Thursday, July 31, 2008

Reactions to Ryan v. Lyondell

Posted by Jeff Lipshaw

Larry Ribstein
and Francis Pileggi have already posted on Ryan v. Lyondell Corp., just handed down in the Delaware Court of Chancery.  (HT to both!) 

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?

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» Major Decision by Chancery Court on Corporate Law Aspects of Mergers and Acquisitions from Delaware Corporate and Commercial Litigation Blog
In Ryan v. Lyondell Chemical Company, (Del. Ch., July 29, 2008), read opinion here, the Delaware Chancery Court rendered a decision that is must reading for anyone who needs to know the latest developments in Delaware corporate law involvin... [Read More]

Tracked on Jul 31, 2008 6:43:45 PM

» Delaware Court of Chancery on good faith and the duty of loyalty in a Revlon setting from New Developments
The Delaware Court of Chancery has erroneously permitted a case to survive summary judgment under Stone v. Ritter without showing facts indicating that the defendants intended to violate a known duty. In Ryan v. Lyondell Chemical Co., (HT Francis Pileggi [Read More]

Tracked on Aug 3, 2008 5:57:09 PM

» D&O Insurance: The "Insured v. Insured" Exclusion from The D & O Diary
It remains to be seen whether the current economic turmoil will result in significant additional bank failures. But if history is any guide, to the extent that there are further bank failures, there likely will also be follow-on lawsuits in... [Read More]

Tracked on Aug 3, 2008 6:07:54 PM

» Fiduciary Duties and merchant Princes from Unincorporated Business Law Prof Blog
posted by Gary Rosin The recent opinion by the Delaware Chancery court in Ryan v. Lyondell Chemical Co., C.A. No. 3176-VCN (Del. Ch. Ct. July 29, 2008), has stirred up the blawg-o-sphere (begin with Francis Pileggi, then see Steve Bainbridge, [Read More]

Tracked on Aug 19, 2008 7:17:08 PM

Comments

Section 7.1(d) of the merger agreement suggests there is NO force-the-vote. What am I missing?

Posted by: Corp Lawyer | Aug 12, 2008 6:48:34 AM

Corp Lawyer: I stand corrected, but add a nuance. I read this quickly when I put up this post originally. I read 5.3 which says: "The Company shall call, hold and convene a meeting of its stockholders to consider the adoption of this Agreement, to be held as promptly as reasonably practicable after the mailing of the Proxy Statement to the Company's stockholders (and in any event no later than 45 days after the mailing of the Proxy Statement), and the Company's obligation to call, hold, and convene such meeting in accordance with this Section 5.3 shall not be affected by the withdrawal, amendment, or modification of the recommendation by the Board of Directors of the Company that the stockholders of the Company vote in favor of adoption of this Agreement, unless the Agreement is terminated pursuant to ARTICLE VII." Obviously there could have been reasons to terminate other than a superior proposal.

But you are correct in pointing out that I missed 7.1(d), which permits termination, but only if the breakup fee is paid immediately upon termination. So the acquirer potentially fends off a competing bid, because the board has to choose between paying the break-up fee before the other deal is approved and consummated (giving up the bird in hand, so to speak) or going to a vote even over the board's withdrawal of its recommendation.

Assuming that this is less than a full force the vote and hence less "deal protective", it simply compounds the oddity of the decision, because it means that indeed the Lyondell board did obtain some wiggle room short of the full panoply of lock-in devices.

Posted by: Jeff Lipshaw | Aug 13, 2008 6:35:16 PM

I thought the same thing when I read 5.3 until i went to the termination article.

I've seen provisions in the stockholders meeting covenants that permit postponements in the event that a board is assessing an unsolicited proposal. Under the Lyondell agreement, the board could be in an interesting situation if an unsolicited proposal landed, say, 5 or 10 days before the meeting date. You can imagine a situation in which there isn't enough time to negotiate a definitive superior proposal before the meeting date. If you delay, the initial buyer sues for breach of the covenant to use best efforts (or whatever standard). If you don't delay, you get sued by your stockholders. If you terminate, you lost your bird in hand and your leverage vis-a-vis the topping bidder. Ouch.

Posted by: Corp Lawyer | Aug 26, 2008 1:24:39 PM

Many thanks for your hat tip.

Posted by: francis pileggi | Sep 10, 2008 9:30:56 PM

'what would you do?'
Heres what I would ask in hindsight? What was the stock worth then, prior to the deal, and what is it all worth today now that the venture is in peril.
My instinct is that investment is a conservative matter, smaller risks, smaller yields, safely. Highly speculative ventures can return high yields to be sure, why take the risk when you are operating under good sound principals already?
Steady as she goes.

Posted by: publius | Jan 27, 2009 6:31:50 PM

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