United States: M&A Update: Revlon: Motive, Market Checks And Injunctions

Last Updated: December 30 2014
Article by Joshua Apfelroth, Gregory A. Markel, William P. Mills, III, Brittany Schulman and Martin Seidel

Most Read Contributor in United States, November 2018

In two separate December 19th decisions, the Delaware Supreme Court and the Delaware Chancery Court declined to enjoin stockholder votes with respect to pending mergers for alleged violations of the target board's Revlon duties. The decisions affirmed longstanding Delaware caselaw providing that "there is no 'single blueprint' for directors to obtain the highest value reasonably attainable" for its stockholders in the satisfaction of its Revlon duties, "so long as they choose a reasonable route to get there." The decisions offer boards nuanced guidance on how to satisfy Revlon duties in the context of a sale of corporate control.

Background

In C&J Energy Services, Inc. v. City of Miami General Employees' and Sanitation Employees' Retirement Trust, C&J Energy Services, Inc. entered into an agreement to acquire a subsidiary of Nabors Industries Ltd. for a mix of cash and stock totaling nearly $3 billion. For tax reasons, Nabors will retain 53% of the combined entity's equity. C&J negotiated several minority protections (including the ability to share pro rata in any future sale of the company, board seats and standstill restrictions on Nabors). C&J also obtained a passive "fiduciary out" and the right to terminate the agreement for a modest termination fee to enter into a superior transaction. C&J stockholders sued for an "unusual" 30-day preliminary injunction to require that C&J actively shop the company before the stockholder vote on the Nabors transaction. The Chancery Court found it plausible that the C&J Board had breached its Revlon duties, and ordered the board to solicit other bids. The Delaware Supreme Court, however, overturned the injunction.

In In re Family Dollar Stores, Inc. Shareholder Litigation, each of Dollar General, Inc. and Dollar Tree, Inc. engaged in contemporaneous discussions with Family Dollar Stores, Inc. regarding a potential acquisition of Family Dollar. Dollar Tree agreed to acquire Family Dollar for a mix of cash and stock, valued at approximately $76 a share. The transaction agreement included a passive "fiduciary out." Dollar General subsequently offered to acquire Family Dollar for a higher price, ultimately $80/share, but Family Dollar determined that the offer was subject to substantial antitrust risk. Dollar General sued to enjoin the vote on the Dollar Tree merger, claiming that Family Dollar breached its Revlon duties by not informing Dollar General that it was in negotiations with Dollar Tree prior to signing the merger agreement with Dollar Tree and by not engaging with Dollar General regarding its higher offer. The Chancery Court declined to issue an injunction.

Takeaways

Both decisions reiterate that there is "no specific route that a board must follow" to satisfy its Revlon duties. Careful analysis of each opinion reveals similar guidance on how boards should undertake to satisfy their Revlon duties in the context of a change of control transaction.

  1. Courts are Reluctant to Second-Guess a Well-Informed Board Acting in Good Faith. Each of these decisions makes clear that a court will be reluctant to second-guess a target board's reasonable judgment in the context of a change of control transaction absent a basis to question its motivations. The Delaware Supreme Court noted that a court must determine "whether the directors made a reasonable decision, not a perfect decision." In determining that a preliminary injunction was inappropriate in each case, both courts focused on the high level of information provided to, and deliberation undertaken by, the board in connection with its evaluation of the transaction, the independence of the board's directors, and the alignment of economic interests between the members of the board in their capacity as significant stockholders of the company and the other stockholders of the company. Furthermore, each court found that no debilitating entrenchment motivation of the board or management existed, relying in large part on the fact that such individuals would not have a significant role with the combined company going forward, or if they would, that such individuals did not negotiate the material terms of such employment until late in the negotiations after all of the material deal terms were agreed upon.
  2. An "Active" Market Check is Not Always Required to Fulfill Revlon Duties. In both C&J and Family Dollar, the court determined that an active pre-signing market check is not required to fulfill a board's Revlon duties, particularly if a pre-signing check is rejected following reasonable consideration by the board and the board has the ability to conduct a passive post-signing market check. Indeed, the Chancery Court noted in C&J that as long as "the transaction is subject to an effective market check under circumstances in which any bidder interested in paying more has a reasonable opportunity to do so," a board should be free to "pursue the transaction it reasonably views as most valuable to stockholders."
  3. Balance of the Equities Favors a Vote When Shareholders are Informed. While the Delaware Supreme Court in C&J acknowledged that after-the-fact monetary damages are an "imperfect tool," each court found that the issuance of a preliminary injunction delaying the stockholder vote and requiring the target company to enter into discussions with alternative bidders was inappropriate under the circumstances. The decisions highlight the Delaware courts' reluctance to enjoin a vote of the stockholders where the stockholders are fully informed, not coerced and have the ability to reject the proposed transaction in favor of an alternative transaction that has been presented directly to the stockholders or continuing as a stand-alone company. Indeed, the Delaware Supreme Court noted that "when a board exercises its judgment in good faith, tests the transaction through a viable passive market check, and gives its stockholders a fully informed, uncoerced opportunity to vote to accept the deal, we cannot conclude that the board likely violated its Revlon duties."
  4. Mandatory Injunctions Should Not Be Awarded Without a Full Record. In C&J, the Delaware Supreme Court held that the Chancery Court had overstepped its bounds in ordering a mandatory injunction that "blue-penciled" the merger agreement to divest Nabors of its contractual rights before a full record had been developed. Moreover, the Chancery Court made this determination absent any finding that Nabors committed any wrongdoing that warranted the stripping of its bargained for rights, while obligating Nabors to continue to comply with the other terms of the merger agreement. The Delaware Supreme Court further criticized the Chancery Court's decision by noting that the issuance of a mandatory injunction at such time and on such record far surpassed the traditional use of preliminary injunctions to keep the status quo pending the outcome of a full trial.
  5. Minority Protections May Impact the Applicability of Revlon Duties. In C&J, the Delaware Supreme Court did not address the question of whether or not the minority protections negotiated by C&J brought the transaction outside the reach of Revlon duties, noting that the issue was a matter of first impression and that a ruling in this matter was time sensitive. Instead, the Court assumed that Revlon did apply for purposes of its decision. The Court did however acknowledge that contractual provisions that have the effect of limiting the power of the majority stockholder and that ensure that minority stockholders will share in the benefit of any future control premium may result in Revlon not applying to a transaction to which it otherwise would.

For a full copy of the C&J Energy Services opinion, click here. For the In re Family Dollar Stores, Inc. Shareholder Litigation opinion, click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions