The Delaware Court of Chancery has erroneously permitted a case to survive summary judgment under Stone v. Ritter without showing facts indicating that the defendants intended to violate a known duty.
In Ryan v. Lyondell Chemical Co., (HT Francis Pileggi here) Lyondell received an unsolicited all cash all shares offer at a substantial premium to the market. Lyondell had made no effort to sell itself or seek a strategic partner and the company was economically viable. The board delegated much of the negotiating work to its board chair and CEO, Smith. The final agreement did not contain a go-shop provision but did include several deal protective measures. Ryan, a Lyondell shareholder, brought the required shareholder suit challenging whether the board met its Revlon duties. The board was independent and not interested and Lyondell’s Certificate of Incorporation contained a 102(b)(7) exculpatory clause.
Vice Chancellor Nobel concluded, on a motion for summary judgment, that Ryan might show that the board’s actions were not reasonably designed to secure the highest value reasonably obtainable, thus violating Revlon. The Vice Chancellor then held that the deal protective measures (termination fee, matching rights, no-shop, and pill), in the aggregate, might be preclusive (especially the no-shop) and thus violate the enhanced scrutiny required under Omnicare.
The more interesting part of the opinion is next (see p. 54, et seq.) in which the Vice Chancellor had to face the argument that, even if the Revlon and Omnicare claims were viable, the 102(b)(7) provision will negate any recovery. This, of course, squarely raises Stone. Vice Chancellor Noble noted that the board “made no discernible effort at salesmanship either before or after the Merger was announced” and that the board hadn’t, at this stage, proved that it had adequate information about the company’s market price. Because the current record did not show that the directors discharged their Revlon duties, they might not have acted in good faith. If they did not act in good faith, then they have violated their duty of loyalty, which negates the 102(b)(7) protection.
I think Vice Chancellor Noble has been insufficiently attentive to Stone’s requirement of intent. To be liable under Stone, the plaintiff must show that the defendants knew they were not discharging their fiduciary duties. Vice Chancellor Noble does not address that requirement. Instead, he focuses on a salient aspect of Revlon, which is that its duties are quite clear. Revlon certainly applies to these facts and, presumably, the board knew it. The Vice Chancellor held that, at this stage, the board can’t show that its actions met the Revlon standard. However, what the court doesn’t address, and what is absolutely key, is whether there’s any evidence that the directors intended not to comply. Assuming (and I think it must almost certainly be true) that the board knew it was under Revlon duties and knew what those duties required, where is the evidence that they intended not to comply with Revlon? Is there any evidence other than that they arguably didn’t meet the standard? That surely can’t be enough to impose liability and without that possibility, summary judgment should be entered for defendants.
Stone was decided in a case involving a Caremark claim; this case is a Revlon claim. The theories of Caremark and Revlon are quite different but these facts present one critical similarly: liability is predicated on the board’s inaction. Caremark claims are always posited against a board’s inaction, either in not establishing an appropriate monitoring system or in not adequately monitoring. Revlon cases typically involve, inter alia, challenges to the board’s actions, which are usually many; in most Revlon cases the board has been anything but inactive. It is quite unusual to see a Revlon claim (especially where Revlon’s application was clear) predicated on board inaction. Regardless of whether a Revlon claim is based on board action or inaction, if the claim is one of duty of loyalty rather than duty of care, a plaintiff must show either that the directors were interested, or not independent, or that they intended their actions (or lack of actions) to violate a known duty. It is that analysis that is missing here and that, ultimately, leads Vice Chancellor Noble into error. See my earlier post on Stone (here).
This could be taught in Chapter 11 after Stone v. Ritter.