The Delaware Supreme Court last month overruled a perplexing -- and, to many lawyers, troubling -- decision from Vice Chancellor John Noble. In Lyondell Chemical Co. v. Ryan, Noble declined to dismiss a lawsuit that claimed Lyondell's directors violated their duty of loyalty by approving a $13 billion cash offer from Basell AF SCA in July 2007 that came at a 45% premium to the target's share price on the day before news of Basell's interest became public.

Noble's decision, issued last August, raised the possibility of personal liability for the directors with no conflicts who sold a company at a hefty premium, and it flew in the face of economic reality. By the time Noble issued the ruling, Hexion Specialty Chemicals Inc. was trying to walk from its agreement to buy Huntsman Corp., which had initially agreed to sell to Basell, and the high price of oil had caused a massive decline in the stocks of many chemicals companies and helped push Basell's North American unit into Chapter 11 in January. As Goldman, Sachs & Co. M&A banker Tim Ingrassia offered on April 2 at the Tulane Corporate Law Institute: "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 [the seller] got a pretty good price."

On March 25, a unanimous Delaware Supreme Court reversed Noble's decision. In a memorandum to clients, Wachtell, Lipton, Rosen & Katz partners Theodore Mirvis, Paul Rowe and David Katz called the reversal "a sweeping rejection of attempts to impose personal liability on directors for their actions in responding to acquisition proposals, and reaffirms the board's wide discretion in managing a sales process"

The reversal was the latest chapter in a story that started with the 1985 Delaware case Smith v. Van Gorkom, which 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 allows companies to exempt board members from personal liability for violations of the duty of care -- but not the duty of loyalty. Lyondell has such an exculpatory provision in its charter.

Delaware Supreme Court Justice Carolyn Berger noted that the distinction between care and loyalty should have been central to Noble's analysis.

"The trial court approached the record from the wrong perspective," she wrote. "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 court found that the Lyondell directors did not commit such a lapse.

She also wrote that Noble erred in his interpretation of the Delaware decision Revlon Inc. v. MacAndrews & Forbes Holdings Inc., which requires a board to get the best price reasonably available for a company once it has decided to sell. Noble found that the Lyondell board did nothing for the two months after Basell went public with its interest in Lyondell and was unacceptably disengaged during the weeklong flurry of negotiations that led to a deal.

Berger found three mistakes in Noble's application of Revlon. First, she wrote, he "focused on the directors' two months of inaction" rather than "the one week during which they considered Basell's offer." The former were irrelevant, since Revlon duties arise only once a board has decided to sell and not when the company is put into play. Second, Noble saw Revlon "as creating a set of requirements that must be satisfied during the sale process." That's just wrong, she said. "No court can tell directors exactly how to" fulfil their Revlon duties.

Finally, Berger wrote, "[t]he trial court equated an arguably imperfect attempt to carry out Revlon duties with a knowing disregard of one's duties that constitutes bad faith."

And Berger wrote that she would have found that the Lyondell board did satisfy its duty of care by meeting several times in the week Basell's bid was on the table, trying to get a better price, and evaluating Basell's offer and the likelihood of getting a better one.

The Delaware Supreme Court ruling was widely welcomed in the M&A bar. Before parsing Berger's decision at Tulane, Noble's fellow vice chancellor, Stephen Lamb, suggested that he thought the decision to overrule Noble was obvious. Said Lamb of the Berger opinion: "It's only 20 pages long, and you can read it twice, and you can cite it without any fear of what's in the footnotes, because you can read all those too."