Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.
506 A.2d 173 (Del.Supr. 1985)
A corporation called Pantry
Pride was interested in buying out a corporation called Revlon. They
negotiated with Revlon's directors, but were unable to reach an agreement.
Pantry Pride began a hostile takeover.
Revlon's directors set up a poison
pill and a stock repurchase plan to
stop Pantry Pride.
There was a lot of wheeling
and dealing, but eventually Revlon's directors went to a third
corporation, Forstmann and made a deal that they would buy out Revlon.
The deal included a lock-up
option that guaranteed that Forstmann
could have one of Revlon's core business divisions at a discount if
someone else (like Pantry Pride) bought 40% of Revlon's stock, and a no-shop option that prevented Revlon from negotiating
with a rival bidder.
The directors' wanted
Forstmann to takeover, he was what's known as a white knight.
Pantry Pride sued.
Pantry Pride argued that the
directors had breached their fiduciary duty by signing the deal with
Forstmann. Pantry Pride argued that it hurt Revlon's shareholders
because it prevented them from accepting Pantry Pride's higher offer for
The directors argued that
their actions were covered by the business judgment rule.
The Trial Court found for
Pantry Pride. The directors appealed.
The Trial Court found the
directors had beached their duty of loyalty because they were worried about their own personal interests as
opposed to maximizing shareholder value.
The Delaware Supreme Court
The Delaware Supreme Court
found that that the business judgment rule does not apply to a decision to implement anti-takeover
measures, if the directors are only doing it to preserve their own jobs.
See Unocal Corp. v. Mesa
Petroleum Col. (493 A.2d 946
(1985)) which said that in order to benefit from the business
judgment rule, the directors must demonstrate that it was
responding to a legitimate threat to corporate policy and effectiveness,
and that its actions were "reasonable in relation to the threat
The Court found that the
directors were acting reasonably to fend of a perceived threat when they
set up the poison pill to stop
However, once it became
inevitable that the corporation was going to get sold to someone, the
directors were obligated to maximize the corporation's immediate value
for the benefit of shareholders.
The directors acted to stop
a bidding contest between Pantry Pride and Forstmann, which made the
sale price less than it otherwise could have been.
"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
Basically, this case said that
once a corporation is for sale, the directors' job (aka Revlon duties) is to be an auctioneer and try to drive the
price up as high as possible.
On the other hand, when sale
is not inevitable, under the standard set in Unocal (aka Unocal duties), the
directors are expected to resist any legitimate threats to the