In July 2009, the Delaware Chancery Court applied one of its first applications of the Delaware Supreme Court’s ruling in Lyondell Chemical Company v. Ryan. In so doing, the chancery court, in Wayne County Employees’ Retirement System v. Corti, dismissed all shareholder claims stemming from a sale-of-control transaction, including a claim that the board had violated its duty of loyalty in negotiating and approving the transaction.
Citing the directors’ twin fiduciary duties of care and loyalty, the court quickly cut to the chase in focusing on whether the board had satisfied those duties under the well-established presumption of the business judgment rule: if the board acted on an informed basis, in good faith and in an honest belief that the action taken was in the company’s best interests, then the board’s judgment will be respected. The burden is therefore on the plaintiff to rebut the rule’s presumption in favor of the board.
The court noted that a sale-of-control transaction does not impose additional duties; rather, quoting Lyondell, the court said that a board in a sale-of-control transaction must attempt to maximize the sale price for the company. At first blush, this sounds like a reference to the Revlon duty – but there’s more to the story.
In this case, the board enjoyed protection from a breach-of-care claim because the company’s certificate of incorporation barred claims for money damages against the directors. Thus, the court said that the plaintiffs must show that the board breached its duty of loyalty – or, in other words, that the directors had acted in their self-interest at the expense of the company. Under the Lyondell precedent, this means that the directors must have utterly failed to attempt to obtain the best sale price for control of the company. According to the chancery court, this translates into a burden on plaintiffs to show that the board “knowingly and completely failed to undertake their responsibilities…”
Applying this standard, the court dealt with the plaintiffs’ allegations summarily in dismissing the complaint:
- It was acceptable that the two most senior officers of the company who owned 7.5% of the outstanding shares of the company drove the negotiations because a committee of the board comprising independent directors was overseeing the process, meeting and receiving updates, and giving instructions on a regular basis.
- The lack of a formal auction or “market check” during the process did not violate Revlon because there is no set of prescribed steps that must be followed in a sale of control and there was no evidence that alternative bidders had surfaced during the seven months between signing and closing.
- The allegation that the board failed to obtain a control premium amounted only to a thinly veiled attack on the adequacy of the price, which the court would not second-guess since the board had fulfilled its fiduciary duties.
In following Lyondell, the Wayne county ruling reaffirms that a Delaware court will focus only on the process by which a board approves a sale of control of a company and will not second-guess the board unless it is shown to have consciously disregarded its fiduciary duties, even if the board arguably could or should have done a better job.