Enhanced Scrutiny in a Change of Control Scenario Under Lyondell

Enhanced Scrutiny in a Change of Control Scenario Under Lyondell

 
In the recently-decided Lyondell case, the Delaware Supreme Court examines what Revlon duties mean to independent, disinterested directors in a takeover situation, holding that such directors only breach their duty of loyalty if they utterly fail to attempt to obtain the best sale price.
 
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In 1986, the Delaware Supreme Court issued its seminal Revlon decision, holding corporate directors have a fiduciary duty to obtain the best price for the company's stockholders when the company embarks on a transaction that will result in a change of control. Following the Revlon decision, the Delaware judiciary has examined the application of these Revlon duties in a variety of circumstances; however, the broad array of possible fact patterns left numerous unresolved issues. In the recently-decided case of Lyondell Chem. Co. v. Ryan, 2009 Del. LEXIS 152 (Del., March 25, 2009), the Delaware Supreme Court examines what Revlon duties mean to independent, disinterested directors in a takeover situation, holding that such directors only breach their duty of loyalty if they utterly fail to attempt to obtain the best sale price. This standard provides independent and disinterested directors with an extremely high level of protection and latitude in handling the potential sale of a company. The Lyondell court also clarifies and reaffirms several other aspects of a director's Revlon duties.

The Development of Enhanced Scrutiny in Delaware.

The concept of enhanced scrutiny in Delaware when reviewing a corporate change of control arose out of two cases decided by the Supreme Court of Delaware in 1985 and 1986. These cases, Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) and Revlon Inc. v. MacAndrews & Forbes Holding, Inc., 506 A.2d 173 (Del. 1986),changed the landscape in how directors approach their roles in change of control situations. From the shareholder and potential purchaser's perspectives, enhanced judicial scrutiny is warranted due to the inevitable risk during a corporate change in control that a board may be acting in its own interest, and not that of the corporation and shareholders. In re Lukens Inc. Shareholders Litigation, 757 A.2d 720, 731 (Del. Ch. 1999). Under this heightened standard of review, courts perform a two-step evaluation of directors' actions: 1) determining the adequacy of the decision-making process employed by the directors, including the information on which the directors based their decisions; and 2) examining the reasonableness of the directors' actions in light of the circumstances then existing.1

Before Unocal and Revlon, courts evaluated board decisions under the more lenient business judgment rule2, whereby the board's decision was presumed to be made on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company, as long as the board's decision was made for any rational reason. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). The burden fell to the plaintiffs to prove that the directors were breaching their duties. This level of scrutiny came to be known as a "bare rationality" standard of review.