Mergers & Acquisitions
And a Lesson for Sellers . . .
Since one rarely has the opportunity to say "I told you so" after criticizing an opinion of the Delaware Chancery Court regarding a matter of corporate law, I don't want to pass up such an opportunity which recently arose!
In one of my recent comments on important developments in corporate law, I discussed a Delaware Chancery Court case (Ryan v. Lyondell Chemical Company, decided on August 20, 2008) which was filed against various directors of Lyondell by Ryan, a Lyondell shareholder, after the acquisition of Lyondell by Basell AF. In that case, the Chancery Court denied a summary judgment motion filed by the directors on the grounds that there was sufficient evidence on the record from which a trier of fact could, after a full trial of the case, find that the directors' failure to take necessary steps to establish the value of the company's stock could have involved an "intentional dereliction of duty or a conscious disregard of [their] responsibilities" - i.e. bad faith. The Court further opined that, if such a finding of bad faith were possible, the language contained in the corporation's certificate of incorporation designed to eliminate or limit the personal liability of its directors (i.e. the "exculpation clause") would not provide a shield against such liability for the directors.
In my comment, I characterized the opinion of the Court as "curious", given the facts described in the opinion, and suggested that the ruling in the Lyondell case and in a companion case, McPadden v. Sidhu, decided on August 28, 2008, failed to provide a "bright line" path which could be safely followed by directors or their legal counsel in deciding how to handle offers from prospective buyers of the company.
Apparently the Supreme Court of Delaware shared that opinion since, on March 25, 2009, the Supreme Court reversed the Chancery Court decision and remanded the matter for entry of summary judgment in favor of the Lyondell directors. In so doing, the Court focused on the fact that the directors (1) met several times to consider the prospective buyer's offer, (2) were generally aware of the value of Lyondell and knew the chemical company market, (3) solicited and followed the advice of their financial and legal advisors, (4) attempted to negotiate a higher offer even though all of the evidence indicates that the buyer had offered a "blowout" price and, finally, (5) approved the merger agreement because "it was simply too good not to pass along to the stockholders for their consideration". In light of these facts, the Court concluded that the directors did not breach their duty of loyalty by failing to act in good faith. Simply stated, there was no evidence to support a finding that the directors had intentionally or consciously disregarded their responsibilities. While there might have been sufficient evident to support a finding that the directors had failed to exercise due care, that was not the issue before the Court, since the exculpation clause in the certificate of incorporation would have barred a claim based solely on negligence of the directors.
The Supreme Court's decision appears to restore some degree of certainty from which directors of Delaware corporations can proceed. It is important to note that, in arriving at their decision, the Court reminded that in the seminal case of Revlon v. MacAndrews & Forbes Holdings, Inc., the single directoral duty enunciated was "to get the best price for the stockholders at a sale of the company." It emphasized that it was not up to the courts to tell directors exactly how to accomplish that goal, however. In that regard, I am reminded that one very useful tool to satisfy that responsibility is through the use of a vigorous "auction" process, once the board determines that a sale of the company is desired in the best interests of the shareholders. This process was discussed in a recent video (Part II) featuring our guest, investment banker Phil Currie, of Shoreline Partners, LLC . In that session, Phil discussed how sellers can manage the M&A process and create leverage through the auction process, to improve price and terms of sale by having buyers bid against each other through a well managed "blind" bidding process.
George P. Shenas