A landmark Delaware court case has been decided in favor of directors, after months of legal speculation and appraisal. The resolution of Lyondell Chemical Co. v. Ryan before the Delaware Supreme Court allays worries that civil courts can secondguess the decisions made by corporate boards. It also strengthens the protection of decisions made in “good faith” as it applies to directors.
The Lyondell case, which was first decided by the Delaware Chancery Court in December of 2007, pitted a class action group of shareholders led by investor Walter E. Ryan against the board of directors at Lyondell, which was the third largest independent producer of chemicals in the United States prior to being bought out by Dutch chemical maker Bassell in 2007. The plaintiff argued that Lyondell directors had not properly managed the negotiations of the merger, too readily acceding to Bassell’s buyout offer.
“The merger had been largely negotiated by the CEO and not actively investigated prior to the seven-day period in which the offer was on the table,” explains Bryn Vaaler, partner at Minneapolis law firm Dorsey & Whitney. Though the offer was considered generous—$48 per share on a stock that had hovered around $30 before Bassell’s intentions were publicized—the plaintiffs argued that Lyondell directors had breached their duty of loyalty by failing to obtain the best possible price for shareholders.
The implications of the case’s reversal for directors are significant, says Francis G.X. Pileggi, founding partner at Fox Rothschild’s Wilmington office. “It lets directors sleep better at night,” says Pileggi. “It should give them comfort that if they do everything they are reasonably expected to, then the law does give them protection from personal liability.”