This case arose from the acquisition of Lyondell Chemical Company by Basell AF and involved claims by shareholders that the Lyondell board of directors breached its fiduciary duties of care and loyalty in failing to engage fully and actively in the sale process. In a widely criticized opinion, Vice Chancellor Noble of the Delaware Chancery Court denied Lyondell’s motion for summary judgment with respect to the breach of loyalty claims, citing, among other things, a flawed board process — despite acknowledging a blowout price and a knowledgeable and independent board.
The Delaware Supreme Court’s Decision:
Because Lyondell’s charter contained a provision protecting the board from liability for a breach of the duty of care, the sole issue on appeal was whether the Lyondell directors breached the duty of loyalty by failing to act in good faith. The Delaware Supreme Court reversed the Chancery Court and remanded the case for entry of judgment in favor of the directors. The Supreme Court identified the following three factors that led the trial court to review “the existing record under a mistaken view of the applicable law:”
- imposing Revlon duties on the Lyondell directors before either they decided to sell or the sale had become inevitable;
- reading Revlon and its progeny to create a set of specific requirements that directors must follow in order to discharge their duties; and
- equating an imperfect attempt to carry out duties with a knowing disregard of one’s duties.
Revlon Duties. In holding that “the Board’s failure to engage in a more proactive sale process may constitute a breach of the good faith component of the duty of loyalty,” the Chancery Court focused on the time period between the filing of a Schedule 13D by a Basell affiliate, which alerted the public to its interest in Lyondell, and the beginning of negotiations for the sale of the company. The Supreme Court clarified that Revlon duties apply only “when a company embarks on a transaction…that will result in a change of control.” Thus, the Lyondell board’s Revlon duties attached when negotiations began in earnest and not two months earlier when the company was put “in play” by the filing of the Schedule 13D. The board’s wait and see approach after the 13D filing was “an entirely appropriate exercise of the directors’ business judgment.” Finally, the Supreme Court reiterated that there is only one Revlon duty — to obtain “the best price for the stockholders at a sale of the company” — and due to the unique circumstances of each transaction there is and can be no prescribed method of discharging that duty.
Duty of Loyalty. The Chancery Court focused heavily on the Lyondell board’s flawed process prior to and during the negotiation of the merger agreement. The Supreme Court, though, noted that “there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.” During the one week between the time negotiations began and the signing of the merger agreement, the Lyondell board met several times, evaluated the value of the company and the premium price offered, and consulted with legal and financial experts prior to approving the merger agreement. Although the Lyondell board may not have done “everything that they (arguably) should have done to obtain the best sale price,” the Supreme Court held that the record “clearly establishes that the Lyondell directors did not breach their duty of loyalty by failing to act in good faith.”
The Delaware Supreme Court, in reversing the lower court’s Lyondell decision, took a big step towards restoring confidence to boards of directors faced with the difficult task of selling a company. Where the duty of loyalty is in question and the case involves independent directors with knowledge of the market and the value of the company, the appropriate inquiry is whether the directors “utterly failed to attempt to obtain the best sale price.” The Supreme Court was unequivocal in holding that the Lyondell facts did not approach the conscious disregard necessary to imply a breach of the duty of loyalty.
If you have questions or need additional information please contact:
David F. Gieg
L. Kent Workman