Corporate Governance

Airgas, Inc. v. Air Products: Staggered Boards Staggered (The Overstated Role of Proxy Advisory Firms)(Part 6)

By J Robert Brown Jr.

The discussion below is based upon the Chancery Court decision in Airgas, Inc. v. Air Products.  The Supreme Court has reversed the decision.  The Supreme Court's opinion is here. 

One of the interesting factual asides in the case is the role of the investor advisory firm.  In Yucaipa, a decision on a poision pill, the Vice Chancellor gave what amounted to definitive weight to the firm's recommendation in making his decision. 

• The Rights Plan is not preclusive because, as Yucaipa's own experts indicated, there is good reason to believe that Yucaipa will succeed in a proxy contest if it puts together a platform and a slate of candidates that are attractive to Aletheia and the leading institutional proxy advisors, particularly Risk Metrics. . . . As will be discussed, Yucaipa admits that if it gets the support of Risk Metrics, it will likely win, as it is difficult to imagine a situation where Yucaipa gets Risk Metrics' support and does not also get Aletheia's. The policies of Risk Metrics about contests for a minority of the board help Yucaipa, as they make short slates easier to elect. Risk Metrics also makes plain that it looks at nominees' strategic plans and business expertise. For these reasons, it is plain that Yucaipa can win and is indeed perhaps a favorite in a proxy fight for three members of Barnes & Noble's board. Certainly, Yucaipa is not precluded by the Rights Plan from running a successful campaign -- rather, its merits case will be the key. In that light, it is also noteworthy that all of the experts in this case agreed that Risk Metrics was much more likely to support an insurgent slate than the management slate.

The prediction turned out to be wrong.  Risk Metrics in fact supported Yucaipa, the insurgent, but Yucaipa still lost.  In other words, the Delaware courts have used investor advisory firms and their purported power to justify decisions that are favorable to management in the proxy contest area.  Yet as Yucaipa demonstrates, they can reflect a serious overstatement of the power of investor advisory firms. 

This case is another example.  The Air Products bylaw was opposed by ISS because it would have the effect of 'reducing Airgas's negotiating leverage in the bidding process.'  Yet the bylaw still passed.

In short, a court's decision to uphold a poison pill or other defensive tactic that prevents shareholders from reaching agreement with each other cannot be justified just because the shareholders can still talk to, and negotiate with, the investor advisory firm.  Other shareholders have the power to determine the outcome of a contest; advisory firms often do not.  

Full post as published by The Race to the Bottom on November 25, 2010 (boomark / email).