Lyondell: A Note of Approbation

Abstract

Litigants and commentators have been mooting an expansive reading of Delaware’s fiduciary duty of good faith. The Delaware Supreme Court recently made its most emphatic negative response to this proposition to date in Lyondell Chemical Company v. Ryan, a merger case. Lyondell simultaneously diminishes the intensity of scrutiny of target boards under the Revlon rubric. For one, the other, or both reasons, Lyondell will have more than its share of critics. But this comment enters a note of approbation. The current controversy regarding the good faith duty poses the question whether the fiduciary standard of conduct should be brought into congruence with prevailing standards of best practice, merging the soft law of corporate governance into the hard law of fiduciary duty. The Delaware courts have declined to effect the combination for two compelling reasons. First, they are not institutionally positioned to impose a liability standard directly grounded in best practices. Such a heavy duty liability regime, quite simply, lies outside of their job description. Second, even if they were institutionally positioned to impose such a standard, the policy case for doing so is unpersuasive. Big stick fiduciary liability presumably would serve the deterrent purpose of forcing corporate boards to follow best practices. Yet best practices have become deeply rooted in the fabric of corporate decision-making, including boardroom processes respecting mergers, without the additional prod of a liability stick. It is accordingly difficult to project that a liability regime based on best practices has a productivity-enhancing role to play. In any event, Lyondell was decided correctly on its facts. Even as the board of directors in question arguably failed to follow the book of best practices, it did so in pursuit of a good deal, a deal that looks all the better in retrospect.

Keywords: corporate law, fiduciary duty, Delaware courts, good faith, Revlon scrutiny, mergers

JEL Classification: G34, K22