In the Toys R Us Shareholders Litigation, Delaware VC Strine holds that the directors of Toys R Us did not breach their "Revlon duties" instructuring the sale of the company. Originally, the Toy R Us board had intended only to sell on division. The process of seeking a buyer for that division had turned up four potential bidders. The board subsequently decided to sell the whole company, but did not reopen the bidding process to seek additional potential bidders. Plaintiffs objected to that failure, which Strine dismissed in harsh terms:
I begin by noting my disagreement with the plaintiffs about the nature of players in the American M & A markets. They are not like some of us were in high school. They have no problem with rejection. The great takeover cases of the last quarter century — like Unocal, QVC, and — oh, yeah — Revlon — all involved bidders who were prepared, for financial advantage, to make hostile, unsolicited bids. Over the years, that willingness has not gone away.
... capitalists are not typically timid, and any buyer who seriously wanted to buy the whole Company could have sent a bear hug letter at any time, if it wanted to be genteel about expressing an interest. In all reasonable likelihood, the board’s sales process for Global Toys provided the most credible and likely buyers of the whole Company with information that would have gotten their acquisitorial salivary glands going.
The opinion is instructive for two reasons. First, it confirms the interpretation of Revlon that I offered up in my book Mergers and Acquisitions, in which I observe that (at 351):
... target directors need not be passive observers of market competition. The board's objective, however, "must remain the enhancement of the bidding process for the benefit of the stockholders." Favored treatment of one bidder at any stage of the process was therefore subjected to close scrutiny. Ultimately, the board's basic task was to get the best possible deal, which usually but not always meant the best possible price, for their shareholders. Directors did not need to blindly focus on price to the exclusion of other relevant factors. The board could evaluate offers on such grounds as the proposed form of consideration, tax consequences, firmness of financing, antitrust or other regulatory obstacles, and timing.
Just so, Strine does not accord the board's decision, business judgment rule protection, but also is unwilling to second guess a reasonable board decision about how to conduct a sale of the company.
Second, Strine devotes considerable attention to the question of whether Toy R Us directors and officers engaged in self-dealing and/or had conflicted interests in connection with their conduct of the sale. Again, I think this is consistent with my understanding of Delaware's takeover jurisprudence. As I observe at 366 of Mergers and Acquisitions:
In its takeover jurisprudence, Delaware typically has balanced the competing claims of authority and accountability by varying the standard of review according to the likelihood that the actions of the board or managers will be tainted by conflicted interests in a particular transactional setting and the likelihood that nonlegal forces can effectively constrain those conflicted interests in that setting. In other words, the Delaware cases suggest that motive is the key issue. … If the conflict of interest inherent in [board resistance to unsolicited tender offers] has matured into actual self dealing, the court will invalidate the defensive tactics. If the board acted from proper motives, even if mistakenly, however, the court will leave the defenses in place.
Anyway, this is an important take on the so-called Revlon duties that will be of interest to all corporate lawyers and law students.
