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 that will occur absent the injunction. Additionally, the court shall balance the conveniences of and possible injuries to the parties.
This case involved a battle for corporate control of Revlon, Inc., whereupon, the Court of Chancery enjoined certain transactions designed to thwart the efforts of Pantry Pride, Inc. to acquire Revlon. The defendants were 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 to Forstmann for the purchase of 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. 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. On appeal, defendants claimed that they did not breach the business judgment rule.
Did the Revlon directors breach their duty of care and the business judgment rule?
According to the Court, the breach occurred because defendants made concessions to the third-party corporation, rather than maximizing the sale price of the company for the stockholders' benefit. Thus, the Court held that defendants allowed considerations other than maximizing shareholder profit to affect their judgment. Accordingly, the preliminary injunction was upheld because the defendant directors did not act in the shareholders' best interest in ending an active auction. This decision was a breach of the directors' fundamental duty of care and, thus, was not entitled to the deference accorded it by the business judgment rule. The Court affirmed the judgment.
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