Center for Law and Economic Studies
Center for Contract and Economic Organization
Delaware's new approach to takeover law is announced in three cases that address different aspects of management's role in the standard drama of defending against a hostile takeover. Unocal Corp. v. Mesa Petroleum Co. scripts a main act for the drama by prescribing a duty to compare the outsider's offer with the universe of other options and, if necessary, to resist the outsider within the guidelines fixed by the proportionality test. Moran v. Household International, Inc. writes a prologue by encouraging management to plan a vigorous defense that can thwart a coercive offer without damaging the company. Finally, Revlon Inc. v. MacAndrews & Forbes Holdingssurveys the entire drama and supplies an epilogue for occasions when the best interests of shareholders will no longer permit the target to remain independent. Once the company's sale has become "inevitable," Revlon decrees that resistance under the aegis of Unocal's proportionality test must end. At this point, management's duty shifts from canvassing alternatives to a sale to determining how the sale should take place:
The duty of the board had thus changed from the preservation of Revlon as a corporate entity to the maximization of the company's value at a sale for the stockholders' benefit. This significantly altered the board's responsibilities under the Unocal standards. It no longer faced threats to corporate policy or effectiveness, or to the stockholders' interests, from a grossly inadequate bid. The whole question of defensive measures becomes moot. The directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.
As the concluding case in the Unocal trilogy, Revlon is the most difficult and far-reaching of the trio. Revlon ties management's obligations during a takeover attempt to a discrete event – the point at which a sale of the company becomes inevitable – that is both ambiguous and commonplace, since its occurrence may be difficult to pinpoint in a hostile takeover, and yet it must arise in every friendly acquisition. Within the confines of defending against a hostile takeover, Revlon poses the problem of specifying precisely what action or decision finally trips the board's duty to lay down its arms and discharge "the Revlon obligation to conduct a sale." Outside the setting of a hostile takeover, Revlon raises the open-ended issue of what follows when the identical action or decision occurs in the course of a friendly deal that does not respond to a hostile bid.
Ronald J. Gilson & Reinier Kraakman,
What Triggers Revlon?,
Wake Forest L. Rev.
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/892