No. 401, 2008 (Del. Mar. 25, 2009)
In an en banc decision following an interlocutory appeal, the Delaware Supreme Court reversed the Court of Chancery’s decision in Ryan v. Lyondell Chem. Co., C.A. No. 3176 (Del. Ch. Jul. 29, 2008). The Supreme Court rejected the trial court’s determination that the plaintiff had sufficiently stated a claim that the Lyondell directors breached their duty of loyalty by failing to act in good faith in fulfilling their Revlon duties when considering and accepting a merger proposal from Basell AF. The Supreme Court refused to accept the Court of Chancery’s conclusion that the speed with which the merger agreement was negotiated and executed and the failure of the Lyondell directors to negotiate better terms in the merger agreement and prepare for or pursue potentially superior offers could support a claim that the directors knowingly disregarded their responsibilities. Writing for the Court, Justice Berger stated that, at most, the record established a triable issue of fact as to whether the directors exercised due care but, because Lyondell’s charter contained an exculpatory provision as permitted by Section 102(b)(7) of the General Corporation Law of the State of Delaware, such an issue could not support a claim for monetary damages against the directors.
Beginning in April 2006, Basell made a number of approaches to Lyondell indicating an interest in an acquisition, which were ultimately rejected. In May 2007, Basell signaled its continuing interest in acquiring Lyondell when one of its affiliates filed a Schedule 13D. Thereafter, the Lyondell board met and decided to take a “wait and see” approach to the filing. On July 9, Basell made an oral offer that, after preliminary negotiations with Lyondell’s chairman and CEO, amounted to $48 per share with no financing contingency, but with a $400 million termination fee and a requirement that Lyondell agree to and execute a definitive agreement within seven days. The Lyondell board met twice during the next two days to consider the offer and, on July 11, 2007, gave a firm indication of its interest and retained a financial advisor. Over the next several days, the parties negotiated the terms of the merger agreement. The Lyondell board instructed the company’s CEO to contact Basell in an attempt to obtain better terms, including a higher price per share, the inclusion of a go-shop provision in the merger agreement, and a lower termination fee. Basell had a strong negative reaction to those requests but, as a sign of good faith, agreed to lower the termination fee to $385 million. Lyondell’s financial advisor offered its opinion that the offer was fair (the $48 per share price was described by one banker as “an absolute home run”) and the board’s legal advisors indicated that, notwithstanding the absence of a go-shop clause, the agreement contained a fiduciary out sufficient to ensure the board could exercise its fiduciary obligations to the stockholders should a superior offer materialize. On July 16, 2007, the board approved the merger agreement, and the agreement was subsequently approved by over 99% of the voted shares.
Plaintiff alleged that the Lyondell directors had agreed to a grossly insufficient price, were motivated by their own self-interest, undertook a flawed process in the negotiations, agreed to unreasonable deal protection devices in the merger agreement, and failed to disclose numerous material facts in the preliminary proxy statement filed with the SEC in connection with the planned merger. Following defendants’ motion for summary judgment, the Court of Chancery rejected all of plaintiff’s claims except for those challenging the adequacy of the process and the deal protection measures. The Court of Chancery determined that, in light of the 102(b)(7) charter provision, the success of plaintiff’s claim depended on the extent to which any failures of the directors in exercising their duties under Revlon implicated their duty of loyalty. Because the directors were independent and disinterested, the sole issue was whether they failed to act in good faith. The Court of Chancery determined that, based on the pled facts and the inferences that must be drawn in favor of the non-moving party, the motion for summary judgment should be denied in order to obtain a more complete record.
The Supreme Court reversed the Court of Chancery, finding that the court below had reviewed the existing record under a mistaken view of the applicable law. The Supreme Court identified three factors contributing to the reversible error.
First, the Court of Chancery imposed Revlon duties on the Lyondell directors before they had decided to sell the company or a sale had become inevitable. Critical to the Court of Chancery’s analysis was the determination that the Lyondell directors did nothing to seek out potential suitors or competing offers in the two months after Basell’s 13D filing, which arguably put Lyondell “in play.” The Supreme Court held, however, that Revlon duties do not apply simply because a company is “in play.” Rather, the duty to seek the best possible price applies only when a corporation embarks on a change-of-control transaction, either by its own initiative or in response to an unsolicited offer.
Second, the Court of Chancery read Revlon as establishing that the board must follow one of several courses of action to satisfy its fiduciary duties during the sale process. The Supreme Court stated that there is only one Revlon duty -- to get the best price -- and that there is no one blueprint or any legally prescribed steps that a board must follow to satisfy its Revlon duties. As a result, the Supreme Court concluded that “the failure to take any specific steps during the sale process could not have demonstrated a conscious disregard of” the directors’ duties.
Third, the Court of Chancery determined that a board’s imperfect attempt to carry out its Revlon duties amounted to a knowing disregard of its duties. The Supreme Court noted that there is a “vast difference between a flawed effort to carry out fiduciary duties and a conscious disregard for those duties.” The Supreme Court acknowledged that a flawed attempt to discharge the board’s duties under Revlon might constitute a breach of the duty of care but when, as in this case, the issue is limited to whether the directors breached their duty of loyalty, those flawed actions must constitute a conscious disregard of their duty to obtain the best possible price. According to the Supreme Court, the proper inquiry should have been to consider whether the directors utterly failed to attempt to obtain the best sale price, not whether the directors did everything they should have done to obtain that price. Viewing the limited record before it, the Supreme Court noted that the Lyondell directors met several times to consider the offer, were generally aware of the value of Lyondell, knew the chemical company market, solicited and followed advice of financial and legal advisors, attempted to negotiate a higher price, and ultimately approved the merger agreement because the offer was too good not to pass along to stockholders. Although the Supreme Court assumed, as it was required to do on a summary judgment motion, that the Lyondell directors did absolutely nothing to prepare for the Basell offer following the Schedule 13D filing and did not even consider conducting a market check, it found that the record clearly established that the directors did not breach their duty of loyalty by failing to act in good faith.
The Supreme Court thus remanded the case for entry of judgment dismissing all claims against the directors defendants.
The full opinion is available here.