Originally uploaded to SSRN.

Abstract

The Delaware Supreme Court has set a very high hurdle for plaintiffs challenging directors' good faith in the sale of a company. In Lyondell Chemical Company v. Ryan, the court held that unconflicted directors could be found to have breached the good faith component of their duty of loyalty in the transactional context only if they "knowingly and completely failed to undertake," and "utterly failed to attempt" to discharge their duties.

In this essay I argue that the Lyondell standard effectively imports into the transactional context the exacting standard previously applied in the oversight context — a move clearly aimed at substantially limiting directors' liability exposure for conscious disregard of duty. Part I of the essay traces the evolution of the goodfaith concept over recent decades, including the Delaware Supreme Court's acceptance in its 2006 Disney opinion of a formulation of non-exculpable bad faith conduct by unconflicted directors in the employment context involving "intentional" and "conscious" disregard of duty. Part II contrasts this strict state of mind requirement with an even stricter standard applied later that year in Stone v. Ritter to establish bad faith inthe board oversight context. I then turn to Lyondell, where the Delaware Supreme Court in 2009 extended the exacting standard of Stone to the transactional context.

Commentary on Lyondell has suggested that the decision effectively forecloses monetary liability for unconflicted directors in the transactional context. I argue in Part III, however, that while the opinion undoubtedly limits directors' liability exposure, it is amenable to a reading that preserves some limited capacity for the good faith component of the duty of loyalty to discipline boards in the sale of a company.