In the last issue of In Brief, we noted some passages from the Supreme Court of Canada in the BCE case that directors owe a fiduciary duty to the corporation, and only to the corporation. Recently, the full panel of the Delaware Supreme Court dealt with the fiduciary duties of directors in the context of a merger (Lyondell sale to Bassell AF) that was ultimately approved at a stockholders’ meeting by more than 99% of the voted shares.
Delaware law permits the charters of public companies to contain an exculpatory provision for breaches of duty of care. But such provisions do not exonerate or indemnify directors for breach of duties of loyalty or acts or omissions, not carried out in good faith.
The decision in Lyondell Chemical Corporation v. Ryan (“Lyondell”) must be viewed in light of such an exculpatory provision and what is known as the Revlon duties emanating from the case of Revlon v. MacAndrews & Forbes Holdings, Inc.
In Lyondell, the class action complaint challenged the U.S. $13 billion cash merger and alleged that Lyondell directors (although independent) breached their fiduciary duties of care, loyalty and candour, and put their personal interests ahead of those of the shareholders.
While on the face of it, Lyondell’s directors may have adopted a wait-and-see approach for some two months while the company was in play, the Court found that the Revlon duties do not apply until “a company embarks on a transaction – on its own initiative or in response to an unsolicited offer – that will result in a change of control.”
Once merger negotiations were under way, the Lyondell board met several times, attempted to negotiate better terms, and even tried to secure a go-shop provision. After evaluating the likelihood of getting a better price, the Lyondell board voted to approve the merger and to recommend it to its shareholders.
Accordingly, it could not be said that the Lyondell directors utterly failed to attempt to obtain the best sale price. Indeed, as noted by the Delaware Supreme Court, the Revlon case did not create any new fiduciary duties, but simply required a board to perform its fiduciary duties in the service of the specific objective to maximize the sale price of the enterprise.
In Lyondell, the Delaware Supreme Court reiterated that a board’s decision to sell must be reasonable, not perfect. The Court was not prepared to second guess the board as there is no single blueprint for a board to follow to fulfill its duties when facing a unique combination of circumstances.