Master Delaware Supreme Court established that once a sale or break-up becomes inevitable, directors must seek the best price reasonably available for stockholders, commonly known as Revlon duties. with this comprehensive case brief.
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. is a cornerstone of Delaware corporate law and one of the most frequently cited cases in mergers and acquisitions. It announced the so-called Revlon duties: when a company is up for sale or a break-up becomes inevitable, directors must shift their focus from long-term corporate strategy to a single goal—maximizing immediate value for the stockholders. This transformed the legal framework for board conduct during change-of-control transactions and continues to guide deal design, negotiation, and judicial review of defensive measures.
The decision sits at the intersection of Unocal’s enhanced scrutiny of defensive measures and subsequent cases refining when sale-of-control duties are triggered. Revlon crystallized how far a board may go in resisting a hostile bid and when a board must instead become an auctioneer charged with securing the best price reasonably available. The case also cautions boards against favoring particular bidders, using lock-ups and no-shops to end an auction prematurely, or privileging the interests of creditors or other constituencies at the expense of stockholders once the company is effectively for sale.
506 A.2d 173 (Del. 1986)
In 1985, Pantry Pride, a subsidiary of MacAndrews & Forbes Holdings controlled by Ronald Perelman, launched a hostile tender offer for Revlon. After Revlon’s board rejected an initial bid, Pantry Pride raised its offer repeatedly (from approximately $45 per share to $47.50 and then to $53). Revlon responded with a suite of defensive measures, including a shareholder rights plan (poison pill) and a highly leveraged exchange offer that placed new debt on the company and included covenants that would be triggered by a change of control (so-called poison puts), thereby making a takeover more expensive. As bidding escalated, Revlon sought a white knight. Forstmann Little proposed a leveraged buyout at $56 per share in cash. To secure Forstmann, Revlon granted deal protections: a no-shop provision restricting Revlon from negotiating with other bidders, a termination fee, and notably a lock-up option giving Forstmann the right to purchase certain valuable Revlon business units (the crown jewels) at a favorable price if a competing bidder acquired a significant stake or control. Pantry Pride then increased its bid to a higher price (ultimately reaching approximately $58 per share) and offered to address concerns relating to Revlon’s new debt. Nevertheless, Revlon, citing its contractual commitments to Forstmann and focusing in part on protecting the new noteholders created by its exchange offer, refused to negotiate with Pantry Pride and kept its poison pill in place. Litigation ensued. The Court of Chancery denied certain injunctive relief, and the parties appealed. The Delaware Supreme Court reviewed whether Revlon’s directors breached their fiduciary duties by favoring Forstmann and by employing deal protections that effectively ended the auction in the face of a higher bid.
Once a sale or break-up of the company became inevitable, did Revlon’s directors breach their fiduciary duties by favoring Forstmann through a lock-up, no-shop, and related measures, and by prioritizing noteholder interests, rather than maximizing the company’s sale price for stockholders?
Under Delaware law, when the sale or break-up of a company becomes inevitable, the directors’ role changes from defenders of the corporate bastion to auctioneers charged with getting the best price reasonably available for stockholders. In this Revlon mode, directors may not consider other constituencies (such as creditors or noteholders) at the expense of stockholder value, and they may not employ defensive or deal-protection measures that preclude or materially impede a fair, competitive bidding process. While directors retain latitude to design the sale process, their actions are subject to enhanced scrutiny and must be reasonable in relation to the objective of maximizing immediate stockholder value.
Yes. The Delaware Supreme Court held that once Revlon placed itself in a sale mode, the directors had a duty to obtain the highest value reasonably available. By favoring Forstmann with a crown-jewel lock-up, a restrictive no-shop, and other protections that ended active bidding in the face of a higher offer, and by focusing on protecting noteholders rather than stockholders, the board breached its fiduciary duties. The Court enjoined enforcement of the lock-up, the no-shop, and related provisions.
