Corporate Governance

Lyondell Chemical v. Ryan: Yawn

By J. Robert Brown

Alerted by Steve Bainbridge, we have become aware that the Delaware Supreme Court has issued the much awaited decision in Lyondell Chemical.  The Chancery Court caused a ruckus by denying a motion for summary judgment on whether the board acted in bad faith (and thereby leaving the board unprotected by the waiver of liability provision)  by failing to fulfill its duties under Revlon. 

The case caused an outcry, particularly by those who view waiver of liability provisions as sacrosanct.  Suddenly they looked a little bit less sacrosanct.  These provisions are ubiquitous and have all but rendered the duty of care meaningless.  Those who view the provisions favorably often claim that they are a product of the market, a product of negotiations between management and shareholders.  They are anything but.  They are more like a contract of adhesion than an agreed upon term between owners and managers.  This is discussed at length in Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom. 

In this particular case, it hardly mattered that the Chancery Court denied the motion for summary judgment.  The court all but invited the defendants to file another motion for summary judgment and all but admitted that he would grant it.  Indeed, the tone of the Vice Chancellor's opinion was one of pique, viewing the outcome as forced on him by the failings of the defendants.  In other words, the plaintiff was going to lose when the defendants refiled.

As a result, the Supreme Court's decision to reverse the denial of summary judgment merely finished the case a little bit earlier.  Indeed, by ending it now, the Court has avoided forcing the plaintiff to engage in more discovery and respond to more briefs and then lose the case.  This was a good result for plaintiff.

The weakness in the analysis was never the application of the waiver of liability provision.  It was the treatment of the allegation that the board lacked independence.  Plaintiffs alleged that the board was interested in the transaction because of huge payouts received by directors as a result of the merger and that the transaction ought to be tested under the duty of loyalty.  The lower court's decision?  Ignore the conflict and apply the duty of care.  That is the travesty of the decision.  It illustrates the meaningless of the duty of loyalty in Delaware.  At least the Supreme Court had the sensitivity to write in a gender neutral manner.

As usual, some of the operative documents (from the Chancery Court proceeding) are on file at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on March 28, 2009 (boomark / email).