- ‘Revlon duties’ require directors of Delaware companies to seek the highest price possible for shareholders when a sale of the company or a transfer of control is inevitable. This is narrower than the scope of a director’s general duties which extend beyond share price maximisation.
- The recent Delaware decision reaffirms that there is no single blueprint that a board must follow to fulfil its ‘Revlon duties’. It also confirms that there is no duty for directors to conduct a pre-signing market check for other bidders.
- ‘Revlon duties’ do not apply in an Australian context. There is no comparable narrowing of a director’s duties in a change of control transaction. In particular, the Takeovers Panel has on occasion afforded boards significant latitude in change of control transactions.
Revlon duties: introduction
‘Revlon duties’ require directors of Delaware companies to focus on seeking the highest price possible for shareholders in a change of control scenario. This is narrower than the usual scope of a director’s duties which extend beyond share price maximisation. The so called ‘Revlon duties’ emanate from the 1986 landmark decision involving the takeover contest for Revlon, Inc.
There have been a number of developments and refinements to this doctrine since it was first developed, including clarification on the use of ‘Don’t ask don’t waive’ standstill provisions1and their interaction with the ‘Revlon duties’.
In some circumstances, ‘Revlon duties’ had been interpreted as requiring boards to conduct a pre-signing auction or market check to seek out other potential buyers.
A recent Delaware Supreme Court decision relating to the proposed merger between C&J Energy Services (C&J) and a division of Nabors Industries Ltd (Nabors CPS)confirms, amongst other things, that:
- ‘Revlon duties’ do not require a board to conduct a pre-signing auction, and
- there is no single blueprint that a board must follow to fulfil its ‘Revlon duties’.
C&J and Nabors CPS: the facts
On 25 June 2014, C&J announced a proposed acquisition of Nabors CPS for approximately US$2.9 billion in cash and stock. Under the terms of the deal, C&J was the acquirer but its shareholders would end up holding 47% of the enlarged entity (MergeCo), with Nabors holding the remaining 53%.
A key reason for this deal structure was to achieve a “tax inversion” whereby MergeCo would be re-domiciled in Bermuda for tax purposes. In order for the tax inversion to be effective, Nabors had to own a majority of MergeCo. A key feature of the deal is that it was subject to approval by C&J shareholders.
Following the announcement of the deal, the City Of Miami General Employees’ and Sanitation Employees’ Retirement Trust, a C&J shareholder, launched a class action to enjoin the deal. It argued, amongst other things, that the directors of C&J had failed to view the transaction as a ‘control transaction’ despite Nabors ending up with 53% of MergeCo, and accordingly failed to discharge their ‘Revlon duties’.
On 24 November 2014, the Delaware Court of Chancery, at first instance, granted injunctions to:
- enjoin the proposed C&J shareholder vote for a period of 30 days, and
- require that C&J actively solicit alternative bids.
It is relevant to note here that the merger agreement between C&J and Nabors permitted either party to terminate the deal if it was not completed by 31 December 2014, with no exceptions for delays caused by a court-imposed injunction. Accordingly, this injunction, if not overturned, would have placed the deal at risk of termination.
This decision was overturned by the Delaware Supreme Court (Court) on 17 December 2014.
No duty to run an auction
The Court confirmed that there is no duty for a board to run an auction whenever the board approves a change of control transaction.
As noted above, the ‘Revlon duties’ requires directors of companies to seek the highest share price possible in a change of control transaction. However, this does not mean that there is a prescribed way for directors to achieve this ‘maximum value’ or to assess the market value of the shares. The court reaffirmed its previous decision that ‘there is no single blueprint that a board must follow to fulfil its duties’.
Instead, what is important is that directors must ensure that where there is an interested rival bidder, that bidder will have a fair opportunity to present a higher-value alternative and the board must have the flexibility to terminate the original transaction and accept the rival bid, where it is viewed to be of higher value.
Appropriate limits to barriers for a rival bidder
The ‘Revlon duties’ were primarily designed to ensure that a board could not unreasonably reject a higher-value rival bid over an existing bid.
Accordingly, a key focus for a court in deciding whether ‘Revlon duties’ have been fulfilled should be to consider whether the merger agreement contains appropriate limits on the barriers for a rival bidder. Relevantly here, the Court noted that:
- the deal was due to complete more than 5 months after it was announced, providing ample opportunity for an interested rival bidder to submit an alternative bid during that time, and
- C&J had negotiated a ‘fiduciary out’ for a superior proposal (which is unusually favourable for an acquirer in the US) and a break fee of approximately 2.27% of the deal value (which is considered modest in the US context).
Importance of shareholder vote
The Court also placed great importance on the fact that the deal was subject to a C&J shareholder vote and that C&J shareholders could make a well informed, uncoerced decision as to whether to accept or reject the deal.
Board’s actions to be viewed as a whole
The Court emphasised that it is important to consider the actions of the board as a whole when considering whether it has discharged its “Revlon duties” and noted:
“Although the record before us reveals a board process that sometimes fell short of ideal, Revlon requires us to examine whether a board’s overall course of action was reasonable under the circumstances as a good faith attempt to secure the highest value reasonably attainable. When that standard is applied to this record, we cannot conclude that the plaintiffs have proven that the majority-independent C&J board acted unreasonably in negotiating a logical strategic transaction, with undisputed business and tax advantages, simply because that transaction had change of control implications”
The Court also provided a reminder that the 'Revlon duties' were originally developed to counter a board that was resistant to a competing, superior bid, noting the key differences from the present deal:
“When a board exercises its judgment in good faith, tests the transaction through a viable passive market check, and gives its stockholders a fully informed, uncoerced opportunity to vote to accept the deal, we cannot conclude that the board likely violated its Revlon duties. It is too often forgotten that Revlon, and later cases like QVC, primarily involved board resistance to a competing bid after the board had agreed to a change of control, which threatened to impede the emergence of another higher-priced deal. No hint of such a defensive, entrenching motive emerges from this record.”
The Australian position
The general position in Australia is that directors of a target company do not have a positive duty to auction a company merely because the company is subject to a change of control proposal.
However, consistent with their fiduciary duties, the board should facilitate a process which would maximise shareholder value, including ensuring that there are no significant barriers to the emergence of a rival superior proposal. This proposition has been endorsed both by the Court and by the Takeovers Panel.
The Takeovers Panel’s position is reflected in its guidance notes and decisions which:
- prescribe limits on a target’s ability to entrench selected transactions to the exclusion of other potential transactions, and
- prohibit a target from taking actions which frustrate a bid or ‘chill’ an auction process.
The guidance points from the Takeovers Panel include:
- generally limiting break fees to 1% of the equity value of a target (absent other factors),
- requiring that no-talk and no-diligence restrictions are subject to ‘fiduciary outs’, and
- generally preventing a target from taking actions, without shareholder approval, that would trigger a bid condition in an ongoing takeover bid.
Despite the above, it is important to note that directors of Australian target companies can take into account a broad set of considerations when deciding what is in the best interest of the company and its shareholders. The Takeovers Panel has also on occasion afforded boards significant latitude in change of control transactions to choose the transaction the relevant board has considered to be in the best interests of shareholders.
The 'Revlon duties' do not require a board of a Delaware company to run an auction before entering into a change of control transaction and there is no single blueprint that directors must follow to ensure that they have discharged their various duties.
While Australia does not have equivalent 'Revlon duties', the consistent theme between the two markets is that there is an emphasis on ensuring an efficient and competitive market for control transactions.