Airgas's Brief

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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

)AIR PRODUCTS AND CHEMICALS, INC., )

)

Plaintiff, ) C.A. No. 5249-CC)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. SHAREHOLDERLITIGATION

))

C.A. No. 5256-CC

)

DEFENDANTS POST-SUPPLEMENTAL HEARING MEMORANDUM

POTTER ANDERSON & CORROON LLP

OF COUNSEL:

Kenneth B. ForrestTheodore N. MirvisEric M. RothMarc WolinskyGeorge T. Conway IIIJoshua A. NaftalisBradley R. WilsonJasand MockCharles D. Cording

WACHTELL, LIPTON, ROSEN & KATZ51 West 52nd StreetNew York, New York 10019(212) 403-1000

Donald J. Wolfe, Jr. (No. 285)Kevin R. Shannon (No. 3137)Berton W. Ashman, Jr. (No. 4681)Ryan W. Browning (No. 4989)Hercules Plaza1313 North Market Street, 6th FloorP.O. Box 951Wilmington, Delaware 19801(302) 984-6000

Dated: February 2, 2011 Attorneys for Defendants

REDACTED VERSION

Dated: February 2, 2011

REDACTED VERSION

Dated: February 3, 2011


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TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ......................................................................................................... iii

PRELIMINARY STATEMENT .....................................................................................................1

ISSUES TO BE DECIDED .............................................................................................................4

I. WHETHER, UNDERUNOCAL AND ITS PROGENY, THE COURT SHOULDORDER THAT AIRGAS BE STRIPPED OF ALL ITS DEFENSES TOFACILITATE AN INADEQUATE OFFER. ANSWER: NO. .........................................4

A. Unocaldoes not apply in a situation where the bidders nominees agreewith the incumbent directors after receiving advice from a new investment

banker.......................................................................................................................4

B. The independent Airgas Board acted in good faith and after reasonable in-vestigation. ...............................................................................................................6

1. The new directors and Credit Suisse enhanced the already robustinvestigation by the Airgas Board................................................................7

2. The Airgas Board relied on the advice of three preeminent invest-ment banks and on its own business judgment based on Airgas

performance, improvements in the economic environment and sev-eral other factors. .........................................................................................9

3. Plaintiffs did not prove that the Boards reliance on expert adviceand Airgas five-year plan was unreasonable. ...........................................10

C. The Airgas Board reasonably concluded that the $70 offer constitutes athreat. .....................................................................................................................15

1. The $70 offer is clearly inadequate............................................................15

2. The offer is opportunistic and came at a time when it would be dis-advantageous to sell the company..............................................................20

3. Consummation of the offer will interfere with the execution ofAirgas corporate plan................................................................................21

4. The $70 offer is particularly coercive given the successful execu-tion of Air Products plan to drive shares into the hands of arbitra-geurs...........................................................................................................23


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5. The possibility of an appraisal remedy, the majority shareholdersfiduciary duties to the minority shareholders, and the possibility ofa subsequent offering period do not diminish the coercive nature ofthe $70 offer. .............................................................................................26

6. The offer is substantively coercive. ...........................................................30

7. The Board reasonably concluded that Air Products has not neces-sarily made its best and final offer and the companys defensestherefore still provide the Board with a valuable negotiating tool.............34

D. The Airgas Boards response is reasonable in relation to the threat posed. ..........38

1. The Board is willing to sell........................................................................39

2. The effect of the Boards actions is to require Air Products to pro-ceed in accordance with the companys pre-existing corporate go-

vernance structure, a structure that is authorized by Delaware law...........40

3. Removing the Airgas Board by obtaining a 67% vote at a specialmeeting is realistically attainable. ..........................................................42

II. WHETHER EQUITABLE PRINCIPLES SUPPORT THE ENTRY OF APERMANENT INJUNCTION. ANSWER: NO..............................................................51

A. Plaintiffs have failed to demonstrate that, absent an injunction, they willsuffer irreparable harm...........................................................................................51

B. The equities do not favor entry of a mandatory permanent injunction..................52

III. WHETHER McCAUSLANDS OPTION EXERCISE WAS PROPER.ANSWER: YES. ...............................................................................................................56

CONCLUSION..............................................................................................................................57


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TABLE OF AUTHORITIES

Cases Page

Barkan v. Amsted Indus., Inc.,567 A.2d 1279 (Del. 1989) ........................................................................................................ 6

Berlin v. Emerald Partners,552 A.2d 482 (Del. 1988) ....................................................................................................... 41

Brozv. Cellular Info. Sys.,673 A.2d 148 (Del. 1996) ....................................................................................................... 41

Centaur Partners, IVv. Natl Intergroup, Inc.,582 A.2d 923 (Del. 1990) ...................................................................................................... 41

eBay Domestic Holdings, Inc. v. Newmark,2010 WL 3516473 (Del. Ch.) .................................................................................................. 36

Frazer v. Worldwide Energy Corp.,1987 WL 8739 (Del. Ch.) .................................................................................................. 51, 53

In re Gaylord Container Corp. Sholders Litig.,753 A.2d 462 (Del. Ch. 2000).................................................................................................. 55

In re Topps Co. Sholders Litig.,926 A.2d 58 (Del. Ch. 2007)................................................................................................ 8 n.4

Moran v. Household Intl, Inc.,490 A.2d 1059 (Del. Ch.), affd, 500 A.2d 1346 (Del. 1985).............................................. 6, 54

M.P.M. Enters., Inc. v. Gilbert,731 A.2d 790 (Del. 1999) ....................................................................................................... 27

NCR Corp. v. Am. Telephone & Tel. Co.,761 F. Supp. 475 (S.D. Ohio 1991) ......................................................................................... 46

NiSource Capital Mrkts. v. Columbia Energy Group,1999 WL 959183 (Del. Ch.) ................................................................................................... 22

Paramount Commncs, Inc. v. Time, Inc.,571 A.2d 1140 (Del. 1990) ............................................................................ 3 n.1, 6, 22, 30, 31

Phelps Dodge Corp. v. Cyprus Amax Minerals Co.,1999 WL 1054255 (Del. Ch.) .................................................................................................. 48


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Schoon v. Smith,953 A.2d 196 (Del. 2008) .................................................................................................... 8 n.4

Shamrock Holdings, Inc. v. Polaroid Corp.,559 A.2d 257 (Del. Ch. 1989).................................................................................................. 54

TW Services, Inc. v. SWT Acquisition Corp.,1989 WL 20290 (Del. Ch.) ..................................................................................................... 22

Unitrin, Inc. v. Am. Gen. Corp.,651 A.2d 1361 (Del. 1995) ....................................................................................... 6, 48, 49-51

Unocal Corp. v. Mesa Petroleum Co.,493 A.2d 946 (Del. 1985) ................................................................. 4-5, 6, 7, 20, 26, 34, 38, 52

Versata Enters., Inc. v. Selectica, Inc.,5 A.3d 586 (Del. 2010) ............................................................................................................ 49

Woodv. Frank E. Best, Inc.,1999 WL 504779 (Del. Ch.) .................................................................................................... 27

Rules & Statutes

8 Del. C. 141 .............................................................................................................................. 34

8 Del. C. 203 .............................................................................................................. 4, 29, 41, 54

17 C.F.R. 240.14d-101 (2010) ............................................................................................. 23 n.13

17 C.F.R. 229.1012 (2010) ................................................................................................... 23 n.13

17 C.F.R 240.14d-11(c) ................................................................................................................ 28

Other Authorities

Andrew G.T. Moore, II, The 1980s Did We Save the Stockholders While the

Corporation Burned, 70 WASH. U.L.Q. 277 (1992) ............................................................ 6 n.3

John Laide, Poison Pill M&A Premium (Aug. 30, 2005),https://www.sharkrepellent.net/pub/rs_20050830.html........................................................... 56

J.P. Morgan & Co., Poison Pill and Acquisition Premiums (July 1997)................................. 55-56

J.P. Morgan & Co., Poison Pill and Acquisition Premiums (May 2001) ..................................... 55


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J. Travis Laster, Exorcizing the Omnipresent Specter: The Impact of SubstantialEquity Ownership by Outside Directors on Unocal Analysis,55 BUS. LAW 109 (1999) ...................................................................................................... 5 n.1

Patrick A. Gaughan, Mergers, Acquisitions, and Corporate Restructurings(5th ed. 2011) .......................................................................................................................... 55

Robert Comment & G. William Schwert, Poison or Placebo? Evidence on theDeterrence and Wealth Effects of Modern Antitakeover Measures,39 J. FIN. ECON. 3 (1995) ......................................................................................................... 55

Ronald J. Gilson & Reiner Kraakman, Delawares Intermediate Standard forDefensive Tactics: Is there Substance to Proportionality Review,44 BUS. LAW 247 (1989) .......................................................................................................... 32

Stephen M. Bainbridge, MERGERS AND ACQUISITIONS (2d ed. 2009) .................................. 56 n.26

Thomas W. Bates et al., Board classification and managerial entrenchment:Evidence from the market for corporate control, 87 J. FIN. ECON. 656 (2008) ....................... 55

A. Gilchrist Sparks, III & Helen Bowers, After Twenty-Two Years, Section 203of the Delaware General Corporation Law Continues to Give Hostile Bidders aMeaningful Opportunity for Success, 65 BUS. LAW 761 (2010). ................................... 45 n.20

Guhan Subramanian et al., Is Delawares Antitakeover Statute Unconstitutional?,65 BUS. LAW. 685 (2010)................................................................................................. 45 n.20


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The Airgas defendants respectfully submit this brief in response to the Courts re-

quest that the parties identify the issues that require resolution, the passages in prior briefs that

address those issues, and the evidence adduced at the supplemental hearing that addresses those

issues. For the Courts convenience, attached as Exhibit A is a summary chart listing the issues

and the pages in prior Airgas briefs discussing them.

