A noble error

John Noble can't be accused of focusing on outcome instead of process in evaluating Lyondell Chemical Co.'s sale to Basell AF SCA to form Lyondell Basell Industries AF SCA.

Otherwise, the Delaware vice chancellor would have waved away a shareholder challenge to the $13 billion cash deal, which came at a 45% premium to the target's share price on May 10, 2007, the day before news of Basell's interest became public.

He also would have been influenced by the following facts: The parties signed the merger pact on July 17, 2007, just days before the credit markets collapsed; the all-cash deal was not subject to financing; and Lyondell shareholders overwhelmingly approved the deal.

Instead, the judge found in his July 29, 2008, ruling that the process by which Lyondell's board vetted the sale was wanting under the Revlon doctrine, which requires a board selling a company for cash to realize the highest value reasonably attainable. He raised three primary objections in a 73-page opinion in which he would not dismiss claims that Lyondell's directors violated their duties of care and good faith in approving the deal. The merger agreement itself was highly favorable to Basell even though the board did not conduct a presigning market check and could not do so after signing the deal. In Noble's telling, Lyondell CEO Dan Smith (pictured) dominated the sale process. And, Noble wrote, "the whole deal was considered, negotiated, and approved by the board in less than seven days," even though Lyondell was on solid financial footing. Noble's decision was especially unnerving to the M&A bar because it raised the possibility that Lyondell directors could be personally liable, though the judge went out of his way to say such an outcome was remote.

Many deal lawyers have found the opinion problematic for reasons that Debevoise & Plimpton LLP set out in a strongly worded memorandum: "The case is troubling because it finds that independent directors, acting without conflicts of interest, could be held personally liable for approving a high-premium, cash merger with non-coercive, customary deal protection terms, which was overwhelmingly supported by stockholders. According to the court, the directors may have breached their duty of good faith by failing to engage in a more proactive sale process."

Lawyers had previously thought that there is "no single blueprint" for a target board that's selling a company for cash, a doctrine the Delaware Supreme Court set out in the 1989 case Barkan v. Amsted Industries Inc., and that target boards had broad leeway in designing a process that would pass muster under Revlon. Noble cited Amsted but called it a "limited exception to the active sale process generally contemplated by the Revlon jurisprudence."

Delaware lawyers, always ready to defend their state's jurisprudence, didn't disappoint. J. Travis Laster of Abrams & Laster LLP in Wilmington argued in a memo that Noble's decision was another example of Delaware judges' long-standing suspicion of target CEOs who dominate a sale process. Such a situation inspired Smith v. Van Gorkom, the 1985 Delaware Supreme Court decision that imposed personal liability on target directors. The case caused such uproar that the state's legislature passed a law allowing companies to exempt directors from personal liability for violations of the duty of care. As Laster and others noted, Noble's ruling came on the defendants' motion to dismiss the case, a procedural posture that meant Noble had to draw all inferences in favor of plaintiff Walter Ryan Jr.

And the Lyondell board could have created a record that cast it in a better, more proactive, light.

Nevertheless, Lyondell remains a puzzling decision. Basell first expressed interest in Lyondell in 2006, and the target had seen two rivals, GE Plastics and Huntsman Corp., sell in multibillion deals. Thus Lyondell's board had ample opportunity to consider the company's fate. Noble offers no conflict of interest that might have clouded Smith's ability to negotiate the deal. And in the two months between the emergence of Basell's interest and the signing of the deal and the six months between signing and closing, no rival bidder emerged.

Noble admits in a footnote that Ryan will have trouble proving damages, given the "fair price" in the deal. Maybe the judge should have thought over that price further before issuing an opinion that seems an exercise in judicial willfulness rather than one based on business practicalities.

David Marcus is a senior writer at Corporate Control Alert.