On a corporate law professor list serv to which I subscribe, the following question was posted:
Are Revlon duties triggered if a corporation receives a(n unsolicited) time-sensitive offer for an acquisition (say 3 days) at an obviously large premium (say twice the valuation of the corporation) and the board is convinced that there can possibly be no better deal down the line?
If indeed Revlon duties are triggered, can one say they are satisfied anyway by procedurally structuring the deal to be an arms-length transaction e.g. getting proper fairness opinion that convinces the board it is in the best interests of the shareholders to sell? Differently put, does the board have to actually seek other potential acquirers (or at least spend some reasonable time seeking) for it to discharge its Revlon duties?
I replied as follows:
First, it’s important to note that the so-called "Revlon duties" are really just the general Unocal rules applied to a special fact situation. To be sure, the courts have waffled on this issue, although the latter interpretation seems to have ultimately prevailed. In 1987, for example, the Delaware supreme court drew a rather sharp distinction between the Unocal standard and what it then called "the Revlon obligation to conduct a sale of the corporation." Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1338 (Del.1987). Two years later, however, the court indicated that Revlon is "merely one of an unbroken line of cases that seek to prevent the conflicts of interest that arise in the field of mergers and acquisitions by demanding that directors act with scrupulous concern for fairness to shareholders." Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989). While subsequent cases and commentators still occasionally use phrases like “Revlon duties” or even “Revlon-land,” the court has continued to indicate that Revlon is properly understood as a mere variant of Unocal rather than as a separate doctrine. See my Unocal at 20.
Second, the Delaware Supreme Court appears to have settled on three triggers for invoking the Revlon variant of Unocal:
The directors of a corporation “have the obligation of acting reasonably to seek the transaction offering the best value reasonably available to the stockholders,” in at least the following 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 the break-up of the company”; or (3) when approval of a transaction results in a “sale or change of control.” In the latter situation, there is no “sale or change in control” when “‘[c]ontrol of both [companies] remain[s] in a large, fluid, changeable and changing market.’” Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1289-90 (Del. 1994) (citations and footnotes omitted).
The scenario posed doesn’t invoke any of the conditions for implicating Revlon. Hence, the relevant standard of review would be the requirement of process due care established by Van Gorkom. (See my Mergers and Acquisitions at 166-172.)
The more difficult issue, I think, would be whether the board in tihs scenario can do anything to lock up the deal for the favored bidder. Although Van Gorkom neither invalidated exclusivity provisions nor mandated inclusion of a fiduciary out, recent Delaware case law has trended in that direction. See my Mergers and Acquisitions at 179-92.
I find the Delaware courts’ hostility to no shops and other forms of exclusive merger agreements very puzzling. Precommitment strategies are commonplace. Think of Odysseus lashing himself to the mast so that he can hear the Sirens’ song without running his ship aground. Hostility to precommitment strategies certainly does not follow a fortiori from the mere fact that directors are fiduciaries. Why should informed directors acting in good faith not be allowed to lash themselves to the mast of a particular deal? Case law in other jurisdictions allows them to do precisely that. See, e.g., Jewel Cos., Inc. v. Pay Less Drug Stores Northwest, Inc., 741 F.2d 1555 (9th Cir. 1984), which specifically validated no shop clauses by permitting the target’s board to “lawfully bind itself in a merger agreement to forbear from negotiating or accepting competing offers until the shareholders have had an opportunity to consider the initial proposal.” Id. at 1564.
No Delaware court has yet offered a persuasive reason for their hostility to no shop clauses and the like. Instead, the invalidity of such strategies has been asserted by mere fiat. See my Dead Hand and No Hand Pills: Precommitment Strategies in Corporate Law.
In sum, I think the answer is that provided the board has gathered all material information reasonably available to it, the board may take this deal without shopping the company. However, the board’s ability to use lockups, no shops, best efforts clauses, and the like will be sharply constrained. As I explain in my Mergers and Acquisitions at 187-88:
Van Gorkom, however, does not require target boards to shop the company among competing bidders in order to satisfy their duty of due care. [FN: Van Gorkom, however, was decided before the duty to auction control emerged in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). Subsequent Delaware decisions suggest that the Revlon auctioneering duty may apply where the merger would result in a change of control, such as where a publicly held corporation goes private by means of a merger. Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 928 (Del. 2003).] Rather, the court seems to be saying that target boards must have some credible basis for determining that a proposed merger is in the best interest of their shareholders. An unfettered market test is merely one means of satisfying the board's duties. A determination of the firm's "intrinsic value," preferably in the form of a fairness opinion by an independent financial expert, is another. A combination of both techniques is probably the safest approach, but the duty of due care should be satisfied even if only the latter device is utilized. [FN: Cf. In re TW Services, Inc. Shareholders Litigation, [Current] Fed. Sec. L. Rep. (CCH) 94,334 at 92,179 n.8 (Del. Ch. 1989) ("alternatives to an auction for collecting the information that directors need to make an informed choice may be appropriate"); In re Amsted Indus. Inc. Litigation, No. 8224, slip op. (Del. Ch. Aug. 24, 1988) (alternatives to auction procedures acceptable).]
