Ryan v. Lyondell is a major Chancery Court decision issued about a month ago that has generated a substantial amount of commentary by experts and practitioners alike. A summary of the case and commentary by Professors Ribstein and Bainbridge are compiled here.
The newest development in this case came by means of a letter decision of the Chancery Court on August 29, 2008, here, in which the Court denied the interlocutory appeal by the defendants, but did, however, dismiss Lyondell as a nominal defendant.
There is so much to write about this important decision which clarifies and confirms the prior opinion, compared with the limited time I have today, that for now I will just highlight a few key "bullet points".
- The Chancery Court emphasized that: "the reports of the death of Section 102(b)(7) (and the consequent possibility for the "resuscitation" of a Van Gorkom-esque liability crisis) in Delaware law are greatly exaggerated both with regard to the application of Lyondell’s exculpatory charter provision in this case, and certainly with regard to the application of a Section 102(b)(7) provision defense in any other case." (my italics)
- The Court went out of its way to repeatedly emphasize the restricted procedural posture of its decision and the circumscribed nature of the meager–and by definition incomplete–record in the context of the summary judgment motion that was presented. (see, e.g., footnotes 13 and 14.)
- The Court emphasized the following five facts that were key to its conclusion:
- The directors knew that the company was "in play" (although noting that the filing of a Schedule 13D will not always trigger Revlon duties.)
- According to the Court, the directors did little or nothing to develop a strategy pursuant to Revlon to maximize shareholder value in connection with the possible sale of the company.
- The Court held that the directors did little or nothing pre-signing to confirm that a better deal could be obtained.
- The directors, the Court held, did little or nothing to negotiate the offer they did receive.
- The directors, in the Court’s view, did little or nothing post-signing to verify that a better deal could have been obtained.
The Court went to great lengths to explain why it did not conflate the duty of care with the duty of good faith component of the duty of loyalty. One might write an entire law review article based on the court’s explication of the finer points of these concepts but for now I can only refer you, for example, to footnotes 26 to 33 and related text. Footnote 26 provides in part as follows:
"the Court decided that there were material fact questions that raised an issue of whether the directors’ failure to act in the face of a known duty to act amounted to something more than a simple violation of the duty of care (i.e., gross negligence). In other words, this is an instance where issues of care and loyalty (good faith, in this context) bleed together under the facts presented in the summary judgment record, and, therefore, the Court was unable to ascertain, at least at this point, the ultimate effect of Lyondell’s exculpatory charter provision in this context. The Court was careful to explain, however that, ultimately, a determination that the directors’ failed to act in “good faith” could result in liability only because in that instance the directors will have violated their duty of loyalty. Opinion at 54-56. Thus, the Court did not conflate good faith into a theory that would result in legal liability for a breach of only the directors’ duty of care, notwithstanding a Section 102(b)(7) charter provision. Unfortunately, at this preliminary stage of this case, it is difficult to frame the issue in a manner that does not, to some extent, track closely with those facts suggesting only an apparent failure to act with appropriate care; it remains to be seen whether the directors’ acts (or failure to act) reach into the realm of non-exculpable bad faith. See, e.g., Desimone v. Barrows, 924 A.2d 908, 935 (Del. Ch. 2007)."
At pages 12 to 14 of the letter decision, the court described the "three points in the spectrum of fiduciary conduct deserving of the "bad faith" pejorative label". The Court’s description could be the topic of an entire separate article.
Another key point: the Court explained that: "when one views the totality of the directors’ conduct on this record, that leads the Court to question whether they [the directors] may have disregarded a known duty to act and may not have faithfully engaged themselves in the sale process in a manner consistent with the teachings of Revlon and its progeny." ( Slip op. at page 19).
There is so much more in this decision that is "red meat for the cage" of any (non-vegetarian) lawyer that wants to, or needs to, know about this area of the law, I regret that I don’t have time to add more today, but I will leave one last quote.
- The Court made clear that the defendants’ : "interpretation of the Opinion—that they have been “deprived” of the protection of the Company’s exculpatory charter provision—is not only inaccurate, but, in fact, the Court stated repeatedly throughout the Opinion that on a more developed factual record the directors may very well either prevail on the merits of Ryan’s Revlon claims or, alternatively, on their Section 102(b)(7) defense. (my bold)
Also, importantly, the Chancery Court did agree to a stay of its decision pending a decision by the Delaware Supreme Court about whether to accept the appeal.
SUPPLEMENT: As they used to say in some Western movies, "the reinforcements are arriving". We are fortunate to have the expert insights of several law professors who have already provided their learned commentary about this case. Professor Larry Ribstein weighs in here, and Professor Gordon Smith adds to his previous commentary on the case here. Professor Eric Chiappinelli (also Dean of the Creighton University Law School) analyzes the case here.
SUPPLEMENT II: Broc Romanek on his DealLawyers.com Blog highlights the case here.
POSTSCRIPT: The Wall Street Journal’s online edition here listed my post among the "top legal stories around the web".