr. 666-67 (McCausland). McCausland then reached out to Dan Neff at Wachtell, Lipton, Rosen & Katz, and Airgas's longtime financial advisors Goldman Sachs (Michael Carr) and Bank of America Merrill Lynch (Filip Rensky).

      374

      [63] JX 73 (Minutes of the Regular Meeting of the Airgas Board (Nov. 5-7, 2009)); Trial Tr. 484 (Thomas); Trial Tr. 586 (McCausland).

      375

      [64] Trial Tr. 484-85 (Thomas); Trial Tr. 672 (McCausland). Although the five-year plan was not "presented" to the board until Day 2 of the retreat—nineteen pages into the minutes of the three-day meeting, and after the board had already unanimously decided to reject Air Products' offer (see JX 73 at 1)—I credit the testimony of Thomas and McCausland that the board had read and was familiar with the five-year plan before the retreat and thus were able to rely on it in considering the $60 offer. See JX 73 at 19; see also Trial Tr. 484 (Thomas); Trial Tr. 586-87 (McCausland); Trial Tr. 672 (McCausland) (testifying that when the board was discussing Air Products' offer at the November retreat, "the board was very familiar with [the five-year] plan. [The directors] come to our strategic retreats ready. And they knew it well.").

      376

      [65] JX 75 ("McCausland Analysis" Handout (Nov. 5, 2009)). The McCausland Analysis applies a sale of control multiple to forward EBITDA (earnings before interest, taxes, depreciation and amortization) forecasts from the 2009 five-year plan, and then various discount rates are applied to the results to generate present value estimates.

      377

      [66] Trial Tr. 492 (Thomas).

      378

      [67] Id.

      379

      [68] JX 73 at 1.

      380

      [69] Trial Tr. 308-09 (Ill) ("[T]here's no sense in sitting down [to discuss] what we conceived to be an inadequate price and establish a floor in regards to any negotiating. And we've consistently said that we would in fact sit down and negotiate, if there was an adequate price put on the table."); see also Thomas Dep. 21; Trial Tr. 503 (Thomas) ("Q. How about the conclusion not to have discussions, open negotiations, with Air Products at $60, $63.50, $65.50? A. We felt we should not have discussions at this point until they are prepared to put a reasonable offer on the table, with the full understanding that they would sit down and negotiate fair value from that.").

      381

      [70] McCausland Dep. 121.

      382

      [71] Trial Tr. 121 (McGlade); JX 84 (Letter from McGlade to McCausland (Nov. 20, 2009)).

      383

      [72] JX 84 at 1-2 ("[W]e welcome the opportunity to identify incremental value above and beyond what we have offered and are prepared to engage with you promptly to better understand the sources of that value and how best to share the value between our respective shareholders. To that end, we and our advisors request a meeting with you and your advisors as soon as possible, both to explore such additional sources of value and to move expeditiously towards consummating a transaction.").

      384

      [73] Id. at 2.

      385

      [74] JX 87 (Draft 11/25 letter from McCausland to McGlade (Nov. 25, 2009)). The letter was never intended to be sent to McGlade and was immediately recognized as a joke by most, although one director was "worried that [McCausland had] said what [he] really thought." JX 91 (email chain between Paula Sneed and Peter McCausland (Nov. 25-26, 2009)).

      386

      [75] JX 89 (Letter from McCausland to McGlade (Nov. 25, 2009)).

      387

      [76] JX 100 (Minutes of the Special Telephonic Meeting of the Airgas Board (Dec. 7, 2009)).

      388

      [77] Id.; see JX 102 (Proposed Talking Points (Dec. 7, 2009)); JX 104 (Discussion Materials (Dec. 7, 2009)).

      389

      [78] JX 100 at 1.

      390

      [79] Id. at 2.

      391

      [80] Id.

      392

      [81] JX 106 (Letter from McCausland to McGlade (Dec. 8, 2009)) at 2. McCausland also wrote that Airgas had "no interest in pursuing Air Products' unsolicited proposal" because the board unanimously believed that Air Products was "grossly undervaluing Airgas and offering a currency that is not attractive." Id. at 1.

      393

      [82] JX 111 (Letter from McGlade to McCausland (Dec. 17, 2009)) at 1; Trial Tr. 124 (McGlade).

      394

      [83] JX 111 at 1.

      395

      [84] Id.

      396

      [85] JX 111 at 5.

      397

      [86] JX 116 (Minutes of Special Telephonic Meeting of the Airgas Board (Dec. 21, 2009)).

      398

      [87] Id.; Trial Tr. 597 (McCausland).

      399

      [88] JX 116.

      400

      [89] JX 120 (Graff handwritten notes from Airgas Board of Directors Meeting (Dec. 21, 2009)).

      401

      [90] See JX 116 (Minutes of Special Telephonic Meeting of the Airgas Board (Dec. 21, 2009)).

      402

      [91] JX 137 (Minutes of the Continued Special Telephonic Meeting of the Airgas Board (Jan. 4, 2010)).

      403

      [92] Id.; Trial Tr. 598-99 (McCausland).

      404

      [93] Id.; JX 136 (Graff notes re Presentation to Airgas Board of Directors (Jan. 4, 2010)) at 1-2.

      405

      [94] JX 137 at 2.

      406

      [95] JX 141 (Letter from McCausland to McGlade (Jan. 4, 2010)); see also Trial Tr. 126 (McGlade).

      407

      [96] Id.

      408

      [97] On February 11, 2010, Air Products amended its complaint to add an allegation that McCausland improperly exercised these options while in possession of nonpublic information, and that the rest of the Airgas board breached its fiduciary duties by failing to stop him from exercising the options. Verified Amended Compl. ¶¶ 43-44, 61-62. Although this issue was addressed in the October trial and in post-trial briefing, those allegations were not set forth in a separate claim in Air Products' complaint, and Air Products has not sought relief specifically focused on those allegations. Defendants have argued that the allegation is "frivolous" under Court of Chancery Rule 11 and requested an order that Air Products pay the fees of Airgas's expert witness Gordon. Rather than take additional space later in this Opinion, I will dispose of this issue right here. Defendants' request is denied. First, defendants have not satisfied the procedural requirements of Rule 11(c)(1)(A). Second Air Products had a good faith basis for its allegation—McCausland did, in fact, exercise his stock options at a time when he knew Air Products had made an offer for Airgas, and he did receive a tax benefit based on the timing of his exercise. It is also true that Airgas may have received a larger tax deduction had he waited to exercise them on schedule. Trial Tr. 568-69 (McCausland). As it turns out, his exercise was entirely legal, permissible under Airgas's policy, and consistent with custom and practice of other companies. Trial Tr. 936-37 (Gordon). In short, Air Products made a good faith allegation and Airgas defended against it. There is nothing "frivolous" about Air Products' conduct that would rise to the level of sanctions under Rule 11. See Katzman v. Comprehensive Care Corp., C.A. No. 5982-VCL (Dec. 28, 2010) (Transcript) at 13, 16 ("I'm going to give you all some general principles [with respect to motions for sanctions]. I think lawyers should think twice, three times, four times, perhaps more before seeking Rule 11 sanctions or moving for fees under the bad faith exception . . . These types of motions are inflammatory. They involve allegations of intentional misconduct by counsel and, as a result, what they usually result in almost inevitably is an escalation of hostilities . . . So what's the bottom line here? . . . For most types of conduct that really merits Rule 11 or fee-shifting, you shouldn't need to point it out. It should be obvious from the briefing that someone's out of line. [Y]ou don't need to make the Rule 11 or bad faith motion.").

      409

      [98] JX 249 (Airgas Schedule 14D-9 (Feb. 22, 2010)) at 10; see also Trial Tr. 540 (McCausland) (expressing view that Airgas board at that time was not looking to sell the company); JX 215 (Letter from McCausland to McGlade (Feb. 9, 2010)) at 2 ("We agree that the `timing is excellent'—for Air Products—but it is a terrible time for Airgas stockholders to sell their company.").

      410

      [99] JX 150 (Letter from McGlade to Air Products' board (Jan. 20, 2010)) at 1. Defendants emphasize that Air Products timed its offer to "take advantage of the situation" before Airgas's stock recovered from the recession, also pointing to Huck's testimony that Air Products was "attempting to acquire Airgas for the lowest possible price." Trial Tr. 46 (Huck); see also SEH Tr. 76-77 (Davis) (testifying that he "believed that the price of Airgas stock was suppressed at the time that Air Products made its initial offer"). But this is exactly the type of thinking expected in a highly strategic acquisition attempt—of course Air Products wanted to acquire Airgas when its stock price was depressed and for the lowest possible price it had to pay. Air Products' directors were doing their job to get the best deal for their shareholders. At the same time, the Airgas board was acting well within its fiduciary duties to the Airgas stockholders, defending against Air Products' advances while making its views about the inadequacy of the offers known to the Airgas stockholders. Indeed, McCausland testified that Airgas itself has made "opportunistic" purchases and he believes there is nothing wrong with such an acquisition strategy. Trial Tr. 541-42 (McCausland); JX 14A (Seeking Alpha Interview with Airgas CEO Peter McCausland) at 2.

      411

      [100] JX 177 (Letter from McGlade to McCausland (Feb. 4, 2010)) at 1.

      412

      [101] Id. at 2.

      413

      [102] JX 204 (Minutes of the Regular Meeting of the Airgas Board (Feb. 8-9, 2010)). The meeting lasted almost five hours on February 8, and an additional three hours on February 9. See id. at 1, 5, 12.

      414

      [103] Id. at 2.

      415

      [104] JX 204 at 2-3.

      416

      [105] Id. at 4, 11.

      417

      [106] Id. at 11.

      418

      [107] JX 215 (Letter from McCausland to McGlade (Feb. 9, 2010)) ("[I]t is the unanimous view of the Airgas Board of Directors that your unsolicited proposal very significantly undervalues Airgas and its future prospects. Accordingly, the Airgas Board unanimously rejects Air Products' $60 per share proposal.").

      419

      [108] JX 222 (Airgas Schedule TO: Offer to Purchase by Air Products & Chemicals, Inc. (Feb. 11, 2010)).

      420

      [109] Specifically, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act as applicable to the tender offer must have expired or been terminated. Id. at 1. The regulatory hurdles have now been cleared. The FTC approved the potential acquisition, subject to certain divestitures. See Press Release, FTC Approves Final Order Settling Charges that Air Products' Potential Acquisition of Rival Airgas Would be Anticompetitive (Oct. 22, 2010), available at http://www.ftc.gov/opa/2010/10/airproducts.shtm; see also In the Matter of Air Products and Chemicals, Inc., Docket No. C-4299, Analysis of Proposed Agreement Containing Consent Orders to Aid Public Comment (Sept. 9, 2010), available at www.ftc.gov/os/caselist/1010093/100909airproductsanal.pdf; Decision and Order [Redacted Public Version], at 11 (Sept. 9, 2010), available at http://www.ftc.gov/os/caselist/1010093/100909airproductsdo.pdf; Decision and Order [Redacted Public Version], at 11 (Oct. 22, 2010), available at http://www.ftc.gov/os/caselist/1010093/101022airproductsdo.pdf. See also SEH Tr. 305 (McCausland) ("Air Products has gotten FTC approval."). In addition, Air Products has identified buyers for those assets subject to divestiture. Trial Tr. 45 (Huck).

      421

      [110] JX 222 (Airgas Schedule TO: Offer to Purchase by Air Products & Chemicals, Inc. (Feb. 11, 2010)) at 1-2.

      422

      [111] Id. at 10-11.

      423

      [112] Id.

      424

      [113] Id. at 11; see also JX 186 (Air Products Offers to Acquire Airgas for $60 Per Share in Cash Conference Call Transcript (Feb. 5, 2010)) at 6.

      425

      [114] JX 245 (Minutes of the Special Telephonic Meeting of the Airgas Board (Feb. 20, 2010)).

      426

      [115] See JX 247 (Bankers' Presentation to Airgas Board at Feb. 20, 2010 Meeting).

      427

      [116] JX 245 at 3; see also Trial Tr. 601-02 (McCausland). At trial, one of Airgas's bankers explained the meaning of the financial advisors' "inadequacy opinion": "In this case, generally, inadequacy would mean that the offer does not fairly compensate the shareholders for the intrinsic value of the company. And in this case, [specifically,] we also relied on an understanding that this bidder, as well as potentially other bidders, could pay more for the company than that price." Trial Tr. 963-64 (Rensky).

      428

      [117] JX 249 (Airgas Schedule 14D-9 (Feb. 22, 2010)) at 18.

      429

      [118] Id. at 20.

      430

      [119] Id. at 20-21.

      431

      [120] Id. at 21. As Air Products has obtained the necessary regulatory approvals, these concerns are no longer "significant."

      432

      [121] Id. at Exhibit (a)(6). The presentation detailed (among other things) Airgas's growth strategy and explained why Airgas is "well-positioned for the U.S. economic recovery." Id. at slide 37.

      433

      [122] See JX 314 (Airgas Schedule 14-A: Notice of Intent by Air Products to Nominate Individuals for Election as Directors and Propose Stockholder Business at the 2010 Annual Meeting of Airgas Stockholders (May 13, 2010)); see also JX 454 (Airgas Schedule 14A: Air Products' Definitive Proxy Statement for 2010 Annual Meeting of Airgas Stockholders (July 29, 2010)).

      434

      [123] Mr. Clancey (age 65) has more than twenty-two years of experience as both CEO and Chairman of complex international businesses, and sixteen years of experience serving on the boards of large public companies across a range of industries. He is currently Chairman Emeritus of Maersk Inc. and Maersk Line Limited, a division of the A.P. Moller—Maersk Group, one of the world's largest shipping companies. Mr. Clancey previously served as the Chairman of Maersk Inc., where he managed the company's ocean transportation, truck and rail, logistics and warehousing and distribution businesses, and as Chief Executive Officer and President of Sea-Land Service, Inc. Mr. Clancey is currently a Principal and founder of Hospitality Logistics, International, a furniture, fixtures and equipment logistics services provider serving customers in the hotel industry. He has served as a member of the board of directors of UST Inc., Foster Wheeler AG, and AT & T Capital. Mr. Clancey, a former Captain in the United States Marine Corps, received a B.A. in Economics and Political Science from Emporia State College. Id.