PRELIMINARY STATEMENT

As will be shown below there is no basis under our existing law for the Court to

order the Airgas Board to dismantle Airgas defenses against Air Products clearly inadequate

$70 bid. The Airgas Board was not only justified in resisting Air Products inadequate offer, it

was obligated to do so. At the supplemental hearing, there was no better testament to this than

that given by Air Products lead director, William Davis:

THE COURT: And so if an offer was made for Air Products that youconsidered to be unfair to the stockholders of Air Products, what would you con-sider your duty to be to do?

THE WITNESS: Fiduciary duty would be to hold out for the proper price.

THE COURT: And to use every legal mechanism available to you to do

that?

THE WITNESS: Mm-hmm. Yes, sir.

Supp. Tr. 104.

That directors must hold out for a proper price, a price reflecting their good faith

assessment of long-term value, is not only dictated by Delaware law, it is also compelled by a

simple, practical consideration: the directors know things about a corporations prospects that

stockholders dont, and cant, know. Again, Air Products lead director put the point best:

THE COURT: . . . Im curious whether . . . you think that you know bet-ter than the average stockholder in Air Products what the value of Air Products istoday?


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THE WITNESS: Well, I have more information than most, than the aver-age shareholder of Air Products probably, yes, as to whats really happening, so Iwould say yes.

THE COURT: So you would agree that you probably do have a better un-derstanding of the value of Air Products than the average stockholder in Air

Products.

THE WITNESS: I would agree.

Supp. Tr. 103 (Davis).

The point is well illustrated, too, by the experience of the three Air Products no-

minees who now sit on Airgas Board. Air Products picked them, supported them, vouched for

their independence, and hoped that, once in office, they would see things Air Products way.

And indeed they were independent. They called for a fresh look. They demanded informa-

tion. They insisted that a new investment bank be hired, and a new bank, a third, was engaged.

What did the new directors and the incumbent directors all conclude? That in

light of the improving business and operating environment and based upon the report of a third

investment banker, the offer was clearly inadequate. Ex. 1063 at 10-11. What did this mean, in

terms of what the Airgas directors accordingly had to do? Exactly what one of the new directors,

John Clancey, told his fellow Airgas directors at their meeting on December 21: We have to

protect the pill. Supp. Tr. 420 (emphasis added). And why did Clancey conclude that? Be-

cause 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. Supp. Tr. 421

(Clancey).

In short, there can be only one answer to the ultimate legal question presented by

this case: Whether the directors of an unquestionably independent board, one that has indisputa-

bly acted in good faith and upon reasonable investigation, should be branded as having breached

their fiduciary duties and be ordered to violate their duties, based on clear Supreme Court

precedent in effect for a generation, act in a manner they believe is contrary to the best interest of


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the companys shareholders and facilitate a bid that is clearly inadequate by every relevant

measure. The answer to that question must be no.

Let the shareholders decide, the mantra invoked by Air Products at every turn,

simply is not the law of Delaware. The fundamental power and duty to select[] a time frame for

achievement of corporate goals is one that under our law may not be delegated to stockhold-

ers,1 and it would mean nothing if it had a clock on it. Corporate goals often take years to real-

ize, as our courts have consistently recognized. And if a time fuse were engrafted upon them, the

power and duty to resist inadequate bids would mean nothing as well.

Hostile bidders would understand: no need to make your best bid, no need to

share synergies, no need to pay for the value of the future stand-alone growth of the enterprise

being acquired. For if you start with a low-ball offer, hang around long enough, as long as Air

Products has, make minor increases to draw enough risk arbitrageurs into the stock, and finally

claim best and final, a court will let you have the company. Negotiate with the court, not the

board. And Delaware targets would know: the business judgment of the board, in the end,

would become the instrument of its own demise, for each time the board communicates its views

on the bid, thereby informing the shareholders, it would hasten the day that a court will strike

down the boards powers on the ground that stockholders supposedly have everything they need

to know.

That is not the law, and it cannot be the law. The obligations and duties of the di-

rectors of a Delaware corporation do not evaporate with the passage of time. Nor do they melt

away when stockholders are claimed to have ample information upon which to make their own

decisions. Under our law, stockholders have the right to decide whether to sell their own indi-

1Paramount Commcns Inc. v. Time Inc., 571 A.2d 1140, 1154 (Del. 1990).


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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. Unocal, 493 at 954.2

Here, Airgas has presented irrefutable and overwhelming evidence going far

beyond simple board independence: the independent directors who acted unanimously here in-

cluded three indisputably independent directors whom Air Products had nominated to Airgas

Board. See Airgas Post-Trial Br. 7, 41-42, 79, 83-84; Ex. 454 at 8, 41 (independence of the new

directors); see also Airgas Pre-Trial Br. 5, 55-58; Airgas Post-Trial Br. 83-84 (independence of

other Airgas directors). All three new directors concluded that Air Products offer was clearly

inadequate. E.g., Supp. Tr. 213, 217-20 (McCausland); Supp. Tr. 417 (Clancey). Not only that,

the directors acted in good-faith reliance on the advice of Airgas financial advisors, which in-

cluded a third, brand new firm, Credit Suisse, hired at the insistence of the Air Products nomi-

nees to provide a different perspective[]. Supp. Tr. 411-14, 417 (Clancey).

In short, Unocals heightened standard of review does not apply here, where even

the theoretical specter of disloyalty does not exist. Not only does the record evidence materially

enhance a finding that no breach of duty occurred, it conclusively rebuts any possible breach.

The business judgment rule applies.

Nor is there need to extend or enhance the scrutiny to which courts subject direc-

tor conduct. If anything, there is now less justification forUnocals approach. Boards are more

independent than they were when Unocalwas decided. And stockholders are better able,

through the proxy contest and other means, to keep boards in check. By way of example, since

2000, 101 Delaware companies that are or were in the Fortune 500 have de-staggered their

boards by shareholder-approved proposal. Ex. 1084A; Supp. Tr. 678 (Genet). What this proves

2See also J. Travis Laster, Exorcizing the Omnipresent Specter: The Impact of Substantial

Equity Ownership by Outside Directors on Unocal Analysis, 55 BUS. LAW 109, 113 (1999).


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is that shareholders and boards, through private ordering, have determined that for some compa-

nies, it is in the interests of the company and its shareholders to make it easier to remove a board

that is not acting in accordance with the shareholders wishes. The rules of the road that have

been in place since Moran was decided 25 years ago have worked well, quite well.

B. The independent Airgas Board acted in good faith and

after reasonable investigation.

But even ifUnocal is applied, plaintiffs have no basis for the relief they seek. For

they must still show a breach of fiduciary duty by the Airgas directors, including the three Air

Products nominees arising from their efforts to promote and protect the interests of their share-

holders. [T]he basic teaching of [Unocaland its progeny] is simply that the directors must act

in accordance with their fundamental duties of care and loyalty. . . . If no breach of duty is

found, the boards actions are entitled to the protections of the business judgment rule. Barkan

v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989) (citations omitted). Because Unocal

does not invite our courts to substitute their business judgment for that of the directors, Uni-

trin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1386 (Del. 1995) (citation omitted), plaintiffs must

still show that the Airgas boards decision . . . was lacking in good faith or dominated by mo-

tives of either entrenchment or self-interest. Paramount, 571 A.2d at 1153. 3

The evidence unquestionably proves that the Airgas Board has satisfied the first

part of the Unocal test by demonstrating good faith and reasonable investigation. Airgas Pre-

Trial Br. 55-57; Airgas Post-Trial Br. 81- 82. With the concurrence of the three Air Products

nominees, and with the advice of three preeminent investment banks, including one hired at the

3 Accord, e.g., Andrew G.T. Moore, II, The 1980s Did We Save the Stockholders While theCorporation Burned, 70 WASH. U.L.Q. 277, 287-89 (1992) (the Supreme Courts cases govern-ing corporate takeovers, [a]s long as the directors adhered to their fiduciary duties, it wouldhave been most inappropriate for any court to intrude upon a boards business decision).


