In a much anticipated reversal of the Delaware Court of Chancery's controversial opinion in Ryan v. Lyondell Chemical Co. ,1the Delaware Supreme Court recently reaffirmed that Delaware law will not countenance an aggrieved stockholder's attempt to "bootstrap" onto a duty of loyalty claim for monetary damages an otherwise exculpated duty of care claim brought against independent and disinterested directors under the rubric of Revlon v. MacAndrews & Forbes Holdings, Inc. 2
To provide context, it is appropriate to review briefly the background of the transaction, as well as the Court of Chancery's decision. (See also http://www.kslaw.com/Library/publication/ca081208.pdf.) Before the transaction at issue, Lyondell Chemical Company ("Lyondell" or "the Company") was the third-largest independent, publicly traded chemical company in North America. In April 2006, Basell AF (Basell), a company specializing in polyolefin technology, proposed an acquisition of Lyondell at a price in the range of $26.50 to $28.50 per share. Lyondell's board rejected the overture as inadequate. Over the following year, no potential acquirors expressed interest in the Company.
In May 2007, Basell filed a Schedule 13D disclosing a 8.3 percent ownership position in Lyondell's stock, and noted its interest in possible transactions with Lyondell. Although the board recognized that the Schedule 13D signaled to the market that the Company was "in play," the directors opted for a "wait and see" approach rather than actively assessing Lyondell's strategic options. Over the subsequent two months, Basell had sporadic contact with Lyondell's CEO, which culminated in discussions on July 9, 2007 concerning an all-cash deal at $40 per share. After Lyondell's CEO indicated that $40 per share was inadequate, Basell raised its offer to between $44 and $45 per share. Since Lyondell "really was not on the market," Lyondell's CEO advised Basell to provide its "best offer." Later that day, Basell offered to pay $48 per share during a telephone conversation. Under this proposal, Basell would require no financing contingency, but Lyondell would have to agree to a sizable break-up fee ($400 million) and execute a merger agreement within a week's time.
Over the course of the next few days, the Lyondell board met several times to discuss the proposal and, once a written offer was secured, authorized the retention of a financial advisor and instructed the CEO to negotiate with Basell in an attempt to secure more favorable terms. However, Lyondell's requests for a reduction of the break-up fee, the inclusion of a "go-shop" provision and an increased price were flatly rejected by Basell: it already had offered its best price (at a substantial premium to market) and its best terms. However, in a sign of good faith, Basell did agree to reduce the break-up fee by roughly four percent.
Accompanied by its legal and financial advisors, the Lyondell board met on July 16, 2007 to consider the merger agreement. At the meeting, legal counsel explained that, notwithstanding the "no-shop" clause in the merger agreement, a "fiduciary out" provision would allow the board to consider any unsolicited superior proposals. Moreover, the financial advisor not only opined that the merger was fair from a financial standpoint, but described the merger price to the board as an "absolute home run." The Lyondell board voted to approve the agreement, and the stockholders approved the merger on November 20, 2007 by more than 99 percent of the voted shares.
The Court of Chancery ultimately rejected all of the plaintiffs' claims except those directed at the procedure by which the directors sold the Company and the deal protection devices in the merger agreement. Vice Chancellor John Noble concluded that "unexplained inaction" by the Lyondell board for two months following the Schedule 13D filing permitted a reasonable inference at the summary judgment stage that the directors may have "consciously disregarded their fiduciary duties" in such a manner as to have breached the good faith prong of the duty of loyalty.
Justice Carolyn Berger, writing for a unanimous Delaware Supreme Court sitting en banc , disagreed, stating that the Court of Chancery "reviewed the existing record under a mistaken view of the applicable law." According to Justice Berger, three related factors contributed to this mistake.
