Delaware Court Rejects Revlon Claims; Approves Process-Based Approach for Evaluating Director Actions

A Revlon claim against target company directors for their conduct in negotiating a sale of the company failed. While it was possible that the directors could arguably have better navigated the sale process, held the Chancery Court, Delaware law does not require perfection. Chancellor Chandler said that Delaware law does not hold directors liable for failing to carry out a perfect process in a sale of control of the company. Directors’ decisions in such a situation must be reasonable, he averred, not perfect. The case challenging the board’s conduct was brought by a former target company shareholder. Wayne County Employees’ Retirement System v. Corti, Del. Ch. Ct, July 24, 2009, Civil Action No. 3534-CC.

Citing the Delaware Supreme Court’s Lyondell opinion, the Chancellor said that the relevant question is whether the directors utterly failed to attempt to obtain the best sale price. Far from suggesting that the directors knowingly and completely failed to undertake their responsibilities, which is what would be needed to show a breach of the duty of loyalty, the allegations demonstrated that the board, along with its outside financial advisor, met several times in the months leading up to the transaction, regularly evaluated financial reports, and considered several facts and analyses in reaching a decision to approve the business combination.

The assertion that the directors failed to probe for alternatives did not state a claim for a breach of the duty of loyalty, said the court. Revlon does not proscribe any specific steps that must be taken by a board before selling control of a company. And, indeed, there was no allegation than any alternative bidder emerged in the seven month period between the signing and the closing of the deal. Thus, the directors’ failure to take any certain specific steps during the sale process could not have demonstrated a conscious disregard of their duties.

The court also said that assertions that the directors failed to obtain a control premium did not support a claim against them for breach of the duty of loyalty. It was not clear to the court if the former shareholder was merely asserting that the consideration received by the company in exchange for the sale of control was too low, or contending that the board had a responsibility to obtain and identify some separate consideration that would satisfy the requirement that the shareholders receive a control premium. In either case, the argument failed.

As part of the combination, noted the court, the target company shareholders now hold shares in a company that owns, among other things, an enormously popular product. There is no requirement that the board obtain some separate consideration that could be separately identified as a “control premium.”

According to Chancellor Chandler, the duty of the directors in a sale of control is to exercise their fiduciary duties in furtherance of the objective of obtaining the best price reasonably available for the shareholders. Any control premium received by the selling company would be included in the consideration received by the shareholders in exchange for what is given to the acquirer, including voting control.

The court viewed the allegation that the board failed to obtain a control premium as a thinly veiled attack on the adequacy of the price the board obtained in the sale of control. If the directors fulfilled their fiduciary duties in the sale of control, however, the court will not second guess the business decision of the board.

More broadly, the court emphasized that this process-based approach to evaluating director action in a sale of control is consistent with the business judgment rule and the foundational principle of Delaware corporate law that the directors, and not the court, properly manage the corporation. The court properly focuses on the board’s decision making process rather than making an independent business judgment of whether the consideration obtained for the shareholders was adequate.

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