Corporate Governance

Ryan v. Lyondell Chemical Company and Waiver of Liability Provisions (Interlocutory Appeal Denied)(Introduction)

By J. Robert Brown

Lyondell, a recent case out of the Delaware Chancery Court, has generated a great deal of attention, mostly because the Vice Chancellor had the temerity to find, on motion for summary judgment, that the ubiquitous waiver of liability provision (and by ubiquitous, we mean ubiquitous, see Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom) did not apply to the facts of the case. The Vice Chancellor concluded that the plaintiff had sufficiently raised the issue of whether the board had engaged in "conscious disregard" and, therefore, lacked good faith, in failing to meet its duties under Revlon. To some, the case threatened to upset the standards with respect to fiduciary directors and unnecessarily subject board members to an increased threat of liabilty. 

Viewing the case as another Van Gorkom, the defendants sought to go over the Vice Chancellor's head and appeal to the Delaware Supreme Court to restore order.  But there was a roadblock.  They needed to ask the same VC for permission to file an interlocutory appeal.  VC Noble issued his decision last week and it was a resounding no.  The opinion is posted on the DU Corporate Governance web site.

The decision generated a renewed spate of commentary.  Larry Ribstein wasn't mollified, contending that VC Noble was still making application of waiver of liability dependent upon a trial. Gordon Smith viewed the case as a tempest in a teapot, with the court merely wanting "to see a more developed record. That is all."

Gordon is right, but the decision is more insidious than what he suggests. As we shall show from the language of the opinion, VC Noble viewed his decision not as a victory for shareholders but as punishment for defendants for having prematurely bothered him with a motion for summary judgment on an incomplete record.  He all but invited a second motion for summary judgment and all but telegraphed that he will grant it. 

In other words, Larry Ribstein is wrong.  In this case, there will be no trial.  Plaintiffs will lose but only after having gone through full discovery and two sets of motions.  Said another way, shareholders would have been better off losing the initial motion for summary judgment.  

The opinion and some of the pleadings can be found at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on September 11, 2008 (boomark / email).