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Ryan v. Lyondell Chem. Co., C.A. No. 3176 (Del. Ch. July 29, 2008) (V.C. Noble)

July 29, 2008

The case involved a stockholder challenge to the actions of the Lyondell board of directors in
approving a $13 billion cash acquisition of Lyondell by Basell AF. The Court of Chancery denied
the defendants’ motion for summary judgment on plaintiff’s Revlon and deal protection claims,
but granted summary judgment in favor of the defendants on plaintiff’s “structural loyalty”
claims, disclosure claims, and claims against Basell for aiding and abetting a breach of fiduciary
duty.

Lyondell’s board did not conduct a formal pre-signing market check before approving the merger agreement, and it avoided an active role in negotiations with Basell, delegating much of that task to Lyondell’s CEO. The deal was considered, negotiated, and approved during a period of less than seven days, and the final merger agreement employed several deal protection devices, including a no-shop provision, matching rights, and a $385 million termination fee. For purposes of the summary judgment motion, the Court was required to draw all reasonable inferences in favor of plaintiff and could not conclude on the basis of the undisputed facts that the directors had satisfied their obligation under Revlon to carry out a process reasonably designed to secure the highest price reasonably attainable under the circumstances. Nor could the Court conclude on the summary judgment record that the deal protection measures in the merger agreement were reasonable under the circumstances. The Court therefore denied defendants’ motion for summary judgment on those claims. In its conclusion, the Court explained that the denials of summary judgment were “driven more by the constraints of a summary judgment process than it is by our corporate law,” and that the $48 per share price “was undeniably a fair one and may well have been the best that could reasonably have been obtained in that market or any market since then.”

With regard to the Revlon claims, the Court found that defendants could not satisfy their summary judgment burden in view of numerous factors from which the Court could draw a
reasonable inference that the directors had violated their Revlon duties. Those factors included: (i) the entire deal was negotiated, considered, and agreed to in less than seven days, raising concerns about how hard the board really thought about the transaction and how carefully it sifted through the available market evidence; (ii) the board met to discuss the buyer’s proposal for a total of no more than six or seven hours, suggesting the board did not carefully consider all of the alternatives available; (iii) after being put on notice by a Form 13D filing by Basell, the board did not take any action (e.g., retaining an investment banker; asking management to prepare projections and valuations; conducting a formal market check) in anticipation of a possible proposal from Basell or another suitor; (iv) the board did not actually negotiate with Basell or actively participate in the sale process but accepted a deal already fully-negotiated its CEO without its knowledge; and (v) the board did not conduct even a discrete and targeted market check to pitch a sale of the entire Company or the possibility of breaking it up into more valuable parts.

With respect to plaintiff’s challenges to the deal protection measures in the merger agreement,
the Court held that the summary judgment record before it did not allow it to rule that the
board’s full complement of deal protections were reasonable and proportionate under the
circumstances. The Court explained that “[o]n summary judgment, without undisputed and
sufficient evidence of either a proactive market check or that the Board, in fact, ‘knew’ that
it had secured the best deal reasonably available to the stockholders, one cannot exclude the
inference that the deal protections agreed to by the Board served no purpose other than to
squelch even the remotest possibility of a competing bid that might have increased the price
for the stockholders.” The Court did offer, however, that “[r]easonable deal protections can
serve numerous important purposes, including the fostering of deal certainty for both the target and the acquirer. Furthermore, deal protections can provide a rational economic incentive for a bidder to offer ‘top dollar’ for a target company—a benefit that is consistent with the target board’s Revlon objective—because it can be reasonably confident that its efforts will not be thwarted by a marginally more attractive jumping bid.”

The Court granted summary judgment in defendants’ favor on plaintiff’s “structural loyalty”
claims because the undisputed evidence showed that the members of the board were not
motivated by self-interest to approve the merger and that the ten non-management directors
were independent. Nevertheless, the Court declined to view the Revlon and deal protection
claims solely as violations of the duty of care – thereby denying a defense under Lyondell’s
Section 102(b)(7) exculpatory charter provision, which eliminated the directors’ liability for
damages for breaches of the duty of care. For purposes of summary judgment, the Court could
not rule out the possibility that the board’s failure to engage in a more proactive sale process
may have constituted “a breach of the good faith component of the duty of loyalty” because directors might have failed to act in the face of a known duty to act. The Court explained that
the board “appears never to have engaged fully in the process to begin with, despite Revlon’s mandate.”

The Court granted summary judgment in favor of defendants on plaintiff’s disclosure claims,
finding that the proxy materials disclosed, in a full and accurate manner, most of the material
information to which the stockholders were entitled. While there existed one potentially material defect in the disclosure, it amounted, at worst, to a violation of the duty of care, for which the defendant directors could not be held liable for damages by reason of the Section 102(b)(7) exculpatory provision in Lyondell’s certificate of incorporation.

In a lengthy footnote, the Court rejected defendants’ stockholder ratification defense, even
though the Lyondell stockholders had overwhelmingly approved the merger. First, in view of
the one potential disclosure violation, the Court could not conclude for purposes of summary
judgment that the stockholder vote had been “fully informed.” Second, plaintiff’s Revlon claim
was premised on the directors’ alleged failure to discharge their Revlon duties in good faith prior to recommending and submitting the merger to stockholders for approval, which might have undermined the voting process by depriving stockholders of the assurance that the board had acted diligently to pursue the best transaction reasonably available. The stockholders had not been asked to ratify the board’s potential abdication of its Revlon duties.

The Court also granted Basell’s motion for summary judgment on plaintiff’s claim that Basell
(the buyer) had aided and abetted the board’s breach of fiduciary duty. The summary judgment
record established that the negotiations had been at arm’s length, and therefore plaintiff could
not satisfy the “knowing participation” element of a claim of aiding and abetting a breach of
fiduciary duty.

The full opinion is available here