Corporate Governance

Delaware Validates "Just Say Never:" Air Products v. Airgas (The Need for Shareholder Access) (Part 3)

By J Robert Brown Jr.

This case (and its counterparts, Yucaipa and Selectica, the other recent poison pill decisions), contain some real irony.  Those who support the "enabling" approach to governance have traditionally relied on the market for corporate control to keep management in check.  Yet the poison pill crippled the hostile take over market and these decisions all but kill it.

What Airgas makes clear is that a poison pill can remain in place indefinitely as long as there is a possibility of a successful proxy contest.  Moreover, the presence of a staggered board does not change the analysis.  Thus, effectively, there has to be the possibility of a successful proxy contest over a two year period.  Putative acquirors must now be prepared to pay all of the costs associated with making an acquisition (lining up the financing, paying the advisors, devoting management time to the matter), then pay the costs of a proxy contest to win one-third of the board. 

They then must spend a year in almost constant conflict with incumbent management of the target (not to mention bringing and defending against a likely bevy of lawsuits) before incurring the expenses of yet another proxy contest.  If they lose the second contest, all of the prior effort and expense will be for naught. The "for naught" will be even more likely if the company, for example, lowers the threshold of the poison pill to 5% (as in Selectica) in order to prevent the bidder from actually negotiating with other shareholders. 

Airgas in conjunction with Selectica and Yucaipa have as a practical matter mostly eliminated the market for corporate control.  Without the market for corporate control, management becomes even more entrenched.  These decisions, therefore, make it even more important that shareholders have a mechanism to remove directors who do not respond to shareholder interests.  Cases like Airgas all but prove the need for shareholder access.   

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

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