      435

      [124] Mr. Lumpkins (age 66) has more than forty years of significant operational, management, financial and governance experience from a variety of positions in major international corporations, covering both developed and emerging countries, and service on public company boards in a wide range of industries. He is currently the Chairman of the board of directors of The Mosaic Company, a producer and marketer of crop and animal nutrition products and services, a position he has held since the creation of the company in October 2004. He previously served as Vice Chairman of Cargill Inc., a commodity trading and processing company, until his retirement in 2006, and as Cargill's Chief Financial Officer from 1989 until 2005. Mr. Lumpkins currently serves as a director of Ecolab, Inc., a cleaning and sanitation products and services provider; a director of Black River Asset Management LLC, a privately-owned fixed income-oriented asset management company; a Senior Advisor to Varde Partners, Inc., an asset management company specializing in alternative investments; and a member of the Advisory Board of Metalmark Capital, a private equity investment firm. He also serves as a Trustee of Howard University. He received an M.B.A. from the Stanford Graduate School of Business and a B.S. in Mathematics from the University of Notre Dame. Id.

      436

      [125] Mr. Miller (age 58) has extensive executive, financial and governance experience as a founder, significant shareholder, executive officer and director of both start-up companies and large public companies. He is the former Chairman and Chief Executive Officer of Crown Castle International Corp., a wireless communications company he founded in 1995 that currently has an equity market capitalization in excess of $10 billion. He currently serves as the President of 4M Investments, LLC, an international private investment company. He is also the founder, Chairman and majority shareholder of M7 Aerospace LP, a privately held aerospace service, manufacturing and technology company; founder, Chairman and majority shareholder of Intercomp Technologies, LLC, a privately held business process outsourcing company; and founder, Chairman and majority shareholder of Visual Intelligence, a privately held imaging technologies company. Mr. Miller previously served as a member of the board of directors of Affiliated Computer Services, Inc., from November 2008 until its acquisition by Xerox Corporation in February 2010. He received a J.D. from Louisiana State University and a B.B.A. from the University of Texas. Id.

      437

      [126] JX 454 (Airgas Schedule 14A: Air Products' Definitive Proxy Statement for 2010 Annual Meeting of Airgas Stockholders (July 29, 2010)) at 3.

      438

      [127] Id. at 3, 41; see also id. at A-1 ("[E]ach of the Air Products Nominees would be considered an independent director of Airgas.").

      439

      [128] Id. at 3, 41.

      440

      [129] Id.

      441

      [130] Id. at 8.

      442

      [131] Id.

      443

      [132] JX 638A (Supplemental Report of Peter C. Harkins (Sept. 26, 2010)) at 4. There is some evidence suggesting that the parties may have even added fuel to the media (bon)fire. In an email from McGlade whose subject line read "RE: Project Flashback Media Coverage," discussing some of the media coverage following Air Products' February 4, 2010 public announcement, McGlade wrote, "In the what it is worth category, our guys (that is our PR firm SARD) believe the Cramer story was planted. Of course our guys did the Faber story. So much for independent journalism!" See JX 192.

      444

      [133] Airgas made well over 75 SEC filings regarding Air Products' offer, including JX 249, JX 269, JX 276, JX 279, JX 282, JX 286, JX 290, JX 299, JX 305, JX 306, JX 317, JX 321, JX 332, JX 339, JX 353, JX 358, JX 363, JX 365, JX 373, JX 387, JX 388, JX 429, JX 435, JX 450, JX 452, JX 458, JX 459, JX 463, JX 468, JX 470, JX 474, JX 478, JX 481, JX 484, JX 486, JX 490, JX 491, JX 496, JX 500, JX 506, JX 512, JX 515, JX 522, JX 523, JX 540, JX 541, JX 545, JX 555 (Airgas's 14D-9 filings and amendments). Airgas also filed a 69-page proxy statement (JX 449), issued several comprehensive investor presentations (including JX 249, JX 480, JX 511, and JX 516), and to date Airgas has issued four earnings releases (JX 304, JX 433, JX 645, and JX 1086) since Air Products went public with its offer. Air Products also has made numerous SEC filings, including JX 275, JX 280, JX 291, JX 293, JX 298, JX 311, JX 315, JX 323, JX 326, JX 337, JX 342, JX 348, JX 349, JX 351, JX 356, JX 359, JX 362, JX 381, JX 389, JX 436, JX 447, JX 455, JX 464, JX 469, JX 475, JX 483, JX 488, JX 492, JX 497, JX 513, JX 525, JX 542, JX 546, JX 556 (Air Products Schedule TO filings and amendments).

      445

      [134] JX 294 (Minutes of the Regular Meeting of the Airgas Board (Apr. 7-8, 2010)) at 4. An executive session of non-management directors was held at the end of this board meeting. Id. In the executive session, the outside directors discussed the "Air Products situation" and unanimously reaffirmed their position that Airgas should not engage in discussions with Air Products at that time. Id. at 5. The next regularly-scheduled Airgas board meeting was held on May 24 and May 25, 2010. See JX 331 (Minutes of the Regular Meeting of the Airgas Board (May 24-25, 2010)). The board again discussed Air Products' tender offer and proxy contest. Id. at 4-5. After hearing reports from McLaughlin and Molinini on Airgas's recent financial performance and upcoming fiscal year plans, id. at 2-4, and based on economic and industry updates from the financial advisors (Rensky and Carr), the board once again was in "unanimous agreement that neither the directors nor management should meet with Air Products in response to its $60 per share cash tender offer." Id. at 5.

      446

      [135] Id.; JX 296 (Airgas Amended and Restated Bylaws (amended through April 7, 2010)) at Art. II.

      447

      [136] As we now know, based on the Delaware Supreme Court's decision in the related bylaw case, the Airgas board's future discretion to fix an annual meeting date is not unfettered; it must pick a date that is "approximately" one year (365 days) after its last annual meeting. See Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182 (Del.2010).

      448

      [137] Trial Tr. 526-27 (Thomas).

      449

      [138] See JX 449 (Airgas Schedule 14A (July 23, 2010)) at 1.

      450

      [139] JX 381 (Airgas Schedule TO: Amendment 18 (July 8, 2010)); Trial Tr. 63 (Huck).

      451

      [140] JX 381.

      452

      [141] JX 392 (Letter from McGlade to Airgas Board of Directors (July 9, 2010)).

      453

      [142] JX 417 (Minutes of the Special Telephonic Meeting of the Airgas Board (July 15, 2010)).

      454

      [143] Id. at 2.

      455

      [144] Id. at 4-6; JX 414 (Goldman Sachs and Bank of America Merrill Lynch presentation to the Airgas board regarding the $63.50 offer).

      456

      [145] JX 425 (Minutes of the Special Telephonic Meeting of the Airgas Board (July 20, 2010)) at 3.

      457

      [146] JX 438 (Letter from McCausland to McGlade (July 21, 2010)).

      458

      [147] JX 429 (Airgas Schedule 14D-9 (July 21, 2010)) at 7. See id. at 9 ("In the Airgas Board's judgment, the [$63.50] Offer, like Air Products' previous offers, is grossly inadequate and an extremely opportunistic attempt to cut off the Airgas stockholders' ability to benefit as the domestic economy continues its recovery."); JX 434 (Airgas Schedule 14A (July 21, 2010)) (same). July 21 was a big day for Airgas public filings—also on this day, Airgas announced its first quarter earnings and raised its earnings guidance for fiscal years 2011-2012. See JX 433 (Airgas Press Release (July 21, 2010)).

      459

      [148] JX 429 at 9-18.

      460

      [149] Id. at Annex D (Bank of America Merrill Lynch), Annex E (Goldman Sachs).

      461

      [150] Airgas's SAP implementation deserves some elaboration. Essentially, the implementation of SAP software is a company-wide process that can take several years to complete. The benefits can be enormous, from managing costs to improving communication. As Thomas explained, "It gives you power to manage your costs, particularly your inventory costs, your purchasing costs. It gives you great leverage as far as pricing is concerned." Trial Tr. 523 (Thomas). Notably, the November 2009 five-year plan included the costs but not the benefits of SAP. Trial Tr. 872 (Molinini). On August 31, Airgas announced anticipated benefits of its new SAP implementation, and released a detailed press release disclosing the perceived future benefits associated with the SAP implementation. JX 499 (Airgas Press Release re: "Airgas Provides Update on Value of Highly Customized SAP Implementation" (Aug. 31, 2010)).

      462

      [151] JX 435 (Airgas Schedule 14D-9: Amendment 22 (Airgas Schedule 14A: Presentation to Airgas Stockholders) (July 21, 2010)). In August, the Airgas board released an updated sixty-two page version of this presentation regarding its "perspective on valuation" and reasons for opposing Air Products' offer, reiterating once again Airgas's "strong future growth prospects [in the] recovering economy." JX 480 (Airgas Presentation: "It's All About Value (Updated)" (August 18, 2010)).

      463

      [152] JX 449 (Airgas Schedule 14A: Definitive Proxy Statement (July 23, 2010)) at 65.

      464

      [153] JX 454 (Airgas Schedule 14A: Air Products' Definitive Proxy Statement for 2010 Annual Meeting of Airgas Stockholders (July 29, 2010)).

      465

      [154] JX 454 (Airgas Schedule 14A: Air Products' Definitive Proxy Statement for 2010 Annual Meeting of Airgas Stockholders (July 29, 2010)) at 6; see also Airgas, Inc. v. Air Prods. & Chems., Inc., 2010 WL 3960599, at *2 (Del. Ch. Oct. 8, 2010).

      466

      [155] See, e.g., JX 459 (Airgas Schedule 14D-9: Airgas Press Release (Aug. 4, 2010)); JX 486 (Airgas Schedule 14D-9: Airgas Press Release (Aug. 23, 2010)); JX 449 (Airgas Schedule 14A: Definitive Proxy Statement (July 23, 2010)) at 65.

      467

      [156] JX 496 (Airgas Schedule 14D-9 (Aug. 30, 2010)). In that same press release, Airgas told its stockholders that "the short time fuse of a January deadline" would "impede the Airgas Board's ability to obtain an appropriate price for our stockholders from Air Products or to explore other strategies." Id. at 2. But the Airgas board has known about Air Products interest since at least October 2009. Even after Air Products went public with its offer in February 2010, the Airgas board has had a year from that point to "explore other strategies."

      468

      [157] JX 525 (Airgas Schedule TO: Amendment 31 (Airgas Schedule 14A: Air Products Increases All-Cash Offer for Airgas to $65.50 per Share; Airgas Schedule 14A: Air Products Offer for Airgas Presentation) (Sept. 8, 2010)); Trial Tr. 63 (Huck).

      469

      [158] JX 517 (Air Products Press Release (Sept. 6, 2010)).

      470

      [159] Id. ("If Airgas shareholders do not elect these three nominees and approve all of our proposals, we will conclude that shareholders do not want a sale of Airgas at this time—and we will therefore terminate our offer and move on to the many other attractive growth opportunities available to Air Products around the world.").

      471

      [160] JX 530A (Minutes of the Special Telephonic Meeting of the Airgas Board (Sept. 7, 2010)).

      472

      [161] Id. at 2.

      473

      [162] Id. at 3.

      474

      [163] JX 539 (Airgas Schedule 14A: Airgas Press Release (Sept. 8, 2010)).

      475

      [164] JX 540 (Airgas Schedule 14D-9: Amendment 44 (Sept. 8, 2010)).

      476

      [165] Trial Tr. 1155 (Carr).

      477

      [166] Trial Tr. 509-10 (Thomas); Trial Tr. 688 (McCausland).

      478

      [167] Trial Tr. 510 (Thomas).

      479

      [168] Trial Tr. 510 (Thomas); Trial Tr. 688-89 (McCausland).

      480

      [169] Trial Tr. 510-11 (Thomas); Trial Tr. 688-89 (McCausland).

      481

      [170] Trial Tr. 689 (McCausland).

      482

      [171] Trial Tr. 986-87 (Rensky); Trial Tr. 1142 (Carr).

      483

      [172] Trial Tr. 1154-55 (Carr).

      484

      [173] Trial Tr. 1144 (Carr); Trial Tr. 993-94 (Rensky).

      485

      [174] Trial Tr. 1148 (Carr).

      486

      [175] Trial Tr. 1151 (Carr); Trial Tr. 1180, 1183 (Woolery).

      487

      [176] Trial Tr. 1152 (Carr).

      488

      [177] See JX 565A (certified results of inspector of elections).

      489

      [178] JX 565B (Airgas Press Release (Sept. 23, 2010)).

      490

      [179] Airgas, Inc. v. Air Prods. & Chems., Inc., 2010 WL 3960599 (Del.Ch. Oct. 8, 2010).

      491

      [180] Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182 (Del.2010). See Section I.Q. (More Post-Trial Factual Developments). For an interesting analysis of the different effects on firm value attributable to the Court of Chancery decision validating the bylaw and the Supreme Court's decision invalidating it, see Lucian Bebchuk, Alma Cohen & Charles Wang, Staggered Boards and the Wealth of Shareholders: Evidence From a Natural Experiment (Nov. 1, 2010), available at http://ssrn.com/abstract=1706806.

      492

      [181] Defs.' Dec. 21, 2010 Supplemental Post-Trial Br. 1.

      493

      [182] Trial Tr. 630 (McCausland).

      494

      [183] Trial Tr. 631 (McCausland).

      495

      [184] Trial Tr. 841 (McLaughlin).

      496

      [185] Trial Tr. 474-75 (Thomas).

      497

      [186] Trial Tr. 271 (Ill).

      498

      [187] Trial Tr. 273 (Ill); see also Trial Tr. 318 (Ill) ("Isn't it true that everything that you believe Airgas['s] shareholders need to know about the Airgas five-year strategic plan has been disclosed to shareholders? A. I believe everything that they need to know to make their decisions, yes.").

      499

      [188] See supra note 150.

      500

      [189] Trial Tr. 889 (Molinini).

      501

      [190] Trial Tr. 67 (Huck); see also Trial Tr. 50 (Huck) ("No, it is not the best price.").

      502

      [191] Trial Tr. 79 (Huck); see also Trial Tr. 46 (Huck) (testifying that Air Products is attempting to acquire Airgas for the lowest possible price).