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insistence of the Air Products nominees, the Airgas Board has unanimously 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. Ex. 659 at 6. The evidence de-

monstrates that the Board reached this conclusion through a good faith and reasonable investiga-

tion. See Airgas Pre-Trial Br. 59-66; Airgas Post-Trial Br. 81-91; Ex. 659 at 5-6.

1. The new directors and Credit Suisse enhanced the already

robust investigation by the Airgas Board.

The presence of the new directors on the Airgas Board enhanced the already ro-

bust process and deliberations. The record is replete with evidence that the new directors in-

sisted that the Airgas Board and its advisors take a fresh look at the Air Products bid, particu-

larly when Air Products made its $70 best and final offer. Indeed, even before the $70 offer,

the new directors engaged Skadden Arps and wrote formally to Airgas Chairman pushing for

the retention of a third bank to come to a decision on valuation from different perspectives, to

look at things that [the new directors] didnt feel were being addressed properly. Supp. Tr. 411

(Clancey); see also Ex. 706; Ex. 1024. With the support of the new directors, the outside direc-

tors unanimously selected Credit Suisse, a firm whose only prior involvement with Airgas was as

an advisor to the special committee opposite management in the unconsummated 2007 LBO dis-

cussions. Supp. Tr. 315-16 (DeNunzio).

Credit Suisse agreed to evaluate the offer and render an opinion as to adequacy

for a flat fee contingent upon neither the outcome of its analyses nor the consummation of a

transaction. Supp. Tr. 317 (DeNunzio). Credit Suisse approached the engagement agnostically

and advised Airgas that Credit Suisse might not reach the same conclusion that Bank of America

and Goldman Sachs had reached with respect to Air Products prior offers. Supp. Tr. 319 (De-

Nunzio). There can be no doubt that Credit Suisse is a competent and independent advisor. Air


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Products own witnesses agreed that Credit Suisse was qualified and independent. Huck

Dep. 769. 4

The three new directors held separate calls with Credit Suisse without Airgas

management, incumbent directors or other advisors on the line. Supp. Tr. 320-22 (DeNunzio);

Supp. Tr. 414-15 (Clancey). They asked Credit Suisse to investigate, among other things, the

five-year plan, the companys SAP implementation plan and expected benefits, the comparable

company set, the universe of comparable transactions, and Airgas ability to continue with acqui-

sitions. Supp. Tr. 166-68 (Miller); Supp. Tr. 322-24 (DeNunzio); Supp. Tr. 415 (Clancey).

Credit Suisse did all of this, and more. And it concluded that Airgas five-year

plan was highly credible; that Airgas was the most impressive SAP implementation plan

weve seen; that the potential upside of SAP is orders of magnitude greater than whats been

assumed;5 that the comparable transactions identified by Bank of America and Goldman Sachs

4 Plaintiffs will no doubt claim that early disagreement between the new directors and incum-bent directors undermines the good faith of the boards investigation. To the contrary, this disa-greement and its resolution show the boards healthy debate and seriousness in determining howto proceed. Schoon v. Smith, 953 A.2d 196, 207 (Del. 2008) (directors may confer, debate, andresolve their differences through compromise); In re Topps Co. Sholders Litig., 926 A.2d 58,84 (Del. Ch. 2007) (on a record reflecting spirited debate between incumbent and dissident di-rectors, the court was not at all convinced that [the incumbent directors] were wrong to resistthe Dissidents demand for a full auction). In particular, the new directors December 7 letter tovan Roden (Ex. 1027), upon which plaintiffs rely, was, in Clanceys words, merely meant asleverage, suggest[ed by] outside counsel as a way to prompt [the other directors] to act onthe new directors request for an additional financial advisor. Tr. 427 (Clancey). We wanted afinancial advisor and this was we were trying to induce them. Its like playing poker. We putour chips up on the table, everything we had. Tr. 430 (Clancey). The move worked, the newdirectors got what they wanted, and, in the end, they were completely satisfied. The result was a

process that was above reproach and more than meets the threshold of a reasonable investigation.

5

Clancey, who has his own extensive experience with SAP, also testified that he was veryimpressed with Airgas approach. It is slow and its prodigious in terms of what they have to gettheir arms around, but theyre taking it step by step. Theyve used every best practice. And un-fortunately, the best practice is what theyve learned by the failures of other companies. Buttheyve hired subject experts and they have a solid organization, and they took me through how

(footnote continued)


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were the most relevant; and that Airgas ability to acquire additional businesses would have only

a small impact on the achievability of the five-year plan. Supp. Tr. 336, 337-38, 397 (DeNunzio).

From what they learned from Credit Suisse, and from what they saw with their

own eyes, the three new directors were entirely satisfied with the Airgas Boards process.

Supp. Tr. 414 (Clancey) (I was satisfied [with Credit Suisse]. . . .

Theyre a good firm. I know of them and Ive 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.).

2. The Airgas Board relied on the advice of three preeminent

investment banks and on its own business judgment based on

Airgas performance, improvements in the economic

environment and several other factors.

Credit Suisse ultimately rendered an opinion that $70 was inadequate from a fi-

nancial point of view. Bank of America and Goldman Sachs also concluded that the offer was

inadequate. Relying on these opinions, the bankers presentations to the Board, Airgas histori-

cal and recent performance, Airgas strategic plan, and improvements in the overall economic

environment, along with several other factors, the Board unanimously concluded that the offer is


far theyve come, and I am very optimistic that theyll be very successful. Supp. Tr. 407-08(Clancey). And Air Products CEO McGlade said at the November 4 meeting that Airgas hadunderestimated the cost saving achievable with SAP. Supp. Tr. 192-93 (McCausland).


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clearly inadequate and that Airgas rights plan and other defenses should be maintained. Ex. 659

at 5-6, 17, 20, 24; Ex. 1063 at 10-11.

The Airgas Boards consideration of these factors, and its reliance on the advice

of expert financial advisors, fully satisfies its obligation to conduct a reasonable and good faith

investigation of Air Products offer. See Airgas Post-Trial Br. 84-86. Even Air Products con-

cedes that the new directors have not breached their fiduciary duties. Supp. Tr. 80 (Davis) (I

dont believe that they have breached their fiduciary duties, no.); Supp. Tr. 115 (McGlade) (the

three new directors have acted in accordance with their fiduciary duties).

If these new directors have not breached their fiduciary duties, then neither have

the incumbent directors, who received the same information and reached the same conclusion.

See Supp. Tr. 80-81, 102 (Davis) (I have no knowledge of anything going on inside the Airgas

boardroom that would suggest that there is an issue.). As noted earlier, Air Products director

Davis conceded that if an offer were made for Air Products, his [f]iduciary duty would be to

hold out for the proper price. Supp. Tr. 104. That is exactly what his Airgas counterparts are

doing here.

3. Plaintiffs did not prove that the Boards reliance on expert

advice and Airgas five-year plan was unreasonable.

In their post-trial briefs and at trial, plaintiffs launched two main attacks upon the

Airgas Boards decision-making: first, that Airgas five-year plan improperly relies on macroe-

conomic conditions beyond Airgas control; and, second, that Airgas did not consider what

might happen if the economy suffers a double-dip recession. Neither of these challenges was

borne out at trial. 6

6 Air Products counsel might also resurrect its cynical claim that the November 4 meeting be-tween Airgas and Air Products representatives was a sham designed by Airgas in order to en-



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The claim that Airgas ability to meet its projections depends in part on the over-

all economic environment is a meaningless truism. The fortunes of every business depend in

part on the overall economy. If macroeconomic uncertainty rendered business plans inherently

unreliable, then no board could ever rely on management projections. That cannot be and is

not the law. Under our law, boards are entitled to rely on management projections. See Air-


hance Defendants position before this Court, rather than a real attempt to negotiate a higherprice. Air Products Post-Trial Reply Br. 1. However, the evidence from all sides strongly vin-dicates Airgas good faith and belies counsels rhetoric. Supp. Tr. 81-86 (Davis) (all of the par-ties acted in good faith during the November 4th meeting); Supp. Tr. 86-87 (Davis) (van Rodencalled Davis the next day to reiterate why Airgas was worth more than Air Products was offering

and that Air Products should raise its offer); Davis Dep. 57 (I thought that this meeting wouldprobably lead to further negotiations.); Supp. Tr. 121 (McGlade) (I believed that [Airgas] be-lieved they had a good faith basis for their views.); Supp. Tr. 121-22 (McGlade) (agreeing thathe believes that representatives from Air Products and Airgas acted in a business-like mannerand in good faith during the November 4th meeting); Supp. Tr. 33-35 (Huck) (believed at thetime that the Airgas participants acted in good faith); Supp. Tr. 166 (Miller) (Mr. van Rodencalled me to report that he had gotten some good feedback from the independent director fromAir Products, Mr. Davis, and that he expected to hear back from him); Supp. Tr. 410-11 (Clan-cey) (Airgas reached out to Air Products to see if they could get a deal done).

