In re Lear Corporation Shareholders Litigation: Is Vice Chancellor Strine Critical of Ryan v. Lyondell Chemical Company?

In yesterday’s post I reviewed Vice Chancellor Noble’s decision in Ryan v. Lyondell Chemical Company, 2008 WL 2923427 (July 29, 2008) and compared it to Chancellor Chandler’s decision in McPadden v. Sidhu, 2008 WL 4017052 (August 29, 2008), noting the criticism that Vice Chancellor Noble’s decision has received by the corporate bar, as reported in The Daily Deal of September 5, 2008. The author of The Daily Deal article reads Chancellor Chandler’s decision in McPadden as critical of Ryan and he includes in that criticism his fellow member of the bench Vice Chancellor Strine in his opinion in the Lear case. I address Vice Chancellor Strine’s opinion in this post.

Fundamentally, Lear and Ryan are different cases. Vice Chancellor Noble found in Ryan that the board of directors of Lyondell Chemical Company failed in performing their Revlon duties in not adequately verifying that the $48 per share price negotiated by Lyondell’s CEO with Basell AF was the best price reasonably available for Lyondell. In Lear Vice Chancellor Strine has no qualms about the process followed by the board of directors of Lear Corporation in agreeing to a merger with affiliates of Carl Icahn, who was Lear’s largest stockholder. The question in Lear was whether the board’s subsequent agreement to pay a termination fee to Icahn, of $25 million, in the event of a naked no vote by the stockholders on the proposed merger in return for an increase in the merger price of $36 to $37.25 per share, represented a breach of the board’s fiduciary duties. Again relying upon the process followed by the board, Vice Chancellor Strine emphatically concluded that it was not.

That the Lear board appropriately complied with its Revlon duties was made clear by the Vice Chancellor in his earlier decision largely rejecting plaintiffs’ request for a preliminary injunction, In re Lear Corp. Shareholder Litigation, 926 A.2d 94 (Del. Ch. 2007). Vice Chancellor Strine makes clear his satisfaction with the process followed by the Lear board in the very first paragraph of this recent decision on the validity of the termination fee:

“In this case, stockholder plaintiffs seek to hold the board of Lear Corporation (“Lear” or “the company”) responsible in damages for agreeing to pay a bidder a termination fee payable upon a no vote on a merger in exchange for that bidder increasing its bid from the original merger agreement by $1.25 per share (“the Merger”). The bidder did not face competition from a rival bidder; in fact, Lear had been fully shopped, and no topping bid had emerged. Rather, in a frothy M & A market, stockholders perceived that the original merger price of $36 per share was inadequate and that the original bidder could do better. Facing likely defeat on the $36 merger at the polls, the Lear board bargained to get another $1.25 per share. In exchange, the bidder demanded $25 million in compensation contingent solely upon a no vote, in contrast to the original termination fee, the bulk of which was payable only if Lear consummated an alternative transaction within twelve months. The $25 million represented only 0.9% of the total deal value.”

2008 WL 4053221 at *1.

As Vice Chancellor Noble confronted in Ryan, on this motion to dismiss the question before Vice Chancellor Strine was whether plaintiffs had adequately pled demand futility, which, given that plaintiffs did not challenge the independence of the Lear board, meant that they had to establish that the board’s decision to pay Icahn the termination fee of $25 million was not the product “of a valid exercise of business judgment.” Id. at *6 (footnote omitted). Because Lear, like Lyondell, had a director exculpatory provision in its certificate of incorporation, as authorized by Delaware’s GCL § 102(b)(7), to survive the motion to dismiss plaintiffs had to plead facts “suggesting that the Lear directors breached their duty of loyalty by somehow acting in bad faith for reasons inimical to the best interests of the Lear stockholders.” Id. at *7.

Vice Chancellor Strine had no difficulty concluding that plaintiffs had not remotely met their burden:

“For starters, the complaint does not come close to alleging that the board failed to employ a rational process in considering whether to approve the Revised Merger Agreement.”

Id. at *7.

After detailing the process followed by the Lear board and the steps it had taken, the Vice Chancellor concludes:
“Put bluntly, the complaint would not state a claim for lack of due care even if simple negligence were the applicable standard.”

Id.

The case could have ended right there, but Vice Chancellor Strine being Vice Chancellor Strine, he continues, at length, addressing plaintiffs’ claim of bad faith by the Lear board. Plaintiffs argued that the Lear board agreed to the payment of a $25 million termination fee to Icahn knowing that the increase in the share price of $36 to $37.25 would not “cut it with the stockholders,” meaning that they would reject the merger in all events, thereby establishing that the agreement to pay the termination fee constituted corporate waste and therefore bad faith by the Lear board.

Vice Chancellor Strine scoffed at this notion, in typically colorful language:

“Directors are not thermometers, existing to register the ever-changing sentiments of stockholders. Directors are expected to use their own business judgment to advance the interests of the corporation and its stockholders. During their term of office, directors may take good faith actions that they believe will benefit stockholders, even if they realize that the stockholders do not agree with them. In the merger context, directors are free to adopt a merger agreement and seek stockholder approval if they believe that the stockholders will benefit upon adoption, even if they recognize that securing approval will be a formidable challenge.”

Id. at *12 (footnote omitted).

So far no hint of any disapproval by the Vice Chancellor of his colleague’s opinion in Ryan. But, in the course of his opinion, the Vice Chancellor takes an aside that can be read as critical of Vice Chancellor Noble’s decision in Ryan:

“To this point, the plaintiffs’ use of this body of law [Caremark, Disney, re director monitoring] also makes clear the policy danger raised by transporting a doctrine rooted in the monitoring context and importing it into a context where a discrete transaction was approved by the board. When a discrete transaction is under consideration, a board will always face the question of how much process should be devoted to that transaction given its overall importance in light of the myriad of other decisions the board must make. Seizing specific opportunities is an important business skill, and that involves some measure of risk. Boards may have to choose between acting rapidly to seize a valuable opportunity without the luxury of months, or even weeks, of deliberation – such as a large premium offer – or losing it altogether. Likewise, a managerial commitment to timely decision making is likely to have systemic benefits but occasionally result in certain decisions being made that, with more time, might have come out differently. Courts should therefore be extremely chary about labeling what they perceive as deficiencies in the deliberations of an independent board majority over a discrete transaction as not merely negligence or even gross negligence, but as involving bad faith. In the transactional context, a very extreme set of facts would seem to be required to sustain a disloyalty claim premised on the notion that disinterested directors were intentionally disregarding their duties. Where, as here, the board employed a special committee that met frequently, hired reputable advisors, and met frequently itself, a Caremark-based liability theory is untenable.”

Id. at *11 (footnotes omitted).

Note again, however, that Vice Chancellor Strine is careful to qualify his observations by noting that the board followed Revlon processes in considering the Icahn merger. Thus, as he might say, his comments have no applicability to the Ryan context.

One final point: as noted by Vice Chancellor Strine, Lear is currently trading at $13 per share ($14.55 per share as of September 12, 2008), so the stockholders’ rejection of Icahn’s $37.25 proposal was a boo-boo, which simply adds an emphatic point to Vice Chancellor Strine’s decision.