An avid follower of all insurtech startups and a critical thinker, he has also contributed several papers in organization wide technical paper contests.
- Bank Reconciliation - November 29, 2022
- London Bridge Risk:A Protected Cell Company - January 2, 2022
- Side Pockets in (Re) Insurance investments - July 20, 2021
Lot has been legislated and written on corporate laws and within it, the Duty of Directors of the company. A very famous and interesting topic on it is that of Revlon doctrine that every corporate lawyer deems to know about and every corporation has it in its caselaw. The Revlon doctrine has been cited thousands of time in law review articles and has been subject of much debate within corporate law circles and has become the most relevant doctrine for judicial review of Mergers and Acquisitions (M&A). Let’s dive into the realms of corporate law and learn about it
About 35 years ago, Delaware Supreme Court heard the arguments in the seminal case of Revlon v. MacAndres and Forbes Holdings, where the term ‘Revlon duties’ was invented. The Revlon duties hold that in a change of control transaction in an M&A seller board is required to seek and achieve the highest price reasonably available, thereby setting the Director’s duty to achieve the best price for the shareholders when a takeover is inevitable.
In the case cited above, a corporation called Pantry Pride was interested in buying out Revlon corporation. They negotiated with Revlon’s directors but were unable to strike a deal (prime reason, also cited by the court, was the personal difference between both company’s CEO’s). Revlon wanted to avoid a ‘hostile takeover’, a term in M&A deals that involves the acquirer trying to take control of a firm without the target corporation’s consent or cooperation generally by buying out the required stock from the open market.
Therefore Revlon’s director’s opted for the ‘poison pill’ by repurchasing its own stock from open market to avoid the takeover. Pantry Pride raised the offer price per share higher again and was adamant to take over control. Ultimately Revlon went to a third corporation ‘Forstmann’, one of their partner companies, and offered the to buy Revlon. This included a $25 million cancellation fee if any party backed out and guaranteed that Forstmann could have one of Revlon’s core business divisions at a discount if someone else bought 40% of Revlon’s stock. This deal also included a ‘no-shop’ option that prevented Revlon from negotiating further with a rival bidder.
Pantry Pride sued Revlon for this deal with Frontsmann with the argument that Directors had a fiduciary duty towards shareholders and they failed in that by rejecting their offer higher than what they negotiated with Frontsmann. Revlon argued that it was ‘business judgment’ because of which Revlon favored Frontsmann over Pantry Pride. The Trial court ruled in favor of Pantry pride ruling that Revlon directors failed in the duty of loyalty towards shareholders by not seeking the highest price and following the bidding process.
The Delaware Supreme court ruled that ‘Favoritism for a white knight to the total exclusion of a hostile bidder might be justifiable when the latter’s offer adversely affects shareholder interests, but when bidders make relatively similar offers, or dissolution of the company becomes inevitable, the directors cannot fulfill their enhanced Unocal duties by playing favorites with the contending factions. Market forces must be allowed to operate freely to bring the target’s shareholders the best price available for their equity’
On the other hand, when the sale is avoidable, the directors are expected to resist any legitimate threats to the corporations’ existence (aka ‘Unocal duties’, a phrase derived from the case Unocal Corp v. Mesa Petroleum Col.)