Nor does the fact that the parties agreed to a joint disclosure that no further meetings wereplanned at that time somehow turn the November 4 meeting into a sham. See Ex. 1016 (reflect-ing disclosure agreed upon by parties). As McCausland testified, (a) both parties agreed not todisclose the substance of the meeting so as to avoid a media circus; (b) McCausland brought withhim to the November 4 meeting three statements reflecting different possible outcomes; (c)McCausland placed those three statements on the table at the end of the meeting; (d) McCaus-land handed the statement that he thought best reflected where the parties were to Huck; and (e)Air Products agreed to the statement that no further meetings were planned at that time. Supp.Tr. 196-98; Ex. 1013 at ARG00050707-09 (showing three prepared statements). Airgas honoredits agreement not to reveal the substance of the meeting or seek to use it for tactical advantage.All Airgas did was provide the Court with a copy of a public, SEC filing noting that the meetinghad occurred and argued that the Court should not pull the rights plan because, among otherthings, the end stage of the takeover battle had not been reached. And before doing so, Airgas

asked Air Products Delaware counsel if they objected. They did not and the disclosure wasadded to the record. Ex. 652. It was only later, when Air Products sought to strengthen its liti-gating position by making its false accusations, that the claim that the meeting had been a stagedevent was made.


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gas Post-Trial Br. 85-86, 88. Davis, an Air Products director, himself testified that he believes it

is reasonable for the Airgas Board to rely on the projections provided by Airgas management.

Supp. Tr. 82 (Davis). And Air Products witnesses testified that no one knows Airgas better than

Airgas directors. Supp. Tr. 82 (Davis); Supp. Tr. 120, 134 (McGlade).

In any event, plaintiffs challenge to the macroeconomic assumptions of Airgas

five-year plan is meritless. Airgas assumes GDP growth of

See Airgas Post-Trial Br. 13-14. Airgas financial advisor Filip Rensky of Bank

of America, Airgas expert Professor Hubbard and now Credit Suisse have all reviewed the ma-

croeconomic assumptions in the five-year plan and have found them to be reasonable. Airgas

Post-Trial Br. 11-15, 87-88; Supp. Tr. 380-81, 387, 391-92 (DeNunzio). And the Airgas direc-

tors brought their own experience and business judgment to their assessment of the five-year

plan and found the plan to be reasonable. Supp. Tr. 172 (Miller); Supp. Tr. 408-409 (Clancey).

Beyond this, Airgas projections are consistent with its historical performance.

7

7

DeNunzio testified that he expected Airgas management to refresh the five-year plan. Supp.



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Not only that, the reasonableness of Airgas projections has been confirmed by its

actual performance in 2010. A year has passed since the November 2009 five-year plan was pre-

sented to Airgas management. During that time, Airgas has emerged from the great recession,

grown EPS ahead of schedule

.

As for plaintiffs refrain about the possibility of a double-dip recession,

Ex. 1063 at 5; see also Ex. 1064 at 5. The directors own business judgment confirmed this

view; as John Clancey testified, double-dip recessions are very rare. I dont see any indication

of a double-dip recession. Supp. Tr. 409 (Clancey); Supp. Tr. 181 (Miller); Supp. Tr. 234-35

(McCausland). Indeed, just four days before the supplemental hearing, Air Products CFO Huck

publicly stated, I dont see a double dip either, so I see long, good, steady, solid growth going

forward here for the economy. Ex. 1086A at 7.


Ex. 1064 at 30.


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Thus, it was perfectly appropriate for Airgas management to present a single case

with no double-dip in its five-year plan. See Airgas Post-Trial Br. 55-57. As DeNunzio

testified, bankers expect to receive managements best estimates of what is most likely to hap-

pen in terms of their future performance. Supp. Tr. 386-87 (DeNunzio). And as Miller ex-

plained, in the real world of business you do forecasts in a range based on the facts and cir-

cumstances you understand at the time. And the questions been asked about double-dip reces-

sion. And I mean, you could . . . . pick the midpoint between the reasonable range and Arma-

geddon. Thats not the real world, so I dont know how else to answer that question. Supp. Tr.

172 (Miller).

In any event, in addition to the sensitivities analysis provided to the directors as

part of the five-year plan itself, Credit Suisse presented DCF sensitivities analyses to the Board

that included the impact if Airgas missed its projected EBITDA margins by 200 basis points.

Ex. 1066 at 25. A 200 basis point miss would take approximately $100 million a year out of the

EBITDA projections in perpetuity. That is a greater loss than the one-year$81 million decrease

in EBITDA Airgas suffered during the depths of the great recession. See Ex. 1047 at 3. As De-

Nunzio testified, the best way to think about this analysis is as a $100 million bucket of mon-

ey that is either subtracted or added to the companys annual earnings or cash flow going for-

ward . . . . from whatever source. Supp. Tr. 345-46 (DeNunzio).

8

In short, the record presents no basis upon which to dispute that the Airgas Board

acted in good faith and upon reasonable investigation.

8 The discount range of the DCF also captures risk to Airgas projections. See Airgas Post-Trial Br. 56.


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C. The Airgas Board reasonably concluded that

the $70 offer constitutes a threat.

The evidence at the supplemental hearing demonstrates that the directors reasona-

bly concluded that the $70 Air Products offer represents a threat for several reasons: its inade-

quacy; its opportunistic timing; the impediment it presents to Airgas business plan; the coercion

caused by Air Products successful effort to drive shares into arbitrageurs hands; the coercion

that results from stockholders lack of access to critical nonpublic information; and the fact that

the Airgas Board has reasonably concluded that what Air Products calls its best and final bid

may not, in fact, be best and final.

1. The $70 offer is clearly inadequate.

The law is clear that an inadequate offer is, in and of itself, a threat that a board

has a duty to resist. Airgas Pre-Trial Br. 51-54, 74-80; Airgas Post-Trial Br. 92-93; Airgas Supp.

Br. 5. 9

The evidence at the supplemental hearing amply demonstrates that Air Products

$70 offer is inadequate. Three of the top investment banks in the country have so advised the

Airgas Board. As Credit Suisse told the Board, it had pretty easily concluded that the $70 a

share was inadequate from a financial point of view and that its bankers didnt think it was a

close call. Supp. Tr. 349 (DeNunzio). The three new directors agree. Indeed, at the December

21 meeting, Clancey urged that in light of the improving business and operating environment

and based on the report of a third investment banker, the offer was clearly inadequate and that

9 Air Products might once again contend that price inadequacy is a mild threat. As ad-dressed in Airgas Post-Trial brief, the concept of a mild threat is far too slender a reed to sup-

port the weight Air Products attempts to make it bear. Airgas Post-Trial Br. 100-01. As dis-cussed below, even if the threat is characterized as mild (which it is not), the law is clear that arights plan is a proportional response to an inadequate offer. Moreover, Air Products $70 offeris so far below full and fair value that it cannot fairly be termed a mild threat.


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that language be used to describe the Air Products offer. With advice from its financial advi-

sors, the Airgas Board unanimously agreed and also reiterated its unanimous view that the value

of Airgas in a sale, at this time, is at least $78 per share, in light of the Boards view of relevant

valuation metrics. Ex. 1063 at 10-11; Ex. 659 at 3.

Notably, Air Products offered no evidence at the supplemental hearing challeng-

ing the Boards and its advisors unanimous view that $70 is inadequate. Not from J.P. Morgan,

not from Perella Weinberg, and not from Professor Fischel. The shareholder plaintiffs, likewise,

decided to leave their experts home. And Huck admitted on the stand that he couldnt identify

any recent analyst report that even comes close to supporting the Air Products valuation that Air

Products claims justifies its bid its claim that Airgas, on a stand-alone basis, is worth only $51

a share. Supp. Tr. 133.

The evidence overwhelmingly proves the point, and Air Products made no effort

at the Supplemental Hearing to prove otherwise. Air Products $70 offer is inadequate by every

measure:

Discounted Cash Flow(Ex. 1064 at 22; Ex. 1066 at 24, 25, 28)

As DeNunzio testified in response to the Courts

questioning, his personal view is that the DCF implies a fair value range in the mid to high se-

venties, and well into the mid eighties. Supp. Tr. 393-94 (DeNunzio).


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Ex. 1063 at 6. 10

Future Stock Price (Ex. 1064 at 21; Ex. 1066 at 26)

11

Unaffected Stock Price (Ex. 1064 at 20, 23-24; Ex. 1066 at 20)

At these prices, Air Products offer implies a meager premium far be-

low those paid in recent transactions. Supp. Tr. 347-48 (DeNunzio).

10See Airgas Post-Trial Br. 73, 89, 91 n.49.

11


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Analyst Reports (Ex. 1064 at 19) In October, Air Products told Airgas it

should consider analyst reports. Ex. 649 at 2. Recent analyst commentary reflects stand-alone

target prices for Airgas stock ranging from the mid $60s to mid $70s.

Accretion Analysis (Ex. 1064 at 26, 27)

LBO Analysis (Ex. 1064 at 28; Ex. 1066 at 30-34)

Ex. 1063 at 6. Thus, this analysis reinforces that Air Products $70 of-

fer does not fully and fairly compensate Airgas shareholders for their contribution to the signifi-

cant synergies Air Products anticipates achieving.

