The recent Ryan v. Lyondell Chemical opinion extends a line of Delaware Chancery Court decisions over the last two years that offer important lessons for sellside boards. Beginning with last year’s Netsmart decision and continuing with In re Topps, In re Lear and now Ryan, the Delaware Chancery Court has reiterated longstanding Revlon principles of fiduciary duties that arise in the context of a company sale and, while not mandating a “single blueprint a board must follow to fulfill its duties”, sets some contours around a sale process that would satisfy Revlon. Under these decisions, Revlon continues to demand that a target company’s board of directors conduct a reasonable (not flawless) process with a “singular focus” on seeking the highest shareholder value reasonably available. Ryan does not establish new standards in this regard, but it does reinforce the principle that, except in limited circumstances, boards should both set up an active sale process and, once such process is established, be engaged in that process. One notable aspect of the Ryan opinion is the Court’s statement that, if, as alleged by plaintiffs, a board does not actively seek to maximize shareholder value, but instead acts as a “passive conduit to the stockholders” for a bid, then the board, in failing to meet its Revlon duties, may not only have breached its duty of care, but may also have breached the good faith component of the duty of loyalty, which breach is not exculpatable under Section 102(b)(7) of the Delaware General Corporation Law. While the specter of personal liability generally sounds loud alarms in board rooms, we temper such alarms by noting that the opinion arose in the context of defendants’ motion for summary judgment, which requires that the Court view the limited factual record then available in the light most favorable to plaintiffs. The Court devoted a number of pages in the opinion to the possibility that the Lyondell board may ultimately establish a record supporting the reasonableness of its actions. Thus, we must await a final decision in this litigation before we know whether personal liability will attach in this case.
Ryan arose out of the sale of Lyondell Chemical to Basell AF, negotiated during the height of the merger boom in the spring and summer of 2007. Unlike many companies seeking “strategic alternatives”, Lyondell was financially strong and viable as a standalone company. In fact, Lyondell had not contemplated a sale of itself or any extensive restructuring when Basell tipped its hat about a possible deal by filing a Schedule 13D in May 2007, in connection with its purchase of a large block of Lyondell shares. Two months later, on July 9, 2007, Basell’s and Lyondell’s CEOs began discussing a merger in earnest. A deal was negotiated in a back-and-forth between the two CEOs, was approved by the Lyondell board and signed in seven days. The Court found that the Lyondell board did little to prepare for the possible offer after the 13D was filed (e.g., it did not hire a financial advisor or value the company) and equally little after the offer was received (e.g., it did not conduct a pre- or post-signing market check and did not actively negotiate with Basell).
Pending a final outcome in Ryan, we take this opportunity to highlight some of the “lessons learned” from this and other related opinions:
- Once a company has decided to sell itself, Revlon requires that the board act “reasonably” and conduct a “logically sound process to get the best deal that is realistically attainable”, taking into account current market circumstances unique to the company when determining the appropriate marketing and deal protection techniques available. A board should generally pursue an active sale process, unless it can otherwise demonstrate “sufficient knowledge of relevant markets to form the basis for its belief that it acted in the best interests of shareholders”. Ryan literally sets the floor on what a board must do in a sale context, requiring that “in most instances a board of directors would be well-advised to do something to test the adequacy of an offer or to demonstrate otherwise that a proposed deal maximizes shareholder value”. The Court criticized the Lyondell board for being “indolent” for the approximately two months after Basell’s 13D filing. While the board argued that the 13D acted as an implicit market check, alerting the world to Lyondell’s being in play and inviting other bidders to attend the party, the Court said that the board’s “languid” wait for bidders to emerge was insufficient, at least to carry a motion for summary judgment. Thus, in this instance, the Court found that a 13D filing alone did not equate to the board’s posting a prominent “for sale” sign.
Moreover, even after the official bid arrived, the board did not conduct any active market check. While a board may pursue a single bidder strategy if it possesses “a body of reliable evidence with which to evaluate the fairness of the transaction” (see Barkan v. Amsted Industries, 567 A2d 1279, 1287 (Del. 1989)), the record did not show that the Lyondell board possessed such evidence. Also, the Delaware Chancery Court has similarly found such focused selling strategies inadequate in Netsmart and Topps. Thus, while Delaware courts have upheld implicit or limited market checks (among other indicia of a fair sale process), this should be viewed as a riskier path for selling boards to take.
Beyond the need to do “something” and caution regarding single bidder sales, Delaware courts have not set strict parameters as to what constitutes an acceptable process, but rather advise boards to consider what is reasonable based on “the M&A market dynamics relevant to the situation” being faced by a particular company (Netsmart), such as the company’s market capitalization, business and viability as a standalone entity, the likelihood of alternative bidders (pre- and post-signing; strategic and financial), the possibility that business would be disrupted by a broader market check and the risk that a bidder in hand will walk away if the company insisted on soliciting other offers. While practitioners have historically relied on “what’s market” to determine reasonableness, these decisions indicate that each company’s particular circumstances will color what is appropriate under Revlon.
Once a process is established, the board should remain actively engaged. The board “in most instances. . . is duty bound to engage actively in the sale process” (Ryan) and should shape and direct the negotiation strategy and terms of the transaction, including considering whether independent directors or the board’s financial advisors should participate in or oversee key negotiation sessions. The Court in Ryan criticized the board for being “largely out of the loop until the very end of the process when it, more or less, ceremonially approved the deal that [Lyondell’s CEO] had negotiated.” Delegation of all negotiation duties to management, as appeared to be the case in Lyondell, must be carefully considered as it is rife with possible conflicts and may be viewed as inconsistent with the board’s execution of its duties of care and loyalty under Revlon.
In Ryan, the Court further noted that the board did not negotiate aggressively or “seriously push back” against the Basell proposal with respect to price or deal protection, instead agreeing to what seemed “typical”. While Delaware Courts have upheld many forms of deal protections as reasonable, particularly in light of the need to preserve a good deal, the Court again stressed that the Lyondell board did little to establish the superiority of the Basell offer. Thus, in this case, the board could not have evaluated the reasonableness of the deal protections against the need to preserve a “superior” deal.
A fairness opinion does not bulletproof a deal. While a fairness opinion can “buttress other efforts of a board to meet the expectations of Revlon”, it only serves to indicate that an offer is “financially fair” to shareholders, not that it is “the ‘best’ deal reasonably available” (Ryan). In light of the Delaware courts’ recent skepticism towards the value of fairness opinions, boards should not rely on them in lieu of a reasoned, proactive sale process.