Many Ohio-based companies are incorporated in Delaware, the nation’s foremost state of incorporation. Therefore, boards of directors of these companies should heed the Delaware Supreme Court’s recent decision in Lyondell Chemical Company v. Ryan, which will have a resounding impact on shareholder suits for breach of loyalty.
Lyondell comes twenty-three years after Revlon v. McAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), the famed decision in which the Delaware Supreme Court defined the duty of good faith owed by directors when conducting the sale of their company. Lyondell clarifies what – and when – a board must do when faced with a merger proposal. The Lyondell court held that absent evidence that board members “knowingly and completely failed” to perform the duties owed to company stockholders, a shareholder claim for breach of the duty of loyalty must fail. The court further held that a board’s “Revlon duties,” including the duty to obtain the best price for stockholders, do not kick in when a company first becomes “in play.” Rather, the duties begin when the board starts to actively negotiate the sale of the company.
At issue in Lyondell was whether Lyondell Chemical Company’s board of directors had, under Revlon, failed to obtain the best available price when they accepted a merger offer of $48.00 per share from Basell AF. The pertinent facts are as follows: In May 2007, Basell, which had previously made acquisition overtures to Lyondell, filed a Schedule 13D with the Securities Exchange Commission, disclosing its right to acquire an 8.3% block of Lyondell stock. Lyondell’s board recognized that Basell’s action signaled that the company was in play. However, the directors sought no alternative bids, and did not obtain a valuation of the company. On July 9, 2007, Basell made a take-it-or-leave-it offer of $48.00 per share and gave Lyondell one week to accept. Between July 10 and 16, Lyondell’s board met to consider Basell’s offer. The board retained Deutsche Bank to conduct a valuation of the company, and legal counsel to help assess the merits of the offer. The board’s considerations took place within the span of one week and involved special meetings lasting no more than one hour each. Ultimately, the board voted to approve the merger and recommended it to company shareholders who overwhelmingly ratified it. However, a small group of disgruntled shareholders sued claiming that Lyondell’s board had violated its duty to shareholders by not doing enough to research the deal after Basell’s original overtures (in April 2006), and then by accepting the deal too quickly after Basell imposed the deadline.
The trial court denied the board’s motion for summary judgment. On appeal, the Delaware Supreme Court reversed, finding that the board had not breached its duty of loyalty. The court ruled that the board’s “Revlon duties” did not begin with Basell’s Schedule 13D filing, but rather when Basell formally offered $48.00 per share. Accordingly, the court confined its assessment of the board’s conduct to the one-week period between Basell’s final offer and the board’s approval of the acquisition. During that time, Lyondell’s directors met several times to consider the offer; were apprised of the company’s valuation and the unlikely prospect of a better offer from another suitor; and solicited legal advice and financial expertise. According to the court, the board’s actions, while not perfect, were reasonable effectuations of the board’s fiduciary duties.
Board members and corporate practitioners alike are wise to familiarize themselves with Lyondell and its impact on shareholder claims for breach of loyalty. Under Lyondell, a board’s “Revlon duties,” including the duty to auction, arise when the board starts to negotiate the sale of the company. Moreover, only where directors are shown to have “knowingly and completely failed” to perform their responsibilities will they be liable for breach of their duty of loyalty to shareholders. In sum, Lyondell will make it harder for disgruntled shareholders to sustain claims against board members, given that shareholders will have to prove that the board “completely and utterly” failed to carry out its duties when presented with an offer of acquisition.
If you would like a full copy of the opinion, or if you have any questions related to corporate director liability, please contact one of our Corporate and General Business Practice Group members.
