Delaware Supreme Court Further Defines Director Liability, Sets High Bar

Steven D. Goldberg, Esq. Wilmington, DE
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Delaware courts have increasingly applied corporate rules to LLC’s. In a new decision the Delaware Supreme Court has further defined the conduct which will impose liability on corporate directors in the sale of  the company and sets the bar high for any plaintiff to prevail in the future. This further definition of the fiduciary duty of loyalty may well find its way into LLC decisions.

Lyndell Chemical Co. v. Ryan (Del. Supr. March 25, 2009) involved the merger of the company with Basell AF and addressed just what duties are imposed by Delaware Law on the Board of Directors and when those duties become applicable.

Unlike other typical sale cased, there was no evidence from which the court could infer that the defendant directors knowingly ignored their legal responsibilities when overseeing the sale of the company. The plaintiff, a shareholder of Lyndell, alleged breach of the fiduciary duty of loyalty in connection with the merger of Lyndell and Basell AF. The Supreme Court accepted an interlocutory appeal from the Court of Chancery on the issue of whether the directors breached their duty of loyalty by failing to act in good faith to obtain the best price in selling the company under the requirements set down in 1986 in the case Revlon v. MacAndrews & Forbes Holdings, Inc.

In the appeal Lyondell asserted that the court below erred by not following historical precedent. In In re Walt Disney Co. Derivative Litigation(2006) the court concluded that the issue of “bad faith” encompasses not only an intent to harm but an intentional dereliction of duty. In Stone v. Ritter(2006) the court in addressing the concept of bad faith in the context of corporate oversight adopted the so called Caremark Standard (In re Caremark International Derivative Litigation, 1996) and found that standard to be consistent with Disney. In Stone the court also stated that “imposition of liability requires a showing that the directors knew that they were not discharging fiduciary obligations.”

The Court imposed “Revlon Duties” only when a company embarks on a transaction that will result in a change of control or when it responds to an unsolicited offer. Just because the company is “in play” does not trigger these duties to obtain the best possible price. There is only one Revlon Duty, to get the best price for the shareholders, but there is not just one way to reach that end. The court stated that “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 obtain the best sale price.”

The record clearly established that the directors did not breach their duly of loyalty by failing to act in good faith.

The company’s bylaws exculpated the directors from liability under a duty of care, only the duty of loyalty is not exculpated, for that reason the Plaintiff had to persue a loyalty case, not a breach of duty case.

This case sets the bar high for plaintiffs in change of control cases.

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