The LBO analysis also showed that Airgas shareholders will be better off if Air-

gas continues to follow its strategic plan than if it is sold in a purely financial transaction at this

time. As McCausland testified, the conclusion was that selling [to] private equity did not com-


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pete well with running the business for the long-term through execution of the management

plan. Supp. Tr. 282-83; see also Supp. Tr. 306-07 (McCausland).12

2. The offer is opportunistic and came at a time when it

would be disadvantageous to sell the company.

In Unocal, the Supreme Court expressly recognized that the nature and timing

of an offer are valid considerations when assessing whether an offer poses a threat. Airgas Post-

Trial Br. 93-94. Air Products witnesses have continued to concede that Air Products goal is to

acquire Airgas for the lowest price at which it can get 50%of the shares tendered. Supp. Tr. 17,

46 (Huck); Supp. Tr. 76 (Davis); Supp. Tr. 125 (McGlade). See also Airgas Post-Trial Br. 93-

94.

Indeed, Air Products launched its offer at a time when Airgas last twelve months

EBITDA, EPS, and revenue were in the trough of the most severe recession since the Great De-

pression. Ex. 1118 at 3; Ex. 907. As Air Products director Davis conceded, the trading price of

Airgas stock was lower than it would have been had the economy not been in the middle of a

recession. Supp. Tr. 76-77. After he had an opportunity to learn about the company and its stra-

tegic plans, Airgas new director Clancey agreed with the testimony that McCausland gave at the

12 Air Products suggested through its questioning that Airgas is worth $70, and no more than$70, because no other bidder has emerged that is willing to pay more. Supp. Tr. 135-36(McGlade); Supp. Tr. 739 (Morrow). This circular reasoning fails. Indeed, by this logic, Airgasshould have been sold for $60 in February 2010 because that was the only offer outstanding atthe time. As DeNunzio testified, any public company always can achieve a premium in a sale,

but [t]hat doesnt mean the company should be sold on any given day. Supp. Tr. 354. Theissue is one of timing. Here the record is unrebutted that Airgas has a fair value in the mid tohigh seventies, and well into the mid eighties. Supp. Tr. 394 (DeNunzio). And at anothertime, in another market environment . . . [Airgas] could do substantially in excess of the 70, even

accounting for time value of money in the intervening period. Supp. Tr. 398 (DeNunzio); seealso Supp. Tr. 304-05 (McCausland). For this reason, no principle of Delaware law compels a

board of directors to accept a clearly inadequate offer simply because for the moment it isthe only offer on the table. Airgas Post-Trial Br. 104-07; Dec. 10 Airgas Supp. Br. 11-13.


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no duty to maximize current share value even when so desired by holders of some 88% of the

[c]ompanys stock). Directors are not obliged to abandon a deliberately conceived corporate

plan for a short-term profit unless there is clearly no basis to sustain the corporate strategy. Pa-

ramount, 571 A.2d at 1154; see Airgas Post-Trial Br. 104-105; see also NiSource Capital Mrkts.

v. Columbia Energy Group, 1999 WL 959183, at *2 (Del. Ch.) (board of directors may reasona-

bly perceive that offer threaten the target's long-term business plan).

To pursue a deliberately conceived corporate plan is exactly what Airgas Board

has chosen to do here, and there clearly is a basis to sustain that plan. Key elements of Airgas

plan include: (i) expansion into bulk gases; (ii) SAP; (iii) Strategic Accounts and segmentation

of Airgas sales force by vertical markets; and (iv) $2.5 billion in capital investments made over

the past 3 years. Tr. 644-45 (McCausland); Tr. 748-50 (McLaughlin); Tr. 865-69 (Molinini); Ex.

64 at 5; Ex. 499.

The Airgas Board made the business judgment in November 2009 that Airgas

corporate plan would provide greater benefits to Airgas shareholders than the $60 per share Air

Products was offering at the time. Ex. 249 at 18 (The Airgas Board is confident that Airgas

will, consistent with its history, deliver greater value to its stockholders by executing its strategic

plan than would be obtained under the Offer.). Each time Air Products adjusted its offer, the

Airgas Board revisited its decision, and each time it came to the same conclusion that Airgas

would be better off by pursuing its plan for expansion and improvement. As reflected in Airgas

14D-9 response to Air Products $70 offer, the Airgas Board most recently considered (among

other things):

its knowledge of and its experience with the Company and its view of the Com-panys business, earnings, financial condition, prospects and strategic plans;

the Companys strategic plan, including its updated strategic plan reflecting actualfinancial performance through November 30, 2010 . . . estimates of future SAPcosts and benefits, and its views as to Airgas future prospects;


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that Airgas had made substantial capital investments since the last recessionaryperiod, including nearly $2.5 billion in the period since 2007 alone, and consi-dered its view of the potential benefits of such investments;

Airgas scarcity value as the only remaining independent gas company of scale inthe world and its view of the underlying value of Airgas assets, operations and

strategic plan, including its industry-leading position, more than one million cus-tomers, unrivaled platform and future growth prospects.

Ex. 659 at 5-6; see also Ex. 1063 at 2-4, 10-11; Supp. Tr. 307 (McCausland). 13

4. The $70 offer is particularly coercive given the successful

execution of Air Products plan to drive shares into the hands

of arbitrageurs.

Airgas has previously shown that Air Products successful effort to manipulate

the Airgas shareholder base and maximize the percentage of shares held by arbitrageurs has sig-

nificantly increased the threat that shareholders will be coerced into tendering into an inadequate

offer. See Airgas Post-Trial Br. 95-98; Dec. 10 Airgas Supp. Br. 15-20. The record established

at the supplemental hearing further demonstrates that the substantial ownership of Airgas stock

by these short-term, deal-driven investors poses a threat to the company and its shareholders.

Huck reaffirmed his faith in the arbitrageurs at the supplemental hearing, when he

acknowledged that it was Air Products expectation that the arbs would support Air Products

. . . because they came into the stock to get a deal done. Supp. Tr. 45. Air Products board was

on the same page as management. Davis testified that Air Products board actively considered

the fact that much of the Airgas stock was owned by arbs that had acquired their stock at a price

13 It should be noted that Schedule 14D-9 requires only disclosure of a target boards recom-mendation to its shareholders and the reasons for that recommendation. See 17 C.F.R. 240.14d-101 (2010) (Rule 14d-101 (Item 4)); 17 C.F.R. 229.1012 (2010) (Reg. M-A (Item 1012)) (state

whether the filing person is advising holders of the subject securities to accept or reject the ten-der offer . . . . State the reasons for the position . . .). Thus, Airgas 14D-9 is neither meant norrequired to describe the reasons why the Board determined to maintain Airgas rights plan andother defenses.


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under 70 at its December 9 meeting and that the board believed [the arbs] would support a $70

offer. Supp. Tr. 86-88 (Davis).

Airgas expert witness, Peter Harkins, described the simple logic of Air Products

strategy. Harkins testified that arbitrageurs have typically purchased their shares at elevated

levels in order to profit by realizing the spread between the price they paid and the deal price

and that, as a consequence, [i]f the offer fails and the stock returns to pre-bid levels or to antic-

ipated post-trading levels, the arbitrageurs . . . would suffer huge losses. Supp. Tr. 567; see also

Supp. Tr. 201 (McCausland). Those losses are magnified when arbitrageurs have used leverage

to buy their positions, as they customarily do. Supp. Tr. 750 (Morrow); Ex. 1081 at 12. As Har-

kins explained, while an arbitrageur might threaten to withhold its shares if the bidder refused to

increase the price, [o]n the expiration date of the offer, . . . in what is tantamount to a game of

chicken, they dont have a choice. They have to tender by virtue of what they are and how they

do it. Supp. Tr. 563.

Harkins testimony that arbitrageurs have skewed incentives is hardly controver-

sial. Supp. Tr. 654. Huck, McGlade and the Air Products board all share Harkins perspective.

Supp. Tr. 45 (Huck); Supp. Tr. 87-88 (Davis); see also Tr. 63-64 (Huck); Tr. 151-52

(McGlade). 14 ISS agrees, too:

The risk arbitrage business model is often described as picking up pennies infront of a steam-roller. Because of the de minimis margin with which they often

play, one wrong trade can easily wipe out most of the profits they have made,given the asymmetric risk/reward profile of their investments. As such, risk arbs

at least once they have bought into a position are more likely to be riskaverse than risk loving (although risk tolerance will also vary depending upon thesize of the firm, investment strategies, etc.).

14 Air Products expert witness, Joseph Morrow, seems to agree as well. Morrow acknowl-edged that arbitrageurs will generally tender if they believe the risk that the targets stock pricewill drop if the bidders offer is withdrawn is too great. See Supp. Tr. 748-49.


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Ex. 1034A at 2 (Dec. 10, 2010 M&A Edge Note). According to ISS, this decision bias a

willingness to leave some money on the table in exchange for an earlier and more certain

payout can make arbs a hostile acquirers best ally. Ex. 1034A at 2. Of course, that is

what Air Products has been banking on from the beginning.

