Twenty-five years ago, in the seminal case of Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), the Delaware Supreme Court declared that once a board of directors decides to put a company up for sale, the board’s role changes from that of “defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.” As a result of that ruling, when a board enters Revlon territory, its decisions receive heightened scrutiny from the courts instead of the deferential business judgment rule. Some years later, the Delaware Supreme Court explained that Revlon duties apply in three scenarios: “(1) when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company; (2) where, in response to a bidder’s offer, a target abandons its long term strategy and seeks an alternative transaction involving a break-up of the company, or (3) when approval of a transaction results in a sale or change of control.”

Recently the Delaware Chancery Court was called upon to decide if there is a “change of control” (scenario number 3 above) when merger consideration is split evenly between cash and stock. The merger that prompted the lawsuit was between two publicly-held companies in which the shareholders in the target company were to receive $35 per share, with 50% of the consideration to be paid in cash and 50% to be paid in the acquiring company’s stock. Certain shareholders in the target company filed suit to enjoin the merger, claiming that the $35 merger price was unreasonably low and that the target company’s board of directors had failed to maximize stockholder value under the Revlon line of cases. The defendants argued that the proposed merger did not result in a change of control (and, therefore, did not trigger Revlon) because control of the post-merger entity would remain, as it had in the case of the target company prior to the merger, “in a large, fluid, changeable and changing public market.” After carefully reviewing the facts and legal precedents, the Chancery Court held that Revlon did apply because, even though every stockholder in the target company would retain a portion of his or her investment after the merger, “the concern here is that there is no ‘tomorrow’ for approximately 50% of each stockholder’s investment” and, therefore, the proposed merger constituted an “end-game” for a substantial part of each stockholder’s investment. The Court candidly acknowledged, however, that its decision was “not free from doubt.”