Revlon Inc. v. MacAndrews & Forbes Holdings

Supreme Court of Delaware · Corporations

CorporationsTakeoversMergers and AcquisitionsFiduciary Dutiesduty of loyaltyduty of careauctioneer dutyhighest price

Facts

After Pantry Pride launched hostile bids for Revlon, Revlon's board initially adopted defensive measures including a Rights Plan and an exchange offer in response to what it reasonably viewed as an inadequate bid. As Pantry Pride raised its offers and Revlon authorized negotiations with alternative buyers, Revlon agreed to a leveraged buyout with Forstmann and later approved a lock-up option on key assets, a no-shop provision, and a $25 million cancellation fee. Forstmann also agreed to support the market value of Revlon's notes, whose value had fallen after waiver of note covenants became likely, and the board cited noteholder protection as a reason for approval. Pantry Pride then challenged those arrangements as ending the auction for Revlon and preventing further bidding.

Issue

When a company is effectively for sale and active bidders are competing for control, may the board grant a lock-up, no-shop, and cancellation fee that end the auction in order to prefer one bidder and protect noteholders? More broadly, to what extent may directors consider nonshareholder constituencies once their duty has shifted to obtaining the best price for shareholders?

Rule

Defensive measures adopted in response to a takeover threat are subject to enhanced scrutiny under Unocal: directors must show reasonable grounds, based on good faith and reasonable investigation, for perceiving a threat, and the response must be reasonable in relation to that threat. But once breakup or sale of the company becomes inevitable and the board undertakes to sell the company, the directors' role changes from defenders of the corporate bastion to auctioneers charged with maximizing the company's value for the stockholders' benefit. At that stage, concern for other constituencies is permissible only if rationally related benefits accrue to stockholders, and measures that end an active auction and foreclose further bidding are impermissible.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Summit Glass, a Delaware corporation based in Toledo, receives an unsolicited cash tender offer from Ridgeview Capital at $24 per share. After hearing from its investment banker that the company is worth substantially more and that Ridgeview plans to finance the deal with heavy debt and sell major divisions immediately, the board adopts a rights plan redeemable if a later all-cash bid of $34 or more emerges.

If shareholders sue immediately to invalidate the rights plan, how should a court most likely rule?

Explanation. Under the majority opinion, anti-takeover measures are reviewed under enhanced scrutiny. Directors must show reasonable grounds, based on good faith and reasonable investigation, for perceiving a threat, and the response must be reasonable in relation to that threat. Where a board reasonably concludes a hostile bid is grossly inadequate and tied to a leveraged bust-up strategy, a rights plan may be a valid initial defensive measure, especially if it preserves flexibility for superior offers.