The hostile siege of Airgas Inc. developed into one of the most dramatic takeover struggles in recent years and produced the most important Delaware ruling on the use of the poison pill since the mid-'90s. Chancellor William B. Chandler III of Delaware's Court of Chancery reluctantly endorsed the Airgas board's use of the pill to thwart a hostile bid from Air Products and Chemicals Inc. in a long opinion that reviewed the case law and policy arguments for and against the controversial pill.

But the maneuverings of the various parties in the battle for Airgas also brought to the surface an obscure provision of Delaware's corporate law: Section 203. Neither Chandler's opinion nor the various briefs gave much consideration to 203, which might have posed an important obstacle to the Air Products bid had the judge ordered Airgas to redeem its pill. Although Chandler's pill decision eliminated any role for Section 203 in the Airgas bid, the outcome still cast a light on this seeming anachronism of Delaware law.

Section 203 generated impassioned debate when it was enacted in 1988, then quickly turned into an afterthought. The history of 203 shows how seemingly weighty questions of corporate law can quickly become irrelevant as companies find ways to maneuver around it to achieve their objectives.

Like the pill, Section 203 is designed to prevent a prospective bidder from taking over a company without the approval of its board. But while the pill allows the target to issue new shares to every shareholder but the bidder, Section 203 bars a publicly held Delaware corporation from combining with any entity that owns 15% or more of its stock for three years unless the acquirer steps up to buy at least 85% of the shares not held by employees or directors.

The enactment of Section 203 was a response to the hostile takeover wave of the '80s. Delaware's legislature usually rubber-stamps changes to the state's corporate code proposed by a committee of Wilmington lawyers, but lawmakers couldn't duck a question that trapped them between corporate America's desire for protection from corporate raiders and Washington's free-market bent.

Officials from the Reagan administration and Joseph Grundfest, then a commissioner of the Securities and Exchange Commission, argued that Delaware shouldn't interfere with the market for corporate control by adopting a statute that would interfere with a bidder's ability to make a tender offer under federal securities laws.

On the other side, Wachtell, Lipton, Rosen & Katz's Martin Lipton, the staunchest defender of the pill, which he invented, and a skillful practitioner of corporate defense, predicted that Delaware corporations would flee for other jurisdictions unless Delaware acted.

Not wanting to lose the tax revenue that Delaware corporations provide, the Delaware legislature enacted Section 203, which helped appease the corporate base even though it wasn't as aggressive as anti-takeover statutes adopted by some other states.

"A primary motivation for the Delaware bar in proposing, and the Delaware legislature in passing, Section 203 was to appease Delaware's customers," wrote Guhan Subramanian, a professor at Harvard Law and Business schools, in a recent study of 203, which he and his co-authors argue has provided a significant, if little-appreciated, takeover deterrent. "Corporate management and corporate directors were clamoring for protection against hostile bidders, and Delaware delivered Section 203 in order to avoid an exodus from the state."

Despite that, Section 203 soon became a dead letter. Because poison pills have the same practical effect as 203, they have remained the focus of Delaware corporate practice and case law, while 203 became such an afterthought that it's never generated a significant judicial decision.

While the pill allows a target to dilute the bidder's stake to below the threshold provided for in the pill -- usually 15% or 20% -- Section 203 is more complicated. A bidder could quite possibly fail to meet the requirement that it step up to buy at least 85% of the shares not held by employees or directors.

This has to occur as part of the same deal in which the bidder crosses 15%, as
in a tender offer. The bidder may still close on its tender offer with less than 85% and then attempt to complete an acquisition, but in practice that almost never happens.

The law does not apply in two situations. First, the target board may approve the 15% acquisition or the business combination before a bidder crosses the 15% threshold. Second, 203 becomes moot after a 15% acquisition if the target board and two-thirds of the shares not owned by the acquirer approve.

Thus 203 strongly encourages a hostile bidder to negotiate with the target board, since very few bidders can be sure of winning tenders for 85% and most acquirers don't want to tie up their capital in an asset they cannot take full control of for three years. Indeed, the financing conditions on most hostile bids require the target to waive Section 203.

All of this exists mostly in the realm of the theoretical because the poison pill is the more immediate problem for a bidder. Either the bidder and the target strike a friendly deal and the target pulls its pill and waives 203, or the bidder abandons its offer.

Had Air Products succeeded in persuading the Delaware courts to force Airgas to redeem its pill, the theoretical might have become real. Since there was no case law on the issue, it wasn't even clear how Chandler would have analyzed Airgas' reliance on 203 as a takeover defense after redeeming its poison pill.

Still, the parties spent little time on the issue in their final briefs to Chandler. Cravath, Swaine & Moore LLP, Air Products' counsel, referenced 203 only a few times in a 48-page brief. Cravath argued that Chandler should evaluate 203 as part of Airgas' total array of takeover defenses.

Cravath also quoted a memo to clients that Wachtell Lipton, the counsel to Airgas, issued in 2009. "A board's decision whether or not to waive Section 203 is subject to its fiduciary duties," Wachtell Lipton partner Eric Robinson wrote in a harsh response to Subramanian's study. "In any situation where fiduciary duties might compel a board to redeem a rights plan," Robinson added, "they would also likely compel a board to waive Section 203's waiting period."

Wachtell Lipton seemed to concede the point in its brief but added a footnote that alluded to Airgas' plight. The law firm cited a paper in which A. Gilchrist Sparks III, a partner at Morris, Nichols, Arsht & Tunnell LLP in Wilmington, wrote, "Boards in the past 20 years frequently have negotiated with bidders to achieve the best result attainable in those circumstances where it appeared that an unsolicited offer would ultimately achieve an 85% threshold."

People close to the situation thought that Air Products might well have reached the 85% threshold in a tender offer and thus mooted 203 had Airgas been forced to pull its pill. (Airgas insiders own about 10% of the company, so Air Products would have had to get about 74% of Airgas' total equity float.) Air Products would likely have conditioned its tender offer on acquiring a majority of Airgas stock, and had it met that requirement, most of the rest of Airgas' shareholders would have tendered as well.

But there was the possibility that Air Products would have gotten less than 85% in a tender for Airgas, leaving the bidder holding a large stake in Airgas but unable to complete a transaction without the board's approval.

Even if that fact pattern was novel, similar situations are common. For example, controlling shareholders must often negotiate with a target board to buy out the public float in a company.

"People have always been willing to take large minority positions or come up against statutes that inhibit their range of action," says Charles Nathan, counsel at Latham & Watkins LLP in New York. "Everybody's in a bad position, and you negotiate. It's not a good thing for the shareholders to be hung up, and if the 203 bidder is making a reasonably attractive offer, he'll get a deal."

That solution would then turn out to be the same as the easiest way to defeat a poison pill: Offer more money. However tangled the corporate law may be, showing enough money nearly always provides the solution.