What Is the Revlon Rule?

The Revlon rule is a legal principle stating that a company’s board of directors shall make a reasonable effort to obtain the highest value for a company when a 澳洲幸运5官方开奖结果体彩网:hostile takeover is imminent.

This represents somewhat of a shift in responsibility because boards of directors are primarily tasked with preventing takeovers from happening in the first place. However, once a takeover is deemed unavoidable, the Revlon rule kicks in, and the board consequently directs its focus toward securing the highest value for its stakeholders as part of its inherent fiduciary obligation.

Understanding the Revlon Rule

Takeovers can often be not very amicable. Sometimes they might even be achieved by going behind management's back. With a hostile takeover, a company takes control of another company without getting the approval or consent of its board of directors.

When the board senses this is happening, it will likely want to take action to thwart the takeover before it is too late. The Revlon rule makes that more difficult. If the hostile takeover is imminent and deemed a good deal for shareholders, th🧸e board may be forced to accept it.

The main reason the Revlon rule exists is to prevent conflicts of interest. A board of directors must serve the best interests of the company and its shareholders. However, when it comes to hostile takeovers, those duties may be overlooked.

After a hostile takeover, there is a ﷺchance directors might be ousted and lose their jobs. This also means there is a p𒉰ossibility they put their own interests ahead of those of the company. Some directors could be tempted to sell to a lower bidder if it means keeping their job or getting a nice payout.

Historically, the law protected the actions of the directors. When the Revlon rule was introduced in 1985 that changed sliꦉghtly. Greater scrutiny was called for.

The Revlon rulꦍe set a significant legal precedent. It shifted the board of directors’ duty from looking after the health and preservation of the corporation to in🌳creasing the short-term financial gains of shareholders. This narrower interpretation of fiduciary duties, referred to as Revlon duties, results in more scrutiny placed on a board’s decisions.

Origins of the Revlon Rule

The case that created the Revlon rule was Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., which was tried before the Delaware Supreme Court. Delaware courts typically did not evaluate the merits of a merger unless the plaintiff could show the board of directors failed to act in due care or did not act impartially.

In the case, Revlon’s board of directors incentivized a white knight bid from Forstmann, Little & Company, over a bid from Pantry Pride, a supermarket that sought a hostile takeover bid after Revlon rejected its initial buy offer. The board engaged in several takeover defense strategies, despite Pantry Pride offering a higher bid.

The Delaware Supreme Court held that directors “are charged with the duty of selling the company at the highest price attainable for the stockholders’ benefit.” Since the 1985 case, judges treat cases differently if they involve the sale of a company, and use the Revlon rule for guidance.

Revlon Rule Exceptions

Takeover bids are generally made with cash, stock, or a mixture of 🐠both. And not all of them may necessarily come under scrutiny. It’s a known fact that Revlon doesn’t always apply when there is a takeover bid with a significant stock component.

Delaware courts have not created a specific threshold regarding how much consideration must be cash to trigger Revlon. Based on past cases, it would appear that the bid must be made up of at least 50% cash. Anything less may not come under scrutiny.

The Bottom Line

The Revlon rule addressesꦍ potential conflicts of interes🧸t that might arise among a company’s board of directors when a hostile takeover is imminent. The duty of directors is to act in the best interest of shareholders, yet the prospect of losing their job could make them overlook that duty.

The 1985 case of Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. ensured there is now more scrutiny over how directors behave when a takeover is deemed imminent. At that stage, their priority goes from protecting the company to getting the highest value possible for shareholders.