04/04/2008 03:14:44 PM EST
Wolfe and Pittenger On Revlon, Inc. and New Standard of Judicial Review
In this landmark decision, the Delaware Supreme Court established a new standard of judicial review applicable to a challenge by shareholders to the board's endorsement of a merger transaction once it has become inevitable that the company will be broken up or sold. In such a circumstance, the duty of the board was deemed by the Court to change so as to approximate that of an auctioneer, obligated exclusively to maximize the company’s value by securing the best available price for shareholders. In evaluating the board's adherence to that obligation, the Court will not apply the business judgment rule, but instead will apply enhanced judicial scrutiny of the board's actions to ensure compliance with this narrow duty. A board that takes action to favor one bidder over another in such a way as to retard an active bidding contest has not acted reasonably and has breached its duty to maximize immediate shareholder value.
Excerpt:
Pantry Pride promptly raised the price of its offer to $56.25 per share. It further announced publicly that it would top any ensuing bid that Forstmann might make, if only by a fraction. In light of this, Forstmann expressed reluctance to reenter the bidding without significant assurances from Revlon that any resulting deal would close. The Revlon board assuaged Forstmann’s concern. Less than a week following Pantry Pride’s $56.25 offer, it struck a deal with Forstmann pursuant to which Forstmann would pay $57.25 per share conditioned on its receipt of a lock-up option to purchase one of Revlon’s important business divisions at a discounted price should another acquirer secured 40% or more of Revlon’s outstanding stock, a $25 million termination fee, a restrictive no-shop provision precluding the Revlon board from negotiating with Pantry Pride or any other rival bidder except under very narrow circumstances, removal of the Note Purchase Rights, and waiver of the restrictive covenants contained in the recently issued notes. Forstmann for its part agreed to support the par value of the Notes, still falling in value on the market, by exchanging them for new notes, presumably restoring their trading value to original levels.
Pantry Pride raised its offer to $58 per share and simultaneously sought interim injunctive relief from the Court of Chancery to nullify the asset option, the no-shop, the termination fee and the Rights, asserting that the board had breached its fiduciary duty by foreclosing Revlon stockholders from accepting its higher cash offer. The Court of Chancery granted the requested relief, finding the Revlon directors had acted to lock up the Forstmann deal by way of the challenged deal provisions out of concern for their potential liability to Revlon’s disaffected and potentially litigious noteholders, a concern that would be allayed by Forstmann’s agreement to restore the full value of the notes in connection with the new deal. The Court of Chancery found that, by thus pursuing their personal interests rather than maximizing the sale price for the benefit of the shareholders, the Revlon directors had breached their duty of loyalty.
In affirming the judgment below, the Delaware Supreme Court first took up the challenges to the defensive actions undertaken by the Revlon board to fend off the hostile advances from Pantry Pride and challenged in the complaint: the adoption of a poison pill and the consummation of the repurchase program. Referencing its recent decision in Unocal v. Mesa Petroleum1, the Court observed initially that the business judgment rule, while generally applicable to a board’s approval of a proposed merger, does not apply to a board’s decision to implement anti-takeover measures, given the “omnipresent specter” that the board, in so doing, is serving its own interests in remaining in office at the expense of the interests of shareholders in securing maximum value. In such a circumstance, the Court declared that contrary to the traditional presumptions that accompany application of the business judgment rule, it is the directors’ threshold burden to establish that they had a reasonable basis for perceiving the need for defensive actions (typically by showing good faith and reasonable investigation) and that the action taken was reasonable in relation to the threat posed. [footnote omitted]