April 01, 2022

The Corporate Guide: Directors Obligations During a Change in Control Under Revlon

Revlon Duties Generally Described

The sale of a company or other change of control situations give rise to Revlon duties, requiring a company’s board to take reasonable steps to obtain the best price available for the benefit of the company’s stockholders. Revlon duties do not give rise to a new type of fiduciary duty, nor do they alter the fiduciary duties that generally apply. Instead, directors must prioritize Revlon duties over long-term corporate and financial strategies, which are secondary to the objective of securing the highest value reasonably attainable.

That said, Revlon duties do not require directors to choose the hypothetical ideal transaction or the proposal that offers the highest price. Directors simply are charged with selecting the best price and other terms reasonably available under the circumstances. 

Thus, where Revlon duties are triggered, directors must weigh a host practical issues, including an offer’s fairness and feasibility; the proposed or actual financing for the offer; the consequences of the proposed or actual financing; the risk of nonconsummation; questions of illegality; the bidder’s identity, prior background, and other business venture experiences; and the bidder’s business plans for the company and their effects on stockholder interests. 

When Do Revlon Duties Apply

Revlon duties apply to a transaction that will cause control of a company to pass to a third party. According to Paramount Communications Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994), and its progeny, those transactions include: 

  1. A sale or merger for cash or debt securities. 
  2. A merger for securities that transfers control to a private company or to a public company with a majority stockholder.
  3. When a company has initiated an active bidding process for a change in control.
  4. Or a transaction or business reorganization that will cause the company to break up.

Revlon duties are not triggered by:

  1. The process of determining whether to accept an acquisition proposal. 
  2. The rejection of an unsolicited offer based on the company’s strategic plan. 
  3. Or any transaction that does not result in a change of control, including a merger of equals or a common stock merger with a widely held public company. 

Satisfying Revlon Duties

There is no single blueprint for what a company’s board must do if Revlon duties are triggered — assuming that the result is a transaction that secures the best value reasonably available for stockholders. In other words, Revlon duties do not require a heated bidding contest or an auction involving several bidders. Rather, Revlon duties may be satisfied through a negotiation with a single counterparty. And Revlon does not impose on directors of a target company a duty to sell their company or to negotiate simply because they have received an offer.

Ultimately, when Revlon duties are triggered, directors must act in good faith, be diligent and adequately informed by obtaining all material information necessary to negotiate and evaluate the transaction(s), and otherwise act reasonably towards the goal of maximizing value. When alternatives exist, a board must be able to demonstrate that those alternatives were considered and found to be inferior to the offer accepted in terms of maximizing stockholder value. To that end, best practices for satisfying Revlon duties include:

  • Market checks. When the board is considering a single offer and has no reliable grounds upon which to judge its adequacy, fairness demands a canvass of the market to determine if higher bids may be elicited. Where directors possess a body of reliable evidence with which to evaluate the fairness of a transaction, they may approve the transaction without conducting a market check.
  • Mitigation of conflicts and adequate disclosures. Directors must disclose all conflicts of interest to the board and stockholders. And if there are material conflicts of interest, a special committee of disinterested directors should act to avoid permitting interested individuals to approve or negotiate the transaction.
  • Robust negotiation. Directors must ensure that deal terms and price are vigorously negotiated.
  • A reasonable timeline. Allowing sufficient time between announcing a potential transaction and closing on that transaction for other bidders to emerge.
  • Deal protections. Use reasonable and uncoercive deal protection devices, such as “fiduciary out” exceptions, “no-shop” provisions and termination fees (for example, by refraining from charging a break-up fee so high that stockholders feel forced to approve the sale to avoid the fee or by making bids prohibitively expensive for potential interloping bidders or creating a process too complicated to make a topping bid worthwhile).
  • A tailored transaction. Given that there is no specific roadmap for discharging Revlon duties, any deal process employed should be tailored to the circumstances impacting the corporation. For instance, Delaware courts have previously held that auctions for smaller companies could require more marketing to be considered reasonable.
  • Fairness opinion. Obtaining a fairness opinion from a reputable, independent financial advisor or banker. 
  • Active informed decision-making. The board or a special committee tasked with oversight of the transaction should monitor management’s negotiations and maintain an active and informed role in the oversight of the sale process. Most importantly, the directors must understand the value of the target company and the company’s industry such that the board can best achieve its goal of securing the highest price reasonably attainable. In the context of a stock deal, this requires the board to understand the value of the acquiring company and that company’s industry.

Takeaway — The analysis regarding whether Revlon duties have been triggered and how to satisfy them is extremely fact specific. Given the complexities involved, it is important to seek legal advice whenever it seems your company is considering or planning a triggering transaction.

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