10/11/2009 07:13:27 PM EST
Thompson and Schwartz on the Application of the Revlon Duties in a Merger Transaction that Does Not Involve a Change of Control
In Arnold v. Soc. for Savings Bancorp, Inc., 1994 Del. LEXIS 406, the Delaware Supreme Court held that the duty imposed on directors by Revlon, to "seek the best value reasonably available to the stockholders," does not apply in a stock-for-stock merger transaction with no change of control. The court further held that Delaware courts will review directors' approval of such a transaction under the customary business judgment rule rather than the "enhanced scrutiny" standard of review. In this commentary, the authors explain how Delaware courts have applied the Revlon duties in various circumstances. They also discuss lessons that practitioners can learn from the Arnold decision.
Authors Kenneth R. Thompson II, Senior Vice President and Global Chief Legal Officer for LexisNexis, a division of Reed Elsevier Inc., and Michael G. Schwartz, a partner at Vorys, Sater, Seymour and Pease LLP in Cincinnati, write:
In 1986, the Delaware Supreme Court issued its seminal Revlon decision, holding that corporate directors have a fiduciary duty to obtain the best price for the company's stockholders when the company embarks on a transaction that will either break up the company or will result in a change of control. Following the Revlon decision, the Delaware judiciary has examined the application of these Revlon duties in a variety of circumstances including stock-for-stock mergers.
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Lessons from Arnold v. Society for Savings Bancorp
The decision of the Delaware Supreme Court in Arnold has important consequences for mergers involving Delaware corporations:
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The Revlon Duties apply in a stock-for-stock merger if the transaction results in a change of control of one of the constituent Delaware corporations. If, as a result of the merger, a single person or entity or controlled group will effectively control the surviving corporation, the directors of the acquired company are subject to Revlon Duties in considering and approving the transaction.
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If, following a stock-for-stock merger, the stock of the surviving company would be owned by "a fluid aggregation of unaffiliated stockholders," then neither the Revlon Duties nor judicial enhanced scrutiny of the directors' actions is applicable.
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In contrast to a stock-for-stock merger, a merger in which the stockholders of a publicly-held Delaware corporation receive cash for their shares will always trigger Revlon Duties on the part of the directors of the acquired company because the transaction results in a clear and unambiguous change in control of the acquired company.