Target Company Directors Satisfied Their Duty of Loyalty in Merger Approval

Directors of a target company satisfied their duty of loyalty and discharged their Revlon duties to maximize shareholder value in a merger situation, ruled the full Delaware Supreme Court. While it was a quick sale done within a week with no market check, the directors valued the company, they knew the market for that kind of company, they tried to get better terms, and ended up with a premium offer that received overwhelming shareholder approval. ( Lyondell Chemical Co. v. Ryan, Del. Supreme Court, No. 401, March 25, 2009).

When a Schedule 13D was filed, the target directors believed that the company was in play, but took a wait and see approach. While the trial court criticized the directors for slothful indifference for languidly awaited overtures from potential suitors reacting to the acquirer’s SEC Schedule 13D filing, the Supreme Court said that the wait and see approach after the 13D filing was an entirely appropriate exercise of the directors’ business judgment.

Revlon duties do not arise simply because a company is in play, said the Court. The duty to seek the best available price applies only when a company embarks on a transaction on its own initiative or in response to an unsolicited offer that will result in a change of control. The time for action under Revlon did not begin until the day the directors began negotiating the company’s sale. The Chancery Court wrongly focused on the directors two months of inaction, said the en banc Court, when it should have focused on the one week during which they considered the offer.

During that crucial week, the directors met several times to consider a premium offer. They knew the company’s value and followed the advice of legal and financial advisers. They tried to negotiate a higher offer, evaluated the price offered and the likelihood of obtaining a better price, and then approved the merger at a premium price. While they did not conduct a market check before agreeing to the merger, they did not breach their duty of loyalty by failing to act in good faith.

There is only one Revlon duty, said the Supreme Court, to get the best price for the shareholders in a sale of the company. No court can tell directors exactly how to accomplish that goal because they will be facing a unique combination of circumstances, many of which will be outside their control. There is no single blueprint that a board must follow to fulfill its Revlon duties

They did not act in bad faith, said the Court. Bad faith is when fiduciaries intentionally fail to act in the face of a known duty to act, demonstrating a conscious disregard for their duties. According to the Court, there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.

Directors must be reasonable not perfect, continued the Court. In a merger situation, an extreme set of facts is required to sustain a disloyalty claim premised on directors intentionally disregarding their duty. If directors fail to do all that they should have done, said the court, they breach their duty of care. But only if they knowingly and completely fail to undertake their duties would they breach their duty of loyalty. Instead of questioning whether the independent directors did everything they arguably should have done to obtain the best sale price, explained the Court, the inquiry should have been whether those directors utterly failed to attempt to obtain the best sale price.

There may have been a triable issue of due care, intimated the Court, but the duty of due care was not on the table because the company’s charter had a clause protecting directors for liability for breaches of due care, but not for breaches of loyalty.