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

Supreme Court of Delaware
506 A.2d 173 (1986)

ELI5:

Rule of Law:

When the sale or breakup of a corporation becomes inevitable, the board of directors' fiduciary duty shifts from preserving the corporate entity to maximizing shareholder value, and the board's role changes from defenders of the corporation to auctioneers charged with getting the best price for stockholders.

Facts:

Pantry Pride, Inc., led by Ronald Perelman, expressed interest in a friendly acquisition of Revlon, Inc., but was rebuffed by Revlon's CEO, Michel Bergerac.
In response to an impending hostile tender offer from Pantry Pride, the Revlon board adopted two defensive measures: a Note Purchase Rights Plan (a "poison pill") and a share repurchase program, exchanging Senior Subordinated Notes for 10 million of its own shares.
Pantry Pride commenced a hostile tender offer and repeatedly increased its bid price, creating an active auction for Revlon.
Revlon's board began negotiating a leveraged buyout with a 'white knight' bidder, Forstmann Little & Co.
After Revlon announced its initial deal with Forstmann, the market value of the recently issued Notes dropped, and the noteholders threatened to sue the directors.
Pantry Pride raised its bid above Forstmann's initial offer.
To induce a slightly higher bid from Forstmann and end the auction, the Revlon board granted Forstmann a lock-up option to purchase two of Revlon's key divisions at a price significantly below their appraised value if another bidder acquired 40% of Revlon's shares.
The agreement with Forstmann also included a no-shop provision and a $25 million cancellation fee, and in exchange, Forstmann agreed to support the par value of the Notes, thus protecting the directors from potential liability.

Procedural Posture:

Pantry Pride, through its controlling stockholder MacAndrews & Forbes Holdings, Inc., initially sought an injunction against Revlon's Note Purchase Rights Plan in the Delaware Court of Chancery.
Pantry Pride later filed an amended complaint in the Court of Chancery challenging the lock-up option, the no-shop provision, and the cancellation fee that Revlon's board granted to Forstmann.
The Court of Chancery, serving as the trial court, granted a preliminary injunction, finding that the Revlon directors had breached their duty of loyalty by making concessions to Forstmann out of concern for their own liability to noteholders.
Revlon and Forstmann, the defendants, filed an expedited interlocutory appeal of the injunction to the Delaware Supreme Court.

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Issue:

Do a target company's directors breach their fiduciary duties by granting a lock-up option on the company's crown-jewel assets and a no-shop provision to a preferred bidder to end an active auction, when their actions are motivated by a desire to protect noteholders rather than to maximize the sale price for shareholders?

Opinions:

Majority - Moore, J.

Yes. When the sale of a company becomes inevitable, the directors' duty shifts from preserving the company to maximizing its value at a sale for the stockholders' benefit. The Revlon board breached its primary duty of loyalty by granting a lock-up and no-shop provision to end an active auction based on impermissible considerations, such as protecting noteholders and shielding themselves from liability, at the expense of the shareholders. While initial defensive measures to combat a grossly inadequate offer were valid under Unocal, once the board decided to sell the company, its role became that of an auctioneer. The lock-up was not used to entice a new bidder into the contest but to foreclose further bidding and end the auction in return for a marginal increase in price. The board's preference for the noteholders was improper because the noteholders' rights were fixed by contract and did not justify sacrificing the shareholders' interest in obtaining the highest possible price. Therefore, the defensive measures, taken in the context of an active auction and for reasons other than maximizing shareholder value, were invalid.

Analysis:

This landmark decision established what is now known as the "Revlon duties," which imposes a heightened standard of judicial review on board actions once a company is for sale. The ruling clarifies that when a change of control is inevitable, the board's usual deference under the business judgment rule is limited, and its actions are scrutinized to ensure they are reasonably calculated to achieve the best price for shareholders. This doctrine profoundly impacts corporate takeovers, requiring boards to demonstrate they have conducted a fair and active auction process. Future cases would grapple with defining exactly when Revlon duties are triggered, but the core principle of maximizing shareholder value in a sale context became a cornerstone of Delaware corporate law.

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