      503

      [192] See, e.g., Trial Tr. 273 (Ill) (testifying that Airgas's stockholders are a "sophisticated bunch"); Trial Tr. 888 (Molinini) (testifying that Airgas's stockholders are "very savvy"); Trial Tr. 573 (McCausland) (testifying that Airgas's stockholders are "sophisticated" and "capable of making a decision as to whether to accept or reject Air Products' offer").

      504

      [193] See JX 1081 (Second Supplemental Report of Peter C. Harkins (Jan. 5, 2011)).

      505

      [194] See JX 1085 (Expert Report of Joseph J. Morrow (Jan. 20, 2011)).

      506

      [195] JX 645 (Airgas Second Quarter Earnings Release (Oct. 26, 2010)).

      507

      [196] JX 646 (Letter from van Roden to McGlade (Oct. 26, 2010)). That same day, Air Products issued a press release saying that "There is nothing in the Airgas earnings or letter that changes our view of value." JX 647 (Air Products Press Release re Airgas Second Quarter Earnings (Oct. 26, 2010)).

      508

      [197] See JX 646.

      509

      [198] Id. (emphasis added).

      510

      [199] JX 649 (Letter from McGlade to van Roden (Oct. 29, 2010)) at 3.

      511

      [200] The board authorized van Roden to send his November 2 letter during a two-day board meeting that took place from November 1-2, 2010. JX 1010A (Minutes of the Regular Meeting of the Airgas Board (Nov. 1-2, 2010)); SEH Tr. 410-11 (Clancey); see also infra Section I.Q.1 (discussing the November 1-2 Airgas board meeting).

      512

      [201] JX 650 (Letter from van Roden to McGlade (Nov. 2, 2010)).

      513

      [202] Id. (emphasis added). McCausland had previously testified that Airgas would be willing to begin negotiations upon receipt of a $70 offer with a stated intention of paying more. See Trial Tr. 688-89, 694-96 (McCausland). Similarly, Airgas's investment banker testified that "it wouldn't take $78 a share" to get a deal done. Trial Tr. 1159 (Carr); see also Trial Tr. 1188 (Woolery). It later came to light that there was some question as to exactly how unanimous the board really was (particularly regarding the three newly-elected Air Products Nominees on the board) in its conclusion that it would take at least $78 to actually get a deal done, or whether that number was a starting point for negotiations. See infra Section I.Q.2 (discussing December 7 and December 8, 2010 letters between the Air Products Nominees and van Roden). At the time, however, this unanimous view of value was the representation made to Air Products, so it was the view that Air Products had to go on. Moreover, the entire Airgas board now unanimously presses that the value of Airgas in a sale is at least $78. See infra Section I.S. (The Airgas Board Unanimously Rejects the $70 Offer).

      514

      [203] JX 651 (Letter from McGlade to van Roden (Nov. 2, 2010)).

      515

      [204] JX 652 (Airgas Schedule 14D-9: Amendment 58 (Nov. 4, 2010)) at 3; JX 653 (Air Products Schedule TO: Amendment 44 (Nov. 5, 2010)) at 5. In attendance at the meeting were van Roden, McCausland, and Graff from Airgas, and McGlade, Huck, and Presiding Director Davis from Air Products. Id.; see also SEH Tr. 33-34 (Huck).

      516

      [205] SEH Tr. 33-34 (Huck). For example, the two companies had differing views as to how much same-store sales would rise in the future. Id.

      517

      [206] See JX 652 (Airgas Schedule 14D-9: Amendment 58 (Nov. 4, 2010)).

      518

      [207] Id.

      519

      [208] See, e.g., SEH Tr. 35 (Huck) (testifying that at the time of the November 4, 2010 meeting, he believed the Airgas participants had acted in good faith); SEH Tr. 121-22 (McGlade) (testifying that he believed that "representatives from Air Products and Airgas acted in a business-like manner and in good faith during the November 4th meeting"); SEH Tr. 81-86 (Davis) (testifying that he believed all of the parties acted in good faith at the Nov. 4 meeting). The newly-elected Air Products Nominees on Airgas's board similarly expressed the view that the Airgas board had been acting in good faith and had been doing its job all along. See SEH Tr. 412 (Clancey) ("Q: Did you think that the incumbent directors had not been doing their job right? A: No.... I think they were doing a good job and they had two banks to begin with.").

      520

      [209] Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182 (Del.2010).

      521

      [210] Dec. 2, 2010 Letter Order 1-2.

      522

      [211] Id. at 2-3.

      523

      [212] I found Clancey to be a credible witness and thus afford great weight to his testimony. Miller (another one of the Air Products Nominees whose testimony was presented during the supplemental evidentiary hearing), on the other hand, was less confidence-inspiring, and my view of his credibility is weighted accordingly. Robert Lumpkins, the third Air Products Nominee, was not presented as a witness in the supplemental evidentiary hearing, but I have read his deposition transcript in full and find his testimony to be in line with Clancey's.

      524

      [213] SEH Tr. 403 (Clancey).

      525

      [214] SEH Tr. 403-04. The meeting was arranged by Air Products' side, and ISS had also wanted to know about Clancey's background and experience. Id.

      526

      [215] SEH Tr. 404. Clancey concedes that his duty to represent all of the Airgas stockholders includes representing the interests of the Airgas stockholders who happen to be arbitrageurs and those who have shorter-term rather than longer-term investment horizons and who may want to sell their shares. SEH Tr. 421-22. Lumpkins similarly understood his role if elected to the Airgas board. At his deposition, he explained, "I believe [] that as a director of Airgas, my fiduciary duties, including a duty of care and loyalty, run to Airgas, and that in carrying out those duties I was representing all of the shareholders of Airgas."). JX 1095 (Lumpkins Dep. 19 (Jan. 21, 2011)); see also id. at 13-14.

      527

      [216] SEH Tr. 403, 405. Again, Lumpkins was similarly situated. JX 1095 (Lumpkins Dep. 19-22) (testifying that he knew nothing about Airgas when first approached to run as a nominee, did due diligence before accepting the nomination, "did not have a view" as to Air Products' offer, and believed he was "elected as an independent director" who "entered [] with the view of bringing a fresh look to the situation").

      528

      [217] SEH Tr. 406 (Clancey).

      529

      [218] SEH Tr. 406-07 (Clancey).

      530

      [219] SEH Tr. 406-08 (Clancey).

      531

      [220] SEH Tr. 407 (Clancey).

      532

      [221] Id. Lumpkins also "view[s] it as likely that Airgas will achieve or exceed its five-year plan." JX 1095 (Lumpkins Dep. 53)

      533

      [222] SEH Tr. 407-08 (Clancey).

      534

      [223] SEH Tr. 409 (Clancey).

      535

      [224] SEH Tr. 411-12 (Clancey). JX 1010A (Minutes of the Regular Meeting of the Airgas Board (Nov. 1-2, 2010)) at 5.

      536

      [225] JX 1027 (Letter from Clancey, Lumpkins, and Miller to van Roden (Dec. 7, 2010)) at 1.

      537

      [226] Id. at 2.

      538

      [227] JX 650 (Letter from van Roden to McGlade (Nov. 2, 2010)).

      539

      [228] JX 1027 (Letter from Clancey, Lumpkins, and Miller to van Roden (Dec. 7, 2010)) at 3 (footnote omitted).

      540

      [229] JX 1028 (Letter from van Roden to Clancey, Lumpkins, and Miller (Dec. 8, 2010)) at 2.

      541

      [230] Id. at 1, 3.

      542

      [231] SEH Tr. 427 (Clancey).

      543

      [232] SEH Tr. 430 (Clancey).

      544

      [233] JX 1038 (Minutes of the Special Telephonic Meeting of the Independent Members of the Airgas Board (Dec. 10, 2010)) at 2-5.

      545

      [234] See, e.g., SEH Tr. 414 (Clancey) ("I was satisfied [with the selection of Credit Suisse.] They're a good firm. I know of them and I've seen them, you know, in action from afar, and everybody else felt, both the two new directors and the other directors, felt very comfortable with them."); see JX 1038 at 3; JX 1095 (Lumpkins Dep. 172 (Jan. 21, 2011)) ("I felt very good about the process [the board followed in connection with the $70 offer], I felt the addition of the Credit Suisse work was very important and that I was very satisfied with the board's decision.").

      546

      [235] SEH Tr. 53 (Huck).

      547

      [236] SEH Tr. 447 (Clancey).

      548

      [237] JX 1039A (Airgas Schedule 14-D (Dec. 13, 2010)).

      549

      [238] See Section I.S. (The Airgas Board Unanimously Rejects the $70 Offer).

      550

      [239] JX 1033 (Minutes of the Special Meeting of the Air Products Board (Dec. 9, 2010)).

      551

      [240] Dec. 2, 2010 Letter Order 2 n. 1; see also Air Products' Post-Trial Reply Br. 27; Trial Tr. 67 (Huck) ("65.50 is not our best and final offer."); Trial Tr. 155 (McGlade) (testifying that Air Products has been clear that $65.50 is not its best and final offer).

      552

      [241] JX 1033 at 3.

      553

      [242] Id. at 3-4.

      554

      [243] Id. at 4. But for the letter, Air Products would not have raised its offer at that point in time. SEH Tr. 38 (Huck); see also SEH Tr. 89 (Davis).

      555

      [244] JX 657 (Air Products Schedule TO: Amendment 48 (Dec. 9, 2010)).

      556

      [245] Id.; Air Products Press Release (Dec. 9, 2010).

      557

      [246] See, e.g., SEH Tr. 418 (Clancey) ("Best and final is normally a cliché that gets you into the finals so that you can take your price up or take your price down, and it's meant to force a situation."). Indeed, even one of Air Products' directors was not really sure whether the $70 offer was the end of the road. See SEH Tr. 93 (Davis) ("Q. [Y]ou believed that Airgas would make a counteroffer to Air Products' best and final offer; correct? A. Personally? Q. Yes. A. I thought that that would lead to a discussion of value, yes."); SEH Tr. 93-95 (Davis) (testifying that he believed around the time of the December 9 meeting that Air Products might go higher than $70 "to put the deal over the top").

      558

      [247] For example, Air Products has not disclosed its estimate of capital or revenue synergies that would be realized from a deal. See Trial Tr. 49 (Huck).

      559

      [248] January 20, 2011 Letter Order 4; see also In re Circon Corp. S'holders Litig., 1998 WL 34350590, at *1 (Del.Ch. Mar. 11, 1998) ("What is relevant is what the defendants knew and considered at the time they took action in response to [Air Products' tender offer,] not information defendants did not know and did not consider.").

      560

      [249] See, e.g., JX 657 (Air Products Schedule TO: Amendment 48 (Dec. 9, 2010)) ("This is Air Products' best and final offer for Airgas and will not be further increased."); Letter from Counsel for Air Products to Court (Dec. 21, 2010), at 5 ("Air Products has made its best and final offer. If Airgas does not accept that offer, then the process is at an end.").

      561

      [250] SEH Tr. 5 (Huck); SEH Tr. 75 (Davis); SEH Tr. 108 (McGlade).

      562

      [251] SEH Tr. 108 (McGlade); see also SEH Tr. 72 (Huck) ("Seventy dollars is Air Products' best and final offer? A. It is.").

      563

      [252] SEH Tr. 49 (Huck).

      564

      [253] SEH Tr. 72 (Huck).

      565

      [254] SEH Tr. 110 (McGlade).

      566

      [255] SEH Tr. 49 (Huck).

      567

      [256] SEH Tr. 75 (Davis), see also SEH Tr. 76 (Davis) ("Q. As far as you're concerned, $70 is Air Products' best and final offer for Airgas? A. As far as I'm concerned, yes.").

      568

      [257] SEH Tr. 108 (McGlade) ("We were unanimous in the decision.").

      569

      [258] SEH Tr. 67-68 (Huck).

      570

      [259] Defs.' Nov. 8, 2010 Post-Trial Br. 57.

      571

      [260] JX 1063 (Minutes of the Special Meeting of the Airgas Board (Dec. 21, 2010)).

      572

      [261] Id. at 2-3.

      573

      [262] Id. at 4.

      574

      [263] Id. at 4-9.

      575

      [264] Id. at 6.

      576

      [265] Id. at 7.

      577

      [266] Id. at 8.

      578

      [267] Id. at 9. SEH Tr. 349 (DeNunzio) ("[W]e didn't think it was a close call.").

      579

      [268] Id. at 9.

      580

      [269] SEH Tr. 417 (Clancey).

      581

      [270] JX 1063 (Minutes of the Special Meeting of the Airgas Board (Dec. 21, 2010)) at 10.

      582

      [271] SEH Tr. 420 (Clancey).

      583

      [272] Miller: "Q: [I]s it possible that there [is] a price below $78 that you would still be willing to do a deal with Air Products at? A. In my mind, probably not, no." SEH Tr. 162.

      584

      Lumpkins: "I have come to the point where I believe today that the company is worth $78 a share.... My opinion also is that the company on its own, its own business will be worth $78 or more in the not very distant future because of its own earnings and cash flow prospects [a]s a standalone company." JX 1095 (Lumpkins Dep. 165, 169 (Jan. 21, 2011)).

      585

      [273] SEH Tr. 205-06 (McCausland).

      586

      [274] SEH Tr. 217 (McCausland); see also JX 1063 (Minutes of the Special Meeting of the Airgas Board (Dec. 21, 2010)) at 11 ("Mr. Thomas stated that he would certainly be supportive of sitting down and talking to Air Products if it offered $78 per share.").

      587

      [275] JX 659 (Airgas Schedule 14D-9 (Dec. 22, 2010)) at Ex. (a)(111); see id. at 6 ("Airgas's Board of Directors concluded that the [$70 offer] is inadequate, does not reflect the value or prospects of Airgas, and is not in the best interests of Airgas, its shareholders and other constituencies.").

      588

      [276] Id.

      589

      [277] JX 659 at 5-6. Id.

      590

      [278] Id.

      591

      [279] Id. at Annex J (Bank of America Merrill Lynch), Annex K (Credit Suisse), Annex L (Goldman Sachs).

      592

      [280] See supra Section I.O (The October Trial).

      593

      [281] See, e.g., SEH Tr. 189-90 (McCausland); SEH Tr. 395-96 (DeNunzio) (testifying that analysts' projections were "remarkably close" to management's, "[s]o that information's available to the world").

      594

      [282] JX 304, JX 433, JX 645, JX 1086.

      595

      [283] See SEH Tr. 200-01 (McCausland) (testifying that he has met with at least 300 individual arbitrageurs to discuss Air Products' offer).

