March 26, 2009

The Big Reversal: Lyondell Chemical Company v. Ryan

– by Brad Aronstam, Connolly Bove Lodge & Hutz

Last night, the Delaware Supreme Court delivered the much anticipated decision in Lyondell Chemical Company v. Ryan (No. 401, 2008). The decision reverses last year’s widely-followed opinion of the Court of Chancery declining to grant summary judgment in favor of the defendant directors of Lyondell Chemical Company (“Lyondell”) on Revlon claims.

Having taken the rare action of granting defendants’ interlocutory appeal from a decision denying summary judgment, the Delaware Supreme Court took the even rarer action of not only reversing the Court of Chancery but also entering summary judgment in favor of the defendant directors. In so doing, the Supreme Court with surprising terseness decided what apparently is a novel issue of Delaware law: precisely when Revlon duties arise.

As set forth by the Supreme Court, Revlon duties arise not when a company is put in play (such as in the case of Ryan when a Schedule 13D puts a company in play), but “when a company embarks on a transaction – on its own initiative or in response to an unsolicited offer – that will result in a change of control.” Here, the Supreme Court held that Revlon duties did not arise until the target directors actually began negotiating the sale of Lyondell. Rather, the decision to “wait and see” was subject to the deferential business judgment rule.

The Supreme Court moreover directed the focus of any relevant inquiry on the affirmative actions of the directions (i.e., what the directors did do), as opposed to what they did not do. Ultimately, the Supreme Court admonished: “[t]he trial court approached the record from the wrong perspective. Instead of questioning whether disinterested, independent directors did everything that they (arguably) should have done to obtain the best sale price, the inquiry should have been whether those directors utterly failed to attempt to obtain the best sale price.”

The particular factual allegations underlying this decision bear emphasis and provide transparency into where the Supreme Court was coming from: the consideration paid to Lyondell stockholders represented a 45% premium over the closing stock price of Lyondell immediately before the market learned of the would-be acquirer’s interest in Lyondell from the above referenced Schedule 13D; the transaction was approved by an independent and disinterested board; and the merger was additionally approved by 99.33% of the shares voting in favor of the transaction (equal to 65.80% of the total outstanding shares).

The merger transaction thus represented a substantial premium, lacked any of the hallmark conflicted director/shareholder suitors that typically predominate these types of challenged transactions, and garnered the resounding endorsement of the Lyondell shareholders.

At the end of the day, the Court’s outcome is not altogether surprising given this confluence of unusual facts and the decision to grant interlocutory appeal in the first place. The short 20-page opinion is a “must read” for M&A practitioners and surely will serve as fodder for much discussion and debate in the months to come.