When the overwhelming majority of the public reads that word, they think of lipstick, eye shadow, nail polish and other cosmetic products. When a deal lawyer reads that word, particularly those who deal with public company M&A, the first thing that typically comes to mind is the heightened scrutiny of a board’s decision that arises in connection with the sale of a Delaware corporation, particularly those that are publicly traded.
Revlon versus McAndrews imposes a heightened duty on the directors of the acquired company when compared to the business judgment rule. The former imposes a duty on the board to maximize the price available to the stockholders, whereas under the latter, the court will generally not review the substance of the board’s decision, thus deferring to the disinterested directors’ judgment, provided that the court can discern a rational business purpose for the decision.
One of the big unresolved questions under Delaware law is at what point does the so-called Revlon duties apply to an acquisition involving both stock and cash. Prior decisions from the Chancery Court give some guidance, but it is far from definitive. For example, we know from back in the mid-90s, that a deal involving 33% cash and 67% stock was not enough, absent other bad facts, to trigger Revlon. A few years later, the Chancery Court suggested that Revlon would apply to a deal involving 62% cash and 38% stock.
A recent Delaware case shed further light on the question, holding that Revlon does apply in deal involving 50% cash and 50% stock, though the court conceded that its conclusion was not “free from doubt.”
What’s the BIG deal?
Failure to satisfy Revlon, along with allegations of inadequate disclosure in the proxy statement used to solicit shareholder approval of a deal, are the two most fertile grounds for shareholder derivative suits challenging the sale of a public company. Nobody likes being a named defendant in one of those lawsuits, even if they are largely frivolous and rarely result in actual court-imposed liability. Thus, directors of publicly traded Delaware corporations need to fully understand when their decision to sell the company will be reviewed in light of the heightened duty imposed by Revlon. The Court's recent decision helps clarify when those duties come into play.