Target Company Passes Revlon Test But Fails to Dislcose Interests of Financial Adviser

A target company fulfilled its Revlon duties to its shareholders, ruled the Delaware Chancery Court, but stumbled on its disclosure duties by failing to inform stockholders about a company financial adviser’s separate incentives to support the merger. Since shareholders must have full disclosure in order to make an informed decision, Vice Chancellor Noble enjoined the vote on the merger pending curative disclosure. (David P. Simonett Roleover IRA v. Margolis, Del. Chan. Ct, June 27, 2008).

Under the Revlon doctrine, a target company in play must maximize shareholder value within a range of reasonableness. In finding that the directors satisfied Revlon, the court noted that the company attempted to elicit the interest of nineteen potential acquirers, including strategic and financial entities. In addition, the auction process spanned several months and featured multiple rounds of bidding with five potential suitors invited to the table. Moreover, the board was actively engaged, said the court, holding at least fifteen meetings to discuss the process and being regularly informed by its investment advisor and outside legal counsel. In declining to second-guess the board’s auction, the court emphasized that the process was fair, comprehensive, sophisticated, and open.

The disclosure process did not fare as well. When the directors of a Delaware corporation seek shareholder action, explained the court, they are bound by their fiduciary duties of due care and loyalty to disclose fully and fairly all material information within their control.

The target company failed to adequately quantify facets of the interest that one of its financial advisers had in the transaction. The adviser was a global investment bank who allegedly had financial interests beyond its fee in the merger that were not fully disclosed

Initially, the court noted that the financial advisor’s opinion of the fairness of a proposed transaction is one of the most important process-based underpinnings of a board’s recommendation of the transaction to its stockholders and, in turn, for the stockholders’ decision on the transaction. Thus, the vice chancellor emphasized that it is imperative for the stockholders to be able to understand what factors might influence the financial advisor’s analytical efforts.

In this instance, if the merger occurs, the investment bank will receive, not only a substantial fee, but also benefits as the holder of various company obligations. It appears that its debt holdings will be cashed out and a complex hedge/warrant arrangement unwound. Turning debt into cash, perhaps at something of a premium, confers a significant benefit. The peculiar benefits of the merger to the adviser, beyond its expected fee, must be disclosed to stockholders.

The company is asking its stockholders to have faith in the financial adviser and to rely upon its expertise, said the court. While the adviser may be deserving of that confidence, observed the court, the stockholders have every right to expect the company to share with them any extraneous, substantial reasons the adviser may have for seeing that the transaction is consummated.

In this instance, the company failed to achieve that objective, the court found, and the denial of the stockholders’ right to full and complete disclosure as to the peculiar interests of the financial advisor in the merger was irreparable harm. Thus, the court enjoined the shareholder vote pending curative disclosure to the stockholders regarding the potential benefits of the transaction to the adviser.