Structuring corporate board action to meet the ever-decreasing scope of Revlon duties.

• Author: Engledow, Wells M.

INTRODUCTION

The landmark decision by the Delaware Supreme Court in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.(1) and its subsequent progeny have caused a general atmosphere of confusion and uncertainty for courts, academics and, most importantly, directors of corporations for the past thirteen years.(2) In Revlon, the court held that when a "sale" or "break-up" of a corporation becomes inevitable, the role of the board of directors transforms from "defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company."(3) The force of this statement spurred a corporate takeover frenzy, since directors believed that they were compelled to conduct an auction whenever their corporation appeared to be "in play," so as to not violate their fiduciary duties to the shareholders.(4) However, in the time since the Revlon decision, the Delaware courts have yet to clarify precisely which events trigger these "Revlon duties" and which events do not.

This Article attempts to demonstrate that the precise triggers and scope of Revlon duties have never been clearly established, and argue that perhaps the triggers and scope have become less important in light of the most recent installments of Revlon's progeny. In arriving at this conclusion, it will be demonstrated that the Delaware courts struggled for years with the language of the Revlon decision, and its broad implications for corporate boards.(5) Ultimately, it would seem that the apex of judicial thought on the subject was reached in Chancellor Allen's 1997 decision in Equity-Linked Investors, LP v. Adams.(6) It will be argued that after Chancellor Allen's departure from the bench in 1997, the Delaware courts have continued their course toward a more pragmatic and deferential approach to corporate board actions when Revlon is triggered.(7) As a result, questions over the precise triggers, which had plagued the courts and academics for years, have become somewhat moot, and greater emphasis is placed on the increasingly watered-down reasonableness inquiry by courts into the board's conduct when a corporate board is in the Revlon zone. In the end, this Revlon reasonableness inquiry appears to raise few requirements above and beyond those mandated by the duty of care.(8) When coupled with the business judgment rule, the relaxed, but pragmatic, Revlon inquiry achieves a result that is quite antithetical to the language and intent of the original Revlon opinion.(9)

In order to develop the argument, this Article will proceed as follows: Part I will discuss the three tiered model for judicial review of fiduciary duty cases in Delaware, and provide a brief description of each of the levels of review.(10) Additionally, Part I will provide the historical context within which Revlon was written, and examine the Revlon decision itself.(11) Part II will present Chancellor Allen's interpretation of Revlon duties, as evidenced through his Equity-Linked opinion, and compare that opinion with two recent opinions from the Delaware Court of Chancery after Chancellor Allen's departure from the bench.(12) Part II will demonstrate that the most recent decisions on Revlon duties have lowered the impact of Revlon duties in general, and adopted a more pragmatic approach.(13) Finally, Part III will attempt to define both the triggers and scope of Revlon duties, and will ultimately conclude that both are less than clear.(14) However, Part III will argue that the uncertainty surrounding Revlon duties may prove less important today because the recent Revlon cases have evidenced a decreased focus on the precise triggers of Revlon duties, coupled with a lowering of the Revlon reasonableness inquiry itself.(15) As such, Part III will conclude that Revlon duties in general have been eroded, and will outline the actions that corporate boards should follow when attempting to structure their actions so as to meet their potential Revlon duties.(16)

1. PUTTING REVLON IN CONTEXT

   There are generally three levels of judicial review when an action is brought under the allegation of a breach of fiduciary duties.(17) As the court in Golden Cycle, LLC v. Allan(18) stated, these levels are: "the deferential business judgment rule, the Unocal or Revlon enhanced scrutiny standard [and] the stringent standard of entire fairness."(19) The first and most deferential standard, the business judgment rule, has become virtually a rubber-stamp in Delaware corporate law for corporate boards to meet their duty of care.(20) It is the default standard (i.e., the facts must demonstrate why there should be a deviation from this level of review). The business judgment rule provides a rebuttable presumption "that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company."(21) Thus, at bottom, the business judgment rule reflects little more than process inquiry.