      596

      [284] SEH Tr. 253 (McCausland).

      597

      [285] JX 1090 (van Roden Dep. 262 (Jan. 12, 2011)).

      598

      [286] SEH Tr. 154-55 (Miller).

      599

      [287] SEH Tr. 396 (DeNunzio).

      600

      [288] SEH Tr. 393-94 (DeNunzio).

      601

      [289] JX 1095 (Lumpkins Dep. 169 (Jan. 21, 2011)).

      602

      [290] SEH Tr. 453 (Clancey).

      603

      [291] Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), see also Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310, 335 (Del.Ch.2010) ("[I]t is settled law that the standard of review to be employed to address whether a poison pill is being exercised consistently with a board's fiduciary duties is [] Unocal.").

      604

      [292] Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del.1995) (citing Unocal, 493 A.2d at 955).

      605

      [293] Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140, 1152 (Del.1990); see also Unocal, 493 A.2d at 955.

      606

      [294] Unocal, 493 A.2d at 955.

      607

      [295] Chesapeake Corp. v. Shore, 771 A.2d 293, 301 n. 8 (Del.Ch.2000) (internal citation omitted) (emphasis added).

      608

      [296] See eBay Domestic Holdings, 2010 WL 3516473, at *12 (finding that despite defendants' "deliberative" investigative process, defendants nevertheless "fail[ed] the first prong of Unocal both factually and legally").

      609

      [297] See eBay, 2010 WL 3516473, at *20 ("Like other defensive measures, a rights plan cannot be used preclusively or coercively; nor can its use fall outside the `range of reasonableness.'").

      610

      [298] Id.

      611

      [299] Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1367 (Del.1995).

      612

      [300] Id.

      613

      [301] Defs.' Post-Supplemental Hearing Br. 4.

      614

      [302] Id. (quoting Unocal, 493 A.2d at 954).

      615

      [303] Id. (quoting Unocal, 493 A.2d at 954).

      616

      [304] Id. at 5.

      617

      [305] Unocal, 493 A.2d at 954 (internal footnote and citation omitted) (emphasis added).

      618

      [306] Id. at 955 (internal citation omitted).

      619

      [307] J. Travis Laster, Exorcising the Omnipresent Specter: The Impact of Substantial Equity Ownership by Outside Directors on Unocal Analysis, 55 Bus. Law. 109, 116 (1999); see also Kahn v. Roberts, 679 A.2d 460, 465 (Del. 1996) ("Where [] the board takes defensive action in response to a threat to the board's control of the corporation's business and policy direction, a heightened standard of judicial review applies because of the temptation for directors to seek to remain at the corporate helm in order to protect their own powers and perquisites. Such self-interested behavior may occur even when the best interests of the shareholders and corporation dictate an alternative course.").

      620

      [308] Defendants further argue that there is less justification for Unocal's approach today than when Unocal was decided because boards are more independent now and stockholders are better able to keep boards in check. Whether or not this is true does not have any bearing on whether Unocal applies, though. Unocal applies to both independent outside directors, as well as insiders, whenever a board is taking defensive measures to thwart a takeover. Independence certainly bears heavily on the first prong of Unocal, but it is not outcome-determinative; the burden of proof is still on the directors to show that their actions are reasonable in relation to a perceived threat (that is, they still must meet Unocal prong 2 before they are back under the business judgment rule).

      621

      [309] Unitrin v. Am. Gen. Corp., 651 A.2d 1361, 1376 (Del. 1995) (quoting Paramount Commc'ns v. Time, Inc., 571 A.2d at 1154 n. 8).

      622

      [310] See Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586, 599 (Del.2010) ("Delaware courts have approved the adoption of a Shareholder Rights Plan as an antitakeover device, and have applied the Unocal test to analyze a board's response to an actual or potential hostile takeover threat.").

      623

      [311] TW Servs., Inc. v. SWT Acquisition Corp., 1989 WL 20290, at *9 (Del.Ch. Mar. 2, 1989).

      624

      [312] Id. Here, Air Products' tender offer would almost certainly result in a "change of control" transaction, as the offer would likely succeed in achieving greater than 50% support from Airgas's stockholders, which largely consist of merger arbitrageurs and hedge funds who would gladly tender into Air Products' offer. See SEH Tr. 225 (McCausland) (stating his view that a majority of Airgas shares would tender into the $70 offer).

      625

      [313] 1989 WL 20290, at *10.

      626

      [314] See id. at *9-10.

      627

      [315] Id. at *10.

      628

      [316] Id.

      629

      [317] Moran v. Household Int'l, Inc., 500 A.2d 1346 (Del.1985).

      630

      [318] Id. at 1356.

      631

      [319] Id. at 1354 (citing Unocal, 493 A.2d at 954-55, 958).

      632

      [320] Id.

      633

      [321] Id. at 1356-57.

      634

      [322] See id. at 1354.

      635

      [323] Id. at 1353.

      636

      [324] Moran v. Household Int'l, Inc., 490 A.2d 1059, 1064 (Del.Ch.1985).

      637

      [325] Ronald Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus. Law. 247, 258 (1989).

      638

      [326] Id.

      639

      [327] Id. at 267.

      640

      [328] Id.

      641

      [329] Id. at 274.

      642

      [330] City Capital Assocs. Ltd. P'ship v. Interco Inc., 551 A.2d 787 (Del.Ch. 1988).

      643

      [331] Id. at 797-98.

      644

      [332] The Chancellor cited a draft of the Gilson & Kraakman article, used its two other categories, and clearly chose not to deem an all shares, all cash offer coercive in any respect. Id. at 796 n. 8 (citing Ronald Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to the Proportionality Review?, John M. Olin Program in Law & Economics, Stanford Law School (Working Paper No. 45, Aug. 1988); 44 Bus. Law. ___ (forthcoming February, 1989)).

      645

      [333] Id. at 798.

      646

      [334] Id.

      647

      [335] Paramount Commc'ns, Inc. v. Time Inc., 571 A.2d 1140, 1153 (Del. 1990).

      648

      [336] Id. at 1149-50.

      649

      [337] Id. at 1150. In other words, would the board's actions be judged under the Unocal standard or under the Revlon standard of review?

      650

      [338] Id.

      651

      [339] Id. at 1150-51.

      652

      [340] Id. at 1153. The Court also noted other potential threats posed by Paramount's all-cash, all-shares offer, including (1) that the conditions attached to the offer introduced some uncertainty into the deal, and (2) that the timing of the offer was designed to confuse Time stockholders.

      653

      [341] Id. at 1153.

      654

      [342] Id. at 154-55.

      655

      [343] 651 A.2d 1361 (Del.1995).

      656

      [344] Id. at 1384.

      657

      [345] Id. at 1385.

      658

      [346] Id. at 1389.

      659

      [347] Ronald J. Gilson, Unocal Fifteen Years Later (And What We Can Do About It), 26 Del. J. Corp. L. 491, 497 n. 23 (2001).

      660

      [348] See, e.g., Chesapeake v. Shore, 771 A.2d 293, 324-25 (Del.Ch.2000).

      661

      [349] Id. at 328.

      662

      [350] City Capital Assocs. Ltd. P'ship v. Interco Inc., 551 A.2d 787, 790 (Del.Ch. 1988).

      663

      [351] Id.

      664

      [352] Practitioners may question whether judges are well positioned to make a determination that a takeover battle has truly reached its "end stage." But someone must decide, and the specific circumstances here—after more than sixteen months have elapsed and one annual meeting convened, with three price increases and Air Products representatives credibly testifying in this Court and publicly representing that they have reached the end of the line—demonstrates that this particular dispute has reached the end stage.

      665

      [353] SEH Tr. 394 (DeNunzio).

      666

      [354] 1989 WL 20290 (Del.Ch. Mar. 2, 1989).

      667

      [355] Time, 571 A.2d 1140, 1153.

      668

      [356] Id.

      669

      [357] Specifically, the case involved an all-cash, all-shares tender offer whose closing was conditioned upon execution of a merger agreement with the target. The Chancellor thus decided the case under 8 Del. C. § 251. Under the business judgment rule, the board was permitted to decline the offer and was "justified in not further addressing the question whether it should deviate from its long term management mode in order to do a current value maximizing transaction." 1989 WL 20290, at *11.

      670

      [358] The doctrinal evolution in our Revlon jurisprudence is a story for another day. Suffice it to say for now that it has not remained static and I in no way mean to suggest otherwise by this purely historical description.

      671

      [359] Id. at *8.

      672

      [360] Id. at *7.

      673

      [361] Id. (emphasis added). Chancellor Allen continued, "The rationale for recognizing that non-contractual claims of other corporate constituencies are cognizable by boards, or the rationale that recognizes the appropriateness of sacrificing achievable share value today in the hope of greater long term value, is not present when all of the current shareholders will be removed from the field by the contemplated transaction." Id. (emphasis added).

      674

      [362] Id. at *8.

      675

      [363] Id. at *8 n. 14 (emphasis added).

      676

      [364] Grand Metro. Pub. Ltd. Co. v. Pillsbury Co., 558 A.2d 1049 (Del.Ch.1988).

      677

      [365] City Capital Assocs. Ltd. P'ship v. Interco Inc., 551 A.2d 787 (Del.Ch.1988).

      678

      [366] 1989 WL 20290, at *9.

      679

      [367] Id. at *8.

      680

      [368] Id. (emphasis added).

      681

      [369] Chesapeake v. Shore, 771 A.2d 293, 330 (Del.Ch.2000) (citing Unitrin, 651 A.2d at 1375).

      682

      [370] There are a number of reasons for this. For example, the inadequacy of the price was even greater at $65.50. More importantly, Air Products had openly admitted that it was willing to pay more for Airgas. The pill was serving an obvious purpose in providing leverage to the Airgas board. The collective action problem is lessened when the bidder has made its "best and final" offer, provided it is in fact its best and final offer.

      683

      [371] Selectica Inc. v. Versata Enters., Inc., 2010 WL 703062, at *12 (Del.Ch. Feb. 26, 2010).

      684

      [372] See supra Section I.G (The Proxy Contest) (describing independence of the three Air Products Nominees).

      685

      [373] See, e.g., Trial Tr. 501-03 (Thomas); see also supra note 61.

      686

      [374] JX 659 (Airgas Schedule 14D-9 (Dec. 22, 2010)) at Ex. (a)(111); see id. at Annex J (Bank of America Merrill Lynch), Annex K (Credit Suisse), Annex L (Goldman Sachs).

      687

      [375] SEH Tr. 414 (Clancey); SEH Tr. 53 (Huck).

      688

      [376] See, e.g., JX 73 (Minutes of the Regular Meeting of the Airgas Board (Nov. 5-7, 2009)); JX 100 (Minutes of the Special Telephonic Meeting of the Airgas Board (Dec. 7, 2009)); JX 116 (Minutes of Special Telephonic Meeting of the Airgas Board (Dec. 21, 2009)); JX 137 (Minutes of the Continued Special Telephonic Meeting of the Airgas Board (Jan. 4, 2010)); JX 204 (Minutes of the Regular Meeting of the Airgas Board (Feb. 8-9, 2010)); JX 245 (Minutes of the Special Telephonic Meeting of the Airgas Board (Feb. 20, 2010)); JX 294 (Minutes of the Regular Meeting of the Airgas Board (April 7-8, 2010)); JX 331 (Minutes of the Regular Meeting of the Airgas Board (May 24-25, 2010)); JX 417 (Minutes of the Special Telephonic Meeting of the Airgas Board (July 15, 2010)); JX 425 (Minutes of the Special Telephonic Meeting of the Airgas Board (July 20, 2010)); JX 530A (Minutes of the Special Telephonic Meeting of the Airgas Board (Sept. 7, 2010)); JX 1010A (Minutes of the Regular Meeting of the Airgas Board (Nov. 1-2, 2010)); JX 1038 (Minutes of the Special Telephonic Meeting of the Independent Members of the Airgas Board (Dec. 10, 2010)); JX 1063 (Minutes of the Special Meeting of the Airgas Board (Dec. 21, 2010)) (counsel from Wachtell, Lipton, Rosen & Katz present at all of the meetings; advice provided by Dan Neff, Marc Wolinsky, Ted Mirvis, David Katz and others).

      689

      [377] Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586, 599 (Del.2010).

      690

      [378] See SEH Tr. 188 (McCausland).

      691

      [379] See SEH Tr. 250-52 (McCausland).

      692

      [380] See SEH Tr. 249-50 (McCausland).

      693

      [381] SEH Tr. 438 (Clancey) (testifying that nobody ever actually said anything about stockholders being coerced); SEH Tr. 368 (DeNunzio) (testifying that at the December 21, 2010 Airgas board meeting when the board discussed the $70 offer, there was no discussion about whether Airgas's stockholders would be coerced into tendering); SEH Tr. 158 (Miller) (testifying that he did not discuss the topic of coercion with anyone and did not recall it being discussed at any board meeting); JX 1090 (van Roden Dep. 86 (Jan. 12, 2011)) (testifying that he has never talked about the notion of coercion at a board meeting).

      694

      [382] SEH Tr. 438-39 (Clancey) ("Q. [N]either you nor any of your fellow board members said anything about a so-called prisoner's dilemma. Is that correct? A. That is correct... Q. [And] prior to your deposition, you had never heard the concept of a prisoner's dilemma used in the context of the Air Products offer. Is that correct? A. That is correct."); SEH Tr. 369 (DeNunzio) ("Q. No discussion at [the December 21, 2010 Airgas] board meeting about stockholders being subject to a prisoner's dilemma, was there? A. Not that I recall."); JX 1090 (van Roden Dep. 230 (Jan. 12, 2011)) (testifying that the notion of prisoner's dilemma was never discussed at an Airgas board meeting). Miller, who is "not conversant on prisoner's dilemma" testified that he had not heard the concept discussed in the context of Air Products' $70 offer and "[i]t was not discussed at board meetings." SEH Tr. 157-58 (Miller). The only time he had discussed prisoner's dilemma was in his deposition preparation session with counsel. Id.

      695

      [383] Miller testified that not only did he not know what a "threat" was (in plain English), so he simply could not answer the question whether he believed somehow that the Air Products offer presents some danger or threat to the company, he also has never discussed with anyone the notion of whether Air Products' offer is a threat or presents any danger to Airgas. SEH Tr. 155-57 (Miller).

