EXPLORING REVLON’S PRESENT-DAY VALUE
Thailer A. Buari
Mergers & Acquisitions, Professor Alan Palmiter, Spring 2014
ABSTRACT
The Revlon decision has caused much confusion and uncertainty regarding its application
and legal utility. In an article entitled, The Dwindling of Revlon, written by Lyman Johnson and
Robert Ricca (hereinafter referred to as “the Johnson Article” or “the Article”) and discussed at
length below, Johnson and Ricca attempt to define Revlon’s present-day value. They argue that
Revlon is best understood as a limited remedies doctrine that may afford Revlon plaintiffs access
to non-monetary sanctions in the injunctive relief stage. To accomplish this, Johnson and Ricca
argue that the doctrine should be expanded to apply to no-deal transactions in addition to donedeal transactions. Johnson and Ricca acknowledge, despite their efforts, that Revlon has a
diminished legal and practical significance in today’s corporate law jurisprudence. They then
make extrapolations as to the residual value Revlon has today. This paper offers a critique of the
Johnson Article by comparing and contrasting it to two other Revlon critiques: that Revlon should be
abolished completely and that Revlon is a standard of review that should be expanded to apply to all
negotiated acquisitions.
AN OVERVIEW OF THE REVLON DECISION
As an initial matter, it is important to understand the context within which the Revlon
decision was made (Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, Del.
Sup. Ct. 1986). In 1985, Revlon CEO Michel C. Bergerac rejected overtures from Pantry Pride
CEO, Ronald O. Perelman concerning his desire to acquire Revlon at a price of $40-42 per share.
If the acquisition became hostile, that price would increase to $45 per share. After meeting to
consider the offer, the Revlon board implemented two defensive tactics to prevent a takeover of
the company: (1) a poison pill and (2) company repurchase of five million of its thirty million
shares. Pantry Pride initiated a hostile tender offer at a price of $47.50 per share and Revlon
countered with a tender offer of its own, to which a vast majority of Revlon shareholders
responded.
Over the course of several weeks, Pantry Pride made several subsequent cash bids, each
at a price higher than the offer before. Revlon, however, continued negotiating with other
bidders until it later agreed to a leveraged buyout by Forstmann Little & Co. (Forstmann).
Pursuant to the terms of the buyout agreement, Forstmann would start a company which would
purchase each share of Revlon for $56 per share. The Revlon management would then have the
opportunity to repurchase stock in the new company, Forstmann would take on the Revlon debt
incurred as a result of issuing notes, and Revlon would redeem the poison pill, waiving the
restrictive covenants as to Forstmann and its affiliates.
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The bidding contest continued, resulting in Forstmann’s final offer of $57.25 per share
subject to several conditions. One such condition was that the offer was to be immediately
accepted by the Revlon board or it would be withdrawn. Not surprisingly, the Revlon board
unanimously approved the Forstmann plan. Pantry Pride subsequently filed suit and then raised
its offer to $58 per share. With this final offer, however, Pantry Pride also set forth certain
conditions upon which the offer was made, including nullification of the poison pill, waiver of
the restrictive covenants, and an injunction of the Forstmann lock-up option.
The Delaware Supreme Court acknowledged that, in rejecting Pantry Pride’s initial offer,
the Revlon board did not offend any legal obligation owed to shareholders under Delaware law.
However, the Court made clear that when it became obvious that the Revlon Company was for
sale, the duty of the Revlon board transformed into one requiring said board to “maximize[e] the
company’s value at a sale for the stockholders’ benefit.” The Court further stated that, once an
active bidding process has ensued, the focus of the board is to be the shareholders, not to “protect
or maintain the corporate enterprise.” Ultimately, the Court decided that the Forstmann lock-up
provision failed to adequately accomplish this newly established goal and it upheld the Court of
Chancery’s injunction of those measures.
