The Supreme Court of Delaware announced its much anticipated decision in Lyondell Chemical Company v. Ryan, C.A. 3176 (Del. Mar. 25, 2009) concerning whether the independent directors of a target company’s board were entitled to summary judgment on claims that they failed to act in good faith in conducting the sale of their company.
The Court of Chancery had denied summary judgment in order to obtain a more complete record before determining whether the directors had acted in bad faith. The Supreme Court reversed that decision and remanded the matter for entry of judgment in favor of the Lyondell directors. In doing so, the Supreme Court held the trial court reviewed the existing record before it under a mistaken view of the applicable law. The Supreme Court indicated that three factors contributed to the trial court’s mistake.
“First, the trial court imposed Revlon duties on the Lyondell directors before they either had decided to sell, or before the sale had become inevitable. Second, the court read Revlon and its progeny as creating a set of requirements that must be satisfied during the sale process. Third, the trial court equated an arguably imperfect attempt to carry out Revlon duties with a knowing disregard of one’s duties that constitute bad faith.”
It is important to recall from our posting on the trial court’s decision in Lyondell that the offer the board accepted, and forwarded on to shareholders for approval, included:
- A 45% premium over the company’s stock price;
- 3% break-up fee;
- A “no-shop” clause (with typical “fiduciary out” language and matching rights for the acquirer); and
- A fairness opinion
Yet the trial court was troubled by “the Board’s decision to grant considerable protection to a deal that may not have been adequately vetted under Revlon.”
However, the Supreme Court in its decision confirms that Revlon duties do not arise simply because a company was “in play” and could be potentially acquired. The duty to seek the best available price, under Revlon, applies only when a company “embarks on a transaction – on its own initiative or in response to an unsolicited off – that will result in a change of control.” Additionally, the Supreme Court held that there is only one Revlon duty- to “[get]the best price for the stockholders at a sale of the company.” And, that “[n]o court can tell directors exactly how to accomplish that goal, because they will be facing a unique combination of circumstances, many of which will be outside their control.”
The foundation of the Supreme Court’s decision was its focus on the effect of the exculpatory provision in Lyondell’s charter precluding director liability for duty of care claims, which allows for only duty of loyalty claims for failure to act in good faith and requires a fiduciary to intentionally fail “to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.” The decision is clear that any question about whether directors should have done something differently or more is not sufficient to create post-transaction personal liability. “Directors’ decisions must be reasonable, not perfect. ‘In the transactional context, [an] extreme set of facts [is] required to sustain a disloyalty claim premised on the notion that disinterested directors were intentionally disregarding their duties.’ . . . Only if they knowingly and completely failed to undertake their responsibilities would they breach their duty of loyalty.”
In overturning the trial court’s decision, the Supreme Court has shown that disinterested, independent directors will not be exposed to personal liability in responding to acquisition offers and affirming the board’s discretion in managing a sales process.
The Delaware Supreme Court’s decision can be read here.