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Delaware Supreme Court Limits Revlon and Defines Good Faith, Again

Posted In M&A

Lyondell Chemical Company v. Ryan, C.A. 401, 2008 (Del Sup March 25, 2009)

In this expected reversal of a decision by the Court of Chancery, the Supreme Court has again defined what constitutes "bad faith." The reversal was expected because of the unusual action of the Supreme Court in taking an interlocutory appeal from a decision denying summary judgment . The trial court's decision was considered controversial by some, although the critics exaggerated its significance, as the trial court itself explained when it had refused to certify the appeal.

First, the Supreme Court decided that Revlon duties did not come into play when the Board had rejected a merger proposal. No surprise there, and this is largely a technical point.

Second, the Court repeated, more forcefully than in the past, that only when a disinterested board "knowingly and completely failed to undertake their responsibilities" will it be said to act in bad faith. This means that grossly negligent conduct is not bad faith when there is no scienter involved.

Most significantly, in this case there was no real evidence that the Board knew what it was doing was wrong. It had competent legal and financial advisers, the merger price was a good one, and a "fiduciary out" clause permitted at least some possibility of a competing offer.

Saint Louis University law professor Matt Bodie offers an interesting view on the decision over at the PrawfsBlawg.

Tags: M&A, Revlon
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