According to Pace University Law Professor Andrew Lund, the decision was notable for a couple of reasons. First, the court held that the duties put forth in the famed 1986 Revlon decision, did not apply to the Lyondell board during the two month period of relative inactivity. “The problem with the trial court’s analysis,” reads the opinion, “is that Revlon duties do not arise simply when a company is ‘in play.’ The duty to seek the best available price applies only when a company embarks on a transaction . . . that will result in a change of control.” In other words, Revlon kicks in when a board starts a negotiation to sell the company.
Okay, so what about the week-long period after hearing about the offer? Did the directors fail in their duty of good faith to the shareholders? Lund points to a pivotal section late in the opinion in which the court explains: “Only if [the directors] knowingly and completely failed to undertake their responsibilities would they breach their duty of loyalty. The trial court approached the record from the wrong perspective. Instead of questioning whether disinterested, independent directors did everything that they (arguably) should have done to obtain the best sale price, the inquiry should have been whether those directors utterly failed to attempt to obtain the best sale price.”
Lund explains that given this language, it’s going to be hard for shareholders going forward to make “good faith” claims against corporate boards in such circumstances. “It all but eviscerates the ability to bring such a claim.”
Lund also says that the court didn’t need to go this far; it could have just made its Revlon ruling as it pertained to the two month period, and sent the case back to the Chancery court to apply the Revlon analysis to the one-week period. “But the court swung for the fences,” says Lund, by articulating this new “good faith” standard, particularly the “completely” and “utterly” adverbs. “It’s not going to make the plaintiffs’ bar very happy.”
Importantly, this [case] depends on a strikingly narrow understanding of "bad faith" in Delaware fiduciary law. In my first post on this case last August, I observed, "Disney and Stone now have defined 'bad faith' in a manner that does not require illegality or fraud (the traditional meanings of 'bad faith'), or disloyalty -- at least in the traditional sense of self-dealing. 'Bad faith' now has a more expansive meaning, that might include actions by directors who are admittedly independent and disinterested." While all of this remains true, it appears that the Delaware courts still have an extremely narrow view of bad faith.
Gordon goes on to note that plaintiffs now are going to need AIG-like facts to even get to trial on a bad faith claim.
Francis Pileggi's blog posts a through review by Kevin Brady:
The Supreme Court disagreed noting that the problem with the Court of Chancery’s analysis was that Revlon duties arise not because a company is “in play” (such as in this case where there was a Schedule 13D filing) but rather when the company “embarks on a transaction – on its own initiative or in response to an unsolicited offer – that will result in a change of control.” In this case, that was when the Lyondell directors began negotiating the sale of Lyondell. The Supreme Court further noted that “there is no legally prescribed steps that directors must follow to satisfy their Revlon duties” and that the Lyondell directors failure to take any specific steps during the sale process could not have demonstrated a “conscious disregard of their duties.”
The Supreme Court concluded that the Court of Chancery “approached the record from the wrong perspective. Instead of questioning whether disinterested, independent directors did everything that they (arguably) should have done to obtain the best sale price, the inquiry should have been whether those directors utterly failed to attempt to obtain the best sale price.” Finding that the record clearly established that the Lyondell directors did not breach their duty of loyalty by failing to act in good faith, the Supreme Court reversed the decision of the Court of Chancery and remanded the matter for entry of judgment in favor of the Lyondell directors.
