On March 25, 2009, the Supreme Court of Delaware released its decision in Lyondell Chemical Company v. Ryan, a case where the defendant directors of Lyondell were accused of breaching their fiduciary duties in conducting the sale of the company in July 2007. The plaintiffs claimed, among other things, that the directors did virtually nothing to develop a strategy for maximizing shareholder value once they became aware of the buyer’s filing of a Schedule 13D with the SEC in May 2007, which indicated that the company was “in play”. Since the company charter provided directors protection for breaches of their duty of care, this case turned on whether the directors breached their duty of loyalty by failing to act in good faith. The opinion of the Delaware Supreme Court was issued with respect to the defendants’ appeal of the decision of the Court of Chancery (memorandum opinion of July 29, 2008 and letter opinion of August 29, 2008) denying them summary judgment.
Whereas the Court of Chancery had denied summary judgment on the basis that more information was required in order to resolve whether the directors had acted in bad faith, the Supreme Court disagreed. “Under other circumstances, deferring a decision to expand the record would be appropriate. Here, however, the trial court reviewed the existing record under a mistaken view of the applicable law.” The Supreme Court articulated three factors that had contributed to the Court of Chancery’s mistaken view: (i) the trial court had imposed Revlon duties (to maximize shareholder return in a take-over situation) before a decision to sell had been made or the sale had become inevitable; (ii) the trial court was incorrect in interpreting Revlon and subsequent cases as creating a mandatory set of requirements to be satisfied during the sale process; and (iii) the trial court equated “an arguably imperfect attempt to carry out Revlon duties with a knowing disregard of one’s duties that constitutes bad faith.”
Mistakenly, the Court of Chancery “focused on the directors’ two months of inaction, when it should have focused on the one week during which they considered Basell’s [the acquirer’s] offer.” During that time, the directors met a number of times, there was negotiation as to terms, an evaluation of the company’s value, the offer and the likelihood of obtaining a better price was undertaken and the directors approved the merger. Due to unique circumstances in each case, meanwhile, no blueprint exists for a board to follow in satisfying its Revlon duties and courts cannot dictate how directors are to accomplish their goal of getting the best price for shareholders. “[T]here are no legally prescribed steps that directors must follow to satisfy their Revlon duties. Thus, the directors’ failure to take any specific steps during the sale process could not have demonstrated a conscious disregard of their duties.”
In its decision, the Supreme Court distinguished between an “inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.” In this case, the Supreme Court would not have questioned the trial court’s decision “to seek additional evidence if the issue were whether the directors had exercised due care. Where, as here, the issue is whether the directors failed to act in good faith, the analysis is very different, and the existing record mandates the entry of judgment in favour of the directors.”
While Canadian case law may differ from U.S. law on the fiduciary duties of directors, including in M&A situations, Lyondell may, nonetheless, have material implications in Canada as well.