Lyondell Chemical Co. v. Ryan, Del. Supr. (March 25, 2009), read opinion here. See revised opinion of April 16, 2009 here. The Delaware Supreme Court rendered this unanimous en banc decision last evening. It was much anticipated in the corporate law world and in the few hours since its release it has already generated substantial commentary among corporate law professors and similar commentators.
Kevin Brady, a highly respected Delaware litigator, has provided us with the following review of the opinion:
In its decision on an interlocutory appeal, Delaware’s High Court reversed the Court of Chancery’s July 29, 2008 decision denying summary judgment for the directors of Lyondell Chemical Company (“Lyondell”) as to the “Revlon” and “deal protection” claims and whether the directors of Lyondell acted in good faith in conducting the $13 billion sale of Lyondell.
The class action complaint alleged that the Lyondell directors breached their fiduciary duties of care, loyalty and candor and put their personal interests ahead of the interests of the Lyondell shareholders. In particular, the complaint alleged that: (i) the merger price was grossly insufficient; (ii) the directors were motivated by self-interest; (iii) the process by which the merger was negotiated was flawed; (iv) the directors agreed to unreasonable deal protection provisions and (v) the preliminary proxy statement omitted numerous material facts. By way of background, the merger price represented a substantial premium over the market price and the merger was approved not only by a disinterested board but also by more than 99% of the voted shares.
Lyondell’s charter contained an exculpatory provision pursuant to 8 Del. C. § 102(b)(7), protecting the directors from personal liability for breaches of the duty of care, so the case turned on whether there were any shortcomings on the part of the directors to implicate their duty of loyalty, a breach of which is not exculpated. Because the Court of Chancery had found that the board was independent and was not motivated by self-interest or ill will, the focus became whether the directors were entitled to summary judgment on the claim that they breached their duty of loyalty by failing to act in good faith.
Court of Chancery Focuses on Process and Deal Protection Provisions
The Court of Chancery rejected all of the plaintiffs’ claims except those directed at the process by which the directors sold the company and the deal protection provisions in the merger agreement. In particular, whether under Revlon v. MacAndrews & Forbes Holdings, Inc. (506 A. 2d 173, 182 (Del. 1986)), the directors failed to obtain the best available price in selling the company. The Court of Chancery decided that “unexplained inaction” by the Lyondell directors for two months permitted a reasonable inference that the directors may have consciously disregarded their fiduciary duties. The Supreme Court disagreed finding that there was no evidence from which to infer that the directors knowingly ignored their responsibilities, thereby breaching their duty of loyalty.
Justice Carolyn Berger writing for the Court examined the concepts of “bad faith” and “failure to act in good faith” as well as the range of conduct that might be classified as such in light of existing Delaware case law. See, In re Walt Disney Co. Deriv. Litig. (906 A. 2d 27 (Del. 2006)), Stone v. Ritter, (911 A. 2d 362 (Del. 2006) and In re Caremark Int’l Deriv. Litig. (698 A. 2d 959 (Del. Ch. 1996). While the Court of Chancery had denied summary judgment in order to obtain a more complete record before deciding whether the directors had acted in bad faith, the Supreme Court determined that the trial court “reviewed the existing record under a mistaken view of the applicable law.” The Supreme Court went on to note that there were three factors that contributed to that mistake: (i) the Court of Chancery imposed Revlon duties on the directors before they either decided to sell, or before the sale had become inevitable; (ii) the Court of Chancery read Revlon and its progeny as creating a set of requirements that must be satisfied during the sale process; and (iii) the Court of Chancery “equated an arguably imperfect attempt to carry out Revlon duties with a knowing disregard of one’s duties that constitutes bad faith.”
When Exactly Do Revlon Duties Arise?
In analyzing Revlon and its progeny, the Court of Chancery determined that the directors must actively engage in the sale process, and confirm that they have obtained the best available price either by conducting an auction, a market check or demonstrating “an impeccable knowledge of the market.” The Court of Chancery concluded that because the Revlon sale process must follow one of the these courses of conduct identified above and that the Lyondell directors had not followed any of the standards that the Court of Chancery extracted from Revlon and its progeny, the directors were unable to meet their burden under Revlon.
The Supreme Court disagreed noting that the problem with the Court of Chancery’s analysis was that Revlon duties arise not because a company is “in play” (such as in this case where there was a Schedule 13D filing) but rather when the company “embarks on a transaction – on its own initiative or in response to an unsolicited offer – that will result in a change of control.” In this case, that was when the Lyondell directors began negotiating the sale of Lyondell. The Supreme Court further noted that “there is no legally prescribed steps that directors must follow to satisfy their Revlon duties” and that the Lyondell directors failure to take any specific steps during the sale process could not have demonstrated a “conscious disregard of their duties.”
The Supreme Court concluded that the Court of Chancery “approached the record from the wrong perspective. Instead of questioning whether disinterested, independent directors did everything that they (arguably) should have done to obtain the best sale price, the inquiry should have been whether those directors utterly failed to attempt to obtain the best sale price.” Finding that the record clearly established that the Lyondell directors did not breach their duty of loyalty by failing to act in good faith, the Supreme Court reversed the decision of the Court of Chancery and remanded the matter for entry of judgment in favor of the Lyondell directors.
SUPPLEMENT: Professor Stephen Bainbridge provides a scholarly analysis here. Dean and Professor Eric Chiappinelli provides his learned overview of the case here. Professor Gordon Smith gives us the benefit of his professorial insights here. Attorney Bernard Sharfman of the Cohen Milstein firm has written a thoughtful article that includes a discussion of this case here.
Some of the extensive commentary on the trial court’s opinion is collected here.