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, its 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 bidders 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. Socy for Sav. Bancorp, Inc., 650 A.2d 1270, 1289-90 (Del. 1994) (citations and footnotes omitted).
The scenario posed doesnt 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 targets 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 boards 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).]
Update: I cover this and related Revlon issues in my new eBook for Kindle: Directors as Auctioneers: A Concise Guide to Revlon-Land
