Revlon Mode
When a company enters Revlon mode, the board’s duty shifts from preserving the company as a going concern to maximizing short-term shareholder value. The board must act as a neutral auctioneer to obtain the best price reasonably available for shareholders.
Elements / Triggers
Revlon mode is triggered when (Paramount Communications, Inc. v. QVC Network, Inc., Del. 1994):
- The company initiates an active bidding process to sell itself or to effect a business reorganization involving a break-up
- The company abandons its long-term independence plan in response to a bid, or
- A merger will result in the sale of control — a transaction in which a controlling stockholder will acquire control (not a stock-for-stock merger of equals where control remains in a large, fluid shareholder market)
A stock-for-stock merger with a company that has no controlling shareholder does NOT trigger Revlon because control remains in the market (Paramount v. Time).
Board’s Duties in Revlon Mode
Once triggered, the board:
- Must seek the best price reasonably available for shareholders
- Cannot favor one bidder based on non-financial considerations (e.g., management continuity, employment)
- Cannot use defensive measures to foreclose competition
- Must be a neutral auctioneer — treating all qualified bidders equally
Deal Protections (Lock-Up Provisions)
Permissible if reasonably designed to get the best price rather than lock up the deal:
- Break-up fees: reasonable (typically 1–3% of deal value); must not be so large as to deter competing bids
- No-shop / no-solicitation clauses: permissible with a “fiduciary out” allowing the board to respond to superior proposals
- Matching rights: permissible; but cannot be so onerous that they chill competition
Impermissible if they are coercive or preclusive — if they effectively foreclose the emergence of a superior bid (Omnicare v. NCS Healthcare, Del. 2003: deal protections that prevented shareholders from accepting a superior offer held invalid).
Policy
- Once a company is for sale, shareholders’ primary interest is getting the highest price; Revlon aligns the board’s duty with that interest
- Ensures the board is not co-opted by a favored bidder or management’s self-interest
- Prevents structural coercion where shareholders face a “take it or leave it” choice imposed by defensive measures
Key Cases
| Case | Rule |
|---|---|
| Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (Del. 1986) | Articulates auction duty; once break-up is inevitable, board must maximize price |
| Paramount Communications, Inc. v. QVC Network, Inc. (Del. 1994) | Triggers for Revlon; merger with controlling shareholder triggers Revlon; no rational basis for favoring Viacom over QVC |
| Paramount Communications, Inc. v. Time Inc. (Del. 1989) | Stock-for-stock merger did not trigger Revlon; board may pursue long-term plan |
| Lyondell Chemical Co. v. Ryan (Del. 2009) | Revlon violation requires bad faith; failure to maximize price alone insufficient; board must “utterly fail” to attempt to get the best price |
| Omnicare v. NCS Healthcare (Del. 2003) | Deal protections that precluded shareholders from accepting superior proposal were coercive and invalid |