A recent report by GovernanceMetrics International Research Associate Beth Young on the Airgas poison pill decision expounds upon a point we made in our Director Notes report, Poison Pills in 2011, in that the small and mid-cap companies are relying on classified boards and poison pills much more than their larger brethren.
In the GMI report, Lessons from the Airgas Battle [Registration required], Young points out how 53 percent of S&P MidCap 400 index companies have a classified board and how 62 percent of S&P SmallCap 600 firms also have a classified board. She also states that about 20 percent of these companies have adopted a poison pill.
“Most dramatic is the difference in classified board incidence between new IPO companies and their already-public counterparts,” Young wrote. “In a 2009 study of the top 50 IPOs (by size) in 2007 and 2008, law firm Davis Polk & Wardwell found that 74% had a classified board. So while the largest U.S. companies are embracing more shareholder-friendly governance arrangements, smaller companies are not on the same track, and new IPO companies are headed in the opposite direction.”
As for the Airgas decision, where the Delaware Court of Chancery decided in favor of the takeover target Airgas, not the acquirer Air Products and Services, in February that their poison pill was valid and properly structured, Young makes a point of stating how difficult it still is for shareholders to use courts and state law theories of fiduciary duty to challenge takeover defenses.
Young wrote: “The Airgas and Selectica [Versata v. Selectica, 2010 – net operating loss carryforward (NOL) poison pill case. For more see Director Notes, Poison Pills in 2011], decisions illustrate the difficulty shareholders have in using courts and state-law theories of fiduciary duty to challenge takeover defenses, even when those defenses, as a practical matter, preordain an outcome not supported by a majority of shareholders. Shareholders, especially those with holdings outside the S&P 500, are left with one option if they wish to retain power in the hostile takeover setting: use the tools available, including proxy voting, shareholder proposals and ‘vote no’ campaigns against directors, to work toward the elimination of the classified board.”
While the GMI report paints a pretty dismal picture for those shareholders looking to effect change at public companies through a takeover, not surprisingly the law firm that represented Airgas in the Delaware court case touted the decision as proof that poison pills live on.
Wachtell, Lipton, Rosen & Katz, a reputable firm that was involved in the 1985 precedent case that upheld the first poison pills, released a client letter in February soon after Delaware Chancery Court Chancellor William B. Chandler III explained that under existing Delaware Supreme Court precedent, a corporate board can maintain a poison pill to prevent shareholders from accepting a tender offer that the board believes does not adequately value the company, even if that offer is not “structurally coercive.”
In the Wachtell Lipton memo, the partners involved in the case wrote:
“Almost thirty years ago, our Firm announced there was a way—the poison pill— to level the playing field between corporate raiders and a board of directors acting to protect the interests of the corporation and its shareholders. Despite great skepticism about the pill in the legal and banking communities, the Delaware Supreme Court in 1985 agreed with us and affirmed that directors, in the exercise of their business judgment, could properly use the pill to protect the corporation from hostile takeover bids.
“Since then, many have continued to criticize the pill, and hostile bidders and plaintiffs’ lawyers have continued to litigate to constrain its use. Yesterday [February 15], in a historic decision, the Delaware Court of Chancery rejected the broadest challenge to the pill in decades. Air Products & Chemicals, Inc. v. Airgas, Inc., C.A. No. 5249—CC (Del. Ch. Feb. 15, 2011). The decision reaffirms the vitality of the pill. It upholds the primacy of the board of directors in matters of corporate control under bedrock Delaware law. It reinforces that a steadfast board, confident in management’s long-term business plan, can block opportunistic bids.”