The Delaware Chancery Court has extended Revlon duties to a company’s issuance of notes convertible into a controlling interest in the company.
A transaction that constitutes a change in corporate control triggers Revlon duties for directors, meaning a director’s fiduciary duty is to seek, in good faith, the best value reasonably available to the stockholders. The judicial standard of review for these transactions holds a board’s decisions to a higher threshold than for other business transactions. The business judgment rule protects decisions made by disinterested and independent directors acting in good faith and with due care, and these decisions will be upheld unless there is no “rational business purpose” for them. However, in a change of control transaction, a board of directors’ decision must be “reasonable” both in its process and in its result to be upheld under the business judgment rule and not just have a “rational business purpose,” which is a more exacting standard.
The board of directors of DSL.net Inc., faced with a choice between bankruptcy and issuing notes convertible into more than 90 percent of the company’s outstanding capital stock to MegaPath, Inc. in exchange for a $13 million loan, chose to enter into the MegaPath transaction. MegaPath converted some of its notes into a controlling interest in DSL.net Inc., then as a stockholder voted to issue additional stock, which caused a neartotal loss of share value for the existing stockholders (plaintiff Binks’ investment went from $1.5 million to $24,000). MegaPath then converted the remainder of its notes into a more than 90 percent interest in DSL.net Inc. and subsequently effected a short-form merger. The Delaware Chancery Court applied the Revlon standards to the board’s decision to issue the notes, viewing the issuance of the notes and the merger as one change-of-control transaction because the merger was an “inevitable and foreseeable consequence” of the issuance of the notes. Though the court ultimately found that the board satisfied its Revlon duties, this decision is notable since it effectively expanded the application of Revlon.
Binks v. DSL.net Inc., C.A. 2823-VCN (April 29, 2010)