      696

      [384] See Trial Tr. 474 (Thomas) ("Q. Mr. Thomas, you believe that the only threat posed to the shareholders of Airgas by the Air Products' tender offer is a low price; correct? A. I do.").

      697

      [385] JX 1090 (van Roden Dep. 251-52 (Jan. 12, 2011)).

      698

      [386] SEH Tr. 437-38 (Clancey); SEH Tr. 242 (McCausland) ("Coercion and threat were implicit in everything we discussed that day [at the December 21, 2010 board meeting]."); SEH Tr. 249-50 (McCausland); SEH Tr. 160-62 (Miller).

      699

      [387] JX 1090 (van Roden Dep. 254 (Jan. 12, 2011)).

      700

      [388] See SEH Tr. 301 (McCausland).

      701

      [389] See Section II.C. For example, Clancey testified that the Airgas stockholders have access to "more than adequate" information upon which to base their decision whether or not to tender into Air Products' offer—"all the information that they could ever want is available." SEH Tr. 453-54. This includes the public and well-known opinion of the Airgas board, as well as that of its financial advisors and numerous analysts' reports with numbers that are "very close or almost identical to management's own internal projections for this company going forward." SEH Tr. 453 (Clancey).

      702

      [390] Ronald Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus. Law. 247, 258 (1989).

      703

      [391] Unocal, 493 A.2d at 956 ("It is now well recognized that such offers are a classic coercive measure designed to stampede shareholders into tendering at the first tier, even if the price is inadequate, out of fear of what they will receive at the back end of the transaction.").

      704

      [392] Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140, 1152 (Del.1990) (emphasis added).

      705

      [393] JX 222 (Airgas Schedule TO: Offer to Purchase by Air Products & Chemicals, Inc. (Feb. 11, 2010)); see also Trial Tr. 130-31 (McGlade); SEH Tr. 5 (Huck).

      706

      [394] JX 222 (Airgas Schedule TO: Offer to Purchase by Air Products & Chemicals, Inc. (Feb. 11, 2010)).

      707

      [395] See Section I.F. (The $60 Tender Offer).

      708

      [396] SEH Tr. 15 (Huck); SEH Tr. 110-11 (McGlade).

      709

      [397] SEH Tr. 15 (Huck); SEH Tr. 110-11 (McGlade).

      710

      [398] SEH Tr. 15-16 (Huck); SEH Tr. 111-12 (McGlade).

      711

      [399] See Kahn v. Lynch Commc'n Sys., Inc., 669 A.2d 79, 86 (Del. 1995) ("In this case, no shareholder was treated differently in the transaction from any other shareholder, nor subjected to two-tiered or squeeze-out treatment. [The bidder] offered cash for all the minority shares and paid cash for all shares tendered. Clearly there was no coercion exerted which was material to this aspect of the transaction.") (internal citation omitted).

      712

      [400] Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d 278, 289 (Del.Ch.1989).

      713

      [401] Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1384 (Del.1995) (quoting Ronald Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus. Law. 247, 267 (1989)).

      714

      [402] Shamrock Holdings, 559 A.2d at 289 (internal citations omitted).

      715

      [403] Trial Tr. 290-91 (Ill).

      716

      [404] Trial Tr. 315 (Wolinsky).

      717

      [405] JX 429 (Airgas Schedule 14D-9 (July 21, 2010)) at 10.

      718

      [406] Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1385 (Del.1995).

      719

      [407] Ronald Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus. Law. 247, 260 (1989).

      720

      [408] Id.

      721

      [409] Defs.' Post-Supplemental Hearing Br. 23-25; see also Defs.' Post-Trial Br. 95 (arguing that the fact that Airgas stockholders are informed and sophisticated "does not stand as a rebuttal to the conclusion that Air Products' offer presents a threat of substantive coercion. The issue here is not only that shareholders may disbelieve the Airgas Board, and that they will want to see results before they fully credit the Board's view. The issue is also that they will be coerced into tendering into an offer that they do not wish to accept.").

      722

      [410] Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140 (Del.1990). Similar concerns about short-term investors were noted in Paramount, however: "Large quantities of Time shares were held by institutional investors. The board feared that even though there appeared to be wide support for the Warner transaction, Paramount's cash premium would be a tempting prospect to these investors." Id. at 1148.

      723

      [411] SEH Tr. 202 (McCausland) ("They don't care a thing about the fundamental value of Airgas. I know that. I naively spent a lot of time trying to convince them of the fundamental value of Airgas in the beginning. But I'm quite sure now, given that experience, that they have no interest in the long-term.").

      724

      [412] See SEH Tr. 454 (Clancey) ("[Essentially, the risk is] that the informed minority, in theory, will be forced to do something because of the bamboozled majority, or the majority who will act because their interests' time lines are different than that minority.").

      725

      [413] See Mercier v. Inter-Tel (Delaware), Inc., 929 A.2d 786, 815 (Del.Ch.2007) ("[T]he bad arbs and hedge funds who bought in, had obviously bought their shares from folks who were glad to take the profits that came with market prices generated by the Merger and Vector Capital's hint of a higher price. These folks, one can surmise, had satisfied whatever long-term objective they had for their investment in Inter-Tel.").

      726

      [414] Otherwise, as Gilson and Kraakman have articulated it, there will have been no "coercion" because the first element will be missing—that is, stockholders who tendered into an "adequate" offer will not have made a mistake. Airgas also belatedly tries to make the argument that the typical "disbelieve management and tender" form of substantive coercion exists as well, because there is nonpublic information that Airgas's stockholders do not have access to (for example, the detailed valuation information that goes into the five-year plan, and other sensitive competitive and strategic information). In support of this argument, they point to Clancey, who believed that all the information stockholders could want is available, yet it was not until he gained access to the nonpublic information that he joined in the board's view on value. This argument fails for at least two reasons. First, this argument was simply made too late in the game. Almost every witness during the October trial—and even in the January supplemental hearing—testified that Airgas's stockholders had all the information they need to make an informed decision. See Section I.O. (The October Trial); Section I.S. (The Airgas Board Unanimously Rejects the $70 Offer) at 73-76. Second, Airgas stockholders know this about Clancey, Lumpkins, and Miller. They know that the three Air Products Nominees were skeptical of management's projections initially (after all, these were Air Products' nominees who got onto the board for the purpose of seeing if a deal could get done!), but they changed their tune once they studied the board's information and heard from the board's advisors. This is why stockholders elect directors to the board. The fact that Air Products' own three nominees fully support the rest of the Airgas board's view on value, in my opinion, makes it even less likely that stockholders will disbelieve the board and tender into an inadequate offer. The articulated risk that does exist, however, is that arbitrageurs with no long-term horizon in Airgas will tender, whether or not they believe the board that $70 clearly undervalues Airgas.

      727

      [415] Chesapeake Corp. v. Shore, 771 A.2d 293, 326 (Del.Ch.2000).

      728

      [416] SEH Tr. 303 (McCausland).

      729

      [417] Id.

      730

      [418] Air Products Post-Supplemental Hearing Br. 31; SEH Tr. 31 (Huck); SEH Tr. 82 (Davis); SEH Tr. 121 (McGlade); SEH Tr. 353-54 (DeNunzio); SEH Tr. 180-81 (Miller).

      731

      [419] Professors Gilson and Kraakman expressly coupled their invention of the term substantive coercion with a recognition of its danger and their call for a searching form of judicial review to make sure that the concept did not become a blank check for boards to block structurally non-coercive bids. Indeed, one senses that their article advocated a second-best solution precisely because they feared that the Delaware Supreme Court would not embrace Interco. But their article's articulated solution—a searching judicial examination of the resisting board's business plan—has some resonance here. Although I have not undertaken the appraisal-like inquiry Gilson and Kraakman advocate, the credibility of the board's determination that the bid is undervalued is enhanced by something more confidence-inspiring than judicial review of the board's business plan. The three new directors elected by the stockholders insisted on retaining their own financial and legal advisors. Those new directors and their expert advisors analyzed the company's business plan with fresh, independent eyes and came to the same determination as the incumbents, which is that the company's earnings potential justifies a sale value of at least $78. In this scenario, therefore, even the analysis urged by Gilson and Kraakman would seem to support the board's use of the pill.

      732

      [420] SEH Tr. 409 (Clancey).

      733

      [421] SEH Tr. 409 (Clancey); SEH Tr. 181 (Miller). Air Products' CFO Huck didn't "see a double-dip either, so I see long, good, steady, solid growth going forward here for the economy." JX 1086A at 7.

      734

      [422] Mercier, 929 A.2d at 815.

      735

      [423] Air Products Post-Supplemental Hearing Br. 21-22 n. 15.

      736

      [424] For example, on December 8, 2010, one stockholder who claimed to represent "the views of Airgas stockholders generally" sent a letter to the Airgas board urging them to negotiate with Air Products—when the $65.50 offer was still on the table. See JX 1029 (Letter from P. Schoenfeld Asset Management LP to Airgas Board of Directors (Dec. 8, 2010)); see also SEH Tr. 224 (McCausland). At various points in time, Peter Schoenfeld urged the board to take $65.50, $67, $70. SEH Tr. 224 (McCausland). He would be happy, it seemed, to see a deal done at any price (presumably above what he bought into the stock at). Schoenfeld wrote, "We hope that the demand for $78 per share is a negotiating position. As an Airgas stockholder, we strongly believe that the Airgas board could accept a significant discount from $78 per share and still get a good deal for the Airgas stockholders." JX 1029 at 2. Certainly, I can safely assume that Schoenfeld (and similarly situated stockholders) likely would tender into Air Products' $70 offer.

      737

      [425] SEH Tr. 567-68 (Harkins) ("[A]rbitrageurs [] typically purchase[] their shares at elevated levels in order to profit by realizing the spread between the price they paid and the deal price. If the offer fails and the stock returns to pre-bid levels or to anticipated post-tender trading levels, the arbitrageurs would ... suffer huge losses.... I think it's widely understood that short-term investors own close to if not a majority of this company. So if you decided to not tender, you would be making that decision knowing and believing that owners of a majority were likely to tender."); SEH Tr. 735-36 (Morrow) ("Q. [Y]ou don't know any merger arb who, given a choice between tendering for 70 bucks and waiting for [a] second-step merger three or four months later at the same price, would choose not to tender and wait for that second-step merger instead; right? A. That's correct.").

      738

      [426] TW Servs., Inc. v. SWT Acquisition Corp., 1989 WL 20290 (Del.Ch. Mar. 2, 1989).

      739

      [427] Airgas's board is not under "a fiduciary duty to jettison its plan and put the corporation's future in the hands of its stockholders." Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140, 1149-50 (Del.1990).

      740

      [428] Unitrin, 651 A.2d 1361, 1376 (citing Paramount, 571 A.2d at 1153). Vice Chancellor Strine has pointed out that "[r]easonable minds can and do differ on whether it is appropriate for a board to consider an all cash, all shares tender offer as a threat that permits any response greater than that necessary for the target board to be able to negotiate for or otherwise locate a higher bid and to provide stockholders with the opportunity to rationally consider the views of both management and the prospective acquiror before making the decision to sell their personal property." In re Gaylord Container Corp. S'holders Litig., 753 A.2d 462, 478 n. 56 (Del. Ch.2000). But the Supreme Court cited disapprovingly to the approach taken in City Capital Associates v. Interco, Inc., 551 A.2d 787 (Del.Ch. 1988), which had suggested that an all-cash, all-shares bid posed a limited threat to stockholders that justified leaving a poison pill in place only for some period of time while the board protects stockholder interests, but "[o]nce that period has closed ... and [the board] has taken such time as it required in good faith to arrange an alternative value-maximizing transaction, then, in most instances, the legitimate role of the poison pill in the context of a noncoercive offer will have been fully satisfied." The Supreme Court rejected that understanding as "not in keeping with a proper Unocal analysis."

      741

      [429] Paramount, 571 A.2d at 1150.

      742

      [430] Id. at 1150 n. 12. I admit empirical studies show that corporate boards are subject to error in firm value projections, usually on the overconfident side of the equation. I also admit that markets are imperfect, most often on the side of overvaluing a company. See generally Bernard Black and Reinier Kraakman, Delaware's Takeover Law: The Uncertain Search for Hidden Value, 96 Nw. U.L.Rev. 565 (2001-02) (describing the "hidden value" model on which managers and directors rely as the basis for resisting takeover offers, and contrasting it with the "visible value" model animating stockholders and potential acquirers). In this case, the Airgas board (relying on the "hidden value" model described by Black and Kraakman) is strongly positing that the market has seriously erred in the opposite direction, by dramatically underestimating Airgas's intrinsic value. I do not share the Airgas board's confidence in its strategic analysis and I do not agree with their claims to superior inside information, but I am bound by Delaware Supreme Court precedent that, in my opinion, drives the result I reach.

      743

      [431] Id.

      744

      [432] Id. (quoting Unitrin, 651 A.2d at 1387). Airgas's defensive measures are inextricably related in their purpose and effect, and I thus review them as a unified response to Air Products' offer.

      745

      [433] Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1388 (Del.1995) (citing Paramount Commc'ns, Inc. v. QVC Network, Inc., 637 A.2d 34, 45-46 (Del. 1994)); see Selectica, 5 A.3d at 601.

      746

      [434] Selectica, 5 A.3d at 601 (quoting Unitrin, 651 A.2d at 1387).

      747

      [435] Id. (citing Carmody v. Toll Bros., Inc., 723 A.2d 1180, 1195 (Del.Ch.1998)). Until Selectica, the preclusive test asked whether defensive measures rendered an effective proxy contest "`mathematically impossible' or `realistically unattainable,'" but since "realistically unattainable" subsumes "mathematically impossible," the Supreme Court in Selectica explained that there is really "only one test of preclusivity: `realistically unattainable.'" Id.

      748

      [436] Indeed, Airgas's own expert testified that no bidder has ever replaced a majority of directors on a staggered board by winning two consecutive annual meeting elections. SEH Tr. 657-58 (Harkins).

      749

      [437] Selectica, 5 A.3d 586, 604 (Del.2010) (emphasis added).

      750

      [438] Id. (quoting Carmody v. Toll Bros., Inc., 723 A.2d 1180, 1186 n. 17 (Del.Ch. 1998)).

