The Obligation of a Director of a Delaware Corporation to Act as an Auctioneer
Barry Reder, 44(2): 275–82 (Feb. 1989)
Lower courts and commentators have read Revlon expansively to impose upon directors of Delaware corporations a duty to conduct an auction when a company is for sale. Revlon imposes such a duty only when the corporation is to be broken up. The board may consider the effect of a transaction on a variety of constituencies to determine whether the corporation is being broken up.
The Case Beyond Time
Lyman Johnson and David Millon, 45(4): 2105–25 (Aug. 1990)
The Delaware Supreme Court's decision in Paramount Communications, Inc. v. Time Inc ., 571 A.2d 1140 (Del. 1990), is the latest landmark in the ongoing effort to define target company management's responsibilities in hostile tender offers. This Article seeks to articulate some of the decisions' unarticulated implications. It considers Time's applicability to cases involving refusal to redeem poison pills as well as its deeper significance for the meaning and continued vitality of the Revlon and Unocal decisions.
"The Metaphysics of Time": A Radical Corporate Vision
Trevor S. Norwitz, 46(2): 377–90 (Feb. 1991)
The Delaware Supreme Court decision in Paramount Communications, Inc. v. Time Inc ., 571 A.2d 1140 (Del. 1990), represents a significant shift in emphasis away from the maximization of shareholders value toward the recognition of other stakeholders' interests. In drawing a distinction between the corporate entity and the shareholders themselves, Justice Horsey has opened the door for a new vision of the corporation in the takeover situation and beyond.
Delaware Fiduciary Duty Law after QVC and Technicolor: A Unified Standard (and the End of Revlon Duties?)
Lawrence A. Cunningham and Charles M. Yablon, 49(4): 1593–1628 (Aug. 1994)
The authors argue that the Delaware Supreme Court's decisions in Paramount Communications, Inc. v. QVC Network, Inc ., 637 A.2d 34 (Del. 1994), and Cede & Co. v. Technicolor, Inc ., 634 A.2d 345 (Del. 1993), reflect a movement in Delaware fiduciary law away from doctrinal fragmentation and toward a single, more unified standard of director conduct, imposing upon all corporate directors a single, highly general obligation of good faith and fair dealing based upon reasonably informed judgment. The logic of the decisions and this new unified standard imply that the so-called Revlon duty—an affirmative legal obligation to conduct a fair auction for the company and to sell it to the highest bidder—no longer exists under Delaware law. A new standard, requiring enhanced scrutiny to ensure that management actions achieve the best value reasonably available to shareholders, will apply to all management actions in takeover situations and other extraordinary transactions as well.
The Revlon Duties and the Sale of Companies in Chapter 11
Dennis F. Dunne, 52(4): 1333–57 (Aug. 1997)
Several commentators have argued that, whenever the sale or change of control of a Delaware company will be implemented through a Chapter 11 reorganization plan, state court decisions require the immediate termination of the debtor-in-possession's exclusivity periods in order to conduct an open auction of the company. This Article analyzes the existing law and concludes that automatic termination of the debtor-in-possession's exclusivity periods is not required because: (i) Revlon and its progeny do not impose an ironclad "no auction, no sale" rule under Delaware state law; and (ii) the checks and balances contained in the Bankruptcy Code embody state law fiduciary duty concepts and provide sufficient protection for creditors and stockholders while preserving the necessary flexibility for bankruptcy courts to tailor bidding procedures to fit the particular dynamics of each case and to remedy actual breaches of fiduciary duty.
Why Revlon Applies to Nonprofit Corporations
Colin T. Moran, 53(2): 373–95 (Feb. 1998)
Most state laws require nonprofit corporations that convert to for-profit status to contribute the fair market value of the organization, valued as an ongoing business, to charity. Aggressive for-profit buyers, however, have repeatedly bought hospitals and health management organizations worth hundreds of millions of dollars at undervalued prices. This Article argues that boards of nonprofit corporations engaged in conversion transactions, like boards of for-profit corporations engaged in sale-of- control transactions, face the strict standard of fiduciary responsibility outlined in Revlon.
