The Delaware Supreme Court reversed a controversial Chancery Court decision and re-affirmed the broad protections afforded disinterested directors from personal liability for damages in post-acquisition Revlon claims. In Lyondell Chemical Company v. Ryan (Del. March 25, 2009), the Delaware Supreme Court held that Revlon claims against Lyondell directors should have been summarily dismissed by the Chancery Court because the alleged deficiencies in the sale process constituted, at worst, a breach of the duty of care, and Lyondell directors were shielded from personal liability for duty-of-care claims by a DGCL §102(b)(7) charter exculpation provision. To claim a non-exculpable breach of good faith, plaintiffs would have had to allege not just that the sale process was seriously flawed, but that directors “utterly failed to attempt to obtain the best sale price.”
The Supreme Court’s decision provides important reassurances for directors facing the complex challenges of a sale of control. Revlon duties apply only when directors have actually decided to go forward with a change-of-control transaction, not when an acquirer puts the company “in play” by announcing ownership of a substantial stake and intent to acquire control. Once Revlon applies, there is no single blueprint or exclusive checklist for compliance. And, even a seriously flawed process will not result in personal monetary liability if the company has an exculpation provision in its certificate of incorporation and independent, disinterested directors at least attempt to satisfy their Revlon duties.
Unsolicited “Blowout” Offer
Basell AF first expressed interest in Lyondell in April 2006. Lyondell indicated it was not for sale, and further stated that Basell’s price range ($26.50 to $28.50 per share) was inadequate. In May 2007, Basell filed a Schedule 13D disclosing its right to acquire more than 8% of Lyondell’s outstanding shares and Basell’s intention to explore a business combination. Although the 13D filing fueled a sharp increase in Lyondell’s trading price (from $33 to $37 per share in one day) and signaled Lyondell was “in play,” its board decided simply to “wait and see” if the 13D generated other suitors. They took no affirmative steps to assess market interest or valuation in anticipation of an actual offer from Basell and took no other steps in response to that filing.
In the meantime, Lyondell’s CEO, Dan Smith, met repeatedly with Basell management to discuss acquisition terms, largely without the active supervision (or even the awareness) of the Lyondell board. On July 9, 2007, in response to Smith’s request, Basell’s CEO informed Smith that Basell’s “best” offer for Lyondell was $48 per share in cash, conditioned on a merger agreement being signed no later than seven days later, with a $400 million break-up fee.
CEO Smith convened a special meeting of the Lyondell board on July 10, 2007 to present and discuss the Basell offer. After an additional brief meeting on July 11, the board authorized Smith to finalize negotiations and decided to reconvene on July 16, 2007 to consider what Smith had negotiated. Lyondell engaged Deutsche Bank to prepare a fairness opinion, but not to solicit competing offers.
Smith requested several concessions from Basell: (1) a price increase; (2) a go-shop provision permitting the board to seek other potential buyers for 45 days after signing; and (3) a reduction in the $400 million break-up fee. Basell agreed to reduce the break-up fee to $385 million (3.2% of transaction equity value), but otherwise rejected these requests.
The final merger agreement presented to Lyondell’s board on July 16, 2007 contained a number of deal-protection measures in addition to the $385 million break-up fee, including a no-shop clause (with typical superior-proposal “fiduciary out” language) and a matching right for Basell. In addition, Lyondell kept its stockholder rights (“poison pill”) plan in place, other than for Basell.
Deutsche Bank presented its financial analyses and conclusions regarding financial fairness to the board at the July 16 meeting, concluding that the $48 price was financially fair to Lyondell stockholders. In fact, a Deutsche Bank managing director described the merger price to the board as “an absolute home run.” Deutsche Bank also identified other companies that might have an interest in acquiring Lyondell and presented reasons why no other bidder had materialized or was likely to top Basell’s bid. The board then unanimously approved the transaction.
On November 20, 2007, stockholders approved the transaction by more than 99% of the voted shares. The merger closed on December 20, 2007.
Chancery Court: Revlon Claims Survive Summary Judgment
Stockholders brought a class action claiming that the Lyondell board’s passive acceptance of Basell’s proposal without a proactive market check before or after signing breached its duty to seek the “best price reasonably available” under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). The board moved to dismiss on summary judgment, arguing essentially that it had fulfilled its Revlon duties by obtaining a “blowout” price that had cleared the market of other buyers (as evidenced by the absence of competing bids). In addition, the board argued that, even if it had breached its duties under Revlon, directors had, at worst, breached their duty of care, and Lyondell’s charter exculpation protected them from damage claims by stockholders.