      751

      [439] Id. (citing In re Gaylord Container Corp. S'holders Litig., 753 A.2d 462, 482 (Del.Ch. 2000)). Of course, the target company in the case the Supreme Court cited for that proposition, In re Gaylord Container Corp. Shareholders Litigation, did not have a staggered board (all directors were up for election annually). The combination of the defensive measures in Gaylord Container combined to make obtaining control "more difficult" because an acquiror could only obtain control once a year, at the annual meeting, but the defensive measures were found not to be preclusive because "[b]y taking out the target company's board through a proxy fight or a consent solicitation, the acquiror could obtain control of the board room, redeem the pill, and open the way for consummation of its tender offer." Gaylord Container, 753 A.2d at 482. Vice Chancellor Strine noted, however, that "[t]hese provisions are far less preclusive than a staggered board provision, which can delay an acquiror's ability to take over a board for several years." Id.

      752

      [440] Selectica, 5 A.3d at 604 (quoting Moran v. Household Int'l, Inc., 500 A.2d at 1357). Again, in the case the Supreme Court is quoting from (Moran), the entire Household board was subject to election annually; the company did not have a staggered board.

      753

      [441] Id.

      754

      [442] See Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182 (Del.2010).

      755

      [443] 8 A.3d 1182, 1192 n. 27 (Del.2010) (quoting Lewis S. Black, Jr. & Craig B. Smith, Antitakeover Charter Provisions: Defending Self-Help for Takeover Targets, 36 Wash. & Lee L.Rev. 699, 715 (1979)) (alteration in original).

      756

      [444] Id. (quoting 1 R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations and Business Organizations § 4.6 (2010)) (alteration in original).

      757

      [445] Id. at 1190 n. 18 (emphasis added).

      758

      [446] I say at this time because Air Products has indicated that if Airgas's defenses remain in place, it may walk away from a deal now, but it may be willing to bid for Airgas at some point in the future. See, e.g., SEH Tr. 49-50 (Huck) ("Q. [W]hen you say `best and final,' you mean as of today. But the world could change and you can't commit as to what Air Products may do as future events unfold; correct? A. That is correct."); see also SEH Tr. 95-96 (Davis).

      759

      [447] JX 3 (Airgas Amended and Restated Certificate of Incorporation) at Art. 2, § 2.

      760

      [448] Defs.' Dec. 21 Supplemental Post-Trial Br. 4.

      761

      [449] It also distinguishes this case from the paradigmatic case posited by Professors Bebchuk, Coates, and Subramanian in 54 Stan. L.Rev. 887 (2002). In their article, the professors write: "Courts should not allow managers to continue blocking a takeover bid after they lose one election conducted over an acquisition offer." Id. at 944. In essence, the professors argue that corporations with an "effective staggered board" ("ESB"), defined as one in which a bidder "must go through two annual meetings in order to gain majority control of the target's board," should be required to redeem their pill after losing one election cycle. Id. at 912-14, 944. But, the professors concede, "without an ESB, no court intervention is necessary." Id. at 944. Airgas does not have an ESB as described by the professors because of its charter provision allowing removal of the entire board without consent at any time by a 67% vote.

      762

      [450] SEH Tr. 523-24 (Harkins).

      763

      [451] SEH Tr. 8 (Huck).

      764

      [452] Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310, 337 n. 182 (Del.Ch.2010).

      765

      [453] See JX 1081 (Second Supplemental Report of Peter C. Harkins (Jan. 5, 2011)); JX 1085 (Expert Report of Joseph J. Morrow (Jan. 20, 2011)).

      766

      [454] SEH Tr. 456 (Harkins); SEH Tr. 685-86 (Morrow).

      767

      [455] See, e.g., SEH Tr. 523-24 (Harkins).

      768

      [456] SEH Tr. 759 (Morrow).

      769

      [457] SEH Tr. 535-36 (Harkins).

      770

      [458] See Ex. ARG 912; JX 1081 (Second Supplemental Report of Peter C. Harkins (Jan. 5, 2011)) at 2-8.

      771

      [459] See Ex. ARG 912; SEH 473-74 (Harkins) (testifying that 100% of the arbs and event-driven investors would vote for Air Products, "assuming an appealing platform"); Harkins Supplemental Report (Sept. 26, 2010).

      772

      [460] See SEH Tr. 481-82 (Harkins); SEH Tr. 216-17 (McCausland).

      773

      [461] SEH Tr. 615 (Harkins); JX 1051A (Airgas Investor Relations Update (Dec. 21, 2010)) at 8. The breakdown as of December 9, 2010 was as follows:

      774

      [IMAGE OMITTED]

      775

      [462] Ex. ARG 912.

      776

      [463] Ex. ARG 913; see SEH Tr. 713-15, 723, 736 (Morrow).

      777

      [464] SEH Tr. 617 (Harkins).

      778

      [465] SEH Tr. 203 (McCausland). As far as what accounted for the change, McCausland testified that in the month of December more long term (traditional, fundamental) investors have moved back into the stock, while the largest sales came from arbs and hedge funds. Id.

      779

      [466] SEH Tr. 551 (Harkins).

      780

      [467] SEH Tr. 509-11 (Harkins); SEH Tr. 760-61 (Morrow).

      781

      [468] Chesapeake v. Shore, 771 A.2d 293, 341-44 (Del.Ch.2000) (finding that 88% of participating unaffiliated shares was not realistically attainable).

      782

      [469] SEH Tr. 521-22 (Harkins); SEH Tr. 644 (Harkins); SEH Tr. 759-60 (Morrow).

      783

      [470] SEH Tr. 644 (Harkins).

      784

      [471] SEH Tr. 507 (Harkins).

      785

      [472] SEH Tr. 507-08 (Harkins).

      786

      [473] SEH Tr. 508 (Harkins).

      787

      [474] See Guhan Subramanian et al., Is Delaware's Antitakeover Statute Unconstitutional?, 65 Bus. Law. 685 (2010). But see A. Gilchrist Sparks & Helen Bowers, After Twenty-Two Years, Section 203 of the Delaware General Corporation Law Continues to Give Hostile Bidders a Meaningful Opportunity for Success, 65 Bus. Law. 761 (2010).

      788

      [475] See, e.g., SEH Tr. 52 (Huck) (testifying that "at the December 9th board meeting, the Air Products' board determined [] that it would not pursue its attempt to acquire Airgas through the next Airgas annual meeting"); SEH Tr. 97-98 (Davis) (testifying that at the December 9th meeting, "the board made a business decision that it didn't want to wait that long to pursue Airgas and seek to elect another slate at the annual meeting").

      789

      [476] SEH Tr. 12 (Huck) ("[O]ur shareholders have carried the burden of reduced stock price for a long period of time. The stock price of Air Products declined approximately 10 to 15 percent upon the announcement of this offer, due to the uncertainty which was introduced by the transaction. When that occurred—we knew it was going to occur, however, you know, the shareholders have carried this for almost a year now. ... That is a long time for the shareholders to carry the penalty. We felt that we needed to draw that to a conclusion to be fair to our shareholders.").

      790

      [477] As noted elsewhere in this Opinion, both sides readily seem to admit that there is at least a strong likelihood that a majority of Airgas's current stockholders would want to tender into Air Products' $70 offer. See, e.g., SEH Tr. 202 (McCausland) ("The tender offer would succeed if the pill were pulled. I have no doubt about that."); SEH Tr. 43-44 (Huck); SEH Tr. 87-88 (Davis) ("[M]uch of the Airgas stock was owned by arbs that had acquired their stock at a price under 70, and [so] it was believed they would support a $70 offer.").

      791

      [478] Reading the Supreme Court's decision literally, even a fully informed vote by a majority of the stockholders to move the company's annual meeting date is not allowed under Delaware law when the company has a staggered board. Companies without a staggered board have this flexibility, but not companies with staggered boards. 8 Del. C. § 109(a); 8 Del. C. § 211(b).

      792

      [479] Selectica, 5 A.3d at 604. Although the three Air Products Nominees from the September 2010 election all have joined the rest of the Airgas board in its current views on value, if Air Products nominated another slate of directors who were elected, there is no question that it would have "control" of the Airgas board—i.e. it will have nominated and elected the majority of the board members. There is no way to know at this point whether or not those three hypothetical New Air Products Nominees would join the rest of the board in its view, or whether the entire board would then decide to remove its defensive measures. The preclusivity test, though, is whether obtaining control of the board is realistically unattainable, and here I find that it is not. Considering whether some future hypothetical Air-Products-Controlled Airgas board would vote to redeem the pill is not the relevant inquiry.

      793

      [480] Our law would be more credible if the Supreme Court acknowledged that its later rulings have modified Moran and have allowed a board acting in good faith (and with a reasonable basis for believing that a tender offer is inadequate) to remit the bidder to the election process as its only recourse. The tender offer is in fact precluded and the only bypass of the pill is electing a new board. If that is the law, it would be best to be honest and abandon the pretense that preclusive action is per se unreasonable.

      794

      [481] Selectica, 5 A.3d at 605 (internal quotations omitted).

      795

      [482] Id. at 606 (quoting Unitrin, 651 A.2d at 1384).

      796

      [483] See 8 Del. C. § 141(e) (the board may rely in good faith upon the advice of advisors selected with reasonable care).

      797

      [484] SEH Tr. 80-81 (Davis) ("Q. You're not aware of any facts that would lead you to believe that the three Air Products [N]ominees on the Airgas board have breached their duty to the Airgas shareholders; correct? A. I'm not aware. Q. You're not aware of any facts that lead you to believe that the other Airgas directors on the Airgas board have breached their fiduciary duties to the Airgas shareholders; correct? A. Not based on any facts I'm aware of."); see also SEH Tr. 115 (McGlade) ("Q. [Y]ou're not aware of any facts that lead you to believe that the three Air Products [N]ominees on the Airgas board have breached their fiduciary duties to Airgas shareholders? A. I am not.").

      798

      [485] SEH Tr. 138 (McGlade); see also SEH Tr. 82 (Davis) (testifying that he is "not aware of anyone in a better position than Airgas management to make projections for Airgas" and he "believe[s] that it's reasonable for the Airgas board to rely on the projections provided by Airgas management").

      799

      [486] SEH Tr. 103-104 (Davis) (testifying that he probably has a better understanding of the value of Air Products than the average Air Products stockholder and that, "if an offer was made for Air Products that [he] considered to be unfair to the stockholders of Air Products," he would consider his "[f]iduciary duty [to] be to hold out for the proper price... [a]nd to use every legal mechanism available to [him] to do that.").

      800

      [487] That is, Air Products could have chosen three "independent" directors who may have a different view of value than the current Airgas board, who could act in a manner that would still comport with their exercise of fiduciary duties, but would perhaps better align their interests with those of the short-term arbs, for instance. As an example, Air Products could have proposed a slate of three Lucian Bebchuks (let's say Lucian Bebchuk, Alma Cohen, and Charles Wang) for election. In exercising their business judgment if elected to the board, these three academics might have reached different conclusions than Messrs. Clancey, Miller, and Lumpkins did— businessmen with years of experience on boards who got in there, saw the numbers, and realized that the intrinsic value of Airgas in their view far exceeded Air Products' offer. Maybe Bebchuk et al. would have been more skeptical. Or maybe they would have gotten in, seen the numbers, and acted just as the three Air Products Nominees did. But the point is, Air Products chose to put up the slate that it did.

      801

      [488] JX 454 (Airgas Schedule 14A: Air Products' Definitive Proxy Statement for 2010 Annual Meeting of Airgas Stockholders (July 29, 2010)) at 3.

      802

      [489] SEH Tr. 420 (Clancey).

      803

      [490] SEH Tr. 393-94 (DeNunzio).

      804

      [491] JX 1095 (Lumpkins Dep. 169 (Jan. 21, 2011)).

      805

      [492] Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1384 (Del.1995) (quoting Paramount).

      806

      [493] Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140, 1154 (Del. 1990) (emphasis added).

      807

      [494] Id.

      808

      [495] See id. at 1154-55.

      809

      [496] See JX 1118 (Airgas Earnings Teleconference Third Quarter Ended December 31, 2010 Slide Deck (Jan. 21, 2011)) at 3:

      810

      [IMAGE OMITTED]

      811

      [497] Paramount v. Time, 1989 WL 79880, at *19 (Del.Ch. July 14, 1989); see also In re Dollar Thrifty S'holder Litig., 2010 WL 3503471, at *29 (Del.Ch. Sept. 8, 2010) ("[O]ur law does not require a well-motivated board to simply sell the company whenever a high market premium is available.")

      812

      [498] Specifically, because McCausland and the other directors and officers of Airgas together own greater than 10% of the outstanding shares, there is essentially no way for Air Products to obtain greater than 90% of the outstanding shares in a tender offer. Under DGCL § 253, a bidder who acquires 90% of the outstanding stock of a corporation could effect a short-form merger to freeze out the remaining less-than-10%, without a vote of the minority. Short of obtaining 90% of the outstanding shares, though, Air Products would be left as a majority stockholder in Airgas, and would have to effect any merger under 8 Del. C. § 251, which would require the affirmative vote of both the Airgas board and Airgas's minority stockholders.

      813

      [499] JX 222 (Airgas Schedule TO: Offer to Purchase by Air Products & Chemicals, Inc. (Feb. 11, 2010)) at 1-2; SEH Tr. 15 (Huck). Air Products' representatives made clear, however, that they do not intend to retain a majority interest in Airgas. SEH Tr. 15 (Huck) ("Q. Does Air Products have any interest in owning less than 100 percent of Airgas? A. No, we do not."). Thus, the non-tendering minority Airgas stockholders would likely receive $70 in a back-end transaction with Air Products, or else Air Products would at that point sell its interest and leave Airgas alone, resulting in a depressed stock price for some period of time before it resumes its unaffected stock price.

      814

      [500] See Golden Telecom, Inc. v. Global GT LP, 11 A.3d 214, 217 (Del.2010) ("[I]n determining `fair value,' the [appraisal] statute [DGCL § 262] instructs that the court `shall take into account all relevant factors.' Importantly, [the Delaware Supreme] Court has defined `fair value' as the value to a stockholder of the firm as a going concern, as opposed to the firm's value in the context of an acquisition or other transaction.") (internal footnote and citations omitted); see also M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 795 (Del. 1999) ("Section 262(h) requires the trial court to `appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation.' Fair value, as used in § 262(h), is more properly described as the value of the company to the stockholder as a going concern, rather than its value to a third party as an acquisition.").

