Back in January, the Delaware Supreme Court heard oral arguments on the interlocutory appeal in Ryan v. Lyondell.  It was somewhat surprising that the court agreed to hear the interlocutory appeal.  It’s perhaps more surprising that, after taking the case and hearing oral argument, it has taken the court almost two months to issue a ruling.

In Ryan, Vice Chancellor Noble denied summary judgment for the Lyondell board of directors with regard to a claim by former shareholders that the board violated its Revlon duties in agreeing to sell to Basell/Access.  More interestingly (maybe), the court denied summary judgment on the claim that the Revlon violation was “conscious”, and therefore counted as a non-exculpable violation of good faith.

When the Chancery Court denied summary judgment in Ryan, it generated a lot of commentary.  The opinion didn't distinguish pretrial analyses of care and good faith, thus making it easy for plaintiffs to bootstrap a due care claim into a non-exculpable good faith claim.  I’ve just posted an article to SSRN offering a way forward on that issue.  I’ll be posting some stuff related to my argument in that piece later this week.

But after listening to the oral argument in the case, I’m not sure the forthcoming opinion will say anything about the issue.  At oral argument, the discussion focused almost entirely on whether Revlon applied during the period between Basell/Access’ filing of the 13D and its offer two months later.  If the court finds that Revlon had no relevance for board inaction during that period, there’s presumably no due care violation under Revlon based on the board’s behavior post-offer.  The court might choose to talk about good faith in dicta (as it did in Disney), but it won’t have to reach the care/good faith distinction.

To be sure, a bidder’s credible statement of interest (whether via a 13D or not), by itself, doesn’t trigger Revlon duties.  The Chancery Court’s opinion doesn’t say differently exactly – the opinion would allow a board to go on its merry, Revlon-less, way after the statement of interest, under penalty of considering its post-statement behavior in a Revlon analysis should the board ultimately choose to sell.  During oral argument, one of the Justices referred to this argument as creating a “zone of Revlon”. 

I’m not sure that the “Revlon zone” would be such a bad idea.  The target board that (1) has reason to think a credible offer will be coming in that it might accept, (2) does no background work on a potential sale and then (3) accepts the deal under a tight deadline has done something qualitatively different than another board that gets blindsided by a blowout premium with a tight deadline.  It seems disingenuous for the first board to throw up its hands and say that it didn’t have time to go through a full sales process because of time pressure.  Of course, creating this contingent Revlon application would pose a number of problems, e.g., determining whether the board had received a credible indication that a bid would be coming down the pike (although a 13D would seem to be an easy case). 

A bigger issue for the Ryan plaintiffs, though, is that the Revlon zone would seem to be new law, making it difficult to show that directors knowingly failed to satisfy their enhanced duty of care after receiving the 13D.

Corporate Governance, Corporate Law, Delaware | Bookmark

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