"[n]o court can tell directors exactly how to [get the best price for the stockholders at a sale of the company], because they will be facing a unique combination of circumstances, many of which will be outside their control."
- Justice Carolyn Berger, the Supreme Court of the State of Delaware 1
Lyondell Chemical Company v. Ryan involved a stockholder class action challenging a $13 billion cash merger of Lyondell with and into an acquisition subsidiary formed by Basell AF, a Luxembourg company.2 The stockholder suit before the court alleged that the directors of Lyondell had breached their fiduciary duties of care and loyalty in reviewing and approving the merger.3 In a prior decision, the Court of Chancery had allowed certain claims against the directors to survive a summary judgment motion.4
The Lyondell decision is important because it provides corporate fiduciaries, practitioners and courts with additional guidance on when and how Revlon duties should be applied.5
Revlon duties apply in the context of a sale of, or change in, corporate control, and require that once a board of directors embarks on a control transaction on behalf of the corporation, there is no longer a duty to protect or further the corporation's long-term strategic goals. Instead, the sole duty becomes the maximization of "the sale price of the enterprise," requiring the directors to "obtain the best available price" in the sale transaction.6
The courtship between Lyondell and Basell lasted more than a year, over which time the price increased from an initial offer of less than $30 per share to a final offer of $48 per share.7 In May 2007, an affiliate of Basell filed a Schedule 13D announcing its interest in possible transactions with Lyondell.8 In response to this overture, the directors of Lyondell acknowledged that the corporation was "in play," but adopted a "wait and see" approach and did not take significant further action at that time.9
Thereafter, in July 2007, Basell met with Lyondell and discussed an all-cash deal at $40 per share.10 During that meeting, Basell increased its offer to $44 to $45 per share.11 Later that day, in response to a cool reaction from Lyondell, Basell increased its offer to $48 per share, conditioned on a $400 million break-up fee and a signed merger agreement within one week.12
During the next week, the directors held several meetings, the CEO attempted to negotiate better terms, the board was briefed by its financial advisors that the merger price was "an absolute home run," and the directors evaluated the likelihood of a better offer.13 Ultimately, the directors approved the merger (this approval was subsequently affirmed by 99% of votes cast in a stockholder decision).14 Several weeks later, the plaintiffs commenced their action in the Delaware Court of Chancery.15
Lyondell's Certificate of Incorporation included an exculpatory provision under Section 102 of the Delaware General Corporation law.16 Accordingly, the Court of Chancery agreed that the directors were exculpated from personal liability for a claimed breach of the fiduciary duty of care, leaving the plaintiffs with only a duty of loyalty challenge.17 The Court of Chancery further determined that because the directors were independent and disinterested, the plaintiffs' claims turned on whether the directors had "breached their duty of loyalty by failing to act in good faith."18
The Court of Chancery examined precedent and determined that a bad faith breach of the fiduciary duty of loyalty required conduct ranging from an actual intent to do harm to an intentional failure "to act in the face of a known duty to act, demonstrating a conscious disregard for his duties."19 Questioning whether the directors had properly discharged known Revlon duties, the Court of Chancery denied the defendants' summary judgment motion to allow more evidence on whether the directors had acted in bad faith.20
On a certified interlocutory appeal from the lower court decision, the Supreme Court of the State of Delaware held that the Court of Chancery had "reversibly erred" because the "record clearly establishes that the Lyondell directors did not breach their duty of loyalty by failing to act in good faith."21 Therefore, the Supreme Court reversed the Court of Chancery decision and remanded the matter for entry of summary judgment in favor of the Lyondell directors.22
The Supreme Court of Delaware reversed the Court of Chancery's decision because the Court of Chancery had applied a "mistaken view" of Revlon duties. The Supreme Court identified three mistakes:
- First: The Court of Chancery applied Revlon to time periods prior to when the directors had decided to sell the corporation.23
- Second: The Court of Chancery was mistaken in that Revlon and its progeny do not establish set requirements that must be satisfied during a sale process.24
- Third: The Court of Chancery improperly equated an "imperfect attempt to carry out Revlon duties" with "knowing disregard" of those duties.25
When Do Revlon Duties Start to Run?
The Supreme Court held that "Revlon duties do not arise simply because a company is in 'play.'"26 Instead, the "duty to seek the best available price applies only when 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."27 Therefore, the Court of Chancery erred in examining the board's actions under the Revlon standard after the Schedule 13D filing, when the board had merely adopted a "wait and see" approach.28 The Supreme Court noted that during that time, the directors had not decided to put the corporation up for sale.29 This did not happen until the week-long sale negotiations began two months after the Schedule 13 D filing.30
Are There Set Revlon Requirements Applicable in all Cases?
The Supreme Court held that "[t]here is only one Revlon duty – to '[get] the best price for stockholders at a sale of the company.'"31 Further "[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."32 The Supreme Court noted that there is "no single blueprint" and no "legally prescribed steps" a board must adhere to in meeting its Revlon duties.33 Therefore, the Court of Chancery was incorrect to require that directors not only actively engage in the selling process, but also conduct an auction, conduct a market check or show an "impeccable knowledge" of the market.34
Did the Directors Consciously Disregard Their Revlon Duties?
Finally, the Supreme Court noted that if the fiduciary standard in issue was the duty of care, the Court of Chancery may have been justified in denying the defendants' motion for summary judgment and seeking more evidence on whether the directors had properly carried out their Revlon duties.35 However, when the stricter good faith analysis is applicable, the standard is whether a fiduciary intentionally failed "to act in the face of a known duty to act, demonstrating a conscious disregard for his duties."36
In such a case, the inquiry is not what the directors "should have done to obtain the best sale price"; (emphasis added) it is instead "whether those directors utterly failed to attempt to obtain the best sale price."37 (emphasis added) Given this difference "between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties," the Supreme Court concluded that the alleged failure by the Lyondell directors to take specific actions was not sufficient to rise to a conscious disregard of their fiduciary duties, and therefore held that the directors "did not breach their duty of loyalty by failing to act in good faith."38
The Supreme Court of the State of Delaware has provided important precedent and guidance on the unique director fiduciary duties applicable in corporate control transactions.