Nicholas D. Picollelli, Jr.

In the context of strategic acquisitions, the Supreme Court of Delaware’s recent opinion in Corwin v. KKR Financial Holdings LLC challenges the validity of the Revlon doctrine as it applies to conflict-free mergers.  Revlon requires directors to forego anti-takeover procedures and obtain the best available price when the sale of the company becomes inevitable.  As the Court in KKR asserted, Delaware corporate law is hesitant to invoke Revlon’s heightened standards to “second-guess the judgment of a disinterested stockholder majority that determines that a transaction with a party other than a controlling stockholder is in their best interests.”  Consequently, when stockholders are fully informed and uncoerced, Revlon scrutiny is unnecessary and the business judgment rule would apply.

Revlon distinguished the Court’s earlier Unocal decision, which established enhanced standards of judicial scrutiny of defensive measures adopted by a board of directors in addressing a potential takeover.  Unocal requires such scrutiny due to the concern that directors acted in self-interest, rather than in the interest of the company and its stockholders.  The potential for conflict requires directors to show that they had “reasonable grounds for believing there was a danger to corporate policy and effectiveness.”  Directors can satisfy this burden by showing “good faith and reasonable investigation.”  Finally, Unocal requires directors to show the reasonableness of director action in relation to the threats presented by the takeover.

In Revlon, the board of directors implemented anti-takeover measures in order to prevent acquisition of Revlon, Inc. by Pantry Pride, Inc.  Revlon’s board was concerned that Pantry Pride’s strategy for financing the Revlon acquisition would lead to Revlon’s dissolution.  In response to this threat, the board implemented a “poison pill” plan: an offer to exchange newly issued notes for ten million shares of Revlon stock, a “lock-up” option, and “no-shop” provision.  Although the defenses may have been initially appropriate, the Court found that when it became apparent that Revlon was for sale, the board’s duty “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.”  As such, the merger agreement approved by Revlon’s directors did not survive judicial scrutiny because they were motivated by the fear of personal liability to holders of the notes issued in the exchange offer, rather than obtaining the best price for Revlon’s sale.

In KKR, the plaintiffs challenged a stock for stock merger between KKR & Co., LP and KKR Financial Holdings, LLC (“Financial Holdings”).  The plaintiffs claimed that the transaction should have been subjected to the entire fairness standard of review since KKR & Co., LP was a controlling stockholder of Financial Holdings.  The Court of Chancery found that the plaintiffs were not entitled to entire fairness review because there was no indication that “KKR could prevent the [Financial Holdings] board from freely exercising its independent judgment in considering the proposed merger . . . .”  As the Supreme Court noted, the Chancellor determined that “the voluntary judgment of the disinterested stockholders to approve the merger” resulted in the application of the business judgment rule.

The Court’s decision in KKR is relevant because it challenges whether Unocal and Revlon are applicable in a conflict-free merger.  As long as stockholders are truly uncoerced and fully informed, KKR seems to suggest that they are not.  In essence, the Court’s concern in Unocal and Revlon is with stockholders not getting the best deal in a merger due to directors’ self-interest.  However, whereas in KKR, an independent and fully informed stockholder determines that he is obtaining the best deal, a court should accept the stockholders’ decision instead of second-guessing it.  If anything, the assertion is eerily similar to the requirements for the business judgment standard of review in situations other than Revlon and Unocal.

Typically, under business judgment review, courts are hesitant to second-guess director decisions unless directors are shown to be conflicted or uninformed.  The Court in KKR merely replaces “director” with “stockholder.”  This policy, as the Court in KKR asserts, is intended to prevent increased litigation costs, fear of potentially beneficial risk taking, and second-guessing by judges who are in a worse position to evaluate business decisions.  These principles are especially relevant when stockholders can “protect themselves … by simply voting no.”  Since stockholders evaluate transactions for themselves, there is no need for enhanced scrutiny because the stockholders act directly, rather than indirectly through directors who might coerce the stockholders’ decision.

The Court attempted to mitigate any concerns about stockholder protection by recognizing that if “the structure or circumstances of the vote were impermissibly coercive,” or “if the corporate board failed to provide the voters with material information,” then the Court would not give protective effect to the “ratification.”  More simply, the Court requires that the vote be “fair and fully informed.”  Otherwise, the stockholders would not be in the best position to evaluate a transaction and Unocal or Revlon would be necessary protections.  The Court recently demonstrated, in RBC v. Jervis, the consequences of an uninformed vote by holding that if the stockholder vote is not fully informed and Revlon applies, directors might breach their fiduciary duties if their supervision of the sale process falls “outside the range of reasonableness,” even in the absence of gross negligence.  Consequently, a board should be motivated to ensure the vote is “fair and fully informed” in order to avoid additional scrutiny.

The Court’s additional requirements and threat of increased scrutiny thereby eliminates the concern in Revlon and Unocal that interested directors might interfere with stockholder decisions because the protections allow stockholders to evaluate a decision just as they would in any transaction.  Therefore, the application of Unocal and Revlon is less significant, if not completely unnecessary, and the business judgment rule would apply where truly independent and fully informed stockholders determine that they are obtaining the best available deal.

Nicholas D. Picollelli, Jr. is a third-year student at Widener University Delaware Law School and a senior staff member on the Delaware Journal of Corporate Law.  Nick also serves as a judicial intern to the Honorable Kevin J. Carey in the United States Bankruptcy Court for the District of Delaware.

Suggested Citation: Nicholas D. Picollelli, Jr., Fine-Tuning Revlon: The Consequence of Fair and Fully Informed Stockholder Votes, Del. J. Corp. L. (Jan. 2, 2016),