The Dwindling of Revlon

In this blog post, I trace why my co-author Rob Ricca and I have concluded that the landmark 1986 Revlon ruling is, today, an insipid and remedially insignificant doctrine.  Its overly exalted place in M&A law endures because it is wrongly regarded in narrow, silo-like doctrinal isolation, even though it can only be understood as one part of a legal landscape that has dramatically changed since the mid-1980s.

The iconic Revlon doctrine has been an assumed, accepted, and integral part of M&A law for almost three decades.  In Revlon, the Delaware Supreme Court ruled that, in a corporate break-up sale, the duty of the selling company’s board of directors was solely to maximize short term value for the common stockholders.  Later, that court extended the value-maximization objective into other types of sale settings.  In recent years, a spirited, but less significant debate has centered on what “triggers” Revlon in mixed cash and stock deals.  In short, Revlon, if still of somewhat uncertain contours, is taken for granted.

The real force of Revlon, and the reason it continues to tantalize the plaintiffs’ bar, stems from the 1994 decision of Paramount Communications Inc. v. QVC Network, Inc.  There the Delaware Supreme Court held both that director behavior in a Revlon setting would be reviewed under an enhanced “reasonableness” standard, and that the directors must carry an initial burden of proof.  Thus, selling company boards seemingly do not receive ordinary business judgment rule deference in these high-stakes transactions.  So advising corporate boards is now routine for deal lawyers.

Not surprisingly, in light of QVC’s heightened review standard and accompanying burden shift, target company directors would seem to be at greater risk of incurring personal liability for conducting a faulty sale process.  And deals themselves would likewise seem highly vulnerable to being enjoined.  In fact, just as where there is smoke there may be fire, today where there is a deal, there almost certainly will be litigation.

The number of lawsuits challenging M&A deals skyrocketed in 2012 and appears, preliminarily, to have risen yet again in 2013.  In a forthcoming article, Rob Ricca and I set out to explore whether Revlon might actually have even broader reach than many have considered, hardly a comforting thought to directors and their advisers in this era of litigation.  We wondered about the following questions:  Does Revlon apply only if a sales transaction is actually entered – i.e., a “done deal” – or does it also govern sales efforts by boards that utterly fail even to produce a transaction – i.e., “no deal?”  If an attempted sales effort failed due to a flawed process, might the directors nonetheless have breached their Revlon duty because of how poorly they conducted the selling effort?  And, once in Revlon, if directors conclude that greater long term value will be realized by halting the sale, will they still be judged under the enhanced scrutiny of QVC and by the immediate value maximization metric of Revlon?  We thought these intriguing questions might, as both a theory and policy matter, serve to extend the already robust Revlon doctrine into the neglected “no deal” context.

As we dug deeper, we came to an unexpected conclusion.  Revlon today, we found, may retain a certain cosmetic lustre in the M&A world, but it has little remedial clout in any setting, even in “done deals” where its central place has long been assumed.  For example, because the same director liability standard of Lyondell Chemical Co. v. Ryan applies both inside and outside of the Revlon context, there no longer is a different liability standard in the Revlon sale context as opposed to any other context; there is, rather, simply a vast array of different factual settings for considering monetary sanctions against directors, only one of which is the corporate sale setting. Whether directors do or do not consummate a transaction in the M&A context, they must not consciously disregard their fiduciary duties and thereby breach the duty of loyalty; Revlon has no distinctive bearing on that issue. Thus, oft-recited assertions from QVC and other high-profile Revlon progeny regarding enhanced substantive scrutiny by courts, and statements regarding the placing of an initial burden of proof on directors, appear to be outmoded doctrinal vestiges in the personal liability context.  The business judgment rule, it seems, has returned to the damages setting.

Turning to injunctive relief, only one injunction – out of numerous claims – was granted on a Revlon theory in the six year period running from 2008 through 2013.  And of course, in a “no deal” context there simply is nothing to enjoin, even if that outcome is due to the selling company board running a severely flawed process.  Courts simply are not equipped to – and typically don’t – closely examine decisions not to sell companies.  But courts don’t closely examine decisions to sell companies either, just, supposedly under Revlon, how they do so.

By adopting a remedies perspective on this cornerstone doctrine, we see that the ongoing debate over what “triggers” Revlon in mixed consideration deals is a debate with small stakes:  only pre-closing relief is up for grabs anyway, and that is rarely granted.  We should stop regarding Revlon as a robust standalone doctrine; it has waned in significance and should not be so widely extolled.  Delaware courts have dramatically curtailed the remedial impact of Revlon and, on damages, have harmonized it with the larger arc of fiduciary doctrine.  Yet, puzzlingly, courts rhetorically preserve its stiffer standards.  Although possibly serving some cautionary ex ante function, those standards do not reflect remedial reality.  Accordingly, they should be renounced, along with Revlon’s faulty focus on short-term value maximization.  Then, the corporation’s (and the board’s) objective in the sale setting – of whatever kind – will be the same as it is (and should be) outside the sale setting:  to pursue the best option, in the board’s judgment, for achieving long-term value.

The full article is available here.