| ||||||||||
| ||||||||||
— Analysis —
The recent decisions of the Supreme Court of Delaware in Lyondell Chemical Co. v. Ryan and the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders offer the opportunity to contrast distinct approaches to target board duties in change of control transactions. Process will continue to dominate deliberations on both sides of the border, and the common denominator of judicial deference for the business judgment rule in specific fact situations will play a continued role. In Delaware and those states without constituency statutes that choose to follow Lyondell and its clarification of Revlon, there are a number of takeaways for both bidders and targets. The court found that strike suit criticisms of flawed process and unreasonable deal protection were really two aspects of a single claim under Revlon, namely that "the directors failed to obtain the best price in selling the company." The court also clarified the distinction between director breach of the duty of care (for which the Delaware Code permits charter exculpation) and the duty of loyalty (failure to act in good faith), a breach of which is not exculpable.
The court drew no distinction between bad faith and the absence of good faith and cited Disney as authority that bad faith would encompass intentional dereliction of duty as well as intentional harm. In an important distinction, the court further found that the imposition of liability for bad faith required evidence that the directors knew that they were not discharging their fiduciary duties. In addition to clarifying the issue of mental state of the directors of target companies, the court in Lyondell also gave further guidance on process. First of these practice points is that the mere filing of a Schedule 13D may put a company in play, but Revlon duty is only triggered once the board embarks on a change of control transaction. In Lyondell, a wait-and-see approach upon the Schedule 13D filing was acceptable under the circumstances. Second, the court reaffirmed Barkan to confirm that there is "no single blueprint that a board must follow to fulfill its duties." Accordingly, Revlon's progeny, which have considered issues such as auctions, market checks, canvassing strategic buyers, the quantum of break fees, the use of go-shops and the imposition of no-shops by the buy side, do not stand as authority for a definitive set of steps that must be followed in every case: "the failure to take any specific steps during the sale process could not have demonstrated a conscious disregard of their duties." Third, the court cited Paramount and Lear as authority to confirm that "reasonableness not perfection" is the standard for director decision-making, and that "only if they knowingly and completely failed to undertake their responsibilities would they breach their duty of loyalty." In Lyondell, knowledgeable, experienced, independent directors, properly advised, who required only minimal discussion in the face of a short-fuse, blowout, no-shop bid, met this duty of loyalty. Their decision-making process did not rise to a conscious disregard of that duty. Lyondell clearly affirms the objective of target board directors maximizing shareholder value and obtaining the best sale price available. It also brightens the line between duty of care (implicating as it does gross negligence without conscious or culpable intent), and duty of loyalty (implicating bad faith or failure to act in good faith). By contrast, in BCE, the Supreme Court of Canada has clearly disaffirmed the notion of shareholder value maximization as the sole objective of the board and has arguably blurred the line for target board director duties in change of control transactions. BCE was an attempted takeover by way of plan of arrangement, functionally similar to a merger, but requiring court approval. As in Delaware (where director duties are found in the common law), the constituent statute in the BCE case (Canada Business Corporations Act) statutorily distinguishes between director duties of care and good faith, but the distinction is not meaningful for exculpation purposes (the CBCA and similar provincial statutes do not permit charter relief for breach of director duties at all), only for indemnification purposes (indemnity is denied unless the director acts "honestly and in good faith with a view to the best interests of the corporation.") In BCE the transaction was attacked not by stockholder strike suit, but rather by debenture holders in BCE's wholly-owned subsidiary that would be guaranteeing the acquisition debt who claimed that the transaction would lead to credit ratings downgrades which, in turn, would lead to a reduction in the trading value of their bonds. They argued that the plan of arrangement should not be found to be fair as required under the CBCA arrangement provisions and, alternatively, that the LBO was "oppressive" to their interests under the CBCA. Interestingly, BCE also involved a Schedule 13D filing that put the company in play and caused the directors and their advisers to decide it was in the best interests of BCE and its shareholders to commence an auction process. This generated three bids, all heavily leveraged. Lyondell involved only a single bidder, though with an offer Lyondell's financial advisers described as "an absolute home run." This distinction, however, does not detract from the focus of required director duties. The BCE board very likely believed that Revlon was the law of Canada, at least to a major extent, but they were also careful to consider debenture holder interests as a result of an earlier Supreme Court of Canada decision in Peoples, which was a distress situation and whose application to change of control transactions was uncertain. The court affirmed its earlier decision in Peoples to confirm that the directors must act in the best interests of the corporation, and further, that there is no principle in Canadian law "that one set of interests -- for example the interests of shareholders -- should prevail over another set of interests," even in the case of change of control situations. This is, of course, at odds with Lyondell's and Revlon's shareholder primacy in the same context. In a defining comment, the court enunciated a non-exclusive shopping list of stakeholders including "shareholders, employees, creditors, consumers, governments and the environment" as interests the directors may look to, but also qualifying the consideration by stating that "courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule." More troubling, however, was the Supreme Court's overlay on the facts of the case to say that "directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debenture holders in these appeals" coupled with "this is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen." The court laid out a complicated analytical framework involving numerous prongs and factors associated with each of the plan of arrangement and oppression challenges by the debenture holders. Ultimately, it was determined on the facts that the debenture holders had failed to contract in their trust indentures to preserve their rights (including to vote on a plan of arrangement or maintain credit ratings), and that their economic interests had in fact been appropriately considered, consistent with a reasonable expectation of such consideration in the best interests of the corporation. Although BCE would have been the largest LBO on record had it closed, it ultimately failed to consummate on a solvency certificate condition precedent, not on ability of the debenture holders to derail the transaction. However, the decision stands as good law on director duties in change of control transactions. Both Lyondell and BCE have received criticism following the release of the decisions. For example, in Concurring Opinions' "Delaware Back to Sturdy Doctrine; Good Faith in Coma," Lawrence Cunningham has suggested that what Lyondell has settled "could change in Delaware's next big case" since Delaware courts consciously see themselves as judges in equity who may, on egregious facts "revive the notion of good faith as an independent fiduciary duty or some vital aspect of obligation, such as a component or cognate of the duty of loyalty." This, however, does not detract from the court's Revlon affirmation and clarification as a bright-line test. As such, it is instructive and helpful in focusing the objective of directors' duty to maximize shareholder value in a change of control and confirming shareholder paramountcy. In the case of BCE, however, such guidance has been sacrificed in the name of good corporate citizenship, making Canada a de facto constituency state via case law. In a recent roundtable discussion on BCE at the University of Toronto Law School, law school professor Edward Iacobucci, suggested, as reported in Law Times (April 13), that "the duty to act in the best interest of the corporation is as indeterminate and as socially useful as the duty of a bus driver to act in the best interest of a motor vehicle." Indeed. Nicholas Dietrich is a partner with Gowling Lafleur Henderson LLP. Comments |
|
|
|
|
|
Tough decision. I agree that it is very hard to know how to satisfy the conflicting interests of the constituencies.