Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. case brief

Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.,
506 A.2d 173 (Del. 1986) 

The Revlon Doctrine:  

"In certain limited circumstances indicating that the "sale" or "break-up" of the company is inevitable, the fiduciary obligation of the directors of a target corporation are narrowed significantly, the singular responsibility of the board being to maximize immediate stockholder value by securing the highest price available."

 
FACTS
-Pantry Pride wanted to acquire Revlon.  Suggested price between $40-50/share, later made hostile tender offer of $45.
-Revlon’s investment banker advised directors that $45/share was grossly inadequate.
-Pantry Pride’s strategy was to acquire Revlon through junk bonds and break up Revlon and distribute assets making a profit.
-Pantry Pride made a series of hostile moves, each rejected.  
-Revlon used defensive measures, “note purchase rights plan” and note covenants.  
-Board eventually agreed to leveraged buyout by Forstmann.  Pantry Pride offered $56.25, and Forstmann offered $57.25 per share (time value of money made it less).
-Pantry Pride asked for an injunction barring the consummation of an option allowing Forstmann from purchasing Revlon (lock-up option) as well as bar a no-shop provision from Revlon to Forstmann, and payment of a $25M cancellation fee to Forstmann if transaction was aborted.  
 

RULES
-Ultimate responsibility for managing the business and affairs of a corporation falls on its board of directors.

Directors owe fiduciary duties of care and loyalty to the corporation and its shareholders.

-When a board implements anti-takeover measures, there arises the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders.
-The responsive action taken must be reasonable in relation to the threat posed.
 

ANALYSIS
-The court looks at the poison pill, asks if it is reasonable.  At the time it was adopted, the poison pill was said to be reasonable.  It achieved the proper result, which was the raised bidding.  
Poison Pill: a plan by which shareholders receive the right to be bought out by the corporation at a substantial premium on the occurrence of a stated triggering event.  

-Did the board have power to adopt the measure?  (Yes).

-Was the poison pill adoption reasonable and for a sufficient purpose?  (Yes)

-Rights plan, at time of adoption, afforded a measure of protection consistent with director’s fiduciary duty in facing a takeover threat perceived as detrimental to corporate interests.

-Poison Pill spurred bidding to new heights, proper result of implementation.

-The court also looks at the exchange offer for 10 million of its own shares.  

The court here uses Unocal standards:  Requiring directors to determine the best interests of corporation/stockholders, and impose an enhanced duty to abjure any action that is motivated by considerations other than a good faith concern for such interests.  

-Was reasonable in relation to threat perceived until Pantry Pride increased offer to $50/share.  Here it was apparent that breakup was inevitable.  

-Obtaining the highest price for the benefit of the stockholders should have been the central theme guiding director action.

-Board cannot prefer noteholders to stockholders.  “A board may have regard for various constituencies in discharging its responsibilities, provided that there are rationally related benefits accruing to stockholders.”

 
CONCLUSION
-Can not play ‘favorites’ to a white-knight to the total exclusion of a hostile bidder when bidders make similar offers or when dissolution is inevitable.  
-Here there was irreparable harm, Pantry Pride would have lost opportunity to bid unless injunction decreed.



Subject: Corporations
Issues: The Revlon Doctrine, Poison Pill, Acquisitions


Revlon Inc. v. MacAndrews brief