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Revlon, Inc. v. Macandrews & Forbes Holdings, Inc.

Supreme Court of Delaware

October 31, 1985, Submitted ; Written Opinion, March 13, 1986

Nos. 353, 354, 1985

Opinion

 [*175]  In this battle for corporate control of Revlon, Inc. (Revlon), the Court of Chancery enjoined certain transactions designed to thwart the efforts of Pantry Pride, Inc. (Pantry Pride) to acquire Revlon. 1 The defendants are Revlon, its board of directors, and Forstmann Little & Co. and the latter's affiliated limited partnership (collectively, Forstmann). The injunction barred consummation of an option granted Forstmann to purchase certain Revlon assets (the lock-up option), a promise by Revlon to deal exclusively with Forstmann in the face of a takeover (the no-shop provision), and the payment of a $ 25 million cancellation fee to Forstmann if the transaction was aborted. The Court of Chancery found that the Revlon directors had breached their duty of care by entering into the foregoing transactions  [*176]  and effectively ending an active auction for the company. The trial court ruled that such arrangements are not illegal per se under Delaware law, but that their use under the circumstances here was impermissible.  [**3]  We agree. See MacAndrews & Forbes Holdings, Inc. v. Revlon, Inc., Del. Ch., 501 A.2d 1239 (1985). Thus, we granted this expedited interlocutory appeal to consider for the first time the validity of such defensive measures in the face of an active bidding contest for corporate control. 2 Additionally, we address for the first time the extent to which a corporation may consider the impact of a takeover threat on constituencies other than shareholders. See Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d 946, 955 (1985).

 [**4]  In our view, ] lock-ups and related agreements are permitted under Delaware law where their adoption is untainted by director interest or other breaches of fiduciary duty. The actions taken by the Revlon directors, however, did not meet this standard. Moreover, ] while concern for various corporate constituencies is proper when addressing a takeover threat, that principle is limited by the requirement that there be some rationally related benefit accruing to the stockholders. We find no such benefit here.

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506 A.2d 173 *; 1986 Del. LEXIS 1053 **; 66 A.L.R.4th 157; Fed. Sec. L. Rep. (CCH) P92,525

REVLON, INC., a Delaware corporation, MICHEL C. BERGERAC, SIMON ALDEWERELD, SANDER P. ALEXANDER, JAY I. BENNETT, IRVING J. BOTTNER, JACOB BURNS, LEWIS L. GLUCKSMAN, JOHN LOUDON, AILEEN MEHLE, SAMUEL L. SIMMONS, IAN R. WILSON, PAUL P. WOOLARD, EZRA K. ZILKHA, FORSTMANN LITTLE & CO., a New York limited partnership, and FORSTMANN LITTLE & CO. SUBORDINATED DEBT And EQUITY MANAGEMENT BUYOUT PARTNERSHIP-II, a New York limited partnership, Defendants Below, Appellants, v. MacANDREWS & FORBES HOLDINGS, INC., a Delaware corporation, Plaintiff Below, Appellee

Subsequent History:  [**1]  Oral Decision, November 1, 1985.

Prior History:  Court Below - Court of Chancery of the State of Delaware in and for New Castle County: C.A. No. 8126 Upon appeal from the Court of Chancery.

Disposition: AFFIRMED.

CORE TERMS

bid, lock-up, Rights, shareholders, takeover, per share, bidder, covenants, stockholders, noteholders, negotiate, measures, hostile, merger, shares, stock, financing, enjoined, auction, good faith, circumstances, redeem, contest, transactions, conditioned, injunction, acquire, loyalty, no-shop, options

Business & Corporate Law, Directors & Officers, Management Duties & Liabilities, General Overview, Contracts Law, Contract Interpretation, Fiduciary Responsibilities, Governments, Fiduciaries, Mergers & Acquisitions Law, Mergers, Civil Procedure, Injunctions, Grounds for Injunctions, Remedies, Preliminary & Temporary Injunctions, Fiduciary Duties, Duty of Loyalty, Duties & Liabilities of Directors & Officers, General Business Considerations, Takeovers & Tender Offers, Business Judgment Rule, Takeovers & Tender Offers, Defenses, Duty of Good Faith, Scope of Authority