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Legal Analyses and Theories on Offensive and Defensive Measures in Air Products & Chemicals, Inc. v. Airgas Inc. Takeover

Effectiveness and legality of takeover and anti-takeover measures are sometimes uncertain due to imperfect legislation in China. This paper is an attempt to find and suggest practical takeover and anti-takeover strategies under Chinese law through analyzing a case between Air Products & Chemicals, Inc. (“Air Products”) and the target company Airgas Inc. (“Airgas”).
Airgas had a nine-member, three-class staggered board according to Article 1, Section one of its charter. Each class of the board served a term of three years. “The term of office of a director shall be stipulated by the company’s articles of association, but each term of office shall not exceed three years.” Article 46, Company Law of the People's Republic of China (“Company Law”).   Clearly, Company Law does not prohibit a staggered board and the mere requirement on the board is its term. Here, the term of each class of the Airgas board was three years. Therefore, Airgas’s staggered board complied with Company Law. This means that even if Air Products could acquire the majority shares of Airgas, Air Products had to wait two years before it could actually control the board. Accordingly, staggered board is an effective way to make a hostile takeover attempt more difficult in China. 
Airgas’s charter required an affirmative vote of at least 67% of the voting power of all shares to change the staggered board provision in the charter, or to adopt any bylaw inconsistent with that provision. It was unlikely for Air Products to change the charter, so they proposed a bylaw in Airgas’s annual meeting in September 2009, in an attempt to reschedule Airgas's next annual meeting on January 2010 and reduce the full term of incumbent directors by eight months. “The annual meeting of the shareholders general assembly shall be convened once a year.” Article 101, Company Law.  Rules for the General Meetings of Shareholders of Listed Company Article 4 more specifically provides: “[t]he sessions of the general meeting of shareholders can be divided into annual sessions and temporary sessions. The former shall be held once every year within 6 months upon conclusion of the previous accounting year.”  Here, since its fiscal year ended on March 31, Airgas’s 2010 annual general meeting must be held between April 1 and September 31, 2010. Air Products’ proposal of the annual general meeting was on January 2010, three month earlier than the mandatory range of time. As a result, a court would probably find Air Products’ bylaw proposal invalid. III.    POISON PILL
Airgas adopted a poison pill to entitle all its shareholders except Air Products to buy new shares at a discount, so as to dilute the share of Air Products when its holding reached 15% or more.  “The directors, supervisors and senior managers of an acquired company shall fulfill the loyalty and diligence obligations, and treat all acquirers fairly. The decisions and measures of the target company’s directorate shall be conducive to maintaining the interests of the company and shareholders. The directorate shall not abuse the authority to set unnecessary barriers to the acquisition, use the company’s resources to provide financial aid in any form to the acquirers, or damage the lawful rights and interests of the company and shareholders. ” Article 8, Administration Measures on Takeover of Listed Companies.   In the present case, although Airgas board was allowed to use poison pill, the pill might constitute “unnecessary barriers,” which is not defined by law. However, Company law Article 127 relevantly provides: “shares shall be issued in compliance with the principles of fairness and impartiality. Shares of the same class must carry the same rights. Shares of the same class issued at a time shall be issued on the same conditions and at the same price. All units and individuals shall pay the same price for each of the share they subscribe for.”  In this case, Airgas must treat Air Products and other shareholders equally, since they held the same common stock. In other words, Airgas must not exclude Air Products from buying new shares at a discount. Thus, a court was likely to find Airgas violated Security Law and the pill should be redeemed. 

Airgas charter stipulated that shareholder owning 20% or more of the outstanding voting power of Airgas would be defined as an “Interested Stockholder.” Merger with “Interested Stockholder” required the approval of 67% or more of the voting power of the outstanding shares entitled to vote. Company Law Article 44 provides: “[r]esolutions made at a meeting of the shareholders assembly… on the merger… shall be subject to adoption by the shareholders representing two-thirds or more of the voting rights.”   The supermajority merger vote of 67% in Airgas’s Charter complies with “two-thirds or more” requirement of Company Law and therefore it is valid.

Airgas could impose certain conditions on the nomination of directors. Company Law Article 147 sets forth five circumstances under which people cannot be a director, but it does not specify any qualification required to become a director.   Thus, it was legal for Airgas to put a clause in its charter requiring a candidate to meet certain conditions to become a director, such as holding a number of shares or having been serving Airgas for a number of years. These limits could effectively block Air Products’ nomination of unqualified candidates to Airgas’s board.
When Air Products’ CEO and President John McGlade privately approached Airgas’s founder and CEO Peter McCausland to talk about the takeover, Air Products was on the right track.  “A listed company may be taken over by offer or by agreement.” Article 78, Securities Law of the People’s Republic of China.  Another related law Administration of the Takeover of Listed Companies Procedures Chapter IV sets forth detailed contractual merger procedures.   Thus, it was practical for Air Products to pursue a friendly merger through negotiation with Airgas’s board.
During the negotiation of the contractual merger, Air Products could consider a compensation plan for those departing directors and officers of Airgas, especially for Mr. McCausland, who founded Airgas in 1982 and has been President and CEO since 1987. Without a highly attractive severance pay,  Mr. McCausland and his team would always wage an all-out war to fight against any greedy eyes on control and entrench themselves at Airgas. However, shareholders have the authority to determine the salary and remuneration of directors and officers. Article 38, Company Law.   Shareholders might veto the directors and officers compensation plan if they could not get satisfactory premium themselves.
In conclusion, while staggered board, supermajority vote provision and qualification requirements on directors could be powerful defensive devices for Airgas, friendly negotiation and good compensation plan could be effective takeover measures for Air Products. On balance, I tend to think that either side could win the takeover battle if they adopted right takeover measures and strategies under Chinese law.

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