The poison pill litigation in Air Products and Chemicals Inc.'s (NYSE:APD) bid for Airgas Inc. (NYSE:ARG) has obscured another potentially important factor in the situation's outcome: Delaware General Corporation Law §203. That provision may complicate the bid even if Air Products wins the litigation before Chancellor William B. Chandler III (pictured) in Delaware's Court of Chancery.

Enacted by the Delaware legislature in 1988 during a wave of hostile takeovers, the provision acts as an anti-takeover device in the following way: The statute 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. This has to occur as part of the same deal in which it crosses 15%, as in a tender offer. (Airgas insiders own about 10% of the company, so Air Products would have to get to about 75% of Airgas's total equity float.) The bidder may still close on its tender offer with less than 85% and attempt to complete an acquisition thereafter.

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. Also, 203 becomes moot after a 15% acquisition if the target board and two-thirds of the shares not owned by the acquirer approve.

The law strongly encourages a hostile bidder to negotiate with the target board, since very few bidders can be confident of winning tenders for 85% of a target's stock and do not want to tie up their capital in an asset they cannot take full control of for three years.

Thus, 203 acts as a takeover defense to a hostile bid if a target board opts to rely on it. However, 203 is rarely outcome-determinative. Either the board drops its pill, waives out of 203 and negotiates a friendly deal with the bidder, or the board and on occasion shareholders continue to oppose the bid and the bidder drops its offer.

Airgas, like many targets, has the protection of both 203 and its poison pill. If Chandler orders Airgas to pull its poison pill and the Delaware Supreme Court affirms -- an outcome that is possible but far from certain -- then Airgas may have recourse to 203. Since 203 is a legislatively approved takeover device rather than one implemented by a target board, such as the pill, a Delaware court may show even greater deference to a board's reliance on 203 in thwarting a takeover bid than to its use of the pill for that purpose.

So even if it wins the pill case, Air Products would face three possibilities. To effect a takeover in short order, it would have to persuade the Airgas board to waive out of 203 -- a very unlikely outcome given the board's steadfast opposition -- or would have to gain at least 85% of the Airgas shares held by disinterested holders (about 75% of the total), a high threshold. Alternatively, Air Products could close a tender offer for Airgas and try to take over the company subsequently via a proxy contest or negotiated transaction, though the situation almost never comes up, so it's hard to handicap how it would play out.