Via The Chancery Daily we learn of a recent Revlon decision by Vice Chancellor Slights that is quite striking.
As I explained in my article, The Geography of Revlon-Land, 81 Fordham L. Rev. 3277 (2013), the Delaware Chancery Court has gone seriously awry in applying Revlon.
The Delaware Supreme Court had explained that Revlon duties are triggered in three situations:
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, footnotes, and internal quotation marks omitted). In a series of cases, the Delaware Chancery court invented a fourth trigger:
In transactions, such as the present one, that involve merger consideration that is a mix of cash and stock—the stock portion being stock of an acquirer whose shares are held in a large, fluid market—”[t]he [Delaware] Supreme Court has not set out a black line rule explaining what percentage of the consideration can be cash without triggering Revlon.”
In re NYMEX Shareholder Litig., 2009 WL 3206051 at *5 (Del. Ch. 2009).
In Flannery, VC Slights embraced the NYMEX line of cases clearly erroneous approach to all cash deals:
In an all-cash transaction, Revlon applies “because there is no tomorrow for the corporation’s present stockholders.” (59)
NYMEX and progeny were clearly inconsistent with Arnold. They posit that a mix of cash and stock triggers Revlon, but Arnold’s clear implication is that an acquisition by a publicly held corporation with no controlling shareholder that results in the combined corporate entity being owned by dispersed shareholders in the proverbial “large, fluid, changeable and changing market” does not trigger Revlon whether the deal is structured as all stock, all cash, or somewhere in the middle. The form of consideration is simply irrelevant.
The NYMEX line of cases evaded Arnold by misquoting it. VC Slights repeated this sleight of hand in quoting Arnold:
Revlon duties can be triggered in three ways:
(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. (37)
The observant reader will note that VC Slights (like the other Chancery Court decisions in the NYMEX line) thereby omitted the critical qualifier Arnold adds to checkpoint # 3. To emphasize the point, let us quote the pertinent part of Arnold again in full:
(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.
But what about cases involving mixed consideration? Again, the correct answer is that the form of consideration is simply irrelevant. Unfortunately, although VC Slights held that Revlon was not triggered on the facts of Flannery--where 58% of the consideration was stock and 42% was cash, he did not reject the erroneous view that mixed consideration cases do trigger Revlon when the ratio tilts sufficiently towards cash (specifically, it appears that 50% cash is the triggering line; see pp. 62-63).
The bottomline is that VC Slights perpetuates the basic error made by the Chancery Court, albeit tweaking it a bit by suggesting where the line is to be drawn in mixed consideration cases.
Having said that, would it have killed him to cite my article?
