Delaware Chancery Should Refocus

Governance practitioners should be aware of two very recent Delaware Chancery cases which are likely to have a significant effect upon business practices. In the first, Air Products and Chemicals, Inc. v. Airgas, Inc., et al and In re Airgas Inc. Shareholder Litigation, Civ. Act. Nos. 5249-CC and 5256-CC February 15, 2011, the Delaware Chancellor in a well reasoned 158 page discourse containing 514 footnotes, upheld the indefinite use of the so-called ‘poison pill’ takeover defense mechanism against a challenge that it infringed upon shareholder rights to decide for themselves whether to accept an above-market bid for their company. In the second, In re Del Monte Foods Company Shareholder Litigation , Consol. C.A. no. 6027-VCL February 14, 2011, a Vice Chancellor restricted the ability of investment bankers in M&A situations to act as both adviser to the target company and agent for the purchaser in connection with procurement of financing for the same transaction.

Airgas was explained as follows by Chancellor Chandler:

[T]his 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?

Thus, there should be little doubt as to the legitimacy of the use by a board of a pill to resist a takeover bid, even one which appears to be advantageous to shareholders. Of course, such use requires that directors be genuinely independent and properly informed in connection with their adoption and use of the pill. Prof. Lucian Bebchuck offers an interesting alternative, An Antidote for the Corporate Poison Pill, of avoiding/eliminating classified boards as a way of mitigating the shareholder disenfranchisement caused by the use of the pill.

Del Monte was explained by Vice Chancellor Laster as intended to deal with situations where a financial advisor to a buyout target surreptiously associates with a potential bidder in order to provide financing, while receiving fees from both:

“[A]lthough Barclays’ [the target’s advisor] activities and nondisclosures in early 2010 are troubling, what indisputably crossed the line was the surreptitious and unauthorized pairing of Vestar with K.K.R [potential bidders]. In doing so, Barclays materially reduced the prospect of price competition for Del Monte.”

This case will be of interest mainly to investment bankers and other financial advisors to takeover targets. It tells us that such intermediaries must not ‘two time’ the situation by affiliating with a potential buyer, at least without full disclosure and consent of all concerned, and perhaps not at all. In M&A situations, boards of targets may wish to obtain warranties from their advisors that they will not engage and have not engaged in such practices with respect to their transaction.

The author’s concern is not with the reasoning or outcome in either situation, which seems sound. Rather, it is with the manner in which Delaware jurisprudence has developed, to emphasize such analysis to the exclusion of consideration of the manner in which boards oversee management in situations not involving M&A transactions. One sees constant honing of Delaware law applicable to such situations, even in cases such as these where neither Airgas nor Del Monte have any systematic importance, but much less focus on the need for strong governance in the ‘ordinary course.’ To the author, if the last several years illustrate anything about the need to improve governance, it is that the greatest threat to the economy comes not from these “major corporate transactions,” but from flawed conduct of “everyday” business.

Subjecting actors in these relatively minor M&A situations to this sort of intensive scrutiny, while subjecting the Citigroup board to less scrutiny despite the significance of Citigroup to the economic meltdown send the wrong message to all concerned.

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