Takeover Battles - The changing Role of the Board Flashcards
Revlon, Inc. v. MacAndrews and Forbes Holdings, Inc. (1985) summary
Pantry Pride’s CEO approached Revlon’s CEO and offered a $40-42 per share price for Revlon, or $45 if it had to be a hostile takeover. The CEO’s had personal differences, and the court noted this as a potential motivation for Revlon to turn elsewhere. Revlon’s directors met and decided to adopt a poison pill plan and to repurchase five million of Revlon’s shares. Pantry Pride countered with a $47.50 price which pushed Revlon to repurchase ten million shares with senior subordinated notes. Pantry Pride continued to increase their bids, and Revlon decided to seek another buyer in Forstmann. Revlon offered $56.25 with the promise to increase the bidding further if another bidding topped that price. Instead, Revlon made an agreement to have Forstmann pay $57.25 per share subject to certain restrictions such as a $25 million cancellation fee for Forstmann and a no-shop provision. Plaintiffs, MacAndrews & Forbes Holdings, Inc., sought to enjoin the agreement because it was not in the best interests of the shareholders. Defendants argued that they needed to also consider the best interests of the note holders.
The Delaware Supreme Court affirmed the lower court’s decision to enjoin the agreement. Revlon’s directors owed a fiduciary duty to the shareholders and the corporation, but once it was evident that Revlon would be bought by a third party the directors had a duty solely to the shareholders to get the best price for their shares. Any duty to the noteholders is outweighed by the duty to shareholders. By preventing the auction between Pantry Pride and any other bidders, the directors did not maximize the potential price for shareholders.
Revlon, Inc. v. MacAndrews and Forbes Holdings, Inc. (1985) rule
Revlon duties: Once it becomes inevitable that there is going to be a breakup of the company, there is a shift in the duties of the directors because they will need to get the best price. Put it up for auction for example. While these various techniques may in themselves be ok, once it is determined the company will break up, they are no longer in the defensive mode and are instead acting as auctioneers charged with getting the best price for the stockholders at a sale of the company.
When a takeover is inevitable, the directors’ duty is to achieve the best price for the shareholder.
Paramount Communications v. Time (1989) summary
Time decided to seek a merger or acquire a company to expand their enterprise. After researching several options, Time decided to combine with Warner. Time was known for its record of respectable journalism, and Warner was known for its entertainment programming. Time wanted to partner with a company that would ensure that Time would be able to keep their journalistic integrity post-merger. The plan called for Time’s president to serve as CEO while Warner shareholders would own 62% of Time’s stock. Time was concerned that other parties may consider this merger as a sale of Time, and therefore Time’s board enacted several defensive tactics, such as a no-shop clause, that would make them unattractive to a third party. In response to the merger talks, Paramount made a competing offer of $175 per share, which was raised at one point to $200. Time was concerned that the journalistic integrity would be in jeopardy under Paramount’s ownership, and they believed that shareholders would not understand why Warner was a better suitor. Paramount then brought this action to prevent the Time-Warner merger, arguing that Time put itself up for sale and under the Revlon holding the directors were required to act solely to maximize the shareholders’ profit. Plaintiffs also argued that the merger failed the Unocal test because Time’s directors did not act in a reasonable manner.
In this case, Time only looked as if it were for sale as it moved forward on a long-term expansion plan. Various facts, such as Time’s insistence on ensuring the journalistic independence and it’s temporary holding of the CEO position, illustrated that the directors were not simply selling off assets. Once it was determined that the directors’ decision passed the Revlon test, the Unocal test was applied. The directors also passed the higher standard called for in Unocal to directors who are rebuffing a potential buyer. The directors reasonably believed, after researching several companies, that a merger with Warner made the most sense as far as future opportunities and maintaining their journalistic credibility.
Paramount Communications v. Time (1989) rule
Directors are not required to favor a short-term shareholder profit over an ongoing long-term corporate plan as long as there is a reasonable basis to maintain the corporate plan.
