Narrative Opinion Summary
The case involves a corporate takeover dispute where the Supreme Court of Delaware ruled against Revlon, Inc.'s board of directors for breaching their fiduciary duties during a takeover attempt by Pantry Pride, Inc. Initially, the Revlon board employed defensive measures, such as a lock-up option and no-shop provision, to prevent a hostile takeover by Pantry Pride, which the Court found inappropriate as it obstructed a competitive auction process aimed at maximizing shareholder value. The Court emphasized that, under Delaware law, directors must prioritize shareholder interests over other stakeholders during a corporate sale. The business judgment rule, which protects directors' decisions made in good faith, was deemed inapplicable due to the board's failure to act loyally and independently. The Court also invalidated Revlon's lock-up agreement with Forstmann Little Co., as it unjustifiably ended competitive bidding, harming shareholder interests. The ruling affirmed the lower court's injunction against these defensive measures, reinforcing the directors' duty to act as auctioneers in maximizing shareholder value during a sale of control. The decision underscores the legal standard that, despite other considerations, shareholder value must be the primary focus during a corporate takeover.
Legal Issues Addressed
Business Judgment Rule in Takeover Contextsubscribe to see similar legal issues
Application: The court noted that the business judgment rule applies to directors during takeover threats, provided they act with care, loyalty, and independence, but found Revlon's actions inconsistent with these requirements.
Reasoning: The business judgment rule applies to corporate directors during takeover threats, contingent on meeting foundational principles of care, loyalty, and independence.
Consideration of Stakeholders Other Than Shareholderssubscribe to see similar legal issues
Application: The court ruled that during a takeover, considerations for stakeholders other than shareholders must be justified by a rational benefit to stockholders.
Reasoning: The Court also addressed the extent to which a corporation can consider the interests of stakeholders other than shareholders during a takeover threat, concluding that any such considerations must be justified by a rational benefit to stockholders.
Directors' Duty to Maximize Shareholder Value in Sale of Controlsubscribe to see similar legal issues
Application: The Revlon board's focus shifted from defending against a hostile bid to facilitating the best possible sale price for shareholders, which they failed to do by favoring noteholders.
Reasoning: Consequently, the board's focus shifted from defending against a hostile bid to facilitating the best possible sale price for shareholders.
Fiduciary Duty in Corporate Takeoverssubscribe to see similar legal issues
Application: The court found that Revlon's directors breached their duty of care by enacting defensive measures that halted a competitive auction, prioritizing noteholders over shareholders.
Reasoning: The court granted a preliminary injunction against these provisions, concluding that the Revlon directors acted disloyally by prioritizing noteholders over maximizing shareholder value.
Validity of Lock-Up Agreementssubscribe to see similar legal issues
Application: The court held that lock-up agreements are permissible if they benefit shareholders, but invalidated Revlon's lock-up with Forstmann as it terminated competitive bidding without sufficient justification.
Reasoning: While Delaware law does not categorically prohibit lock-ups, their appropriateness hinges on whether they benefit shareholders. Lock-ups that attract bidders can enhance shareholder profits, but those that terminate active auctions and prevent further bids harm shareholders.