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Feb 2015
February 17, 2015

Revlon Revisited: Delaware Supreme Court Provides New Guidance on M&A Rules

A corporate board of directors has certain fiduciary duties in connection with the sale or merger of the corporation that would result in a change of control or a break-up of the company. These are a board’s so-called Revlon duties, named after a 1986 Delaware Supreme Court case. In Michigan, as in many other states, a board’s Revlon duties have been defined and shaped by Delaware case law.
Under Revlon and its progeny, in the sale or merger context, a board is required to obtain maximum value for the company’s shareholders. In some circumstances, this has been interpreted as imparting an “auction requirement” on the board. However, a recent Delaware Supreme Court decision, C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, has emphasized that a board does not always have to expressly solicit other bids in order to satisfy its Revlon duties — and in fact, that a passive post-signing market check (in combination with other factors) may be sufficient.  
C&J is a publicly traded oil field service provider. In 2013, C&J’s board explored strategic acquisitions and was later approached with the opportunity to buy the CPS division of a company called Nabors. Under the terms of their merger agreement, a newly created subsidiary of Nabors would hold the Nabors CPS business and C&J would merge with that subsidiary to create a new combined entity. C&J’s management team would manage the new company, but Nabors would be the majority owner of the new entity with its stockholders owning 53 percent of the shares, as well as receiving $938 million in cash. The deal was announced in June 2014 but was not supposed to close before the end of that year.
Importantly, because of the potentially disruptive consequences of Nabors' majority ownership for C&J shareholders, the merger agreement contained a provision allowing the C&J board to get out of the transaction (for a relatively modest fee of 2.27% of the deal value) if a superior proposal emerged during the lengthy passive market check. The board also negotiated other protections for C&J’s shareholders, including a two-thirds vote to amend corporate by-laws, sell the company or issue shares for a period of five years. Notably, C&J shareholders also had the opportunity to approve the merger.
The Retirement Trust brought a class-action lawsuit on behalf of itself and other C&J shareholders, seeking to enjoin the merger and arguing, among other things, that C&J’s board violated its Revlon duties. The trial court enjoined the merger for 30 days after finding that there was a “plausible” violation of the board’s Revlon duties because the board did not affirmatively shop the company before or after signing the deal. The trial court also ordered the board to solicit other bids while the transaction was pending and held that doing so would not be a breach of the merger agreement (even though the agreement expressly prohibited C&J from soliciting other bids).
The Delaware Supreme Court reversed the trial court’s decision. The court assumed that the board’s Revlon duties were triggered by the pending merger and explained that Revlon does not set out a specific route that boards must follow in order to fulfill their fiduciary duties.  Moreover, when a board “exercises its judgment in good faith, tests the transaction through a viable passive market check, and gives its stockholders a fully informed, un-coerced opportunity to vote to accept the deal,” the board has not violated its Revlon duties, the Delaware Supreme Court said in its ruling. This is particularly the case, the Delaware Supreme Court explained, where there is no evidence that the board is approaching the transaction with an entrenchment motive, and where the board took several steps to mitigate the effects of the change in control. On this basis, the court held that the trial court erred by imposing a solicitation requirement on the C&J board.
In practice, the C&J decision makes clear that Revlon does not require boards to take any particular course of action in a sale or merger that will result in a change in control, as long as the board's overall course of action was reasonable under the circumstances as a good faith attempt to secure the highest value reasonably attainable. Additionally, a “passive,” post-signing market check by the board may be sufficient to satisfy Revlon, particularly when the board has negotiated a fiduciary out, other post-closing shareholder protections and where the transaction is subject to a fully informed vote of the shareholders.

Contact any member of the Business and Coroporate Services Group at Warner Norcross if you have questions about the impact of the Revlon ruling.

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