   The Unocal and Revlon standards are similar in that they involve a reasonableness inquiry by the court and are triggered by some factual events.(22) The Unocal standard is focused on the erection of defensive tactics by the target board, and involves reasonableness review of legitimate corporate threat and proportionality.(23) The board's case is materially advanced when it can demonstrate that the board was independent, highly informed, and acted in good faith.(24) Revlon duties, on the other hand, are triggered by what will now be loosely referred to as a "change in control" (the triggers will be developed to a more precise extent in Part III),(25) and require a general reasonableness standard.(26) This reasonableness standard requires virtually absolute independence of the board, careful attention to the type and scope of information to be considered by the board, good faith negotiation, and a focus on what constitutes the best value for the shareholders.(27) Finding the best value for shareholders may or may not require an auction, depending on the circumstances, and, again, this decision is subjected to a reasonableness inquiry.(28)

   The entire fairness standard is triggered "where a majority of the directors approving the transaction were interested or where a majority stockholder stands on both sides of the transaction."(29) Directors can be found to be interested if they "appear on both sides of a transaction [or] expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally."(30) Once the entire fairness standard is triggered, the corporate board has the burden to demonstrate that the transaction was inherently fair to the shareholders, by both demonstrating fair dealing (i.e., process) and fair price (i.e., substance).(31)

   1. A Brief Review of Fiduciary Duties and Unocal

      Until the Unocal decision in 1985, the Delaware courts had applied the business judgment rule, when appropriate, to takeover defenses, mergers, and sales.(32) In Unocal, the Unocal board attempted to launch a self-tender offer to combat an unsolicited tender offer by Mesa Petroleum (Mesa).(33) The self-tender offer would be triggered upon Mesa acquiring sixty-four million shares of Unocal, and would mean that Unocal itself would buy-back 49% of the outstanding shares of Unocal--but none of the shares to be bought-back could be shares held by Mesa.(34)

      In Unocal, the Delaware Supreme Court reversed the Court of Chancery's issuance of a preliminary injunction against the use of the self-tender offer defense.(35) However, the true merit of the opinion flows from the court's premise that, due to the inherent conflict of interest involved, takeover defenses pose a significant danger to shareholders.(36) In essence, the Unocal court feared that a board may use takeover defenses to impermissibly prevent threats to corporate policy or to the board's control over the corporation.(37) As a result, there was a need for "an enhanced duty" on the board, so as to ensure that their decisions in this area were meant only to further the welfare of the corporation and its shareholders.(38) Therefore, the court ruled that in order for the board to be allotted the protection of the business judgment rule, the board 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."(39)

      One final comment on Unocal begs to be made explicitly: in delineating this new standard of heightened scrutiny, the Delaware Supreme Court broke from its formalistic roots.(40) Finding no support in the relevant statute, and little if any support in the existing precedent, the court conducted virtually unabated judicial lawmaking, and attempted to veil this fact with lip-service to precedent.(41) However, even in light of this inherent distrust of management, the Unocal decision "suggest[s] the importance to the court of maintaining directorial management even in conflict-of-interest transactions."(42)

   2. The Revlon Case

      In Revlon, Pantry Pride attempted a hostile takeover of Revlon after being rebuffed by Revlon's board.(43) As a result of Pantry Pride's threatened takeover, the Revlon board adopted a Note Purchase Rights Plan designed to act as a poison pill,(44) and effectuated a stock repurchase plan.(45) To stymie s hostile takeover, the notes contained provisions which "limited Revlon's ability to incur additional debt, sell assets, or pay dividends unless otherwise approved by the `independent' (non-management) members of the board."(46) As a result of the decreased value of Revlon after the issuance of the debt notes, Pantry Pride did not withdraw its takeover attempt, and chose instead merely to lower its tender offer value from $47.50 to $42 (these cash bids were raised subsequently from $42, to...