Litigation

Court of Chancery Answers its Critics of the Ryan Decision

By Morris James LLP

Ryan v. Lyondell Chemical Company, C.A. 3176-VCN (Del Ch. Aug. 29, 2008)

The recent decision in this case denying summary judgment has set off a storm of protest that the Court of Chancery is ignoring the business judgment rule and the director exculpation statute. The critics argue that when directors are disinterested in a merger, have independent advice and secure a market premium, their decision cannot be reviewed. This more recent decision in the same case denying an application to take an appeal effectively answers those critics.

This opinion makes it clear that the Court knows very well that even gross negligence is not the same thing as bad faith. Thus, a board that is negligent cannot be held liable for a bad decision when its company has a director exculpation provision in its charter. The opinion carefully reviews the key precedents that discuss the limited circumstances where bad faith will exist, particularly when there is an "intentional dereliction of duty or a conscious disregard of one's responsibilities."

The key to the prior opinion, as the court’s opinion points out many times, is that it was based on a limited summary judgment record that required the court to accept all the allegations of the complaint and draw all reasonable inferences against the directors. Indeed, two even more recent decisions make it clear the Court of Chancery is upholding the business judgment rule and the statutory protection of directors who act in good faith. See McPaddin v. Sidhu, C.A. 3310-CC (Del. Ch. Aug. 29, 2008) and In re Lear Corporation Shareholders Litigation, C.A. 2728-VCS (Del. Ch. Sept. 2, 2008).

Full post as published by Delaware Business Litigation Report on August 20, 2008 (boomark / email).