Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.
Citation: 506 A.2d 173 (Delaware Supreme Court, 1986)
Facts
Ronald Perelman’s Pantry Pride made hostile takeover bids for Revlon. In response, Revlon’s board adopted defensive measures including a poison pill and a leveraged buyout arrangement with Forstmann Little that included lock-up options and a no-shop clause favoring Forstmann Little. The Forstmann deal was at a lower price than Pantry Pride’s final bid but was preferred by the board because Forstmann agreed to support Revlon’s outstanding notes. Pantry Pride challenged the lock-up and no-shop provisions as improperly favoring one bidder.
Issue
Once a company is for sale, what duty do directors owe to shareholders, and may the board use defensive measures to favor one bidder over another at a lower price?
Holding
The Delaware Supreme Court struck down the lock-up options and no-shop clause, holding that once Revlon’s board had decided to sell the company, its duty shifted from protecting the corporate enterprise to maximizing shareholder value in the transaction.
Rule
When a company’s sale or break-up is inevitable (i.e., the board has decided to sell or a change of control is certain), directors enter “Revlon mode” and their duty shifts to acting as auctioneers seeking the highest value reasonably available for shareholders. In this mode, defensive measures that favor one bidder over another at a lower price, or that otherwise impede the auction, are impermissible. Directors may not consider the interests of other constituencies (e.g., noteholders) at the expense of shareholder value once the company is in play.
Significance
Revlon is one of the two foundational Delaware M&A cases (alongside Unocal) and is essential for understanding the enhanced scrutiny that applies to board conduct in change-of-control transactions. The key doctrinal contribution is the “Revlon duties” concept: a distinct fiduciary obligation that arises when a sale of the company is inevitable, requiring the board to maximize price rather than defend corporate independence. Subsequent cases (Paramount v. Time; Paramount v. QVC) have extensively elaborated when Revlon is and is not triggered.