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Delaware Chancery Court Questions Good Faith of Directors in Sale of Company to Unrelated Party at a Premium

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In Ryan v. Lyondell Chemical Co. , 2008 WL 2923427 Del. Ch. July 29, 2008, a case involving an unsolicited, cash offer an unrelated strategic acquirer at a substantial premium to market price, Court denied defendants motions summary judgment on breach of fiduciary duties sale process deal protections. The Court allowed monetary damages claims directors to proceed to trial based on possibility directors conduct so standards of care it involved a lack of good faith no conflicts of interest. The Court critical of Boards response to a filing put company in play, day negotiating process actual deal, failure to conduct a pre signing market check, failure to negotiate successfully a post signing go shop, deal protections a 3 break up fee matching rights a superior proposal. Factual BackgroundLyondell is a manufacturer of chemicals plastics it financial strain or marketed sale at time it received a proposal Basell AF, a Luxenburg plastics company, to purchase company at a attractive premium. In May 2007, an affiliate of Basell obtained rights to purchase 8. 3 of Lyondell s shares filed a Schedule 13D indicating it seek to acquire Lyondell. Following filing, Board adopted a wait posture to gauge market reaction determine if bidders emerge. The Board no to Company, retain an investment banker or develop a response strategy a acquisition be proposed. A private equity firm approached Lyondell CEO Dan Smith a management led buyout, Smith rejected proposal of hand due to concerns inherent conflicts of interest. Smith scheduled a July 9 meeting Chairman President of Basells parent company, Leonard Blavatnik. Prior to meeting, Basell announced a acquisition of a chemical company, outbid, by July 9, needed to decide quickly to increase bid on company or pursue an acquisition of Lyondell. Through a series of negotiations Smith Blavatnik, Basell offered 48 share, a 45 premium market 13D filing, a 20 premium current market price. Such offer conditioned on Lyondell signing a merger agreement days agreeing to a 400 million slightly 3 of equity value break up fee. The Board considered proposal in a 50 minute meeting on July 10 a 45 minute meeting on July 11 discussed transaction in executive session but Smith present at regularly scheduled meeting on July 12. The Board retained Deutsche Bank to prepare a fairness opinion, deal teams worked to meet July 16 signing deadline. On July 15, Smith contacted Blavatnik requested an increase in offer price, a go shop provision 45 days 1 break up fee go shop period, a reduction in 400 million break up fee go shop. Blavatnik agreed to reduce break up fee to 385 million 3 of equity value rejected requests. The directors received proposed merger agreement late in day on July 15. It included a typical fiduciary clause, included a no shop clause matching rights superior proposals. At a July 16 meeting, Board recognized Basells negotiating tactics constraining actions to discharge fiduciary duties, believed offer higher companys future valuation as a stand alone, higher bid. After hearing management legal financial advisors, Board voted unanimously to approve merger. OpinionThe Court that:the Boards process troubling requirements articulated in Revlon Delaware cases, denied summary judgment on plaintiffs Revlon claims in light of Courts doubt adequacy of Revlon procedures, Court conclude deal protection measures, customary norms, reasonable, denied summary judgment on claims deal protections violated fiduciary duties Unocal Omnicare directors actions fallen so short of duties conduct failed to satisfy good faith standard required to uphold exculpatory clause in Lyondell s charter, accordingly, claims monetary damages proceed to trial. The Court recognized is flexibility in a board discharge Revlon duties, in cases, a sale to a single bidder canv ing market be appropriate. However, existing precedent, sale to a single bidder requires a board possess a body of reliable evidence to evaluate fairness of a transaction. The Court considered a number of factors suggested Board requisite information, sophisticated directors generally aware of of company market conditions, long range plans updated at annually, disposition transactions considered by Board, detailed yses by management Deutche Bank, lack of bidders emerging filing of 13D, Smiths initial negotiations Blavatnik leading to a substantial increase in offer Basell proposed, lack of proposals deal announced. However, Court criticized Board Court believed substantial inadequacies in process. These included, in Courts view, day time frame initial discussions to signed agreement, a total of or hours of Board time to discuss acquisition, of time spent on day agreement signed, lack of action 13D filing. The Court strongly suggests 13D filing, Board sought a valuation of company, retained an investment bank, developed a strategy to address a proposal if received, or conducted type of active market check. The Court critical of Boards lack of involvement in negotiating process, as negotiations conducted by Smith, Boards knowledge. The Court yzed deal protection measures, acknowledging measures typical deals of magnitude, concluded deal protections survive an enhanced scrutiny ysis Unocal Omnicare as a result of Court viewed as significant defects in discharge of Boards Revlon duties. In a footnote, Court wrote enhanced judicial scrutiny of Boards decision to accede to provisions in merger agreement contemplate reflexive approval of a typical mix of deal protections. The remarkable aspect of opinion is Courts finding failings of Board a departure duties owed Revlon cons ute a lack of good faith. Such lack of good faith in turn render unavailable provision in Lyondells charter exculpating directors liability monetary damages breaches of fiduciary duty, as acts or omissions in good faith excluded scope of exculpation clauses. Accordingly, no interest or breach of duty of loyalty, claims monetary damages directors proceed to trial. What case mean? The decision in Ryan v. Lyondell represents a significant expansion of range of conduct be deemed a breach of duty owed by directors in a sale of control, an expansion of type of conduct subject directors to money damages. The opinion suggests directors find safety in a substantial premium to market, credible threats of an offer withdrawn if acted quickly, a fairness opinion a bulge bracket investment bank, deal protections customary norms, lack of conflicts of interest, lack of proposals put in play or overwhelming stockholder approval. When faced a expression of interest corporate control, boards fully informed on company valuation, develop a proactive response strategy in event an offer materializes, strongly retaining an investment bank to evaluate strategic alternatives potential bidders. In face of an actual offer, boards to adequacy of pre signing market check for financial strategic bidders, and, if no market check conducted, a post signing go shop period in merger agreement. Boards actively involve in negotiation process. They be informed of negotiations by management, preferably in advance, direct negotiations early in process to improve opportunity to concerns addressed. For information, contact John Tishler at 858 720 8943 or Elizabeth Balfour at 858 720 8985

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