Revlon Is a Standard of Review: Why It's True and What It Means
2013; The MIT Press; Volume: 19; Issue: 1 Linguagem: Inglês
ISSN
1532-303X
Autores Tópico(s)Property Rights and Legal Doctrine
ResumoINTRODUCTIONPowerful imagery the decision1 has long influenced Delaware's mergers and acquisitions (M&A) jurisprudence. In that landmark 1986 opinion, the Delaware Supreme Court stated that when a board of directors stops resisting a hostile takeover and decides to sell the corporation, the directors' role changes from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.2 Adding bite to the metaphor, the court held that the directors breached their fiduciary in selling the corporation for cash to their chosen bidder, and the court enjoined the parties complying with certain aspects of the merger agreement.3 Both the language and result of the decision suggested the existence of special Revlon duties, a set of affirmative conduct obligations imposed by the Delaware courts in particular factual circumstances that require directors to take certain actions and forgo others.Nearly thirty years of subsequent judicial development have readied this stereotypical interpretation for well-deserved retirement. is now understood to be a form of enhanced scrutiny, the innovative standard of review created in Unocal.11' does not establish special or impose particular conduct obligations on directors.5 Rather, it is a standard of review under which the extent of judicial deference given to board decisions narrows rationality to range-of-reasonableness.6Although post-millennial Delaware opinions consistently describe as a standard of review, echoes of Revlon duties reverberate in Delaware law's nominally disparate treatment of third-party mergers.7 If the merger consideration consists of cash, then applies. If the merger consideration takes the form of stock, then does not apply. But, if the consolidated entity would have a controlling stockholder, then applies again.8 The divergent treatment stems two well-known Delaware Supreme Court decisions: TimeWarner9 and QVC.W Both of these cases involved Paramount Communications Corporation, so the resulting patchwork of standards appropriately can be labeled the Paramount doctrine.Because is a standard of review, Delaware law no longer needs the Paramount doctrine.12 As decisions by the Delaware Supreme Court and the Court of Chancery explain, the potential conflicts of interest present in a negotiated acquisition provide the impetus for applying enhanced scrutiny.13 Those conflicts exist regardless of the form of consideration or whether the post-merger entity would have a controlling stockholder.14 Therefore, enhanced scrutiny should apply to all negotiated acquisitions, and as a practical matter, it already does.15 Only the Delaware Supreme Court can get rid of the Paramount doctrine, and in my personal view, the high court can and should officially bid it farewell.I. From Unocal to RevlonUntil the watershed year of 1985, Delaware recognized only two standards of review for evaluating board decisions: the business judgment rule16 and the entire fairness test.17 The two doctrines reflected a binary world view in which directors fell into one of two categories: independent and disinterested directors who made decisions that a court would have no cause to second-guess and directors who made decisions that were inherently suspect.In Unocal, the Delaware Supreme Court recognized that when responding to a takeover bid, target management and the incumbent directors face a potential conflict of interest.18 The directors are not interested in the traditional sense as they would be if they were transacting with the corporation.19 However, they are not truly disinterested or independent either, because the hostile bid threatens their positions with the corporation.20 The resulting structural conflict muddies the waters for purposes of judicial review. …
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