In a comment to my post, The Borders of Revlon-land, Clint Krislov asks:
let me pose you a question we raised in Lyondell.
... why is it that defendants persist in arguing that no revlon duties are implicated when the bid is not solicited by the board. Isn?t revlon triggered by the decision to sell alone, regardless of what brought it about?
There is a suggestion in VC Noble's opinion in Ryan v. Lyondell that all sales of the corporation trigger Revlon duties:
The board of directors is tasked with managing the business and affairs of a Delaware corporation and, ordinarily, its decisions are shielded from intense post hoc judicial review by the business judgment rule.FN66 When a board of directors undertakes a sale of the company for cash, however, its actions are subject to enhanced judicial scrutiny. Thus, the ordinarily deferential ?rational basis? review gives way to ?an intensified form of review involv[ing] two ?key features': (a) a judicial determination regarding the adequacy of the decision-making process employed by the directors, including the information on which the directors based their decision; and (b) a judicial examination of the directors' actions in light of the circumstances then existing.?FN67 Additionally, the burden is shifted to the directors to prove ?that they were adequately informed and acted reasonably.?
FN66: The business judgment rule ?is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.? Aronson v. Lewis, 473 A.2d 805, 812 (Del.1984). Ordinarily, the burden rests on the plaintiff to rebut the presumption by proving either (1) that the directors were interested or lacked independence to assess the merits of the transaction; or (2) that the challenged transaction otherwise was not the product of a valid exercise of business judgment. Globis Partners, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *4 (Del.Ch. Nov.30, 2007).
FN67: In re Toys ?R? Us, Inc., 877 A.2d at 1000 (citing Paramount Commc'ns, Inc. v. QVC Networks, Inc., 637 A.2d 34, 45 (Del.1994)).
Noble appears to recognize that "enhanced judicial scrutiny" does not require an auction prior to every sale. See FN75 of the opinion, discussing Barkan. Insofar as that goes, he's correct.
In my opinion, however, if Noble means to say that every sale of a corporation triggers "Revlon duties" in the sense that enhanced scrutiny applies to the board's conduct of every sale, I believe he is wrong both as a matter of policy and doctrine. I discussed the policy reasons why I think that's an error in the earlier post, The Borders of Revlon-land, so here let me focus on doctrine.
In 2003, the Delaware supreme court stated that: "This Court has held that a board?s decision to enter into a merger transaction that does not involve a change in control is entitled to judicial deference pursuant to the procedural and substantive operation of the business judgment rule." Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 928 (Del. 2003). Indeed!
Some 9 years earlier, the court had explained that:
The Court of Chancery held that Revlon was inapplicable under the facts of this case because the Merger did not involve a change in control. We agree....
The directors of a corporation have the obligation of acting reasonably to seek the transaction offering the best value reasonably available to the stockholders, Paramount Communications, Inc. v. QVC Network, Inc., Del.Supr., 637 A.2d 34, 43 (1994), in at least ... 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.
Arnold v. Society for Sav. Bancorp, Inc., 650 A.2d 1270 (Del. 1994). I believe that, in the phrase "sale or change of control," control must be understood to modify both the words sale and change. Indeed, that conclusion would seem to follow directly from the Omnicare passage quoted above.
To see why, consider the following transactions:
- A public corporation acquires all or substantially all the assets of a publicly held target corporation.
- A public corporation merges with a target public corporation. Under the terms of the merger agreement, the target shareholders get cash for their shares.
- A public corporation acquires a target via a triangular merger in which the public target is merged into a wholly owned subsidiary of the acquirer. The target shareholders get cash for their stock.
Each of these transactions could be characterized as a sale. Remember, however, that in Time Allen had said that Revlon was not triggered because there was no change of control. Why not? Because control of the combined entity remained "in a large, fluid, changeable and changing market." Contrast that to QVC, where Revlon was applied because the effect of the transaction would be "to shift control of Paramount from the public stockholders to a controlling stockholder, Viacom."
In each of my hypotheticals, control of the combined entity will remain "in a large, fluid, changeable and changing market." Accordingly, Revlon should not apply. Accordingly, these transactions should not receive enhanced scrutiny. Accordingly, they should be reviewed under the business judgment rule.
Update: I cover this and related Revlon issues in my new eBook for Kindle: Directors as Auctioneers: A Concise Guide to Revlon-Land
