n the Supreme Court of the State of Delaware, decided March 25, 2009
Key Facts: A suitor approached Lyondell’s CEO to discuss an acquisition at $40/share. The suitor raised its offer twice that same day to $49/share in discussions with Lyondell’s CEO. The Company was not shopped. A banker was engaged for a fairness opinion. The Board met about three times during a one week period. The Board instructed the CEO to negotiate better terms, all of which were rejected by the suitor. an agreement to sell at $48/share was entered into after one week of discussions. The Board’s (and the Banker’s) valuation analysis showed that the price was a substantial premium over the market price of the company. The stockholder approved the deal and the transaction was consummated.
Complaint: A stockholder of Lyondell initiated a class action, claiming breach of the Directors’ fiduciary duties of care and loyalty.
Delaware Court of Chancery Findings: This court found that the plaintiff alleged sufficient claims to allow the case to proceed as to the Directors breaching their fiduciary duties. The court focused on the Board only holding a couple of short meetings during the week, the failure to shop the company and minimal negotiations over the deal price.
Supreme Court of the State of Delaware Findings: This court reversed the Court of Chancery ruling and awarded summary judgment to the defendants, holding that the fiduciary duties of care and loyalty were not breached. The court focused on (1) that 10 of the 11 Board members were not Interested Directors, and thus a lower level of scrutiny was used in addressing the Board duty of care obligations, (2) the acquirer paid a premium for the shares, (3) negotiations over the price did occur and the Board met to address the valuation, while relying on a financial advisor and (4) reasons not to shop the company. In addressing the obligations of the Board, the Court focused on the Revlon obligations in a sale of business context and the duty of loyalty obligations under several established standards. The Court reviewed various previous standards applicable to a disinterested Board requiring either a finding of intent to do harm, intentional dereliction of duty, a conscious disregard of responsibilities or a systematic failure of the Board to exercise oversight.
Practical Pointers: While the Delaware Supreme Court provided comfort in those situations where a seller is negotiating with a single suitor, where the Board fulfils certain responsibilities, Boards should be extremely careful when dealing with a single suitor. A record of appropriate Board review and action needs to be established with the Board focusing on its duty of care and loyalty. These items include addressing potential conflicts of interests among Board members, whether to engage a banker, whether to shop the company, addressing the valuation of the company, including whether to obtain a fairness opinion, establishing a record of negotiations over financial terms, and establishing a record of Board discussions regarding the merits of the transaction.
If you would like to discuss how this case may affect you, please contact Edward D. Hirsch.