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 their stock.
    • 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 affirmed.
    • 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 posed.”
    • The Court found that the directors were acting reasonably to fend of a perceived threat when they set up the poison pill to stop Pantry Pride.
    • 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 equity.”
  • 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 corporation’s existence.