Air Products and Chemicals, Inc., lost two groundbreaking battles during the hostile takeover bid for rival specialty gas maker Airgas, Inc., that it launched in October 2009. The first was a direct attack on the poison pill: The bidder argued that the vaunted takeover defense strategy, invented by Martin Lipton of Wachtell, Lipton, Rosen & Katz, can be used for only a limited time frame. Foiling this attack generated splashy headlines—”Wachtell Saves Marty’s Baby”—but it was always a bit of a sideshow because Wachtell, which defended the target Airgas on every front, never thought that the result was in doubt.

Instead, the key to the outcome of the takeover bid was Air Products’s sneakier bylaw strategy. Advised by Cravath, Swaine & Moore, the bidder proposed a bylaw allowing Airgas shareholders to hold two annual meetings in the space of four months. Arcane though it seems, approving such a bylaw would be just as devastating for targets like Airgas. It would allow shareholders favoring the Air Products bid to quickly gain control of Airgas’s board—by voting in two new blocs of directors inclined to support the deal. Wachtell’s Daniel Neff—who as Airgas’s chief corporate adviser supervised his partners’ litigation strategy—knew that the bylaw battle would be desperately close.

In late October 2010 Neff’s back was to the wall. The Delaware Chancery Court had approved the accelerated-meeting bylaw, and observers were betting that Wachtell would lose its appeal. Arbitrageurs favoring the deal by now owned a majority of the company’s shares. Air Products was bidding at a premium to Airgas’s share price, and Airgas had no strategic alternatives that might justify rejecting the bid.

Neff, who also serves as cochairman of Wachtell’s executive committee, boldly counseled Airgas not to pursue a white knight acquiror. Rather, he advised Airgas to argue forthrightly that the bid undervalued the company—and that a director is justified in rejecting a bid for that reason alone. Amazingly, Airgas’s advisers were able to bring around the three new directors, even though they were voted in by supporters of the deal, and to persuade them that a bid of $70 per share undervalued the company. Neff insisted that Airgas’s stock was depressed only because its recovery lagged behind that of the general economy. (The directors’ faith was rewarded when the stock price hit more than $80 per share early this year.)

On appeal, Wachtell convinced the Delaware Supreme Court in November 2010 that the accelerated-meeting bylaw ran counter to the traditionally accepted understanding of staggered directors’ terms in the charter language of Delaware corporations. Then, as Wachtell expected all along, the Delaware chancellor ruled in February 2011 that the poison pill is not a mere carton of milk with a limited shelf life, and that by deploying the pill to repel the bid, Airgas’s directors had fulfilled their duties “quintessentially.” Air Products shortly withdrew its bid, and admitted defeat in the 16-month battle. Neff maintains that Wachtell saved a great company, as well as 3,000–4,000 jobs that he says would likely have been needlessly cut in the name of synergy.

Airgas founder and CEO Peter McCausland calls Neff and his team “wonderful counselors and incredible lawyers,” and praises them for not straitjacketing him as a manager during the ordeal. “I’m very critical of the litigation system in this country,” he adds, “and I don’t throw around compliments easily.”

Neff, who was honored in this space in 2001 for a range of five remarkable deals in five separate industries, calls Airgas the most challenging of his 35-year career. It was a combination of the length of the battle, he says, and the difficulty of combating a bid after most of the company’s shares were bought up by hedge funds pursuing an arbitrage strategy and betting on completion of the deal. In many cases, Neff believes, arbitrageurs root for an acquisition because they suffer from a shorter-term time horizon than experienced managers.

“If a company as good as Airgas could be taken over at a lowball price,” he argues with the faith of a true believer, “then performance would no longer matter. It would simply be a matter of making sure that shareholders with a short-term perspective come to control the share register.”

For Neff, the lesson of Airgas is not just that the poison pill is here to stay—but that it’s here to stay with good reason.

Deal In Brief

Airgas Defense

Value  Withdrawn

Firm’s Role  Target’s Counsel