On December 19, 2015, the Supreme Court of Delaware issued an engaging opinion reminding readers of the historical origins of the Revlon doctrine in Delaware corporate jurisprudence and reversing the Court of Chancery’s grant of preliminary injunctive relief because it was based on an erroneous view of the doctrine’s requirements. In C&J Energy Services, Inc., et al. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, No. 655/657, 2014 (December 19, 2014), the Supreme Court reversed a mandatory preliminary injunction the Court of Chancery issued requiring C&J Energy Services, Inc. (“C&J”) to “go shop” itself after finding that a failure to shop the company either before or after the transaction made it “plausible” that the court would find a violation of the Revlon doctrine.
While deal-makers will find the opinion an interesting read for the discussion of a fairly unique deal structure, important to understanding the Supreme Court’s discussion ofRevlon duties are the following salient facts: (1) the board was majority independent; (2) none of the directors had any prior relationship with the deal partner; and (3) C&J bargained hard for significant corporate governance concessions that inured to the benefit of the C&J stockholders. The corporate governance concessions included, among other things, a commitment in the by-laws of the new entity (which would be majority owned by the transaction partner for tax and purposes of domestication in Bermuda) that in the event of a future sale of the company, all shareholders would share equally and ratably in the proceeds of any such transaction.
Given the key facts noted, the Supreme Court found that “[a]lthough 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.” The Supreme Court noted that “as the years go by, people seem to forget that Revlon was largely about a board’s resistance to a particular bidder and its subsequent attempts to prevent market forces from surfacing the highest bid.” Given that re-focus on the historical foundation forRevlon duties, the Supreme Court recited the following regarding the proper focus of aRevlon analysis:
Not only did the Court of Chancery fail to apply the appropriate standard of review, its ruling rested on an erroneous understanding of what Revlon requires.Revlon involved a decision by a board of directors to chill the emergence of a higher offer from a bidder because the [company’s] CEO disliked the new bidder, after the target board had agreed to sell the company for cash. Revlon made clear that when a board engaged in a change of control transaction, it must not take actions inconsistent with achieving the highest immediate value reasonably attainable.
But Revlon does not require a board to set aside its own view of what is best for the corporation’s stockholders and run an auction whenever the board approves a change of control transaction. As this Court has made clear, there is not single blueprint that a board must follow to fulfill its duties, and a court applying Revlon’s enhanced scrutiny must decide whether the directors made a reasonable decision, not a perfect decision.
In a series of decisions in the wake of Revlon, Chancellor Allen correctly read its holding as permitting a board to pursue the transaction it reasonably views as the most valuable to stockholders, so long as the transaction is subject to an effective market check under the circumstances in which any bidder interested in paying more has a reasonable opportunity to do so. Such a market check does not have to involve an active solicitation, so long as interested bidders have a fair opportunity to present a higher-value alternative, and the board has the flexibility to eschew the original transaction and accept the higher-value deal. The ability of the stockholders themselves to freely accept or reject the board’s preferred course of action is also of great importance in this context. (internal quotations omitted and italics in original)
This is an important opinion given its reminder that there are many ways for a board to satisfy its Revlon duties so long as the actions taken are reasonably calculated to achieve the best value reasonably attainable for the shareholders. The key factor, however, will be the Court’s assessment of the likelihood that superior alternative proposals–if any are available–had a fair opportunity to percolate to the top, and the board maintained the ability to present those alternatives to the shareholders.