Noting that the board had approved the transaction in less than seven days based on only six or seven hours of meetings, no proactive pre-signing market check and little hope of a meaningful post-signing check due to deal protections, Vice Chancellor Noble refused to dismiss the claims on summary judgment. He reasoned that the board’s pattern of passivity beginning at the filing of the Basell 13D raised serious questions: “It is difficult for the Court to conclude on this record, after giving Ryan the benefit of all reasonable inferences, that the process employed by the Board was a ‘reasonable’ effort to create value for the Lyondell stockholders.”
The Court also concluded there were material facts in dispute regarding whether the board had “failed to act in the face of a known duty to act” under Revlon, thereby “demonstrating a conscious disregard for their responsibilities” and a “breach of duty of loyalty by failing to discharge that fiduciary obligation in good faith.” Consequently, the Lyondell charter exculpation provision could not serve as a basis for granting summary judgment dismissal because trial could reveal non-exculpable duty-of-loyalty breaches.
Supreme Court: Three Mistakes about Revlon Duties
The Delaware Supreme Court reversed the Chancery Court decision, holding that it was based on three misperceptions about Revlon duties:
When Revlon Applies. Revlon duties do not arise simply because a company is put “in play” by an acquirer’s announcement that it has a substantial stake and an intent to pursue a change of control. 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.” The Chancery Court had been critical of the Lyondell board’s “two months of slothful indifference despite knowing the company was in play.” The Supreme Court held that Revlon duties did not apply until the board meeting on July 10, 2007, and that the board’s “wait and see” strategy prior to then was “an entirely appropriate exercise of the directors’ business judgment.”
No Set Requirements. The Chancery Court erroneously interpreted Revlon as creating a specific set of requirements – including an auction, market check or other demonstration of value-confirming market knowledge – that must be part of the sale process in order to comply. Reaffirming that there is “no single blueprint,” for Revlon compliance, the Supreme Court indicated that “there is only one Revlon duty – ‘to get the best price for the stockholders at a sale of the company.’” The Court added: “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.”
Although the Lyondell directors had not carried out an auction or a market check and had not demonstrated an “impeccable knowledge” of the market, the Supreme Court indicated that in the “totality of the circumstances” it would have been inclined to hold that the board had met its burden under Revlon. While the Supreme Court would not have questioned the Chancery Court’s decision that more facts were needed to conclude that Lyondell directors had met their duty of care under Revlon, the question before the Chancery Court was not failure to comply with duty of care but failure to act in good faith.
Imperfect ≠ Conscious Disregard. The Chancery Court wrongly equated an imperfect attempt to comply with Revlon duties with a “conscious disregard” of those duties which could constitute a non-exculpable failure to act in good faith in violation of the duty of loyalty. Reviewing its previous decisions relating to “conscious disregard” and the good faith element of duty of loyalty in In re Walt Disney Co. Derivative Litigation, 906 A.2d 27 (Del. 2006), and Stone v. Ritter, 911 A.2d 362 (Del. 2006), the Supreme Court concluded that “there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.” In the context of a Revlon sale of control, “conscious disregard” and a non-exculpatory breach of the good faith element of the duty of loyalty require a showing that directors “utterly failed to attempt to obtain the best sale price.”
Based on this “utter failure to attempt” standard, the Supreme Court concluded that the Chancery Court could not have found “conscious disregard” because the Lyondell board (1) was generally aware of the value of their company and knew the chemical company market; (2) solicited and followed the advice of their financial and legal advisors; (3) attempted to negotiate a higher offer even though all the evidence indicated that Basell had offered a “blowout” price; and (4) approved the merger agreement because “it was simply too good not to pass along [to the stockholders] for their consideration.”
The Future of Revlon Compliance
The Delaware Supreme Court’s decision does not change the best practices that should guide a board facing a change-of-control decision. Proactive market checks or other deliberate means of confirming market value, appropriate board oversight of management throughout the negotiation process and resistance to hurried, buyer-imposed timetables will continue to be important Revlon process goals that boards should pursue to help ensure the best value for stockholders, satisfy the duty of care and reduce litigation risk.
The importance of the Lyondell decision is that it reaffirms that disinterested directors can attempt to comply with their Revlon duties in the high-pressure, unique-facts-and-circumstances environment of a sale-of-control transaction free from the risk that they will be exposed to personal monetary liability after the fact (so long as the company has a charter exculpation provision). The Lyondell decision makes it clear that stockholder-plaintiffs will not be able to undermine the important policies embodied in DGCL §102(b)(7) simply by recasting duty-of-care claims in terms of “conscious disregard” and breach of the good faith element of the duty of loyalty.