Thursday, July 31, 2008
The case involves a shareholder challenge to Basell's acquisition of Lyondell Corporation, a major specialty chemical manufacturer. This is of no small interest to me, having been the general counsel of a publicly-held specialty chemical company that first sold its publicly-held subsidiary (in a deal reminiscent of McMullin v. Beran for you Delaware corporate law wonks), and then merged with another company (as the target) in a stock-for-stock deal, both of which invoked Delaware law on the fiduciary obligations of the directors in transactions involving change of control. I'm also interested as a result of my more theoretical musings about judgment in Law's Illusion.
In a nutshell, the court denied summary judgment, claiming an insufficient record to establish no genuine issue of material fact, on two issues: (1) whether the Lyondell directors breached their fiduciary obligations (a) to maximize shareholder value in the sale context under Revlon, and (b) not to impose undue "lock-up" restrictions so as foreclose competing bids, under Unocal and Omnicare, and (2) whether the 102(b)(7) exculpatory provision on damages operated to bar claims against the directors. On issue (1), the court observed that the deal went down very fast, with almost no market test, and with a full panoply of deal protection clauses favoring the buyer, even though the offer price was at a 50% premium to market. On issue (2), the court left open the possibility that the board's [in]action constituted a lack of good faith, invoking the duty of loyalty rather than the duty of care, and hence removing the claim from the exculpatory provision of 102(b)(7).
Here are some quick reactions:
1. It looks to me like the Lyondell board and its advisers, although acting very, very quickly, did everything they should or could have done, short of playing chicken with the buyer as they walked out the door to seek competing bids. The opinion doesn't say Basell's CEO threatened to walk away from the deal if Lyondell shopped it, but there's just about everything but that.
2. The court says the board's review is to be reasonable not perfect, and there are instances in which, indeed, the board may conclude an offer is what is called "pre-emptive" or "take-out." The court concludes there is no evidence that the board members were self-serving or otherwise conflicted. The court agrees that the price was fair. And finally the court, at the very end, says that, well, this case is really more about our summary judgment standards than our corporate law.
3. I'm not sure why Basell didn't give a little more. For example, the agreement (you have to read it or the proxy statement to find this) had a "force-the-vote" provision, meaning that there had to be a shareholder vote on the Basell proposal even if there was a superior offer and the Lyondell board withdrew its recommendation. The court is probably right in saying that is "belt-and-suspenders." Moreover, at the end of the day, it's Basell or the insurers who are going to pay if the plaintiffs recover anything - it's hard to imagine the directors having to come out of pocket (I'm assuming this will be Side A coverage with no deductible) when there's no evidence they benefited themselves by the transaction (contra WorldCom or Adelphia).
4. This is a place where the strictures of Delaware law truly put even good faith managers and directors between a rock and a hard place. The court acknowledges the testimony of one Lyondell director who said he was worried about getting sued if the board somehow let this offer go by without submitting it to the shareholders! I recognize, in theory, that you don't know to a certainty that there wasn't another couple bucks a share out there, but I have a hard time seeing what the plaintiff is going to say between the denial of the s.j. motion and trial that isn't in the nature of the worst kind of second-guessing.
5. I have a hard time seeing how this becomes a duty of loyalty case under Stone v. Ritter for purposes of 102(b)(7), when the court has granted summary judgment on other claims, rejecting any notion that the directors were disloyal. This is the "somehow lack of care is so extreme that it constitutes bad faith which is disloyal" bootstrap. Correct me if I'm wrong, but doesn't this case present precisely the Smith v. Van Gorkom factual scenario that 102(b)(7) was intended to address!
So . . . . [inhale deeply] My question to all the corporate law professors out there is this: You understand the facts. You understand the risks. You are sitting there advising the board at H-Hour. Do you really tell Lyondell's board it is duty-bound not to take this deal under this agreement, and watch a $48 offer on a $30 stock evaporate? What would you do?