One of the questions that invariably arises in a transaction involving a change of control of a Delaware corporation is what actions the target board of directors must take in order to properly discharge its duties arising out of Revlon v. MacAndrews & Forbes Holdings. Two recent Delaware decisions provide important guidance on this recurring issue.
Revlon does not mandate either an active pre-signing or active post-signing market check.
A passive post-signing market check, which involves a fiduciary out to terminate the definitive agreement to accept an unsolicited superior proposal, can be used to satisfy Revlon. In C&J Energy Services, Inc. v. City of Miami General Employees and Sanitation Employees Retirement Trust, the Delaware Supreme Court reversed the Delaware Court of Chancery’s unusual ruling that required a company acquiring a business by way of a stock-for-stock merger to conduct a robust post-signing market check by actively shopping itself. The transaction at issue was subject to a passive post-signing market check and a fiduciary out termination right, and would have resulted in C&J Energy, the notional acquirer, becoming majority owned by the notional seller (who would have been subject to limitations on exercising control).
The Delaware Supreme Court reiterated that there was no single blueprint for satisfyingRevlon duties, and noted, consistent with In re Fort Howard Shareholders Litigation, thatRevlon does not mandate that a Delaware corporation actively shop itself pre-signing even if negotiating with only a single bidder. Furthermore, consistent with In re Pennaco Energy andIn re MONY Group, the court stated that, together with a board’s good faith judgment and an uncoerced opportunity of the stockholders to vote to accept the deal, a passive post-signing market check (even with a customary break-up fee) can be an appropriate means by which to discharge Revlon duties. Finally, the Delaware Supreme Court noted that the Revlon case was largely about a board’s resistance to a particular bidder, and made clear that when a target board approves a change of control transaction, it must not take steps inconsistent with achieving the highest value reasonably attainable. However, Revlon does not require running an auction each time a board approves a change of control transaction.
Revlon requires seeking the highest price reasonably attainable, not simply the highest price.
A target board in Revlon-mode may turn down a bid that is at a higher price, but has a lower chance of actually closing. In In re Family Dollar Stores, Inc. Shareholder Litigation, an interloper proposed a higher per share price bid, although the bid was likely to face significant antitrust opposition and the interloper did not obligate itself to do everything possible to obtain antitrust approval. The target refused to negotiate with the interloper on the basis that, while the interloper was proposing a higher price deal, the price was not reasonably attainable due to the low closing certainty.
The Delaware Chancery Court held that the target board properly discharged its Revlonduties and declined to enjoin the stockholder vote. The court noted that the target board’s refusal to negotiate with the interloper and risk a breach of the merger agreement reflected a reasonable decision and the reality that a financially superior offer on paper does not necessarily equate to the highest price reasonably attainable as required under Revlon, in particular if there is meaningful antitrust risk of non-consummation. The Family Dollardecision reinforces the logical underpinning of Revlon—a target board does not have to jeopardize a lower price bid in hand, for a higher price bid that has less deal certainty.
The borders of Revlon-land remain hazy.
The C&J Energy case involved a stock-for-stock merger that would have created a combined company with a controlling stockholder, albeit one subject to limitations on the controller. The Delaware Supreme Court declined to address directly whether such limitations on the controller would be sufficient to take the transaction out of Revlon’s reach. However, putting those limitations aside, the type of transaction in C&J Energy would normally be likely to trigger Revlon, consistent with the holding in Paramount v. QVC (stock-for-stock merger resulting in a combined company with a controlling stockholder triggers Revlon) and Arnold v. Society for Savings Bancorp (stock-for-stock merger resulting in a combined company with a large, fluid, changeable and changing aggregation of stockholders and no controller does not trigger Revlon). It remains an open question as to whether limitations on a controller similar to a C&J Energy-style deal would be sufficient to inoculate a transaction from the application ofRevlon.
In Family Dollar, the target was subject to Revlon because it was to be acquired in an 80%/20% cash/stock deal. Family Dollar is consistent with the established Delaware precedent including In re Santa Fe Pacific Shareholder Litigation (33%/67% cash/stock deal does not trigger Revlon) and In re Lukens (62%/38% cash/stock deal does trigger Revlon). It is also consistent with the more recent cases of Steinhardt v. Occam Networks and In re Smurfit-Stone Container Corp. Shareholder Litigation (a 50%/50% cash/stock deal can triggerRevlon when stockholders are losing the last opportunity to maximize the value of a significant amount of their investment).