Corporate directors are subject to a variety of duties and must exercise reasonable business judgment in performing services on behalf of a corporation and its shareholders. If they conform to legal standards, they generally may avoid personal liability for decisions made in their official capacity, even if a selected course of action produces unfortunate results, substantial losses or business failure. Directors, therefore, should closely follow court rulings to keep abreast of applicable standards and to tailor their behavior accordingly.
Rulings by Delaware courts are of particular interest, because many corporations are organized under Delaware law and Delaware rulings often set the tone for other jurisdictions. Lyondell Chemical Company v. Ryan, decided this past spring, is one Delaware ruling that has attracted substantial attention.
Lyondell Chemical Company ("Lyondell") was the subject of a merger approved by more than 99% of shares voted at a special shareholders meeting in November 2007. Prior to the merger, Lyondell was the third largest independent publicly traded chemical company in North America. The merger was approved by Lyondell’s board of directors before the shareholders’ meeting. The merger was attacked by certain shareholders who claimed that the directors had breached their fiduciary duties to the corporation and its shareholders, and had acted in bad faith, by failing to follow certain steps and processes established under prior Delaware rulings commonly referred to as "Revlon duties."
Revlon duties stem from a merger involving the Revlon cosmetics firm, and consist of a number of measures developed through a series of rulings to ensure that directors obtain the best possible price for a selling corporation and its shareholders when a sale or merger occurs. They impose a duty on directors to make an informed and deliberate inquiry to value an enterprise and to negotiate a transaction and they contemplate what had been perceived as almost a required set of steps necessary to establish directors’ satisfaction of their duty. These steps generally included procurement, discussion and extensive evaluation of various valuations and other independent reports, detailed documentation of deliberations, implementation of a bidding process, avoidance of restrictions on the ability to shop the company, adoption of certain defensive measures, etc.
In April 2006, Lyondell’s Chairman and CEO, Dan Smith ("Smith"), received notice that Basell AF ("Basell") was interested in Lyondell. Several months later, Basell submitted an offer at $26.50 to $28.50 per share which Lyondell’s directors rejected as low. A year later, a Basell affiliate made an SEC filing evidencing acquisition of an 8.3% interest in Lyondell, and stated an interest in acquiring an even larger interest. This type of SEC filing is generally considered to be an announcement to the market that a company is "in play." Instead of implementing a chain of Revlon responsive steps, Lyondell’s directors adopted a "wait and see" approach.
On July 9, 2007, Smith met with Basell’s controlling shareholder and received an offer in the $44 to $45 per share range, which he considered too low because Lyondell was performing well and was not for sale. Later that day, Basell made an offer at $48 per share, as a cash deal, with no financing contingency, but required Lyondell to agree to a $400 million breakup fee and to sign a merger agreement within a week. Smith scheduled a special board meeting for July 10 and presented the offer, which was generally approved by the Lyondell board after just one hour of discussion that included review of internally-prepared financial projections and valuations. The Lyondell board then requested a written offer from Basell, which Basell agreed to provide, but only on the condition that the offer be accepted or rejected by July 11, the date upon which Basell’s offer to acquire a different company was set to expire.
Following another one hour meeting, Lyondell’s board agreed to Basell’s revised offer, instructed its advisor, Deutsche Bank, to prepare a valuation, and began to work toward a merger agreement. Over the next several days, Lyondell and Bassell haggled over deal terms and conditions, and performed their due diligence, including Lyondell’s receipt of Deutsche Bank’s opinion that the merger price was "an absolute home run" which no other entity would top. On July 16, Lyonell’s board approved the deal, subject to Lyondell shareholder approval.
More than 99% of Lyondell’s shareholders who voted approved the merger. Several shareholders, however, claimed that the Lyondell board failed to act in good faith, that the board process employed was flawed, the price was insufficient, and the agreed deal protection provisions were unreasonable. More specifically on the issue of the board process, the claim was that the Lyondell directors had waited for more than two months to take any action to prepare for a transaction after Bassell made its intentions known in the SEC filing, the merger agreement was negotiated in just one week’s time, and the Lyondell directors failed to even consider conducting a limited market check to ascertain if there was an opportunity to negotiate a better merger price.
The Delaware Supreme Court overruled the trial court which held that the Lyondell directors acted in bad faith by failing to implement Revlon measures to assure receipt of the best possible price. The Supreme Court noted that the directors had not breached their duty of loyalty to the shareholders by adopting a "wait and see" position following Basell’s SEC filing. At that point, the company was not for sale and no offer had been received. According to the Supreme Court, Revlon duties do not arise simply because a company is "in play"; the duty to seek the best possible price applies only when a company embarks on a transaction on its own or in response to an unsolicited offer that will result in a change in control.
The Delaware Supreme Court rejected a rigid interpretation of Revlon-suggested responses to a purchase offer, noting that the only duty established by Revlon is for directors to seek the best available price. Directors may satisfy this duty without conforming to a specific checklist of steps and actions. In this case, the Supreme Court noted that there were specific undisputed facts supportive of Lyondell’s directors: they were active, sophisticated and well aware of the company’s value; they had reason to expect no further or better offers; they had negotiated for and received a higher price; they had Deutsche Banks’ favorable opinion; they relied upon their legal advisors; and no other potential buyer expressed any interest during the four months following announcement of the merger and the Lyondell shareholders’ meeting in November.
Because there was no conscious disregard by the Lyondell directors of their duty to obtain the best possible price, even though their effort may have been flawed, the Delaware Supreme Court concluded there was no breach of their duty of loyalty to act in good faith.
The Lyondell decision provides directors assurance that they will not be found to have acted in bad faith, and be personally responsible, unless they were consciously disregarding their duties. Please contact us if you have any questions regarding director obligations to avoid personal liability.