Much has been written about the Court of Chancery’s recent opinion in Chen v. Howard-Anderson, 87 A.3d 648 (Del. Ch. 2014), in which Vice Chancellor J. Travis Laster suggested, among other things, that the appropriate inquiry in determining whether directors are entitled in the context of a change of control transaction to claim the protection of an exculpatory clause in a corporation’s certificate of incorporation is broader than the “conscious disregard” standard applied by the Delaware Supreme Court in Lyondell Chemical v. Ryan, 970 A.2d 235 (Del. 2009). Although the court in Lyondell rejected a definition of bad faith grounded exclusively on an inadequate or flawed sale process, Laster suggested in Chen that evidence of improper motives on the part of directors, combined with a sale process that falls outside a range of reasonableness, may be sufficient to overcome an exculpatory clause without regard to whether the directors consciously disregarded their fiduciary obligations.
The principal issue Laster confronted in Chen with respect to the exculpatory clause was in determining the boundaries between an exculpated breach of the directors’ duty of care and an unexculpated breach of the duty of loyalty in the context of an imperfect sale process. In focusing on the “improper motive” part of Laster’s definition of bad faith, some commentators appear to miss a key fact: The Court of Chancery did not find evidence of any “improper motive” on the part of the directors that would preclude application of the corporation’s exculpatory clause. Thus, even if Chen is applied to confine Lyondell to cases in which plaintiffs allege that directors consciously disregarded their fiduciary duties, it is not yet clear that the improper-motive standard is materially different in application than the traditional conflicts that implicate the directors’ duty of loyalty.