The substantial concentration of shares in the hands of arbitrageurs significantly

compounds the threat faced by the Airgas shareholders. If Airgas poison pill were redeemed,

arbitrageurs would buy additional shares, raising their holdings to more than 50% of the out-

standing stock. Supp. Tr. 551-52 (Harkins). Even if they did not, the arbitrageurs who control a

near-majority of Airgas outstanding stock would tender into Air Products best and final offer

for the reasons discussed above. As a result, as Harkins explained, a shareholder who . . .

agrees with the incumbent boards view regarding this offer, is still faced with the dilemma

where they know that owners of the majority of the outstanding shares are compelled to accept

the offer because of the investment methodology they employ. Supp. Tr. 572. Airgas share-

holders who believe $70 is an inadequate price could not rationally decline to tender under these

circumstances, know[ing] everyone else, a majority, is going to tender . . . and control of the

company will trade at that one time. Supp. Tr. 572-73.

Both Harkins and Morrow agreed that once the Air Products tender offer closes,

unless a shareholder successfully asserted its appraisal rights (an extraordinarily problematic

scenario discussed below), the non-tendering shareholders would never receive more than $70

for their shares. Supp. Tr. 564-65 (Harkins); Supp. Tr. 729-30 (Morrow). At best, these non-

tendering shareholders would receive the same $70 price later on down the road in connection

with a second-step merger, consideration that by definition would be worth less than getting it

on the expiration because of the time value of money. Supp. Tr. 564-65 (Harkins); Ex. 1081 at

7-8.


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Air Products own expert, Morrow, recognized that this would not be a palatable

option for Airgas shareholders:

Q. If Im a professional investor and I know my upside is capped at

the $70 deal price, wouldnt I prefer to cash out as soon as possible and redeploymy funds in a new investment?

A. If you could.

Supp. Tr. 736 (Morrow). These non-tendering shareholders would also assume the risk that a

second-step merger would never occur, leaving them as minority shareholders in a company con-

trolled by Air Products. See Supp. Tr. 568 (Harkins); Ex. 1081 at 7. As Morrow noted, Air

Products own tender offer filings recognize this possibility and spell out adverse consequences

for non-tendering shareholders, including the risks of delisting and deregistration of their shares.

Supp. Tr. 726-34; Ex. 222 at 10, 20.

At bottom, if Airgas is stripped of all of its defenses, the Airgas shareholders will

be left with no choice at all. In Harkins words, in the circumstances of this case, youre forced

to accept something less than what you think you should receive and what your fiduciary has told

you you should receive. Supp. Tr. 565. That is a threat posed by the Air Products offer. The

coercive nature of Air Products clearly inadequate offer is unquestionably a threat for Unocal

purposes

5. The possibility of an appraisal remedy, the majority

shareholders fiduciary duties to the minority shareholders,

and the possibility of a subsequent offering period do not

diminish the coercive nature of the $70 offer.

The threat posed by the $70 offers coerciveness is not diminished by the possible

availability of an appraisal or of a subsequent offering period. As for an appraisal: the right to

seek appraisal will not arise unless and until a second-step merger is consummated, and there is

thus no certainty that non-tendering shareholders will ever have appraisal rights. But in any

event, the availability of an appraisal proceeding in the future is simply not the same as receiving


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full value in a change of control transaction. As the Court is well aware, appraisal proceedings

take a long time and can be extremely expensive particularly for individual shareholders who

must pay all of the fees and costs associated with the proceeding. Moreover, the fair value as

determined in an appraisal does not factor in the synergies associated with the transaction itself.

M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 797 (Del. 1999). In this case, the cost synergies

alone are estimated to be $20 to $30 per Airgas share. Supp. Tr. 199 (McCausland); see also Ex.

511 at 49. There are also considerable risks and uncertainties associated with appraisal proceed-

ings, in which the determination of fair value will depend on expert testimony and the courts

resolution of numerous disputed issues.

There is still another and more fundamental problem with Air Products position

that the appraisal remedy sufficiently protects Airgas shareholders from Air Products coercive

tender offer. Under Delaware law, directors may not abdicate their fiduciary duties based on the

premise that shareholders may have a later opportunity to seek a judicial appraisal. See Airgas

Post-Trial Br. 73; see also Woodv. Frank E. Best, Inc., 1999 WL 504779, at *5 (Del. Ch.) (Ex.

B hereto).

Air Products next suggests that the threat posed by its offer is obviated by the fact

that a second-step merger would be subject to review for entire fairness. This argument fares no

better. Air Products McGlade was resolute that the second-step merger would be done at the

same price as the first step, i.e., at $70 per share. Supp. Tr. 111 (McGlade). Davis said the same

thing. Supp. Tr. 104-106. Thus, all the minority shareholders would really have in that circums-

tance would be a lawsuit. And in any event, again, Delaware law does not permit the Airgas

Board to abdicate its fiduciary duties and subject its shareholders to an inadequate and coercive

tender offer simply because, if at some future date a second-step merger occurs, a new Airgas

Board appointed by Air Products will have a duty to ensure that the price paid in the merger is

fair. Likewise, a majority shareholders fiduciary obligations are cold comfort to shareholders

left holding stock in a controlled corporation. See Airgas Post-Trial Br. 96-97.


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Nor does Air Products courthouse proffer of a subsequent offering period solve

the problem. Air Products initial Schedule TO clearly stated that Air Products did not intend to

include a subsequent offering period, and it is undisputed that, even now, Air Products has not

amended its offer to include a subsequent offering period. Ex. 222 at 13. The question for the

Court is whether the Airgas Board breached its fiduciary duties in connection with its considera-

tion of the $70 offer at the December 21 Board meeting. The fact that Air Products offer did not

include a subsequent offering period at that time is therefore dispositive. See Supp. Tr. 14244

(McGlade) (Q: At the time that the Airgas board considered Air Products best and final offer

of $70, had Air Products suggested that it would include a subsequent offering period?; A: I

dont believe so.). Air Products suggestion that it would now be willing to commit to a subse-

quent offering period in exchange for an order removing Airgas defenses, see Supp. Tr. 147

(McGlade) in what amounts to still another attempt to negotiate the terms of its offer with the

Court is as inappropriate as it is irrelevant.

Moreover, a subsequent offering period would do nothing to alleviate the coercive

nature of the offer. The subsequent offering period only comes into play under the SEC rules

after the initial offering period expires and the bidder accepts the tendered shares for payment.

Supp. Tr. 569 (Harkins); 17 C.F.R 240.14d-11(c). At that point, as both Harkins and Morrow

testified, Airgas shareholders who believed the offer is inadequate would still be compelled to

accept $70 for their shares, whether in the subsequent offering period or in a second-step merger.

Supp. Tr. 572-73 (Harkins); Supp. Tr. 739-41 (Morrow). 15 As Morrow put it, even with a sub-

15 Airgas shareholders would also have the option of selling their shares in the open market, butas Morrow conceded, once Air Products has bought 50%-plus-one of the shares for $70 at theinitial expiration date, the selling shareholders are not going to get $78 in the open market.Supp. Tr. 740-41 (Morrow).


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6. The offer is substantively coercive.

The $70 offer also poses a threat of substantive coercion which, as the Su-

preme Court has recognized, is the risk that shareholders will mistakenly accept an underpriced

offer because they disbelieve managements representations of intrinsic value. Paramount, 571

A.2d at 1153 n.17 (internal quotes and citations omitted); see also Airgas Pre-Trial Br. 75-76;

Airgas Post-Trial Br. 94-95.

The record here perfectly illustrates what the Court in Paramountwas talking

about. At the supplemental hearing, Air Products own witnesses conceded that the Airgas

shareholders do not and cannot know as much about the company and its prospects as the Airgas

Board. Supp. Tr. 33 (Huck); Supp. Tr. 103 (Davis). Even Air Products expert Morrow agreed.

Supp. Tr. 754. Air Products own witnesses also conceded that Airgas management is in the best

position to make projections for the future financial performance of the company. Supp. Tr. 82

(Davis); Supp. Tr. 120 (McGlade). And the parties are in accord that the Board, not the share-


trageurs or similarly incentivized short-term investors, see Ex. 245A at 2; Ex. 328A at 31; Ex.415A at 4; Ex. 1008A at 4; Ex. 1011 at 5; Ex. 1051A at 8, and the percentage was again dis-cussed at the Boards December 21 meeting. Supp. Tr. 369 (DeNunzio). The significance of thesubstantial concentration of arbitrageurs in the stock, and its bearing on the likelihood of successof Air Products offer was not lost on Airgas directors. As one of the new directors to the Air-gas board testified: Certainly, I understand the situation [the arbs] are in. Supp. Tr. 439(Clancey). The Airgas directors are hardly babes in the woods.

