The following post comes to us from Mohsen Manesh, Assistant Professor at the University of Oregon School of Law. It is based on his recent paper, “Nearing 30, Is Revlon Showing Its Age?,” which has been published in the Washington and Lee Law Review Online and is available here.
Nearly 30 years ago, in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., the Delaware Supreme Court famously dictated that in certain “sale or change in control” transactions, the fiduciary obligation of a target corporation’s board of directors is simply to “get the best price for the stockholders.” Much has been written about Revlon in the decades since. But with The Dwindling of Revlon, Professors Lyman Johnson and Robert Ricca provide a refreshingly new perspective on the iconic doctrine. Focusing on remedies, the coauthors argue that corporate law has evolved around Revlon, dramatically diminishing the doctrine’s importance.
In my new essay, Nearing 30, Is Revlon Showing its Age?, I offer a response to Johnson and Ricca. In particular, I leverage two recent Delaware Chancery Court decisions—Chen v. Howard-Anderson and In re Rural Metro Corp. (both issued since The Dwindling of Revlon was published)—to underscore the expansive reach of Revlon and, therefore, the limits of Johnson and Ricca’s thesis. Instead, I suggest the dwindling of Revlon, if it is indeed dwindling, may be best observed from what is happening outside of corporate law rather than what is happening within it.
The Dwindling Thesis
Johnson and Ricca’s central thesis—“that there is little remedial clout” left to Revlon and, therefore, it is today an “insipid” doctrine —is built primarily upon two post-Revlon developments. First, in 1986, Delaware enacted Section 102(b)(7) of the Delaware General Corporation Law (DGCL), enabling corporations to eliminate the liability of their directors for breaches of the fiduciary duty of care. Given the ubiquity of exculpation provisions in corporate charters today, fiduciary breaches of the Revlon doctrine require a plaintiff-shareholder seeking monetary damages to show that defendant-directors acted in bad faith in breach of their unexculpable duty of loyalty. Yet, under the Delaware Supreme Court’s 2009 Lyondell Chemical decision, bad faith requires “an extreme set of facts”—a plaintiff must show the defendant-directors “utterly failed to attempt to obtain the best sale price,” thus “intentionally disregarding their duties”—which, the coauthors observe, is a “tough damages standard.”
With post-transaction monetary damages all but unobtainable, Revlon leaves only pre-transaction injunctions as a remedy for plaintiff-shareholders. Here, however, Johnson and Ricca observe a second significant post-Revlon development: In recent years, “Delaware courts . . . have been extremely reluctant to grant injunctive relief even when directors likely have breached their Revlon duties,” preferring instead to allow shareholders to vote on a challenged transaction.
Added together, the coauthors conclude, DGCL §102(b)(7), Lyondell Chemical, and the Chancery Court’s reluctance to grant preliminary injunctions has meant that “as an ex post remedies matter, Revlon has dramatically faded in usefulness.” Remedially impotent, today the doctrine survives as a mere aspirational standard, not as an enforceable legal duty.
Revlon’s Reach: Directors, Officers, and Outside Advisors
While Johnson and Ricca’s account of post-Revlon developments provides a pragmatic perspective from which to appreciate Revlon in the broader corporate law landscape, recent Chancery Court decisions also reveal important limitations to the coauthors’ thesis. These cases, Chen v. Howard-Anderson and In re Rural Metro, provide stark reminders that Revlon subsists as a potent legal obligation, enforceable against directors and officers as well as their outside advisors.
With respect to directors, Chen makes clear that Lyondell Chemical’s “utterly failed” scenario is not the only scenario under which plaintiff-shareholders may show bad faith on the part of board members. Aside from showing that defendants “utterly failed” their fiduciary duty to get the best price, plaintiffs may also establish bad faith by showing that defendants acted on an improper motive—“a purpose other than that of advancing the best interests of the corporation.” Unlike the “utterly failed” standard, the scope of this “improper motive” standard for bad faith is quite broad. Beyond personal financial interests, a corporate fiduciary may be improperly motivated by a wide range of human emotions, including “hatred, lust, envy, revenge, . . . shame or pride.” Recognizing the link between improper motives and the fiduciary duty of good faith, Chen reveals the true breadth of the good faith limitation on director exculpation under DGCL § 102(b)(7).
