Under In re Toys "R" Us, Inc. Shareholder Litigation, directors must follow a reasonable process once their Revlon Duties have been triggered. This means directors must take reasonable efforts to fulfill their obligation to secure the best available price, but they are not required to perform flawlessly. This deference to reasonable actions also extends to the decision to include deal protection provisions in acquisition agreements. In this Emerging Issues Analysis, 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 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 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; however, the broad array of possible fact patterns left numerous unresolved issues. In the case In re Toys "R" Us, Inc. Shareholder Litigation (877 A.2d 975, 1000 [Del Ch. 2005]), the Court of Chancery of Delaware summarized the applicable standards of review when examining the processes followed by a board of directors once Revlon Duties have been triggered. The Chancery Court also examined the reasonableness of the board's actions regarding deal protection provisions included in a merger agreement.
“The Development of Enhanced Scrutiny in Delaware.
“The concept of enhanced scrutiny in Delaware when reviewing a corporate change of control arose out of two cases decided by the Supreme Court of Delaware in 1985 and 1986. These cases, Unocal Corp. v. Mesa Petroleum Co. (493 A.2d 946 [Del. 1985]) and Revlon Inc. v. MacAndrews & Forbes Holding, Inc. (506 A.2d 173 [Del. 1986]), changed the landscape of how directors approach their roles in change of control situations. From the shareholder and potential purchaser's perspectives, enhanced judicial scrutiny is warranted due to the inevitable risk during a corporate change in control that a board may be acting in its own interest, and not that of the corporation and shareholders. In re Lukens Inc. Shareholders Litigation (757 A.2d 720, 731 [Del. Ch. 1999]). . . .
“Before Unocal and Revlon, courts evaluated board decisions under the more lenient business judgment rule, whereby the board's decision was presumed to be made on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company, as long as the board's decision was made for any rational reason. Aronson v. Lewis (473 A.2d 805, 812 [Del. 1984]). The burden fell to the plaintiffs to prove that the directors were breaching their duties. This level of scrutiny came to be known as a ‘bare rationality’ standard of review.”
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