Moreover, the directors reviewed and authorized the filing of a brief with the Court that ad-dressed this very issue, a brief that discussed the high concentration of arbs and their short-terminvestment horizon and noted that [w]hile these shareholders are largely sophisticated, they facea collective action problem if the pill is pulled. Ex. 1031 at 15-16. And it noted that as a result

shareholders may be pressured into tendering into an offer that they dont want to accept be-cause of the prospect that a bare majority of the other shares will be tendered. Ex. 1031 at16. Indeed, it was for this reason that Clancey stated at the December 21 board meeting: theCompany had to protect the pill. Ex. 1063 at 10; Supp. Tr. 420-21. As Miller testified, protect-ing the pill was implicit in everything we were doing. Supp. Tr. 160.


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holders, is in the best position to understand the intrinsic value of the company. See Supp. Tr.

138 (McGlade); Supp. Tr. 188-89 (McCausland).

And there can be no dispute about it: stockholders simply do not have all the in-

formation about the companys business plans and prospects that is available to the Airgas

Board. As McCausland elaborated:

Well, we were the industry leader in packaged gases. We know a lot aboutwhats going on in our business that even our shareholders dont know. We knowabout our strategies on acquisitions, we know about current negotiations, weknow about negotiations on sourcing product, on building air separation plantsand CO2 plants. We know what our pricing strategies are. We know about all ofour sales strategies and where were going to put our resources. We know what

were doing in E-commerce. You know, we just have a wealth of informationabout the company, and its our job, as directors, to do that.

Supp. Tr. 189. DeNunzio concurred: there are a number of upsides that arent reflected in the

plan. Supp. Tr. 397. And the magnitude of these undisclosed benefits is substantial. For in-

stance, Airgas has not disclosed the full expected range of benefits from SAP implementation,

which is orders of magnitude greater than whats been assumed and which would give substan-

tially higher values. Supp. Tr. 397-98 (DeNunzio).

Shareholders also lack the detailed valuation information available to the Airgas

Board. Airgas has not disclosed its full five-year plan. Supp. Tr. 32 (Huck); Supp. Tr. 190

(McCausland); Ex. 1047 (refreshed five-year plan produced on Litigators Eyes Only basis). And

it has not disclosed the investment bankers analyses. Ex. 1064 (Goldman Sachs/Bank of Amer-

ica book produced on Litigators Eyes Only basis); Ex. 1065 (Credit Suisse book produced on

Litigators Eyes only basis). As Huck agreed, the discounted cash flow analysis contained in

these books is the most important for valuing Airgas and Airgas stockholders dont have it.

Supp. Tr. 32. Stockholders have not seen, and will not see, this critical data.

Nor could Airgas simply cure the problem by disclosing all of this highly sensi-

tive competitive and strategic information to the market. Disclosing the numbers without the


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rationale behind them or business developments without any detail would only leave sharehold-

ers guessing whether the information was reliable. Supp. Tr. 585-86 (Harkins). Indeed, the doc-

trine is premised on the notion that shareholders may mistakenly accept an underpriced offer

because they disbelieve managements representation of intrinsic value. Ronald J. Gilson &

Reiner Kraakman, Delawares Intermediate Standard for Defensive Tactics: Is There Substance

to Proportionality Review, 44 BUS. LAW 247, 267 (1989), cited in Paramount, 571 A.2d at 1153

n.17. If the shareholders are not told how the company will meet its projections, they have no

good reason other than trust me to believe them.

And as McCausland testified, and as common sense confirms, disclosing the stra-

tegic plans and considerations that justify the projections in the five-year plan would risk enorm-

ous harm to the business:

Well, for instance, if we told everyone that we were negotiating with ABC com-pany, to build a CO2 plant, or an air separation plant, then all of our competitorswould rush in. If we told everyone we were negotiating with XYZ company for astrategic account covering 26 facilities in the U.S., the competitors would all jumpin and probably cut the prices.

Supp. Tr. 190-91. For this very reason, target boards and management, which are tasked with

the responsibility of running the business during the pendency of a hostile offer, retain legitimate

interests in preserving the confidentiality of such information. Supp. Tr. 585 (Harkins). Any

rule to the contrary would harm the shareholders. It certainly would be terrible policy to oblige

target company to disclose highly sensitive competitive and strategic information simply because

a bidder (here a competitor itself) has made an inadequate offer.

Nor does it suffice to say that stockholders are in the same position as the Board

to evaluate the financial adequacy of the offer because managements projections are close to the

analyst projections and the analyst projections are available to the market. Supp. Tr. 395-96

(DeNunzio); Supp. Tr. 453 (Clancey). Analyst projections only go out to FY 2013; Airgas pro-

jections and the bankers DCF analysis include FY 2014 through FY 2016. Compare Ex. 1047


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at 3, Ex. 1064 at 35, Ex. 1065 at 2, with Ex. 1061 at 10, and Ex. 1058 at 4. (Airgas will not real-

ize the full annual benefits of SAP until FY . Ex. 457.)

Even to the extent certain information has been disclosed to the market, share-

holders lack the insight of the Airgas directors in evaluating that information. Shareholders do

not attend Board meetings. They do not get individual access to management and the companys

advisors to raise questions or to assess the credibility of their projections and analyses. Supp. Tr.

164 (Miller). Plus, as McCausland explained: [T]he management and the board have

theyre in a better position to evaluate the information because they have experience in the indus-

try and experience with Airgas. Supp. Tr. 190.

In this regard, the experience of John Clancey, one of the new directors, is in-

structive. Based on the information made publicly available during the proxy contest, Clanceys

initial perspective was that Airgas was just saying no. Supp. Tr. 403. But after receiving sub-

stantial amounts of nonpublic information, attending one-on-one briefing sessions with manage-

ment on the five-year plan and consulting with the companys advisors, Clanceys perspective

changed. Supp. Tr. 417.

This is evidence of substantive coercion in action. Even though Clancey believes

that all the information shareholders could want is available (Supp. Tr. 452-53), it was not until

he gained access to nonpublic information, joined in the Boards process of evaluating that in-

formation, and heard from Credit Suisse that he fully accepted managements view on value.

And the same holds true for the other two new directors, Miller and Lumpkins. It was not until

they joined the board and gained access to all the information at its disposal that they fully be-

lieved the companys position on value. Supp. Tr. 163, 164 (Miller); Ex. 1063 at 10-12. There

is simply no way Airgas could replicate that process with each of its thousands of shareholders

holding the 84 million shares outstanding. Supp. Tr. 701 (Morrow).


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That is why plaintiffs oft-repeated mantra of let the shareholders decide is mis-

guided and unrealistic. E.g., Shareholder Plaintiffs Post-Trial Br. 51-56; Air Products Post-Trial

Reply Br. 34, 39. The rhetoric glosses over the crucial point that the role of the board is not

simply to act as a conduit of information so the shareholders can make decisions themselves.

Directors manage the affairs of the corporation through the exercise of their independent busi-

ness judgment. 8 Del. C. 141(a). And at no time is this responsibility more important than

when control of the company is at stake. Dec. 10 Airgas Supp. Br. 10-14.

When the board elects to sell the company, the decision forces out the sharehold-

ers who do not want to sell. That is why change of control decisions are, in the first instance,

decisions of the board that cannot be delegated to the shareholders. While shareholders are free

to sell their shares to serve their own interests, the board is charged with making control deci-

sions because it has both the power and the duty to protect the company and all of its sharehold-

ers from perceived harms. So long as the board acts in good faith and with due care, its judg-

ments cannot be second-guessed by our courts. Airgas Post-Trial Br. 72-73, 75, 77, 94, 98, 105;

Dec. 10 Airgas Supp. Br. 5, 10-14, 20. As Airgas director Ted Miller observed: Thats why

they elect us to the board. Otherwise, why have boards? Why have a board? Supp. Tr. 163.

7. The Board reasonably concluded that Air Products has not

necessarily made its best and final offer and the companys

defenses therefore still provide the Board with a valuable

negotiating tool.

Air Products claims that $70 is its best and final offer. Supp. Tr. 5 (Huck);

Supp. Tr. 104 (Davis); Supp. Tr. 108 (McGlade). But the Airgas Board determined that further

increases are possible, and reasonably concluded that it should still press for a higher price. Un-

derUnocal, it is this reasonable belief of the Airgas Board that controls. 493 A.2d at 955.

The minutes of the December 21 meeting reflect that the directors, clearly of the

view that there was more than $70 to be had, continued to focus on how to get a higher price for


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Airgas.

The Board unanimously approved including the $78 sale price in the Schedule

14D-9 on this very basis. Ex. 1063 at 11; Ex. 659 at 3 (Schedule 14D-9 filed with SEC). The

consensus of the Airgas Board was clear: [A]s a practical matter, I dont think anyone in that

room really believed it was best and final. Supp. Tr. 218-19 (McCausland).

As new director John Clancey explained the Boards reasoning at trial:

Q: There was some discussion at the December 21stboard meeting about the term best and final. Did you express anyviews on that?

A. Yes. Im not bashful about best and final. We do90 percent of our business on contracts. We play best and final.Our customers play best and final. The governments play best andfinal. Best and final is normally a clich that gets you into the fi-nals so that you can take your price up or take your price down,

and its meant to force a situation. And in the commercial world, Ithink its being used less and less.