The Court began with Unocal’s enhanced scrutiny framework for defensive measures, acknowledging that boards may in good faith deploy proportionate defenses against coercive or inadequate bids. However, the Court found that Revlon crossed a decisional Rubicon. By actively pursuing a sale to Forstmann and committing to deal protections that would result in the break-up or sale of control, the board triggered Revlon duties. From that point forward, the board’s obligation was not corporate preservation or long-term strategy but maximizing current value for stockholders. The Court emphasized that the board’s actions had shifted from legitimate defenses to favoritism. The lock-up granted Forstmann an option to acquire Revlon’s most valuable assets at a favorable price if a rival gained control, which chilled further bidding and effectively ended the auction. The no-shop barred negotiations with Pantry Pride even as it made higher offers, depriving stockholders of the opportunity to receive superior value. These protections were not used to extract better terms for stockholders; they foreclosed a higher bid. Moreover, the Court criticized the board’s focus on protecting the newly issued notes and their holders. In Revlon mode, the board could not prioritize creditor or noteholder welfare over stockholder value. The continuing refusal to negotiate with the topping bidder, coupled with the maintenance of the poison pill and the crown-jewel lock-up, evidenced a breach of the board’s duty to secure the best price reasonably available. The Court concluded that the combination of deal protections and the board’s alignment with Forstmann, despite Pantry Pride’s higher bid and willingness to address financing concerns, constituted an unreasonable and impermissible impediment to the competitive bidding process. Injunctive relief was warranted to restore a fair auction environment and enable stockholders to receive the highest available price.
Revlon established that directors’ fiduciary duties are context-specific. When a company is for sale or a break-up is inevitable, directors must maximize immediate stockholder value and cannot privilege other constituencies or entrenchment motives. The case also anchors judicial review of deal protections: lock-ups, no-shops, and similar devices may be invalid if they preclude or seriously impede a competitive auction without demonstrable benefits to stockholders. For law students, Revlon is essential to understanding enhanced scrutiny, the transition from Unocal defenses to sale-of-control obligations, and how later cases (such as Paramount v. Time and Paramount v. QVC) delineate when Revlon duties apply.
Revlon duties are triggered when a sale or break-up of the company becomes inevitable or the board initiates a transaction that will result in a sale or change of control. In Revlon itself, the board moved from warding off a bid to actively pursuing a sale and committing to deal protections that made a sale or break-up inevitable. Later cases clarify additional triggers, including transactions that shift control from a dispersed stockholder base to a controlling stockholder (as in Paramount v. QVC).
No. Revlon duties require that directors take reasonable steps to secure the best price reasonably available, but they do not mandate a specific process. A board can run an open auction, negotiate privately, or use other sale methods, provided the process is designed and executed to maximize value and does not deploy preclusive or coercive measures that foreclose superior bids.
Not always. Deal protections can be permissible if they are reasonably tailored to encourage bidding or to secure a valuable bid and do not preclude a superior offer. In Revlon, the crown-jewel lock-up and strict no-shop were invalid because they chilled bidding and ended an active auction despite higher offers. Post-Revlon practice often includes fiduciary-out clauses and limitations on termination fees or options to avoid being preclusive.
Directors may consider other constituencies when acting under the business judgment rule in the ordinary course, but once Revlon duties are triggered, the board’s paramount obligation is to stockholders. In Revlon, the board’s efforts to protect newly issued noteholders at the expense of stockholder value were improper. The board may negotiate to mitigate creditor risk if doing so helps maximize stockholder value, but it cannot subordinate stockholders’ interests to those of others.
Unocal provides enhanced scrutiny for defensive measures adopted in response to a perceived threat; directors must show reasonable grounds and proportionality. Revlon adds that once a sale or break-up becomes inevitable, the objective shifts to maximizing sale price. Paramount v. Time held Revlon duties did not apply where there was no sale or change of control; Paramount v. QVC clarified that Revlon applies when a transaction will result in a change of control, requiring the board to seek the best value reasonably available.
Revlon v. MacAndrews & Forbes reoriented the duties of directors in sale contexts by declaring that once a sale or break-up is inevitable, the board must focus singularly on maximizing stockholder value. It rejects the use of preclusive lock-ups, strict no-shops, and other devices that end an auction prematurely or privilege other interests over stockholders’ immediate value maximization.
For students and practitioners, the case remains a lodestar for designing and litigating M&A deals. It informs the architecture of fiduciary outs, termination fees, matching rights, and information access, and frames how Delaware courts evaluate director conduct under enhanced scrutiny to ensure a fair, value-maximizing process for stockholders.