THE JOHNSON ARTICLE
As the Johnson Article makes clear, Delaware Courts have since struggled to trace the
confines of the Revlon doctrine. One critical question that arose after the Revlon decision was,
when does Revlon apply? The Johnson Article points to several cases (Paramount
Communications, Inc. v. Time Inc., 571 A.2d 1140 (Del. 1990); Paramount Communications,
Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1993); Arnold v. Society for Savings Bancorp, Inc.,
650 A.2d 1270 (Del. 1994); In re Santa Fe Pacific Corp. Shareholder Litigation, 669 A.2d 59
(Del. 1995)) which collectively establish when the Revlon doctrine applies. Taken together,
these cases establish three scenarios, which the Johnson Article cautions are non-exclusive, that
will trigger the Revlon duty for an acting board: (1) when a corporation initiates an active
bidding process seeking to sell itself or to effect a business reorganization involving the clear
break up of a company; (2) where, in response to a bidder’s offer, a target abandons its long-term
strategy and seeks an alternative transaction involving the break-up of the company; or (3) when
approval of a transaction results in a sale or change of control. Moreover, Arnold counsels that a
company board is not seeking to sell a company unless it initiates an active bidding process.
Santa Fe further clarifies that both an initiation of an active bidding process and a board seeking
to sell control of the company or take other actions which would result in a break-up of the
company are required in order for Revlon to become operative.
In attempting to unveil Revlon’s present-day value, the Johnson Article advocates
redefining the doctrine’s useful purpose. To accomplish this, the Johnson Article takes the
position that in order to give meaning to all of the aforementioned scenarios, the Revlon duty
should not be understood as mandating an actual sale of control or break-up transaction. Instead,
as the Article opines, the duty should be triggered when a board becomes determined to
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consummate a transaction that would result in a change of control or break-up of the company,
regardless of whether such transaction actually occurs. In effect, the Johnson Article argues for a
broadening of Revlon’s reach to subsume not only done-deal transactions, but no-deal
transactions as well.
The Johnson Article’s justification for such an expansion of the scope of the Revlon
doctrine is colored by the authors’ considerations of the current policy and doctrinal deficiencies
existing within in the Revlon doctrine as it is presently understood and applied. The likely effect
of Revlon today, according to the Johnson Article, is that directors who succeed in
consummating a transaction are, ex post, held to a higher standard than those directors who fail
to enter a transaction, a result that Johnson Article asserts makes no “conceptual or policy sense
for directors.” Stated differently, the authors of the Johnson Article fear that the application of
Revlon exclusively in a done-deal posture would mean that “directors who consummate a
transaction—whether by means of an admirable or abject effort—must face heightened scrutiny,
while directors who fail to cut a deal—possibly through their own abysmal performance” would
be subject to the “more deferential business judgment standard of review.” To correct this
inherent inconsistency, the Johnson Article maintains it is necessary to view Revlon as requiring
“a determined seeking” of a sale of control or break-up of a company by its directors, rather than
the actual occurrence of such an event. In other words, the Johnson Article takes the position
that a board should be subject to Revlon review once that board becomes determined to
consummate a change of control or break-up deal.
As further support for this expansion theory, the Johnson Article points to Delaware
courts’ treatment of the entire fairness doctrine, which, as the Johnson Article explains, applies
even where a board decides not to take a particular action due to a conflict of interest. In those,
circumstances, a board member could still face the heightened entire fairness standard of review
even though the deal was not consummated. The Johnson Article does, however, limit
expansion of the Revlon doctrine to those no-deal transactions in which a board “continues a
sales process, but ultimately fails to effectuate a transaction.” Revlon would not apply where a
board initiates the change of control or break-up process, but later decides to terminate the
transaction. In such a scenario, as the Article posits, the heightened standard of review would
apply equally to a director’s decision to abort a transaction and a director’s decision take an
action subject to Revlon scrutiny. This result, the Johnson Article asserts, is undesirable.
