This summer, the Delaware Chancery Court arguably expanded the potential liability of independent directors of Delaware corporations by declining to grant summary judgment in favor of non-conflicted, independent directors that had allegedly accepted a buyout offer without performing standard due diligence about the fairness of the deal. See Ryan v. Lyondell Chemical Co. et al., No. 3176-VCN (Del. Ch. July 29, 2008). The Delaware Supreme Court granted the directors’ motion for an interlocutory appeal, which is currently being briefed.
In 2007, Basell A.F., a Luxembourgian company, acquired Lyondell for approximately $13 billion. A purported class of Lyondell’s shareholders filed an action in Chancery Court against Lyondell and certain of its directors and officers, alleging that the defendants (1) approved Basell’s buyout offer in seven days, (2) did not conducting a “market check” to determine whether a better price could have been obtained, and (3) precluded other bidders from making competing offers. Among the defendants were certain of Lyondell’s independent directors (the “Independent Directors”) that were not alleged to have had any personal interest in the transaction. Notably, Basell paid a 45% premium over Lyondell’s stock price and 99% of the shareholders that participated in a subsequent shareholder vote approved the acquisition.
The Chancery Court granted summary judgment to the Independent Directors on the plaintiffs’ duty of loyalty claims because the plaintiffs did not “demonstrate that the Independent Directors received a benefit not shared equally by the Lyondell stockholders.” However, the Chancery Court denied summary judgment to the Independent Directors on the plaintiffs’ breach of duty of care claims. In coming to its holding, the court summarized the directors’ duties under Delaware law when considering a buyout offer (following the Revlon v. MacAndrews & Forbes Holdings line of cases) as the duty to engage in a process that constituted “a reasonable effort to advance the interests of the shareholders under the circumstances.”
Although the plaintiffs survived summary judgment on their duty of care claims, Lyondell’s corporate charter (which conforms with 8 Del. Code § 102(b)(7)) eliminates the personal liability of its directors to stockholders for breaches of the duty of care, except where the directors have not acted in good faith. Thus, the Court recognized that the plaintiffs could not survive summary judgment unless the Independent Directors had forfeited their indemnification rights by failing to act in good faith.
Notably, in a holding that is arguably at odds with its granting of summary judgment on the plaintiffs’ duty of loyalty claims, the court held that it was possible that the Independent Directors had breached “the good faith component of the duty of loyalty” by failing to perform adequate due diligence about the buyout deal. Thus, the court denied the Independent Directors' motion for summary judgment on the plaintiffs’ breach of duty of care claim.
Arguments on Appeal
The Independent Directors have advanced a number of arguments in favor of reversal of the Chancery Court’s decision. Specifically, the Independent Directors argue that the Chancery Court improperly blurred the distinction between a breach of the duty of care and a breach of the duty of loyalty, particularly given that the plaintiffs had proffered no evidence of self-dealing by the Independent Directors. In further support of their argument, the defendants argue that a finding of bad faith requires a finding of scienter and that there is no evidence in support of such a finding.
In their responsive briefing, the plaintiffs reportedly emphasized that the court had not held that the directors had acted in bad faith, but merely held that there was insufficient evidence upon which to rule, as a matter of law, that the directors had acted in good faith.
The Delaware Supreme Court’s anticipated decision is the subject of intense speculation given its importance to independent directors of Delaware corporations (as well as corporations incorporated in states that follow Delaware’s lead in corporate governance matters). Indeed, this case creates the possibility that independent directors could be denied the protection of corporate exculpatory provisions conforming to 8 Del. Code § 102(b)(7) for conduct that is not widely considered to constitute a failure to act in good faith. Although Lyondell does not explicitly address the issue of corporate indemnification, it is likely that a finding of bad faith would similarly preclude corporate indemnification. To the extent that Lyondell (if affirmed) increases the potential liability of Delaware’s directors and officers, those directors and officers should ensure that they have satisfactory D&O coverage, including Side A coverage for non-indemnifiable claims.