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COMMENT:
AUTHOR: AnonCorpLawyer
DATE: 06/13/2007 12:59:44 PM
Why doesn't this situation fit condition #3: the transaction will result in a change
of control?
In this situation, the board could fulfill its Revlon
duties by agreeing to the premium offer, provided that it would have adequate
time to conduct a post-signing market check. The post-signing market check can be done through a no-shop
that has a fiduciary out (although the transaction should be publicly announced
and there must be sufficient time between announcement and closing for a
topping bid to emerge). See
Barkan; Fort Howard; Pennaco; Wheelabrator. Revlon, of course, is not a duty to auction, but just a duty
to obtain the best price reasonably available. If the board satisfied its care obligations on the
front-end and determined that this
was a tremendous deal, then it could act reasonably by seizing it without an
informal pre-signing market check or an auction so long as the deal protection
measures would not unduly preclude a topping bid under Unocal (see Omnicare).
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COMMENT:
AUTHOR: Steve Bainbridge
URL: http://www.professorbainbridge.com
DATE: 06/13/2007 01:49:55 PM
I don't think the third Revlong trigger is per se
present. I addressed this issue in Unocal at 20, where I asked:
"Does a change of control occur in a triangular
transaction, in which the target ends up as a wholly-owned subsidiary of the
acquirer? Does a change of control occur when target shareholders receive cash
or debt securities, rather than surviving company shares? In both cases, there
has been a change in the ownership structure, but are these charges sufficient
to trigger Revlon or Unocal?
QVC provides some support for finding a change of control
in these situations. For example, the QVC court refers to the “diminution of
the current stockholders’ voting power” and to the loss of future control
premia. Id. at 45. Elsewhere in the opinion, the court notes the effect of the
transaction would be “to shift control of Paramount from the public
stockholders to a controlling stockholder, Viacom.” Id. at 48. Support for such
an argument can also be found in Chancellor Allen’s Time decision, which found
that the Time-Warner merger would not constitute a change of control because it
was a merger of equals in which the existing Time shareholders’ interests were
merely being diluted. Time, [1989 Transfer Binder] Fed. Sec. L. Rep. (CCH) at
93,280, reprinted in 15 DEL. J. CORP. L. at 739.
So long as the acquiring entity is publicly-held,
however, neither triangular nor non-stock for stock mergers should be deemed a
sale of control. Pre-Time cases in which Revlon was deemed applicable, other
than auctions triggered by a proposed defensive merger with a white knight,
were largely limited to management buyouts and defensive restructurings. See
supra notes 149-54 and accompanying text. The former category necessarily
involves the elimination of public ownership. The latter also typically
involves a transfer of control from public investors to corporate insiders or
their allies. Both then involve the creation of a large block of stock held by
an identifiable control group. In contrast, where the acquirer in a negotiated
merger is publicly held, voting control before and after the merger rests in
the hands of the acquirer’s public shareholders. Control of the combined entity
there remains “in a large, fluid, changeable and changing market.” QVC, 637
A.2d at 47 (emphasis omitted)."
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COMMENT:
AUTHOR: AnonCorpLawyer
DATE: 06/14/2007 05:56:35 AM
If the scenario you pose is a cash offer and there is no
target-company controlling stockholder, then Revlon applies. See also In re Lukens Inc. S'holders
Litig., 757 A.2d 720 (Del. Ch. 1999) (stating that a stock and cash transaction
"in which over 60% of the consideration is cash" triggered duties
under Revlon). If you are talking
about a stock-for-stock deal (including a reverse triangular where the target
stockholders receive shares of the parent) and no control group emerges in the
surviving parent entity, then it seems Revlon doesn't apply under Time
Warner.
I do think the Revlon doctrine has been mangled in an
overly technical way. Put more
simply, directors have a duty to act in the best interests of the corporation
and its stockholders. In the
context of a sale of the company, that duty requires them to obtain the best
price possible. That seems like
common sense. In the context of a
merger of equals, that duty may require them to pursue a viable corporate
strategy despite a subsequent unsolicited offer.
P.S. I enjoyed your Unocal at 20 article.
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