Supp. Tr. 418. In addition, Credit Suisse concluded that in different market conditions, there

may be other acquirers of the company at higher prices than what Air Products is offering to-

day, which could lead to a sale of the company at a price above $70 per share to a third-party or

prompt a topping bid by Air Products. Supp. Tr. 398. As McCausland explained, Airgas has not

pursued an alternative transaction because Air Products offer was so low; bidders might be dis-

couraged by Air Products head start with the FTC; and the because some of the industrial, big

industrial gas companies, are in Europe. And Europe is still in difficulty. Supp. Tr. 304-

05.DeNunzio made the additional point that European bidders prefer to negotiate transactions out

of the lime light. Supp. Tr. 331.


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In sum, based on decades of experience with business negotiations generally and

months of dealing with Air Products in particular, the Airgas Board made a business judgment

that Air Products could return with a bid above $70, if not now, then later. Supp. Tr. 418-19

(Clancey); Ex. 1063 at 9. That business judgment is reserved to the Board: under settled Dela-

ware law, a target board may properly use a pill under such circumstances to preserve negotiat-

ing leverage. See Airgas Post-Trial Br. 2 (quoting eBay Domestic Holdings, Inc. v. Newmark,

2010 WL 3516473, at *19 (Del. Ch.)); Ex. 1081 at 13-15 (Second Supp. Harkins Rep.).

The testimony of the Air Products witnesses only confirms that Air Products of-

fer is not necessarily best and final and that this formulation was a litigation tactic. When

asked if Air Products believed that, by raising its price to 70 and labeling it best and final, that it

would strengthen its position on the removal of the pill, Huck responded: Yes, we did. Supp.

Tr. 38. And, as noted above, rather than negotiate with the Airgas Board, Air Products, having

waited 14 months, thought it was now negotiating with the Judge, as Davis candidly admitted

at deposition and was forced to concede on cross-examination at trial. Supp. Tr. 98-99.

At its December 9, 2010 meeting, the Air Products Board did not receive financial

information from its investment bankers about the $70 offer. Nor did it consider how accre-

tive/dilutive an acquisition would be at various price points, information that would be essential

to any board in determining its highest bid. Instead, the Boards focus was on the litigation.

Ex. 1033 at 2.

Ex. 1033 at 4.


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At the supplemental hearing, Huck hedged his bet on best and final testifying

that Air Products never determined $70 was its highest offer regardless of future circumstances.

Supp. Tr. 49, 50 (Huck). Davis went even further, testifying that, if Airgas made a counterpro-

posal, the Air Products board would need to hold another meeting because management needed

authority to go above $70. Supp. Tr. 93. In fact, Davis testified that he believed that Air Prod-

ucts $70 best and final offer would elicit a counteroffer from Airgas that would lead to a dis-

cussion of value. Supp. Tr. 93. Davis further testified that he specifically inquired of Huck or

McGlade whether 70 would be the absolute end or would it be possible that Airgas would go

higher and he understood that Air Products might go higher to put the deal over the top.

Supp. Tr. 93-94. And in January, Huck told the Wall Street firm of Dominick & Dominick that

if the Airgas shareholders decided to change the board, Air Products would bid again. Ex. 1077

at 4. That Huck has admitted that Air Products litigation-driven best and final offer is really

not best and final is understandable given that Airgas fills a major missing hole in Air Products

U.S. business model. Supp. Tr. 77 (Davis).

In short, the Airgas Board has reasonably concluded that Air Products needs Air-

gas, and that accordingly best and final likely means nothing more than best and final for

now. 17 And if there were any doubt about the reasonableness of that business judgment, it

would be erased by history: this would not be the first time that a hostile bidder came back with

a higher offer after being rebuffed by the target board at what was nominally its best price. As

DeNunzio advised one of the Airgas directors, regarding the strikingly similar situation involv-

17 The Airgas Boards skepticism that $70 represents Air Products best and final is not sur-prising given that, prior to the October trial, Huck and McGlade had publicly stated, more than

once, that Air Products would not bid against itself or raise its offer price in the absence of com-peting bidders, but it nonetheless twice proceeded to do so, raising the price from an original $60to $65.50. Supp. Tr. 49 (Huck), Supp. Tr. 127-28 (McGlade); see also, e.g., Ex. 309 at 1, Ex.322 at 1.


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ing CFs bid for Terra Industries: [S]urprise, surprise. The original bidder came roaring back

with a much higher proposal that was, you know, much more than nickels and dimes. Supp. Tr.

328-31. There are indeed numerous examples of a bidder making a best and final offer and

then making another offer at a higher price. Exs. 1001A-F.

Target Bidder Best& Final

Offer

Subsequent

Offer

% Change

CablevisionSystems Corp.

Dolan FamilyGroup

1/12/2007 5/2/2007 20.9%$30.00 $36.26

Vincor Interna-tional, Inc

ConstellationBrands, Inc.

11/28/2005 4/3/2006 10.6%$33.00 $36.50

PeopleSoft, Inc. Oracle Corp. 11/1/2004 12/13/2004 10.4%$24.00 $26.50

For all of these reasons, and because the Board in the exercise of its business

judgment with advice from qualified independent advisors has concluded that Airgas is worth at

least $78 per share in a sale, the Airgas Board has reasonably concluded that the $70 Air Prod-

ucts bid represents a threat.

D. The Airgas Boards response is reasonable in

relation to the threat posed.

The evidence at the supplemental hearing demonstrates that the proportionality

prong ofUnocalhas been met as well. The Boards actions have done nothing more than pre-

vent a sale at an inadequate price and allowed Airgas to pursue its pre-existing plan to max-

imize shareholder value while leaving the door open for a sale at the right price. And the

Board has done nothing to change the company. And assuming that Air Products is not willing

to make an offer that would be attractive to the current directors, Air Products can appeal directly

to the shareholders and, with a 67% vote at either a special meeting or at an annual meeting, re-

move the entire Board.


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1. The Board is willing to sell.

The Airgas Boards maintenance of the companys existing defenses in response

to Air Products $70 inadequate offer is within the range of reasonableness because the Airgas

Board is willing to sell the company. Airgas Post-Trial Br. 83-84. Airgas directors have not

forsworn a sale, and do not seek to entrench themselves; rather, they have discussed repeatedly

their willingness to sell and would embrace a sale at a full and fair price. Indeed, as previously

noted, the Airgas Board tried to sell the company in 2008. Airgas Pre-Trial Br. 5-6; Airgas Post-

Trial Br. 83-84; Tr. 519, 532-35 (Thomas); Tr. at 621-29 (McCausland).

The supplemental hearing testimony confirms that the continuing Airgas directors

remain willing to sell but, again, only at a full and fair price. Airgas Post-Trial Br. 83-84;

Supp. Tr. 217 (McCausland) (Q. Mr. McCausland, are you opposed to a sale of Airgas? A. Ab-

solutely not.). And of course, the new directors embrace a sale at a full and fair price as well.

Supp. Tr. 171 (Miller) ([I]f the price offered is a value that the board believes is worth selling

the company, the company will be sold. Forget the pill.).

The Airgas Boards willingness to do a deal with Air Products is demonstrated by

the Airgas Boards October 26 and November 2 letters, which culminated in the November 4

meeting between the companies. Exs. 646, 651. At the urging of the new Airgas directors, Air-

gas met with Air Products without preconditions. Ex. 650; Supp. Tr. 118-19 (McGlade); Supp.

Tr. 192 (McCausland). Airgas and Air Products had a constructive meeting and made their re-

spective cases on valuation. Exs. 1013, 1014; Supp. Tr. 192-96 (McCausland).

Airgas left the meeting with a feeling of optimism about the negotiations.

Supp. Tr. 192, 199 (McCausland). Van Roden called Davis the next day to continue the discus-sions and go over the key valuation assumptions, and Davis said, I read you loud and clear.

Ex. 1015; Supp. Tr. 84 (Davis). Davis expected that Air Products would get back to Airgas after

its Board met the following week. Supp. Tr. 85-86 (Davis). And van Roden called Airgas di-


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rectors to let them know he thought there had been a breakthrough. Supp. Tr. 166 (Miller). Ne-

gotiations ended only after Air Products made the false accusation that the meeting was a cha-

rade. Ex. 1018; Ex. 655.

For this reason too, the Boards maintenance of the companys exist-

ing defenses is well within the range of reasonableness and its business judgment should be res-

pected.

2. The effect of the Boards actions is to require Air Products to

proceed in accordance with the companys pre-existing

corporate governance structure, a structure that is authorized

by Delaware law.

The reasonableness of Airgas response to the $70 offer is confirmed by the fact

that all the Airgas Board is doing is relying on a corporate governance structure that has been in

place for decades. Every piece of this liberal governance regime is authorized by Delaware law.

Airgas Post-Trial Br. 77-78; Dec. 10 Airgas Supp. Br. 1-3; Dec. 21

Airgas's Brief

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