Corporate & Securities Law

The Geography of Revlonland

By Stephen Bainbridge

Is there such a place as Revlonland? We can break that down into two key questions:

1. Are there unique Revlon “duties” separate and distinct from those imposed by Unocal? Put another way, is the Revlon standard of review any different than that applicable under Unocal?
2. If so, when do those duties trigger?

In Ryan v. Lyondell, the Chancery Court per VC Noble indicated that directors who conciously disregard their “Revlon duties” are potentially liable for breach of the duty of good faith (see Francis Pileggi’s very helpful analysis). This suggests an affirmative answer to the first of the above questions and, by virtue of relocating the analysis into the good faith sphere, one with potentially severe liability consequences.

In In Re Lear Corp. Shareholder Litigation, 2008 WL 4053221 (Del. Ch., Sept. 2, 2008), VC Leo Strine faced another set of claims that directors had violated Revlon duties. (Again, Pileggi has a detailed write-up). After extensive analysis, Strine writes that:

Thus, the plaintiffs are in reality down to the argument that the Lear board did not make a prudent judgment about the possibility of future success. That is, the plaintiffs are making precisely the kind of argument precluded by the business judgment rule.42 Precisely so as to ensure that directors are not unduly hampered in taking good faith risks, our law eschews the use of a simple negligence standard. Even where it is possible to hold directors responsible for a breach of the duty of care, Delaware law requires that directors have acted with gross negligence. Unless judges are mindful of the substantial difference between a simple negligence and gross negligence standard, the policy purpose served by Delaware’s choice of a gross negligence standard risks being undermined. The definition of gross negligence used in our corporate law jurisprudence is extremely stringent.

FN42. Under the business judgment rule, ???directors’ decisions will be respected by courts unless the directors are interested or lack independence relative to the decision, do not act in good faith, act in a manner that cannot be attributed to a rational business purpose or reach their decision by a grossly negligent process....??? Brehm, 746 A.2d at 264 n. 66. See also Stephen M. Bainbridge, The Business Judgment Rules As Abstention Doctrine, 57 Vand. L. Rev 83, 127-28 (2004); E. Norman Veasey & Christine T. Di Gugliemo, What Happened in Delaware Corporate Law and Governance From 1992-2004? A Retrospective on Some Key Developments, 153 U. Pa. L.Rev. 1399, 1421-28 (2005) ( [???Professor Bainbridge’s] approach is consistent with the Delaware doctrine that the [business judgment] rule is a presumption that courts will not interfere with, or second-guess, decision making by directors.???).

Strine goes on to note (footnote 62) that:

The fact that a corporate board has decided to engage in a change of control transaction invoking so-called Revlon duties does not change the showing of culpability a plaintiff must make in order to hold the directors liable for monetary damages. For example, if a board unintentionally fails, as a result of gross negligence and not of bad faith or self-interest, to follow up on a materially higher bid and an exculpatory charter provision is in place, then the plaintiff will be barred from recovery, regardless of whether the board was in Revlon-land.

Precisely! The trouble with Ryan, is that the line between failing to follow up on potentially higher deals through “concious disregard of known duties” and gross negligence requires the court to slice the baloney pretty thinly.

One thing does seem clear; namely, that the geography of Revlonland is worth exploring.

Full post as published by BusinessAssociationsBlog.com on September 15, 2008 (boomark / email).