      815

      [501] See Golden Telecom, 11 A.3d at 218-19 ("[P]ublic companies distribute data to their stockholders to convince them that a tender offer price is `fair.' In the context of a merger, this `fair' price accounts for various transactional factors, such as synergies between the companies. Requiring public companies to stick to transactional data in an appraisal proceeding would pay short shrift to the difference between valuation at the tender offer stage—seeking `fair price' under the circumstances of the transaction—and valuation at the appraisal stage—seeking `fair value' as a going concern.").

      816

      [502] SEH Tr. 397-98 (DeNunzio) ("I think there's every reason that people could conclude there's [] much, much greater upside, for example, in the SAP implementation. I mean, orders of magnitude greater than what's been assumed and which would give substantially higher values. I think there's reason to believe that, at another time, in another market environment, there may be other acquirers of the company at higher prices than what Air Products is offering today. And if you were to sell the company at that moment in time, and to those other kinds of parties, you could do substantially in excess of the 70, even accounting for time value of money in the intervening period.").

      817

      [503] Moran v. Household Int'l, Inc., 500 A.2d 1346, 1354 (Del. 1985).

      818

      [504] Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586, 607 (Del.2010) (citing Moran, 500 A.2d at 1354). Marty Lipton himself has written that "the pill was neither designed nor intended to be an absolute bar. It was always contemplated that the possibility of a proxy fight to replace the board would result in the board's taking shareholder desires into account, but that the delay and uncertainty as to the outcome of a proxy fight would give the board the negotiating position it needed to achieve the best possible deal for all the shareholders, which in appropriate cases could be the target's continuing as an independent company. ... A board cannot say `never,' but it can say `no' in order to obtain the best deal for its shareholders." Martin Lipton, Pills, Polls, and Professors Redux, 69 U. Chi. L.Rev. 1037, 1054 (2002) (citing Marcel Kahan & Edward Rock, How I Learned to Stop Worrying and Love the Pill: Adaptive Responses to Takeover Law, 69 U. Chi. L.Rev. 871, 910 (2002) ("[T]he ultimate effect of the pill is akin to `just say wait.'")). As it turns out, for companies with a "pill plus staggered board" combination, it might actually be that a target board can "just say wait ... a very long time," because the Delaware Supreme Court has held that having to wait two years is not preclusive.

      819

      [505] I will not cite them all here, but a sampling of just the early generation of articles includes: Martin Lipton, Takeover Bids in the Target's Boardroom, 35 Bus. Law. 101 (1979); Frank Easterbrook & Daniel Fischel, Takeover Bids, Defensive Tactics, and Shareholders' Welfare, 36 Bus. Law. 1733 (1981); Martin Lipton, Takeover Bids in the Target's Boardroom: An Update After One Year, 36 Bus. Law. 1017 (1981); Frank Easterbrook & Daniel Fischel, The Proper Role of a Target's Management in Responding to a Tender Offer, 94 Harv. L.Rev. 161 (1981); Martin Lipton, Takeover Bids in the Target's Boardroom: A Response to Professors Easterbrook and Fischel, 55 N.Y.U. L.Rev. 1231 (1980); Ronald J. Gilson, A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 Stan. L.Rev. 819 (1981); Lucian Arye Bebchuk, The Case for Facilitating Competing Tender Offers, 95 Harv. L.Rev. 1028 (1982).

      820

      [506] In addition, Lipton often continues to argue that the deferential business judgment rule should be the standard of review that applies, despite the fact that that suggestion was squarely rejected in Moran and virtually every pill case since, which have consistently applied the Unocal analysis to defensive measures taken in response to hostile bids. Accordingly, although it is not the law in Delaware, Lipton's "continued defense of an undiluted application of the business judgment rule to defensive conduct" has been aptly termed "tenacious." Ronald Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus. Law. 247, 247 n. 1 (1989).

      821

      [507] Martin Lipton, Pills, Polls, and Professors Redux, 69 U. Chi. L.Rev. 1037, 1065 (2002) (emphasis added).

      822

      [508] Id. at 1058.

      823

      [509] See supra note 449 (describing Bebchuk et al.'s ESB argument that directors who lose one election over an outstanding acquisition offer should not be allowed to continue blocking the bid by combining a pill with an ESB, and suggesting that "unless managers are allowed to use a pill-ESB combination to force only one election rather than two, the pill-ESB combination becomes preclusive").

      824

      [510] Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310, 351 n. 229 (Del.Ch.2010) (citing Bebchuk et al. at 944-46); see also Leo E. Strine, Jr., The Professorial Bear Hug: The ESB Proposal As a Conscious Effort to Make the Delaware Courts Confront the Basic "Just Say No" Question, 55 Stan. L.Rev. 863, 877-79 (2002) (questioning whether the continued use of a pill could ever be deemed preclusive if it is considered non-preclusive to maintain a pill after a bidder has won an election for seats on an ESB).

      825

      [511] See Section III.B. 1.; see also supra note 449.

      826

      [512] Bebchuk et al. at 944 ("Note that without an ESB, no court intervention is necessary in order to achieve [the professors' desired] outcome.").

      827

      [513] Hollinger Int'l, Inc. v. Black, 844 A.2d 1022, 1083 (Del.Ch.2004).

      828

      [514] Closing Argument Tr. 88 (Nachbar).

  • 7 The UK Approach

    In global perspective, Delaware’s heavy reliance on fiduciary duties and judicial case-by-case scrutiny is an outlier. Some countries are more takeover friendly, others less. Almost all, however, are more rule-centric than Delaware.

    As a counterpoint to Delaware, the UK is particularly interesting. Like the U.S., the UK is a common law country with very developed financial markets and dispersed ownership of most large corporations. You might, therefore, expect UK takeover law to resemble Delaware’s. You would be quite wrong.

    Please read the following excerpts of the Takeover Code, the Companies Act 2006, and the FCA Disclosure Rules and Transparency Rules. Do these rules have analogues in Delaware law or U.S. federal securities law? In particular, consider the following:

    1. Would the poison pill be legal in the UK?
    2. Would other takeover defenses that we have encountered (think of the board actions in Unocal and Revlon) be legal in the UK?
    3. If not, what other rules, if any, protect UK shareholders?
    4. Who makes the rules?
    5. What is the role of the courts?
    • 7.1 The City Code on Takeovers and Mergers (UK)

      Section A:  Introduction

      § 1: Overview

      The Panel on Takeovers and Mergers (the “Panel”) is an independent body, established in 1968, whose main functions are to issue and administer the City Code on Takeovers and Mergers (the “Code”) .... It has been designated as the supervisory authority to carry out certain regulatory functions in relation to takeovers pursuant to the [European Union] Directive on Takeover Bids (2004/25/EC) (the “Directive”). Its statutory functions are set out in and under Chapter 1 of Part 28 of the Companies Act 2006 ... (the “Act”) ....

      § 2: The Code

      ...

      (a) Nature and purpose of the Code

      The Code is designed principally to ensure that shareholders in an offeree company are treated fairly and are not denied an opportunity to decide on the merits of a takeover and that shareholders in the offeree company of the same class are afforded equivalent treatment by an offeror. The Code also provides an orderly framework within which takeovers are conducted. In addition, it is designed to promote, in conjunction with other regulatory regimes, the integrity of the financial markets.

      The Code is not concerned with the financial or commercial advantages or disadvantages of a takeover. These are matters for the offeree company and its shareholders. In addition, it is not the purpose of the Code either to facilitate or to impede takeovers. Nor is the Code concerned with those issues, such as competition policy, which are the responsibility of government and other bodies.

      The Code has been developed since 1968 to reflect the collective opinion of those professionally involved in the field of takeovers as to appropriate business standards and as to how fairness to offeree company shareholders and an orderly framework for takeovers can be achieved. Following the implementation of the Directive by means of the Act, the rules set out in the Code have a statutory basis in relation to the United Kingdom and comply with the relevant requirements of the Directive. 

      ...

      (b) General Principles and Rules

      The Code is based upon a number of General Principles, which are essentially statements of standards of commercial behaviour. These General Principles are the same as the general principles set out in Article 3 of the Directive. They apply to takeovers and other matters to which the Code applies. They are expressed in broad general terms and the Code does not define the precise extent of, or the limitations on, their application. They are applied in accordance with their spirit in order to achieve their underlying purpose.

      In addition to the General Principles, the Code contains a series of rules. Although most of the rules are expressed in less general terms than the General Principles, they are not framed in technical language and, like the General Principles, are to be interpreted to achieve their underlying purpose. Therefore, their spirit must be observed as well as their letter.

      (c) Derogations and Waivers

      The Panel may derogate or grant a waiver to a person from the application of a rule (provided, in the case of a transaction and rule subject to the requirements of the Directive, that the General Principles are respected) either:

      (i) in the circumstances set out in the rule; or

      (ii) in other circumstances where the Panel considers that the particular rule would operate unduly harshly or in an unnecessarily restrictive or burdensome or otherwise inappropriate manner (in which case a reasoned decision will be given).

      ...

       § 4: The Panel and its Committees

      ...

      (a) The Panel

      The Panel assumes overall responsibility for the policy, financing and administration of the Panel’s functions and for the functioning and operation of the Code. The Panel operates through a number of Committees and is directly responsible for those matters which are not dealt with through one of its Committees.

      The Panel comprises up to 35 members:

      (i) the Chairman, who is appointed by the Panel;

      (ii) up to three Deputy Chairmen, who are appointed by the Panel;

      (iii) up to twenty other members, who are appointed by the Panel; and

      (iv) individuals appointed by each of the following bodies:

      The Association for Financial Markets in Europe (with separate representation also for its Corporate Finance Committee and Securities Trading Committee)

      The Association of British Insurers

      The Association of Investment Companies

      The British Bankers’ Association

      The Confederation of British Industry

      The Institute of Chartered Accountants in England and Wales

      The Investment Association

      The National Association of Pension Funds

      The Quoted Companies Alliance

      The Wealth Management Association.

       § 5: The Executive

      ...

      The day-to-day work of takeover supervision and regulation is carried out by the Executive. In carrying out these functions, the Executive operates independently of the Panel. This includes, either on its own initiative or at the instigation of third parties, the conduct of investigations, the monitoring of relevant dealings in connection with the Code and the giving of rulings on the interpretation, application or effect of the Code. The Executive is available both for consultation and also the giving of rulings on the interpretation, application or effect of the Code before, during and, where appropriate, after takeovers or other relevant transactions.

      The Executive is staffed by a mixture of employees and secondees from law firms, accountancy firms, corporate brokers, investment banks and other organisations. It is headed by the Director General, usually an investment banker on secondment, who is an officer of the Panel ....

       § 6: Interpreting the Code

      ...

      (a) Interpreting the Code — guidance

      The Executive may be approached for general guidance on the interpretation or effect of the Code and how it is usually applied in practice. It may also be approached for guidance in relation to a specific issue on a “no names” basis, where the person seeking the guidance does not disclose to the Executive the names of the companies concerned. In either case, the guidance given by the Executive is not binding ....

      (b) Interpreting the Code — rulings of the Executive and the requirement for consultation

      When a person or its advisers are in any doubt whatsoever as to whether a proposed course of conduct is in accordance with the General Principles or the rules, or whenever a waiver or derogation from the application of the provisions of the Code is sought, that person or its advisers must consult the Executive in advance. In this way, they can obtain a conditional ruling (on an ex parte basis) or an unconditional ruling as to the basis on which they can properly proceed and thus minimise the risk of taking action which might, in the event, be a breach of the Code. To take legal or other professional advice on the interpretation, application or effect of the Code is not an appropriate alternative to obtaining a ruling from the Executive ....

       § 10: Enforcing the Code

      ...

      (b) Compliance rulings

      If the Panel is satisfied that:

      (i) there is a reasonable likelihood that a person will contravene a requirement imposed by or under rules; or

      (ii) a person has contravened a requirement imposed by or under rules,

      the Panel may give any direction that appears to it to be necessary in order:

      (A) to restrain a person from acting (or continuing to act) in breach of rules; or

      (B) to restrain a person from doing (or continuing to do) a particular thing, pending determination of whether that or any other conduct of his is or would be a breach of rules; or

      (C) otherwise to secure compliance with rules.

      (c) Compensation rulings

      Where a person has breached the requirements of any of Rules 6, 9, 11, 14, 15, 16.1 or 35.3 of the Code, the Panel may make a ruling requiring the person concerned to pay, within such period as is specified, to the holders, or former holders, of securities of the offeree company such amount as it thinks just and reasonable so as to ensure that such holders receive what they would have been entitled to receive if the relevant Rule had been complied with. ...

       
      § 11: Disciplinary Powers

       (a) Disciplinary action

      The Executive may itself deal with a disciplinary matter where the person who is to be subject to the disciplinary action agrees the facts and the action proposed by the Executive. In any other case, where it considers that there has been a breach of the Code, the Executive may commence disciplinary proceedings before the Hearings Committee. ...

      (b) Sanctions or other remedies for breach of the Code

      If the Hearings Committee finds a breach of the Code or of a ruling of the Panel, it may:

      (i) issue a private statement of censure; or

      (ii) issue a public statement of censure; or

      (iii) suspend or withdraw any exemption, approval or other special status which the Panel has granted to a person, or impose conditions on the continuing enjoyment of such exemption, approval or special status, in respect of all or part of the activities to which such exemption, approval or special status relates; or

      (iv) report the offender’s conduct to a United Kingdom or overseas regulatory authority or professional body ... so that that authority or body can consider whether to take disciplinary or enforcement action ... or

      (v) publish a Panel Statement indicating that the offender is someone who, in the Hearings Committee’s opinion, is not likely to comply with the Code. The Panel Statement will normally indicate that this sanction will remain effective for only a specified period. ... 

      Section B:  General Principles

      1. All holders of the securities of an offeree company of the same class must be afforded equivalent treatment; moreover, if a person acquires control of a company, the other holders of securities must be protected.

      2. The holders of the securities of an offeree company must have sufficient time and information to enable them to reach a properly informed decision on the bid; where it advises the holders of securities, the board of the offeree company must give its views on the effects of implementation of the bid on employment, conditions of employment and the locations of the company’s places of business.

      3. The board of an offeree company must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid.

      4. False markets must not be created in the securities of the offeree company, of the offeror company or of any other company concerned by the bid in such a way that the rise or fall of the prices of the securities becomes artificial and the normal functioning of the markets is distorted.