The Johnson Article then explores the notion that Revlon’s redeeming value exists in its
potential application as limited remedies doctrine for granting non-monetary sanctions. At the
time that Revlon was decided, the Article points out, the duty of maximizing value to
shareholders was based in directors’ duties of care and loyalty. As the Johnson Article makes
clear, however, several legislative changes to the Delaware legal landscape have made it
increasingly difficult to assert personal liability on the part of a director for a breach of the duty
of care. Even though personal liability for a breach of the duty of loyalty still remains, such
claims are subject to a plaintiff’s ability to show that a director engaged in some “deliberate
wrongdoing.” Accordingly, the Johnson Article maintains that Revlon “has no legal bite” when
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it comes to claims against directors for personal liability flowing from a duty of loyalty breach, a
characteristic of Revlon that exists in both done-deal and no-deal contexts according to the
Article.
Revlon may, the Johnson Article argues, have some value as a remedies doctrine at the
injunctive relief stage as opposed to actions for damages. In this role, the authors of the Johnson
Article believe that Revlon realizes it present-day useful function of “permit[ing] a grant of
nonmonetary sanctions and shap[ing] ensuing settlement negotiations.” Revlon’s use, even in
this constrained context, is diminutive according to the Johnson Article primarily because of
Delaware courts’ reluctance to grant requests for injunctive relief in these deal contexts. The
Johnson Article points out that, between 2008 and 2013, the Delaware courts only granted one of
fifteen injunctions brought in the pre-closing context.
In the no-deal context, the Johnson Article argues that Revlon still may have some value
since, unlike the done-deal context, there is no transaction for a court to enjoin. The no-deal
context would allow for non-monetary sanctions (i.e., an order requiring production of additional
information) which may facilitate a more expedient settlement process. Despite Revlon’s
potential value as a limited remedies doctrine, the authors of the Johnson Article concede that
although Revlon “retain[s] a certain cosmetic luster…it lacks remedial clout.”
As a final attempt to determine Revlon’s present-day utility, the Johnson Article lists
several extrapolations of Revlon’s value-adding qualities based on the authors’ understanding of
doctrine’s pitfalls. First, the Johnson Article posits that the looming threat of Revlon’s
heightened standard of review may operate to encourage directors to act more carefully, which
could increase director performance to the benefit of shareholders. The Johnson Article says this
is a likely result since directors who have decided to sell will not “slack off” for the sole purpose
of stymieing consummation of the deal, thereby taking it out of Revlon review. Conversely, as
the Johnson Article points out, performance that is significantly poor may meet the stricter
damages standards for a breach of duty of loyalty action. In essence, the Johnson Article takes
the position that directors “may perform best if they believe the done deal and no-deal outcomes
will be reviewed under the same standard, even if remedies may differ.”
Second, the Johnson Article suggests that Revlon has some residual value in that it could
potentially serve to validate certain non-monetary relief measures, which may have the effect of
facilitating and inducing resolution of Revlon-type disputes while also warranting court-approved
attorneys’ fees in a settlement. Third, the Johnson Article maintains that Revlon should be
understood as a cautionary tale, highlighting the importance of “keeping a more dynamic, allencompassing perspective on particularized fiduciary doctrines, in light of larger doctrinal
shifts.” When making decisions through this lens, courts may avoid eviscerating the legal clout
of certain doctrines by subsequent doctrinal adaptations. Fourth and finally, the Johnson Article
argues that value may be derived from an understanding that the principles at the heart of
Revlon’s short-term maximizing principle are too narrowly focused. The Article argues that
directors’ focus should remain on the long-term goals of the corporation and long-term
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maximization of shareholder value as untrained focus on the short-term may have undesirable
ancillary effects. All in all, the Johnson Article advocates acknowledging the decline in the
Revlon doctrine and no longer “regarding Revlon as a robust doctrine.”
