Problem: C Corporation, Inc., a public corporation incorporated in Delaware, is in dire financial condition, operating at a loss and about to run out of cash. P Corporation, Inc., a privately held corporation in the same line of business as C Corp., presents an unsolicited offer to invest enough money to give C Corp. a reasonable chance of recovery. In return for the investment, P Corp. would receive 35 percent of the equity in C Corp., the right to fill three seats on the nine-member board, and the right to demand the replacement of the current CEO plus a veto power in the selection of her successor. (a) Does this offer trigger Revlon duties? (b) What if P Corp.'s offer had been, again, for 35 percent of the equity but in the form of a new class of common shares with the right to elect five members of the nine-member board? (c) Would your answer to (a) or (b) change if P were publicly held? (d) What if, before receiving the offer from F Corp., C Corp. had sought equity investments from a couple of private-equity funds (that is, funds that invest on behalf of their wealthy clients)?
Answer: Revlon duties are triggered "(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).
(a) The key question here is whether P Corp. will control C Corp. following the transaction. Under Delaware law, a shareholder is deemed to have control if the shareholder either owns a majority of the voting stock or exercises control over corporate decision making. See, e.g., Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987) ("a shareholder owes a fiduciary duty only if it owns a majority interest in or exercises control over the business affairs of the corporation"); Solomon v. Armstrong, 747 A.2d 1098, 1116 n.53 (Del. Ch. 1999) ("Under Delaware law, the notion of a 'controlling' stockholder includes both de jure control and de facto control."). If the shareholder owns less than 50 percent of the voting stock, plaintiff must show evidence of actual control of corporate conduct. See, e.g., Emerald Partners v. Berlin, 726 A.2d 1215, 1221 n.8 (Del. 1999); Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del. 1989). Consequently, for example, in Kahn v. Lynch Communication Systems, Inc., 638 A.2d 1110 (Del. 1994), the Delaware Supreme Court held that a 43.3 percent shareholder exercised control, not based on the number of shares it owned, but because the board of directors deferred to the shareholder's wishes.
(b) The power to nominate and elect a majority of the board will be strong evidence of ability to control the affairs of the corporation and, arguably, amounts to a de facto "majority interest."
(c) Revlon is not triggered where control of the combined entity remains in the hands not of an identifiable control person or group but rather "in a large, fluid, changeable and changing market." Paramount Communications Inc. v. Time Inc., 1989 WL 79880 (Del. Ch. 1989), aff'd on other grounds, Paramount Communications, Inc. v. Time Inc., 571 A.2d 1140 (Del. 1989). Where one public corporation is acquired by another public corporation, that condition is satisfied. Arnold v. Soc. For Savings Bancorp., Inc., 650 A.2d 1270, 1290 & n. 45 (Del. 1994).
(d) The relevant prong of the Arnold triad here is # 1; namely, "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." The key interpretative question is whether "break up" modifies both halves of that prong or merely the latter. The Delaware Supreme Court observed in Santa Fe Pacific Corp. Shareholder Litigation, 669 A.2d 59 (Del. 1995), that:
Plaintiffs appear to rest their claim of a duty to seek the best value reasonably available on allegations that the Board initiated an active bidding process. Plaintiffs do not consider, however, that this method of invoking the duty requires that the Board also seek to sell control of the company or take other actions which would result in a break-up of the company.
Id. at 70-71. Unless the sale to P Corp. would result in a change of control, accordingly, it would seem that the bidding process must result in a break-up of the company in order for Revlon to be triggered.