      5. An offeror must announce a bid only after ensuring that he/she can fulfill in full any cash consideration, if such is offered, and after taking all reasonable measures to secure the implementation of any other type of consideration.

      6. An offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities.

       
      Section C: Definitions

      Offer period

      ... An offer period will commence when the first announcement is made of an offer or possible offer for a company, or when certain other announcements are made, such as an announcement that a purchaser is being sought for an interest in shares carrying 30% or more of the voting rights of the company or that the board of the company is seeking potential offerors.

      ... [A]n offer period will end when an announcement is made that an offer has become or has been declared unconditional as to acceptances ... that all announced offers have been withdrawn or have lapsed or following certain other announcements having been made ...

      Section D: The Approach, Announcements, and Independent Advice

      Rule 1:  The Approach

      (a) An offeror (or its advisers) must notify a firm intention to make an offer in the first instance to the board of the offeree company (or its advisers).

      ...

      Rule 2:  Secrecy Before Announcements; The Timing and Contents of Announcements

      2.1: Secrecy

      (a) Prior to the announcement of an offer or possible offer, all persons privy to confidential information, and particularly price-sensitive information, concerning the offer or possible offer must treat that information as secret and may only pass it to another person if it is necessary to do so and if that person is made aware of the need for secrecy. All such persons must conduct themselves so as to minimise the chances of any leak of information. ...

      2.2: When an Announcement is Required

      An announcement is required:

      (a) when a firm intention to make an offer is notified to the board of the offeree company by or on behalf of an offeror;

      (b) immediately upon an acquisition of any interest in shares which gives rise to an obligation to make an offer under Rule 9.1. ...

      (c) when, following an approach by or on behalf of a potential offeror to the board of the offeree company, the offeree company is the subject of rumour and speculation or there is an untoward movement in its share price;

      (d) when, after a potential offeror first actively considers an offer but before an approach has been made to the board of the offeree company, the offeree company is the subject of rumour and speculation or there is an untoward movement in its share price and there are reasonable grounds for concluding that it is the potential offeror’s actions (whether through inadequate security or otherwise) which have led to the situation;

      (e) when negotiations or discussions relating to a possible offer are about to be extended to include more than a very restricted number of people (outside those who need to know in the parties concerned and their immediate advisers); or

      (f) when a purchaser is being sought for an interest, or interests, in shares carrying in aggregate 30% or more of the voting rights of a company or when the board of a company is seeking one or more potential offerors, and:

      (i) the company is the subject of rumour and speculation or there is an untoward movement in its share price; or

      (ii) the number of potential purchasers or offerors approached is about to be increased to include more than a very restricted number of people. ...

      2.6: Timing Following a Possible Offer Announcement

      (a) Subject to Rule 2.6(b), by not later than 5.00 pm on the 28th day following the date of the announcement in which it is first identified, or by not later than any extended deadline, a potential offeror must either:

      (i) announce a firm intention to make an offer ... or

      (ii) announce that it does not intend to make an offer...

      unless the Panel has consented to an extension of the deadline.

      (b) Rule 2.6(a) will not apply ... to a potential offeror if another offeror has already announced, or subsequently announces ... a firm intention to make an offer for the offeree company. ...

      (c) The Panel will normally consent to an extension of a deadline…at the request of the board of the offeree company and after taking into account all relevant factors, including:

      (i) the status of negotiations between the offeree company and the potential offeror; and

      (ii) the anticipated timetable for their completion. ...

      2.7 The Announcement of a Firm Intention to Make an Offer

      ...

      (b) Following an announcement of a firm intention to make an offer, the offeror must proceed to make the offer unless, in accordance with the provisions of Rule 13, it is permitted to invoke a pre-condition to the making of the offer or would be permitted to invoke a condition to the offer if the offer were made. ...

      Section E: Restrictions on Dealings

      Rule 6: Acquisitions Resulting in an Obligation to Offer a Minimum Level of Consideration

      6.1:  Acquisitions Before a Firm Offer Announcement

      Except with the consent of the Panel in cases falling under (a) or (b), when an offeror or any person acting in concert with it has acquired an interest in shares in the offeree company:

      (a) within the three month period prior to the commencement of the offer period; or

      (b) during the period, if any, between the commencement of the offer period and an announcement made by the offeror ... or

      (c) prior to the three month period referred to in (a), if in the view of the Panel there are circumstances which render such a course necessary in order to give effect to General Principle 1,

      the offer to the holders of shares of the same class shall not be on less favourable terms. ...

      6.2: Acquisitions after a Firm Offer Announcement

      (a) If, after an announcement made ... and before the offer closes for acceptance, an offeror or any person acting in concert with it acquires any interest in shares at above the offer price (being the then current value of the offer), it shall increase its offer to not less than the highest price paid for the interest in shares so acquired. ...

      Section F: The Mandatory Offer and Its Terms

      Rule 9

      9.1:  When a Mandatory Offer is Required and Who is Primarily Responsible for Making It

      Except with the consent of the Panel, when: 

      (a) any person acquires, whether by a series of transactions over a period of time or not, an interest in shares which (taken together with shares in which persons acting in concert with him are interested) carry 30% or more of the voting rights of a company; or

      (b) any person, together with persons acting in concert with him, is interested in shares which in the aggregate carry not less than 30% of the voting rights of a company but does not hold shares carrying more than 50% of such voting rights and such person, or any person acting in concert with him, acquires an interest in any other shares which increases the percentage of shares carrying voting rights in which he is interested,

      such person shall extend offers, on the basis set out in Rules 9.3, 9.4 and 9.5, to the holders of any class of equity share capital ...

      An offer will not be required under this Rule where control of the offeree company is acquired as a result of a voluntary offer made in accordance with the Code to all the holders of voting equity share capital ...

      9.3: Conditions and Consents

       

      Except with the consent of the Panel...

      (a) offers made under Rule 9 must be conditional only upon the offeror having received acceptances in respect of shares which, together with shares acquired or agreed to be acquired before or during the offer, will result in the offeror and any person acting in concert with it holding shares carrying more than 50% of the voting rights; ...

      9.5: Consideration to be Offered

      (a) An offer made under Rule 9 must, in respect of each class of share capital involved, be in cash or be accompanied by a cash alternative at not less than the highest price paid by the offeror or any person acting in concert with it for any interest in shares of that class during the 12 months prior to the announcement of that offer. ...

      Section G: The Voluntary Offer and Its Terms

      Rule 11: Nature of Consideration to be Offered

      11.1:  When a Cash Offer is Required

      Except with the consent of the Panel in cases falling under (a) or (b), a cash offer is required where:

      (a) the shares of any class under offer in the offeree company in which interests are acquired for cash (but see Note 5) by an offeror and any person acting in concert with it during the offer period and within 12 months prior to its commencement represent 10% or more of the shares of that class in issue, in which case the offer for that class shall be in cash or accompanied by a cash alternative at not less than the highest price paid by the offeror or any person acting in concert with it for any interest in shares of that class acquired during the offer period and within 12 months prior to its commencement; or

      (b) subject to paragraph (a) above, any interest in shares of any class under offer in the offeree company is acquired for cash…by an offeror or any person acting in concert with it during the offer period, in which case the offer for that class shall be in cash or accompanied by a cash alternative at not less than the highest price paid by the offeror or any person acting in concert with it for any interest in shares of that class acquired during the offer period; or

      (c) in the view of the Panel there are circumstances which render such a course necessary in order to give effect to General Principle 1. ...                                    

      11.2: When a Securities Offer is Required

      Where interests in shares of any class of the offeree company representing 10% or more of the shares of that class in issue have been acquired by an offeror and any person acting in concert with it in exchange for securities in the three months prior to the commencement of and during the offer period, such securities will normally be required to be offered to all other holders of shares of that class. ...

       Rule 13: Pre-conditions in Firm Offer Announcements and Offer Conditions

      13.1: Subjectivity

      An offer must not normally be subject to conditions or pre-conditions which depend solely on subjective judgments by the offeror or the offeree company (as the case may be) or, in either case, its directors or the fulfillment of which is in their hands. The Panel may be prepared to accept an element of subjectivity in certain circumstances where it is not practicable to specify all the factors on which satisfaction of a particular condition or pre-condition may depend, especially in cases involving official authorisations or regulatory clearances, the granting of which may be subject to additional material obligations for the offeror or the offeree company (as the case may be). ...

      13.4: Financing Conditions and Pre-conditions

      (a) ... an offer must not be made subject to a condition or pre-condition relating to financing.

      ...

      Section I: Conduct During the Offer

       

      Rule 21: Restrictions on Frustrating Action

      21.1: When Shareholders’ Consent is Required

      During the course of an offer, or even before the date of the offer if the board of the offeree company has reason to believe that a bona fide offer might be imminent, the board must not, without the approval of the shareholders in general meeting:

      (a) take any action which may result in any offer or bona fide possible offer being frustrated or in shareholders being denied the opportunity to decide on its merits; or

      (b)

      (i) issue any shares or transfer or sell, or agree to transfer or sell, any shares out of treasury or effect any redemption or purchase by the company of its own shares;

      (ii) issue or grant options in respect of any unissued shares;

      (iii) create or issue, or permit the creation or issue of, any securities carrying rights of conversion into or subscription for shares;

      (iv) sell, dispose of or acquire, or agree to sell, dispose of or acquire, assets of a material amount; or

      (v) enter into contracts otherwise than in the ordinary course of business.

      ...

      Where it is felt that:

      (A) the proposed action is in pursuance of a contract entered into earlier or another pre-existing obligation; or

      (B) a decision to take the proposed action had been taken before the beginning of the period referred to above which:

      (i) has been partly or fully implemented before the beginning of that period; or

      (ii) has not been partly or fully implemented before the beginning of that period but is in the ordinary course of business,

      the Panel must be consulted and its consent to proceed without a shareholders’ meeting obtained.

      21.2 Inducement Fees and Other Offer-Related Arrangements

      (a) Except with the consent of the Panel, neither the offeree company nor any person acting in concert with it may enter into any offer-related arrangement with either the offeror or any person acting in concert with it during an offer period or when an offer is reasonably in contemplation.

      (b) An offer-related arrangement means any agreement, arrangement or commitment in connection with an offer, including any inducement fee arrangement or other arrangement having a similar or comparable financial or economic effect ...

      Notes on Rule 21.2

      1. Competing offerors

      Where an offeror has announced a firm intention to make an offer which was not recommended by the board of the offeree company at the time of that announcement and remains not recommended, the Panel will normally consent to the offeree company entering into an inducement fee arrangement with a competing offeror at the time of the announcement of its firm intention to make a competing offer, provided that:

      (a) the aggregate value of the inducement fee or fees that may be payable by the offeree company is de minimis, ie normally no more than 1% of the value of the offeree company ...

      2. Formal sale process

      Where, prior to an offeror having announced a firm intention to make an offer, the board of the offeree company announces that it is seeking one or more potential offerors by means of a formal sale process, the Panel will normally grant a dispensation from the prohibition in Rule 21.2, such that the offeree company would be permitted, subject to the same provisos as set out in Note 1(a) and (b) above, to enter into an inducement fee arrangement with one offeror (who had participated in that process) at the time of the announcement of its firm intention to make an offer. ...

      Section P: Partial Offers

      Rule 36

      36.1: Panel’s Consent Required

      The Panel’s consent is required for any partial offer. In the case of an offer which could not result in the offeror and persons acting in concert with it being interested in shares carrying 30% or more of the voting rights of a company, consent will normally be granted. ...

      36.3: Acquisitions During and After the Offer

      The offeror and persons acting in concert with it may not acquire any interest in shares in the offeree company during the offer period. ...

       

      [NB: The full code is available at www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/code.pdf.]

    • 7.2 Companies Act 2006 ss. 979(2), 983(2) (UK)

      Section 979. Right of offeror to buy out minority shareholder ...

      (2) If the offeror has, by virtue of acceptances of the offer, acquired or unconditionally contracted to acquire—

      (a) not less than 90% in value of the shares to which the offer relates, and

      (b) in a case where the shares to which the offer relates are voting shares, not less than 90% of the voting rights carried by those shares,

      he may give notice to the holder of any shares to which the offer relates which the offeror has not acquired or unconditionally contracted to acquire that he desires to acquire those shares.

      ...

      Section 983. Right of minority shareholder to be bought out by offeror ...

      (2) The holder of any voting shares to which the offer relates who has not accepted the offer may require the offeror to acquire those shares if, at any time before the end of the period within which the offer can be accepted—

      (a) the offeror has by virtue of acceptances of the offer acquired or unconditionally contracted to acquire some (but not all) of the shares to which the offer relates, and

      (b) those shares, with or without any other shares in the company which he has acquired or contracted to acquire (whether unconditionally or subject to conditions being met)—

      (i) amount to not less than 90% in value of all the voting shares in the company (or would do so but for section 990(1)), and

      (ii) carry not less than 90% of the voting rights in the company (or would do so but for section 990(1)).

      ...

       

      [NB: The full Companies Act 2006 is available at www.legislation.gov.uk/ukpga/2006/46.]

    • 7.3 FCA Disclosure & Transparency Rule 5 (UK)

      DTR 5.1.2. ... a person must notify the issuer of the percentage of its voting rights he holds as shareholder or holds or is deemed to hold through his direct or indirect holding of financial instruments falling within DTR 5.3.1R (1), ..., (or a combination of such holdings) if the percentage of those voting rights: (1) reaches, exceeds or falls below 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10% and each 1% threshold thereafter up to 100% ... as a result of an acquisition or disposal of shares or financial instruments falling within DTR 5.3.1 R2; ....

      DTR 5.8.3. The notification to the issuer shall be effected as soon as possible, but not later than four trading days in the case of a non-UK issuer and two trading days in all other cases, the first of which shall be the day after the date on which the relevant person:(1) learns of the acquisition or disposal or of the possibility of exercising voting rights, or on which, having regard to the circumstances, should have learned of it, regardless of the date on which the acquisition, disposal or possibility of exercising voting rights takes effect ...
      DTR 5.9. (1) A person making a notification to an issuer to which this chapter applies must, if the notification relates to shares admitted to trading on a regulated market, at the same time file a copy of such notification with the FCA.

      [Note: The full rules are available at www.handbook.fca.org.uk/handbook/DTR/.]

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