SQUARING THE JOHNSON ARTICLE WITH OTHER REVLON CRITIQUES
One inevitable critique of Revlon in terms of its present-day value is that it has none and
should be abolished. This is the position taken by Professor Franklin A. Gevurtz (Removing
Revlon, 70 WASH. & LEE L. REV. 1485 (2013)). The basic premise of Professor Gevurtz’s
contention that the Revlon doctrine should be eradicated is derived from his understanding of the
utility of a sound rationale underlying a legal doctrine. Gevurtz argues that an underlying policy
rationale serves to aid courts in the application of a legal doctrine, acting as a guidepost for
courts when faced with the task of applying a legal doctrine to a new set of facts. With regard to
Revlon, Professor Gevurtz propounds the argument that there is no sound policy rationale
bolstering the doctrine, which has left courts confounded when it comes to applying the doctrine
to new facts. Professor Gevurtz explores what he anticipates are the arguable rationales for the
doctrine, including its function as a substitute for shareholder consent and as a resolution to the
final period problem. Gevurtz, however, disposes of all such rationales as inapposite,
maintaining that there are sound doctrines currently in place which adequately govern the issues
and concerns raised by the Revlon case—Gevurtz argues, for example, that the result in Revlon
would have been the same had the court applied the business judgment rule. Gevurtz ultimately
concludes that “it is time to remove Revlon from the face of corporate law.”
In juxtaposition to the Johnson Article, Gevurtz’s position seems to be rather extreme.
However, the Johnson Article lends itself to at least two different interpretations of the authors’
understanding of Revlon’s present-day usefulness, one of which is not wholly inconsistent with
Gevurtz’s idea of abolishing Revlon altogether. The first interpretation, and the one which aligns
with Gevurtz’s position, is that the Johnson Article is nothing more than a step-by-step, trial-anderror chronicle of the authors’ attempt to unmask Revlon’s utility—a chronicle that culminates
with a realization that Revlon has no present-day legal precedential value, but perhaps some
lasting ancillary benefits the corporate law world. This interpretation of the Johnson Article is
derived from the authors’ methodical treatment of possible present-day uses for Revlon: an idea
is presented, support for the idea is provided, and then the idea’s validity is seemingly
eviscerated by the authors’ acknowledgement of Revlon’s diminution. The only area of the
Johnson Article where this method appears to be lacking—or perhaps exists to a lesser degree—
is the portion of the Article in which the authors set forth the four extrapolations of Revlon’s
present-day value discussed previously.
When viewed through this lens, the Johnson Article seems to do nothing more than
implore Delaware corporate law jurisprudence to discover the value of Revlon’s legacy. Such
legacy would persist despite the abolishment of the doctrine itself and it is in this regard that the
Johnson Article, while not expressly advocating for eradication of the Revlon doctrine, implicitly
recognizes this abolishment as a viable result. Arguably, such an interpretation could be viewed
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as internally inconsistent with the Johnson Article. For example, one formulation of the Revlon’s
present-day value involves the looming threat of heightened scrutiny and its effect on director
behavior. Without the doctrine itself—as the argument would likely proceed—there is no threat
of heightened scrutiny and the value of the doctrine is thereby lost. However, by implementation
and application of the Revlon doctrine over the years, directors are, by now, acutely aware of the
Delaware Courts’ desire to keep a watchful eye on Revlon–like transactions. Accordingly, even
without the operation of the doctrine itself, directors have learned to be cautious when dealing in
such transactions. Moreover, this first interpretation of the Johnson Article views it as a
grasping-at-straws attempt to find present-day value in a doctrine that the authors know to be
legally and practically inept.
An alternative interpretation of the Johnson Article is that each of the ideas set forth in
the Article is a necessary and integral building block of the resulting edifice that is Revlon’s
corporate law value. Put more concretely, in order for Revlon’s present-day value to be
understood, it must be approached as a limited remedies doctrine, which requires expansion of
Revlon to govern no-deal transactions in addition to done-deal transactions. The authors then
temper, but do not completely vitiate, this position by recognizing that in the grand scheme of
corporate law jurisprudence, the Revlon doctrine has suffered a certain degree of diminution.
This is more than likely the authors’ intended interpretation of the Johnson Article, though the
previous interpretation is not wholly unsupported given the Article’s references to the percentage
of failed Revlon claims brought before courts and courts’ unwillingness to provide injunctive
relief in the Revlon context.
