Delaware Supreme Court Rules That Directors Did Not Breach Duty of Loyalty in Approving $13 Billion Merger
On March 25, 2009, in Lyondell Chemical Co., et al. v. Ryan, et al., No. 401, 2008 (Del. March 25, 2009), the Delaware Supreme Court reversed an order of the Delaware Chancery Court denying summary judgment to the directors of Lyondell Chemical Company (“Lyondell”). The Chancery Court had ruled that the directors’ “unexplained inaction” in connection with the sale of Lyondell to Basell AF (“Basell”) permitted a reasonable inference that they had breached their fiduciary duties. The Supreme Court disagreed, holding instead that there was nothing in the record from which to infer that the directors had breached their duty of loyalty to the company.
The $13 billion cash merger between Lyondell and Basell was approved by Lyondell’s board of directors on July 16, 2007. Shortly following the board’s approval, plaintiff filed his purported class action lawsuit challenging the merger on the grounds that the Lyondell directors had breached their fiduciary duties of care, loyalty and candor by putting their personal interests ahead of those of the Lyondell shareholders. Specifically, the complaint alleged that (1) the merger price was grossly insufficient; (2) the directors were motivated by self-interest in receiving cash for their stock options; (3) the merger negotiation process was flawed; (4) the deal protection provisions were flawed; and (5) the preliminary proxy statement omitted numerous material facts.
The directors moved for summary judgment, which was granted on all of the claims except those relating to the negotiation process and the deal protection provisions. Specifically, the trial court, relying on Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), concluded that a triable issue of fact remained as to whether the directors had acted in bad faith by failing to obtain the best available sale price for the company’s stock.
The Supreme Court reversed and remanded for entry of judgment in favor of the Lyondell directors. According to the Supreme Court, the trial court’s decision was based on a misapplication of the Revlon factors. Critical to the trial court’s decision had been the directors’ failure to take any action during the two-month period between May 2007 – when the Basell Schedule 13D was filed with the Securities and Exchange Commission – and July 9, 2007 – when Basell made its first offer to buy Lyondell. According to the Supreme Court, however, the “Revlon duties do not arise simply because a company is ‘in play.’” Rather, the “duty to seek the best available price applies only when a company embarks on a transaction – on its own initiative or in response to an unsolicited offer – that will result in a change of control.” In other words, the directors’ duties under Revlon were not triggered until July 10, 2007, when negotiations for the sale of Lyondell began. Thus, the Supreme Court observed, the trial court should have focused its analysis on the one-week period during which the board considered Basell’s offer – not on the two months of supposed inaction prior to that time.
The court went on to explain that Revlon does not impose one specific set of duties that must be performed in order to obtain the best possible price for the shareholders. “No court can tell directors exactly how to accomplish that goal, because they will be facing a unique combination of circumstances, many of which will be outside their control.” In this connection, the court noted that, during the critical week, the directors had met several times to discuss the offer, retained Deutsche Bank to evaluate and advise them on the transaction, attempted to negotiate better terms, and evaluated Lyondell’s value, the price offered and the likelihood of obtaining a better price. And while the board may have failed to take certain steps – such as not conducting an auction or a market check – the court held that, under the totality of the circumstances, this was not enough to override the otherwise substantial evidence that the directors had not breached their duty to act in good faith. After all, “[d]irectors’ decisions must be reasonable, not perfect.”
In the end, the Supreme Court concluded that the trial court had approached the record from the wrong perspective: “Instead of questioning whether disinterested, independent directors did everything that they (arguably) should have done to obtain the best sale price, the inquiry should have been whether those directors utterly failed to attempt to obtain the best sale price.”