Delaware Supreme Court Reverses Lyondell; Supports Board Discretion in Sale Process
March 27, 2009
In a much anticipated decision on Wednesday, the Delaware Supreme Court reversed the Chancery Court in Lyondell v. Ryan, ruling that the Lyondell directors did not breach their fiduciary duties of loyalty in connection with the $13 billion acquisition of the company by Basell AF in 2007. In its reversal, the Supreme Court held that the directors did not fail to act in good faith in fulfilling their duties under Revlon and granted summary judgment in favor of the directors.
The Supreme Court’s reversal does not come as a surprise to many of us in the M&A community. However, the fact that the shareholders received a significant premium in the merger and that Lyondell is now in bankruptcy must have played a large factor in the Supreme Court’s determination that the Lyondell directors had it right. In any event, we expect that the opinion, written by Justice Berger, will be seen as supportive of directors in a process they adopt for a sale of the company (or a decision not to commence the sale process) and will clarify important principles relating to the application of Revlon.
First, Revlon duties attach only after the company embarks on a transaction – on its own initiative or in response to an unsolicited offer – that will result in a change of control.
The Supreme Court held that the trial court erred by imposing Revlon duties on the Lyondell directors before they either had decided to sell, or before the sale had become inevitable. Even though the Board was on notice that Basell wanted to buy the company after a Basell affiliate filed a Schedule 13D effectively expressing an indication of interest in acquiring Lyondell, the directors became subject to Revlon only after the Board decided to sell the company when formal price negotiations began in the week leading up to the signing of the agreement.
It is now clear that under Revlon, a board has a duty to seek the best available price of the company when the sale of the company becomes inevitable, not simply because a company is “in play.”
Second, there is no single blueprint that a board must follow to fulfill its Revlon duties.
The Supreme Court emphasized this notion when ruling that the directors’ actions were appropriate in Lyondell. (“There is no prescription for fulfilling one’s duties under Revlon.”) It held that the trial court erred in concluding that the directors had not met their Revlon burden because they did not “engage actively in the sale process” by conducting an auction or securing a post-signing market check. The correct inquiry, in the Supreme Court’s view, was not whether the directors met their duty of care (which is exculpated under Lyondell’s charter as would generally be the case for Delaware corporations), but whether the directors failed to act in good faith. According to the record, the directors met several times, their CEO tried to negotiate better terms, and the Board approved the merger after evaluating Lyondell’s value, the price offered and the likelihood of obtaining a better price. Under the totality of the circumstances, the Supreme Court concluded, the directors met their burden under Revlon.
Third, an imperfect attempt to carry out one’s Revlon duties does not equate to a knowing disregard of one’s duties that constitutes bad faith.
The sole issue in this case was whether the directors breached their duty of loyalty by failing to act in good faith, not whether they breached their duty of care. So, even if the record demonstrated the directors breached their duty of care by carrying out a flawed sale process, the Court held that the directors would not have breached their duty of loyalty by failing to act in good faith. A breach of the duty of good faith requires a showing of conscious disregard of director’s responsibilities. In applying this principle, the Supreme Court admonished the trial court for approaching the record from the wrong perspective and held that instead of questioning whether the directors did everything they arguably could have done to obtain the best price, the trial court should have asked whether the directors “utterly failed to attempt to obtain the best sale price.” Even assuming that the directors did absolutely nothing to prepare for Basell’s offer or conduct a market check before agreeing to the merger, the Supreme Court concluded that the Lyondell directors did not fail to act in good faith.
If you have any questions regarding this newsflash, please contact any of the lawyers listed below or your regular Davis Polk contact.
George R. Bason, Jr., Partner
Leonard Kreynin, Partner
John D. Amorosi, Partner
Mutya Fonte Harsch, Associate