Home -> Law Blog Directory -> Corporate Governance Blogs -> The Harvard Law School Corporate Governance Blog

Corporate Governance

: The Harvard Law School Corporate Governance Blog

Delaware Supreme Court Clarifies When Revlon Duties Apply

By Harvard Law School Program on Corporate Governance

(Editor’s Note: An earlier post on this Forum on Lyondell Chemical Co. v. Ryan is available here. The current post provides a more detailed discussion of the Supreme Court’s analysis of when a board’s Revlon duties apply.)

My colleagues William Kucera, Christian Fabian and Erik Axelson have prepared a memorandum further analyzing the Delaware Supreme Court’s recent decision in Lyondell Chemical Co. v. Ryan. The memorandum highlights several key aspects of the decision that provide guidance to M&A practioners in counseling clients and structuring transactions. First, Lyondell clarifies when a board?s Revlon duties apply. By finding that Revlon duties apply ?only when a company embarks on a transaction ? on its own initiative or in response to an unsolicited offer ? that will result in a change of control,? the Supreme Court emphasized the role of the company and its directors in determining when Revlon duties are triggered, as opposed to when third-party actions, such as a Schedule 13D filing or publicly disclosed unsolicited overture, generally inform the market that a third party is interested in acquiring a company. The Supreme Court’s refusal to impose Revlon duties before a board takes affirmative steps to begin negotiating the sale of the company is an important concept for practitioners and M&A professionals because it generally allows for the target company, through its actions, to control whether Revlon duties apply. Guided by this principle, the Supreme Court signaled that a target company will be justified in deciding to take a “wait and see” approach in response to a third-party overture that arguably puts the target company in play, where that approach is the product of a deliberate decision by an independent, disinterested board.

The Lyondell decision also emphasizes the high bar that must be cleared in order to establish a breach of a duty of loyalty based on a failure to act in good faith. Because loyalty claims for failure to act in good faith are reserved only for situations where the board ?knowingly and completely failed? or ?utterly failed? to undertake its responsibilities, there is a high burden of proof to overcome to impose liability on the directors. Indeed, the Supreme Court acknowledged that an extreme set of facts is required to sustain a disloyalty claim premised on the assertion that disinterested directors intentionally disregarded their fiduciary duties. Notably, however, the Supreme Court suggested that the bar is much lower when a claim is based on a breach of duty of care, meaning directors need to be concerned about exercising care and establishing a careful, deliberate and well-documented process in reviewing a sale of control transaction.

The memorandum is available here.

Full post as published by The Harvard Law School Corporate Governance Blog on April 22, 2009 (boomark / email).