The tensions between Gevurtz’s abolishment approach and those advocated by the
Johnson Article are more readily apparent given this second interpretation of the Article.
Abolishment of the Revlon doctrine would, within this interpretation of the Johnson Article,
inevitably foreclose on any possibility that Revlon serves a useful purpose in today’s corporate
law jurisprudence. It is axiomatic that without the doctrine itself, there could be no expansion of
Revlon to encompass no-deal transactions. As a result, the doctrine could serve no function as a
limited remedies doctrine.
Moreover, Professor Gevurtz and the authors of the Johnson Article agree that Revlon has
perpetuated widespread confusion as to its application and legal significance. Accordingly, this
second interpretation of the Johnson Article begs the question, why advocate for the expansion
of a doctrine one recognizes to have escaped the understanding of virtually everyone who knows
of its existence? Despite the Johnson Article’s attempt to delimit the exact breadth of the
necessary expansion, it is inconsistent to assert that the confusion surrounding the Revlon is a
source of its diminution, and then later suggest that the doctrine be further expanded in order to
achieve some present-day significance. This is an internal inconsistency that the authors of the
Johnson Article acknowledge, but seemingly do not address, except to say that there is broad
language in the Revlon decision that would logically include no-deal transactions. The Article
then later states that “it appears that the no-deal prism serves only to magnify the diminished
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relevance of Revlon in today’s M&A law.” Such language within in the Johnson Article tends to
bolster the former interpretation of how the Article should be understood.
J. Travis Laster, Vice Chancellor of the Delaware Court of Chancery, provides a very
different critique of Revlon’s useful purpose in today’s M&A world (Revlon is Standard of
Review: Why It’s True and What It Means, 19 FORDHAM J. CORP. & FIN. L. 5 (2013)). Based on
the premise that Revlon is actually a standard of review and not a doctrine imposing new duties
on directors, Vice Chancellor Laster takes the position that Revlon scrutiny should apply to all
negotiated acquisitions because of the final period problem. Laster maintains that such an
expansion of the doctrine is practical in that it will not operate to increase Delaware courts’ case
loads. Furthermore, according to Laster, application of the doctrine to all negotiated acquisitions
requires no different treatment in preliminary injunction contexts than Revlon transactions.
Lastly, Laster points out, as did the Johnson Article, that in the done-deal phase, such an
expansion would have no implications for the level of culpability to be proved by plaintiffs in
order to hold directors liable for money damages. Laster posits that viewing Revlon as a
standard of review and then applying it to all negotiated acquisitions will have the effect of
“provid[ing] a comprehensible and coherent rationale for how Delaware courts approach a
negotiated transaction,” thereby “enhanc[ing] the legitimacy of Delaware’s legal system.”
The Johnson Article transiently mentions Laster’s article, but does not directly comment
on the notion that Revlon is best understood as a standard of review. Given the Article’s position
regarding Revlon’s present-day value, it seems apparent that the authors either wholly disregard
the notion that Revlon is merely a standard of review or, conversely, that Revlon does create a
new duty, which is inextricably intertwined with the standard of review established by the case.
Additionally, the Article points to the strict standard for proving director liability for monetary
damages as a cause of the Revlon demise, while Laster relies on the same standard as
justification for expanding the doctrine.
CONCLUSION
The authors of the Johnson Article should be lauded for their willingness to take a novel
approach to determining Revlon’s present-day value. Nothing in this paper is intended to suggest
that the authors’ treatment of the issue was in any manner deficient or lacking in careful
reasoning and sound judgment. However, the Johnson Article seems to operate more as a
chronicle of the authors’ venture to discover Revlon’s present-day value. Viewing the Article
through this lens, it seems that the resulting conclusion is that Revlon is antiquated and
inapposite in today’s corporate law arena. This seems to be an implicit acknowledgement made
by the Article’s authors despite their attempts to redefine the doctrine in order to revive its legal
utility. Accordingly, Revlon’s present-day value may simply be its ancillary effects as expressed
in Part IV of the Article.
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