The Delaware Courts have made another strong statement this year in regards to potential director liability. While earlier this year, Delaware took a stance regarding advancement of indemnification for former directors, the Chancery Court recently denied summary judgment to a group of independent directors due to a limited record of the board’s process in evaluating an acquisition offer. In doing so, the Court found that independent directors, acting without conflict, could potentially be personally liable for approving a premium cash offer, with standard deal protections, which was supported by stockholders.
In Ryan v. Lyondell Chemical Co., the Delaware Chancery Court denied summary judgment for the independent directors of Lyondell Chemical Company for breach of fiduciary duties under Revlon regarding the board’s actions during the sale process.
While there are some highlights to address, this blog post cannot provide an adequate summary of the 72 page opinion and the specific facts in the transaction at issue. We will provide a more in-depth summary in the next Acredula newsletter.
Of particular importance, the offer that was accepted by the Board and Shareholders of Lyondell included:
- A 45% premium over the company’s stock price;
- 3% break-up fee;
- A “no-shop” clause ( with typical “fiduciary out” language and matching rights for the acquirer); and
- A fairness opinion
Yet, still the Court questioned the board’s knowledge and efforts to comply with its Revlon duties, even though it found that the board was “active, sophisticated and generally aware of the value of the Company.” Similarly, although the Court found the deal protections to be “typical,” it was not satisfied that the board’s acceptance of the protections was justified by the record.
While this was not a decision after a trial on the merits, there are some key lessons that directors should take away from this opinion to avoid personal liability, as this decision will serve as an invitation to plaintiff’s to seek post-merger litigation and higher settlements where the record is less than perfect:
- When considering an acquisition, boards should avoid delegating the entire negotiation process to management and should instruct those, outside of the board involved in the process, to keep the board informed of all material contacts and discussion with potential acquirers.
- Absent an auction process or post-signing market check, directors must be cautious to satisfy their duties to maximize shareholder value, even if the agreed upon deal is for a sizeable premium.
- Boards need to create the documentary record of actions taken in response to or in anticipation of acquisition proposals, whether solicited or unsolicited.
- Boards need to follow a deliberate process and establish a thorough record of deliberation, which involves outside financial and legal advisors, regarding its decision on deal protection terms. Specifically in regards to break up fees and matching rights.
- Fairness opinions will not overcome a perception by the reviewing court of a deficient process.