Revlon v. MacAndrews & Forbes Holdings, Inc.

Delaware Court of Chancery · Corporations

Corporationsfiduciary dutiestakeover defensessale of controlbusiness judgment ruleUnocal proportionalitypoison pillrights plan

Facts

After Pantry Pride pursued Revlon first through friendly overtures and then through increasingly higher any-and-all cash tender offers, Revlon's board adopted defensive measures including a Rights Plan and a self-exchange offer with restrictive note covenants. Later, as Pantry Pride raised its bid and Revlon began negotiating a leveraged buyout with Forstmann Little, Revlon moved from trying to preserve the company to pursuing a breakup transaction. On October 12, Revlon accepted Forstmann Little's $57.25 per share offer, granted it a lock-up option on key divisions at a price the court viewed as favorable to Forstmann, and agreed to a no-shop clause, while also valuing Forstmann's protection of Revlon noteholders. Pantry Pride then raised its bid to $58 per share and sought to enjoin the lock-up and related restrictions.

Issue

Once Revlon's breakup became inevitable, could its board continue to use takeover defenses and bargaining devices to favor Forstmann Little based on considerations other than maximizing shareholder price? More specifically, were the lock-up option, no-shop provision, and continued enforcement of the Rights Plan and note covenants consistent with the directors' fiduciary duties?

Rule

Directors facing a takeover may adopt defensive measures under the business judgment rule if the response is reasonably designed and proportionate to the threat. But once breakup or sale of the company becomes inevitable, the board's role changes to that of an auctioneer charged with obtaining the highest price for the shareholders, and it may not favor other constituencies or its own interests through devices that foreclose bidding or are not proportionate to shareholder needs.

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

Summit Home Goods, a Delaware corporation based in Denver, receives an unsolicited any-and-all cash tender offer from Cedar Peak Capital at $28 per share. Summit's board, after consulting its banker, concludes the offer is grossly inadequate because a breakup analysis suggests the company is worth $40 to $46 per share, and it adopts a rights plan redeemable by the board before any bidder crosses a 20% threshold.

If Cedar Peak sues immediately to invalidate the rights plan, what is the strongest argument for upholding the board's action?

Explanation. The majority upheld the initial rights plan when adopted in response to a bid the board reasonably viewed as grossly inadequate. Under the business judgment rule as qualified by proportionality, directors facing a hostile acquisition may use defensive measures reasonably designed to meet the threat and strengthen bargaining power. The opinion does not say all rights plans are automatically valid, nor that directors may block bids for any reason.