First, the trial court imposed Revlon duties on the directors before they either decided to sell the Company, or before a sale had become inevitable. The trial court incorrectly "focused on the directors' two months of inaction [following the Schedule 13D filing], when it should have focused on the one week during which they considered Basell's offer." While Basell's filing of the Schedule 13D signaled that the Company was "in play," Revlon duties do not arise simply because of that fact. In the Delaware Supreme Court's view, the directors' "wait and see" approach was an appropriate exercise of business judgment under the circumstances.
Second, Vice Chancellor Noble improperly read Revlon and its progeny as imposing a specific set of requirements directors must satisfy during the sale process. In reiterating that "there is no single blueprint" a board must follow to obtain the best price reasonably available for stockholders, the Delaware Supreme Court took issue with what it viewed as the trial court's imposition of inflexible minimum requirements - namely, that the directors must "actively engage in the sale process," and confirm that they have obtained the best available price by either conducting an auction, performing a market check or demonstrating an "impeccable knowledge of the market." Because the underlying circumstances of a corporate sale invariably differ, application of rigid procedural standards to director conduct is inconsistent with the fact-specific inquiry mandated under Revlon .
Finally, and most glaringly, the Court of Chancery "approached the record from the wrong perspective" by "equat[ing] an arguably imperfect attempt to carry out Revlon duties" with bad faith conduct. Prior Delaware decisions clearly indicate that conduct amounting to bad faith sufficient to constitute a breach of the duty of loyalty exists only if "a fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties." As mentioned above, because satisfaction of Revlon duties is a fluid construct, the Court of Chancery's decision was logically incoherent - the Lyondell directors could not possibly have had the subjective knowledge that they were disregarding their duties, as there were no "legally prescribed steps" imposed by Revlon for them specifically to disregard. Finding that the record established the disinterested and independent Lyondell directors did not breach their duty of loyalty by failing to act in good faith, the Delaware Supreme Court reversed Vice Chancellor Noble's decision and remanded for entry of judgment in favor of the defendants.
Although the Delaware Supreme Court's decision in Lyondell Chemical Company v. Ryan 3serves to reinforce settled principles of Delaware law in the context of a corporate sale, directors and practitioners alike should still consider the opinion in light of all relevant facts. For instance, Lyondell's charter contained an exculpatory provision adopted under Section 102(b)(7) of the Delaware General Corporation Law, which in turn served to eliminate personal liability for the directors for breaches of the duty of care. While a Revlon claim involving no allegations of directorial self-interest or bias against other bidders - such as the one here - sounds in the duty of care (and thus should not result in a judgment of monetary damages in the face of a Section 102(b)(7) provision), the failure of directors to adhere to best practices in discharging those duties could create grounds for injunctive relief if an aggrieved stockholder files suit prior to the closing of the transaction. Such best practices, depending on the circumstances, might include:
• Avoiding delegation of the negotiation process entirely to management, with the board remaining actively involved in the sale process;
• Instructing management to keep the board apprised of all material contacts and discussions with potential suitors when the possibility of a bid for the company looms;
• Obtaining information reasonably sufficient to apprise the board of the company's value as soon as practicable in the face of market activity which indicates a bid may be forthcoming;
• Considering a pre-signing canvass of potential bidders or a meaningful post-signing market check in order to maximize stockholder value; and
• Preparing well in advance for the time constraints a bidder may foreseeably impose by understanding in advance the company's strategy and financial situation and by enlisting financial advisors and legal counsel to assist in formulating an informative andmeasured sales process.
12008 WL 2923427 (Del. Ch. July 29, 2008).
2506 A.2d 173 (Del. 1986).
3C.A. No. 401, 2008 (Del. Mar. 25, 2009).
William Bates is a Partner in the Corporate Practice Group in King & Spalding's New York office and may be reached at (212) 556-2240. C. William Baxley is a Corporate Partner in the firm's Atlanta office and may be reached at (404) 572-3580. The authors would like to thank Will Smoak, a Corporate Associate in the firm's Charlotte office, for his contributions to this article.