The M&A bar breathed a huge sigh of relief last week upon reading the Delaware Supreme Court's decision in Lyondell Chemical Co. v. Ryan, a decision that Delaware Vice Chancellor Stephen Lamb parsed Friday morning at the Tulane Corporate Law Institute in New Orleans. Lamb's fellow Vice Chancellor John Noble in August declined to dismiss a lawsuit that claimed Lyondell's directors violated their duty of loyalty by approving a $48 per share offer from Basell AF in July 2007. Basell had just seen its agreement to buy Huntsman Corp. jumped by Hexion Specialty Chemical Co. The presentation was something of a last hurrah at Tulane for Lamb, who's stepping down from the bench this summer.
The deal came at the absolute peak of the LBO craze. By the time Noble issued his opinion, Hexion was trying to walk from the Huntsman deal, and the high price of oil had badly hurt most of the companies in the industry. Nonetheless, Noble was dissatisfied with the process by which the Lyondell board approved Basell's offer. Many M&A lawyers thought the decision was absurd both legally and practically, sentiment that grew even stronger when Basell's American unit filed for bankruptcy in January. As Goldman Sachs Group Inc. (NYSE:GS) M&A banker Tim Ingrassia said Thursday at Tulane, "I've been amused by the series of Lyondell decisions coming out of the Delaware courts. The market has already ruled. The buyer is bankrupt. I think that means you got a pretty good price."
Lamb offered a more constrained assessment in his analysis of Justice Carolyn Berger's 20-page ruling in Lyondell. He noted that it was the last chapter in the story that started with the 1985 case Smith v. Van Gorkom, a famous Delaware decision that subjected target company directors to personal liability for approving a high-premium bid very quickly. The Delaware legislature essentially voided the decision by amending the state's corporate law to include Section 102(b)(7), which exempts board members from personal liability for violations of the duty of care -- though not of the duty of loyalty.
That distinction was critical to Berger's ruling. "The trial court approached the record from the wrong perspective," she wrote, in a passage Lamb quoted. "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 sales price." The record before Noble clearly showed that the Lyondell board had done more than enough to satisfy the lower standard, Berger held.
Lamb also discussed Berger's consideration of Revlon, a famous Delaware case that requires directors to get the best price reasonably available one it decides to sell a company for cash. But, Berger held, "The Court of Chancery focused on the directors' two months of inaction, when it should have focused on the one week during which they considered Basell's offer." Revlon duties only arise once a board has decided to sell -- not when the company is "put into play." Noble made two other mistakes in his reading of Revlon, Berger held. He saw the case "and its progeny as creating a set of requirements that must be satisfied during the sale process." That's just wrong, she said. Finally, she wrote, "The trial court equated an arguably imperfect attempt to carry out Revlon duties with a knowing disregard of one's duties that constitutes bad faith."
Lamb and his fellow strongly approved of Berger's decision. Perhaps best of all, he said, "It's only 20 pages long, and you can read it twice, and you can cite it without any fear of what's in a footnotes, because you can read all those too." - David Marcus
David Marcus is senior writer at Corporate Control Alert.
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