In an important decision, the Delaware Supreme Court has firmly rejected post-merger stockholder claims that directors failed to act in good faith in selling the company, even if it were assumed that they did nothing to prepare for an impending offer and did not even consider conducting a market check before entering into a merger agreement (at a substantial premium to market) containing a no-shop provision and a 3.2% break-up fee. Lyondell Chemical Corp. v. Ryan, C.A. 3176 (Del. Mar. 25, 2009). The en banc decision, authored by Justice Berger, is a sweeping rejection of attempts to impose personal liability on directors for their actions in responding to acquisition proposals, and reaffirms the board’s wide discretion in managing a sale process.
The Court of Chancery had refused to grant summary judgment on claims that the directors of Lyondell had breached their duty of loyalty by failing to act in good faith in conducting the sale process. Lyondell’s certificate of incorporation included an exculpatory provision, as permitted by Section 102(b)(7) of the Delaware General Corporation Law, that shielded the directors from personal monetary liability for any alleged duty of care violations but not for duty of loyalty violations. The Court of Chancery found the board to be independent and disinterested, but held that the directors’ “unexplained inaction” when it appeared that the company would be put “in play” by a Schedule 13D filing created an inference that the directors may have consciously disregarded their fiduciary duties and failed to act in good faith in violation of the duty of loyalty.
In considering the claim under the Revlon standard requiring that the board seek to get the best price available in selling the company, the Supreme Court found that the lower court had misapplied the law in three respects: first, it imposed Revlon duties before the board had decided to sell the company or a sale had become inevitable; second, it misread Revlon as creating a set of specific requirements to be satisfied during the sale process; and third, it treated an arguably imperfect effort to sell the company as equivalent to “a knowing disregard of one’s duties that constitutes bad faith.”
The Supreme Court rejected the view that Revlon duties arise simply because a company is “in play,” holding: “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 in control.” The Court found that the board had appropriately exercised its business judgment by taking a “wait and see” approach in response to a Schedule 13D filing indicating that a party was interested in acquiring the company. The Court ruled that Revlon duties only arose when the directors chose to begin negotiating the sale of the company. The decision thus again makes clear that a board has no duties under Revlon to seek the “best price” in a sale or other transaction simply because a stockholder or other potential bidder tries to put the company “in play.”
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