Revisiting Consolidated Edison—A Second Look at the Case that Has Many Questioning Traditional Assumptions Regarding the Availability of Shareholder Damages in Public Company Mergers
Ryan D. Thomas and Russell E. Stair, 64(2): 329-358 (February 2009)
In October 2005, the U.S. Court of Appeals for the Second Circuit in Consolidated Edison, Inc. v. Northeast Utilities ("Con Ed") ruled that electric utility company Northeast Utilities ("NU") and its shareholders were not entitled to recover the $1.2 billion merger premium as damages after NU's suitor, Consolidated Edison, refused to complete an acquisition of NU. This case surprised many M&A practitioners who believed that the shareholder premium (or at least some measure of shareholder damages) would be recoverable in a suit against a buyer that wrongfully terminated or breached a merger agreement. If Con Ed proves to have established a general rule precluding the recovery of shareholder damages for a buyer's breach of a merger agreement, the potential consequences to targets in merger transactions would be substantial—shifting the balance of leverage in any MAC, renegotiation, or settlement discussions decidedly to the buyer and effectively making every deal an "option" deal. This ruling, therefore, has left some target counsel struggling to find a way to ensure that the merger agreement allows for the possibility of shareholder damages while also avoiding the adverse consequences of giving shareholders individual enforcement rights as express third-party beneficiaries of the agreement.
The Con Ed case, however, merits a second look. This Article revisits the Con Ed decision and challenges the conclusion of some observers that the court in Con Ed established a general precedent denying the availability of shareholder damages. This Article also discusses how the holding of Con Ed may very well be confined to the facts and the specific language of the merger agreement at issue in the case. Notwithstanding, the uncertainty surrounding how any particular court may approach the issues raised in Con Ed, this Article proposes model contract language that a target might employ to avoid creating a " Con Ed issue" and to minimize the risk of a result that was not intended by the parties.
Preemption as Micromanagement
Larry Ribstein, 65(3): 789–798 (May 2010)
Standing at the Singularity of the Effective Time: Reconfiguring Delaware’s Law of Standing Following Mergers and Acquisitions
S. Michael Sirkin; 69(2): 429-474 (February 2014)
This article examines the doctrine of standing as applied to mergers and acquisitions of Delaware corporations with pending derivative claims. Finding the existing framework of overlapping rules and exceptions both structurally and doctrinally unsound, this article proposes a novel reconfiguration under which Delaware courts would follow three black-letter rules: (1) stockholders of the target should have standing to sue target directors to challenge a merger directly on the basis that the board failed to achieve adequate value for derivative claims; (2) a merger should eliminate target stockholders’ derivative standing; and (3) stockholders xi of the acquiror as of the time a merger is announced should be deemed contemporaneous owners of claims acquired in the merger for purposes of derivative standing. Following these rules would restore order to the Delaware law of standing in the merger context and would advance the important public policies served by stockholder litigation in the Delaware courts.
Financial Advisor Engagement Letters: Post-Rural/Metro Thoughts and Observations
Eric S. Klinger-Wilensky and Nathan P. Emeritz, 71(1): 53-86 (Winter 2015/2016)
The liability of RBC in last year’s In re Rural/Metro decision was derivative of several breaches of fiduciary duty by the Rural/Metro directors, including those directors’ failing “to provide active and direct oversight of RBC.” In discussing that failure, the Court of Chancery stated that a “part of providing active and direct oversight is acting reasonably to learn about actual and potential conflicts faced by directors, management and their advisors.” In the year since Rural/Metro, there has been an ongoing discussion—in scholarly and trade journals, courtrooms and the marketplace—regarding how, if at all, the process of vetting potential financial advisor conflicts should evolve. In this article, we set out our belief that financial advisor engagement letters are an efficient (although admittedly not the only) tool to vet potential conflicts of a financial advisor. We then discuss four contractual provisions that, we believe, are helpful in providing the active and direct oversight that was found lacking in Rural/Metro.
Finding the Right Balance in Appraisal Litigation: Deal Price, Deal Process, and Synergies
Lawrence A. Hamermesh and Michael L. Wachter, 73(4) 961-1010 (Fall 2018)
This article examines the evolution of Delaware appraisal litigation and concludes that recent precedents have created a satisfactory framework in which the remedy is most effective in the case of transactions where there is the greatest reason to question the efficacy of the market for corporate control, and vice versa. We suggest that, in effect, the developing framework invites the courts to accept the deal price as the proper measure of fair value, not because of any presumption that would operate in the absence of proof, but where the proponent of the transaction affirmatively demonstrates that the transaction would survive judicial review under the enhanced scrutiny standard applicable to fiduciary duty-based challenges to sales of corporate control. We also suggest, however, that the courts and expert witnesses should and are likely to refine the manner in which elements of value (synergies) should, as a matter of well-established law, be deducted from the deal price to arrive at an appropriate estimate of fair value.