Overreactions to Ryan v. Lyondell Chemical Company

This post is from Steven M. Haas of Hunton & Williams LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Back in September, the Delaware Supreme Court accepted the defendants’ interlocutory appeal and stayed the lower court proceedings in Ryan v. Lyondell Chemical Company. Typically, the Delaware Supreme Court and the Court of Chancery work in close harmony, so the Supreme Court’s decision was unusual since the appeal had been denied by Vice Chancellor Noble.

The appeal centers on Vice Chancellor Noble’s decision to deny the defendant-directors’ motion for summary judgment on allegations that they breached their fiduciary duties in approving a cash-out merger with a strategic buyer. Charles Nathan posted on the background and analysis of the decision here. The decision generated swift criticism, with most commentary characterizing it as improperly second-guessing a disinterested board’s decision to approve an all-cash premium offer, and as lowering the bar for stockholder-plaintiffs to allege bad faith in change-of-control transactions.

Travis Laster and I recently addressed this criticism in an article entitled “Reactions and Overreactions to Ryan v. Lyondell Chemical Co.” We argued that many commentators have overreacted to the Lyondell decision. To be sure, the Court of Chancery’s opinion can be criticized on several grounds, but its outcome was driven primarily by its procedural posture and does not dictate any meaningful change in established deal practice.

M&A transactions frequently give rise to preliminary injunction hearings, which require courts to assess the likelihood that the plaintiffs will succeed on the merits. Had Ryan tried to enjoin the Lyondell-Basell transaction in Delaware, I’m quite confident his motion would have been denied. But in the summary judgment context, the trial court had to draw all reasonable inferences in favor of the plaintiff and can grant the motion only when there is no genuine issue of material fact.

Against that backdrop, Vice Chancellor Noble reviewed well-pled allegations that directors (i) consciously ignored their Revlon duties where a CEO got too far in front of them in negotiating the deal, (ii) met for no more than six or seven hours during a seven-day period, (iii) specifically directed the company’s financial advisor not to make outbound calls to other potential bidders, and (iv) apparently failed to proffer any significant reasons as to why the company needed to move quickly. A change in any one of those facts might have produced a different result on summary judgment. In any event, given that the board was overwhelmingly independent and secured a 45% premium, all-cash offer just before the debt markets collapsed, it’s almost impossible to see how these directors will be found liable at trial.

The Delaware Supreme Court may reverse the Court of Chancery’s decision. If so, it would be helpful if it addresses the Court of Chancery’s analysis of post-signing market checks, which were deemed a “limited exception” to the active sale process required by Revlon. The Supreme Court also could respond to the Court of Chancery’s questioning of whether deal protections are reviewable under Unocal, a question most practitioners thought settled. But if the Supreme Court doesn’t reverse, transactional lawyers shouldn’t overreact to the Vice Chancellor’s decision.

Our article, which originally appeared in the September issue of Insights, is available here.

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