Law School Case Brief
Revlon, Inc. v. Macandrews & Forbes Holdings, Inc. - 506 A.2d 173 (Del. 1986)
To obtain a preliminary injunction, a plaintiff must demonstrate both a reasonable probability of success on the merits and some irreparable harm, which will occur absent the injunction. Additionally, the court shall balance the conveniences of and possible injuries to the parties.
The shareholders of Revlon, Inc. (Revlon) brought an action against the company’s directors, Forstmann Little & Co. and the latter's affiliated limited partnership (collectively, Forstmann) due to irregularities of a corporate auction. Essentially, the shareholder moved for an injunction to bar Pantry Pride, Inc. (Pantry Pride) from engaging in deals with Forstmann in the form of options, the sale of assets, and exclusive dealing provisions. The Court of Chancery issued an injunction in favor of the shareholders. This barred consummation of an option granted to 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 and effectively ending an active auction for the company.
Did the trial court err in granting the injunction on the grounds that defendants had breached their duty of care by entering into such transactions, thus ending an active auction for the company?
The supreme court affirmed the trial court, holding that defendants allowed considerations other than maximizing shareholder profit to affect their judgment. In conclusion, the Revlon board was confronted with a situation not uncommon in the current wave of corporate takeovers. A hostile and determined bidder sought the company at a price the board was convinced was inadequate. The initial defensive tactics worked to the benefit of the shareholders, and thus the board was able to sustain its Unocal burdens in justifying those measures. However, in granting an asset option lock-up to Forstmann, we must conclude that under all the circumstances the directors allowed considerations other than the maximization of shareholder profit to affect their judgment, and followed a course that ended the auction for Revlon, absent court intervention, to the ultimate detriment of its shareholders. No such defensive measure can be sustained when it represents a breach of the directors' fundamental duty of care. In that context the board's action is not entitled to the deference accorded it by the business judgment rule. The measures were properly enjoined.
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