At the same time, Chen highlights the continuing vulnerability of corporate officers under the Revlon doctrine. Unlike directors, officers cannot be exculpated under DGCL § 102(b)(7). The absence of exculpation means that corporate officers may face personal liability under Revlon in a range of circumstances where a director may be otherwise protected. As noted above, an exculpated director will face personal liability only when she acts in bad faith, for example by conducting an unreasonable sale process driven by improper personal motivations. By contrast, an unexeculpated officer may face personal liability any time she participates in an unreasonable Revlon sale process, regardless of whether the officer was improperly motivated or just careless. This liability exposure is exacerbated by the fact that officers, more so than directors, are likely to face improper motivations in connection with a “sale or change in control” transaction, given the significant financial compensation, perquisites, and professional prestige that officers may derive from their executive positions within a target corporation. The Chen decision illustrated this fact: The only two defendants who lost summary judgment were executive officers of the target corporation with personal financial considerations at risk in any potential transaction.
Finally, In re Rural Metro reminds us that, like corporate officers, Revlon retains its full remedial potency against other corporate actors left uncovered by the protective exculpatory shield of DGCL § 102(b)(7). Investment banks, for example, may not owe fiduciary duties directly to a corporate client, but these outside advisors may nevertheless be liable for monetary damages when they aid and abet the breach of a fiduciary duty by the directors or officers of a client corporation. This fact was brought to bear in concrete fashion by Rural Metro, in which the Chancery Court held the investment bank RBC liable for $75.8 million in damages for selfishly manipulating, and thus aiding and abetting, an exculpated target board through an unreasonable sales process. While the facts involved in Rural Metro may seem egregious, previous high-profile Chancery Court decisions reveal that it is not uncommon for an investment bank to act duplicitously, in its own self-interest, while advising a corporate client through a Revlon sales process. What Rural Metro adds is the stark detail that, while the courts may be reluctant to enjoin a transaction, and directors are mostly protected by exculpation, an investment bank that knowingly advises or assists a corporate board in an unreasonable sales process may face harsh monetary sanctions for aiding and abetting a Revlon violation.
The Dwindling of Revlon?
Although cases like Chen and Rural Metro demonstrate the limits of the dwindling thesis, these cases are admittedly not the typical Revlon cases. They are the exception. Still, what Johnson and Ricca perceive to be the dwindling of Revlon as an enforceable legal directive may actually reflect the hegemony of the doctrine’s unitary shareholder focus in corporate culture and boardroom discussions. In an era of shareholder empowerment and investor activism, for better or worse, directors today are preoccupied with maximizing shareholder profits. If courts seldom enforce Revlon, it is not because the doctrine has been reduced to a “nonenforceable norm or mere aspirational standard,” as Johnson and Ricca suggest. Rather, it is because the norm of shareholder value maximization is so deeply enmeshed in corporate boardrooms that it seldom needs judicial enforcement.
If Revlon is indeed dwindling, it is happening from outside the pressed edges of corporate law, where competing bodies of business law have emerged, rejecting or dispensing of Revlon as a fiduciary mandate. For example, in recent years the use and popularity of LLCs and other unincorporated alternative entity forms has proliferated, especially in Delaware. Yet, under Delaware law, the fiduciary duties of alternative entity managers are optional; they are merely default duties that can be modified or wholly eliminated by the terms of an entity’s governing agreement. As I have shown in previous scholarship, businesses adopting the alternative entity form are able to easily mimic the corporate form and even successfully access the capital of public markets. Yet the standard practice among publicly traded alternative entity businesses is to eliminate the fiduciary duties of managers, including the Revlon duty, replacing those duties with less onerous contractual obligations. Investors in these unincorporated businesses, it seems, have willingly traded the judicially enforced obligation of shareholder wealth maximization in favor of market-driven constraints on their managers.
At the same time, the rise of benefit corporation statutes signals yet another breach in Revlon’s hegemony over business. Today, a majority of states have adopted some form of benefit corporation legislation, including most notably Delaware. While these statutes vary somewhat across jurisdictions, all share a common core: the rejection of Revlon’s underlying tenet that a business is run solely to advance the financial interests of shareholders. The proliferation of these statutes and, more generally, the rise of the larger social enterprise movement thus represent yet another rejection of Revlon’s dictate. Investors in these social enterprises, it seems, have willingly traded the judicially enforced obligation of shareholder wealth maximization in favor of an unenforceable aspiration to do well financially by doing good in business.
In sum, if one wants to see the dwindling of Revlon, one must step outside of the confines of corporate law to appreciate the shrinking realm of the doctrine. Viewed from this broader perspective, the dwindling of Revlon may simply be a part of a larger narrative: the dwindling of the corporate form as the only way to do business.