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Airgas Wins Ruling Invalidating Annual-Meeting Bylaw

Airgas Inc. won an appeals court ruling that may derail a $5.5 billion hostile takeover bid from Air Products & Chemicals Inc., which has been pursuing the industrial-gas company for more than a year.

The Delaware Supreme Court ruled today that Airgas shareholders can’t force the board of directors to hold the next annual meeting in January, just four months after the 2010 meeting. Air Products aimed to use that meeting to replace three Airgas directors with its own nominees and take control of the largest U.S. distributor of packaged gases.

The state’s highest court concluded a bylaw changing Airgas’s annual meeting date improperly shortened the terms of directors on the industrial-gas supplier’s staggered board. Analysts said the ruling may cause Air Products to drop its $65.50-a-share bid.

“The first concern is that Air Products walks away,” Louis Meyer, a New York-based analyst at Oscar Gruss & Sons who rates Airgas a “hold,” said in telephone interview. “This situation is getting old, and old deals sometimes die before they reach the finish line.”

The ruling extends by about nine months the time it would probably take for Air Products to replace a majority of the Airgas board.

Continuing the fight through Airgas’s next annual meeting, which could take place next October, would make it the longest U.S. hostile takeover in at least a decade, surpassing Oracle Corp.’s 556-day hostile pursuit of PeopleSoft Inc., according to data compiled by Bloomberg of bids worth more than $1 billion.

Shares Fall

Airgas fell $3.90, or 5.9 percent, to close at $62 in New York Stock Exchange composite trading. The shares had risen 38 percent this year before today. Air Products fell 93 cents, or 1.1 percent, to close at $84.57 on the NYSE.

“Today is a victory for Airgas shareholders,” Airgas Chief Executive Officer Peter McCausland said in an e-mailed statement. “The Supreme Court’s ruling maintains the balance of bargaining power that Delaware companies with staggered boards have always expected.”

"We are disappointed’’ by the ruling, Air Products said in a statement. “Airgas shareholders have been disenfranchised and have lost hundreds of millions of dollars in market value as a result."

Mark Gulley, a New York-based analyst at Soleil Securities who rates Airgas shares ‘‘hold,’’ said the companies may still negotiate a friendly deal. Air Products ‘‘won’t just fold up their tent’’ as a result of the adverse ruling, Gulley said in a telephone interview.

Too Low

Officials of Radnor, Pennsylvania-based Airgas have repeatedly rejected Air Products’ bid of $65.50 a share as too low. Air Products, based in Allentown, Pennsylvania, is the second-biggest U.S. industrial-gases producer behind Praxair Inc.

An Airgas board member said in a letter included in a regulatory filing Nov. 2 that company officials think the firm is worth at least $78 a share. In a reply letter, Air Products officials estimated that Airgas was worth less than $70 a share.

Airgas’s lawyers failed to convince Delaware Chancery Court Judge William B. Chandler III at an October trial that shareholders erred by voting in favor of the Air Products-backed bylaw changing the company’s meeting date to January.

Investors also voted at the September meeting to add three Air Products nominees to Airgas’s staggered board. Under that system, created to make takeovers more difficult, only some directors are up for election at one time. The defense drags out the process of winning control of a targeted company’s board.

Airgas Appeal

On appeal, Airgas argued that Chandler misread Delaware’s corporate statutes in finding that there is no bar to shortening the interval between annual meetings, and said the ruling undercuts the staggered-board defense.

Air Products’ attorneys countered in their appeal filings that investors have the right to approve corporate bylaws and nothing in Delaware law requires a 12-month interval between annual meetings.

The Supreme Court found that the bylaw change improperly shortened Airgas director’s terms and the measure was ‘‘inconsistent” with the company’s charter.

“In substance, the January Bylaw so extremely truncates the directors’ term as to constitute a de facto removal that is inconsistent with the Airgas Charter,” Justice Henry DuPont Ridgely said in the 23-page ruling.

Chandler still must rule on whether Air Products’ challenge to Airgas’s so-called poison-pill takeover defense is legitimate.

Poison Pill

The pill is designed to make a takeover prohibitively expensive by letting existing shareholders buy stock at a discount when a hostile bid is made. Delaware courts have found such defenses to be proper unless used to restrict directors’ power to consider buyout offers, said Paul Regan, a Widener University law professor who specializes in Delaware corporate cases.

Today’s ruling makes clear that if a director on a staggered board is elected to a three-year term, “he’s going to serve 36 months or pretty darn close to that,” Regan said.

‘Too Clever’

The Supreme Court decision is not likely to change takeover tactics among investors, said Charles Elson, a University of Delaware finance professor and director of the school’s John L. Weinberg Center for Corporate Governance.

Air Products’ attempt to use a change to an acquisition target’s bylaws to gain control was unusual, Elson said.

“I guess the Supreme Court thought it was a little too clever,” he said.

Airgas’s appeal was handled by New York’s Wachtell, Lipton, Rosen & Katz LLP and Wilmington, Delaware-based Potter Anderson & Corroon LLP. New York’s Cravath, Swaine & Moore LLP and Wilmington’s Morris, Nichols, Arsht & Tunnell represent Air Products.

Airgas’s bankers are Bank of America Corp. and Goldman Sachs Group Inc. Air Products is using JPMorgan Chase & Co. and Perella Weinberg Partners LP.

The case is Airgas Inc. v. Air Products & Chemicals Inc., 649-2010, Delaware Supreme Court (Dover). The lower-court case is Airgas Inc. v. Air Products & Chemicals Inc., 5817, Delaware Chancery Court (Wilmington).

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