Revlon Rule

AAA

DEFINITION of 'Revlon Rule'

The legal requirement that a company’s board of directors make a reasonable effort to obtain the highest value for a company when a hostile takeover is imminent. The Revlon rule involves a narrower interpretation of a board’s fiduciary duty, which typically is limited to protecting a company from external threats: under normal conditions a director is not required to negotiate with any hostile bidder.

INVESTOPEDIA EXPLAINS 'Revlon Rule'

The case that created the Revlon rule was Revlon, Inc. v MacAndrews & Forbes Holdings, Inc., and was tried before the Delaware Supreme Court. Delaware courts typically did not evaluate the merits of a merger unless the plaintiff could show the board of directors failed to act in due care or did not act impartially. Since the 1985 case, judges treat cases differently if they involve the sale of a company, and use the Revlon rule for guidance.

The Revlon rule set a significant legal precedent. It shifted the board of directors’ duty from looking after the health and preservation of the corporation to increasing the short-term financial gains of shareholders. This narrower interpretation of fiduciary duties, referred to as Revlon duties, results in more scrutiny placed on a board’s decisions.   

In the case, Revlon’s board of directors incentivized a white knight bid from Forstmann, Little & Company, over a bid from Pantry Pride, a supermarket which sought a hostile takeover bid after Revlon rejected its initial buy offer. The board engaged in several takeover defense strategies, despite Pantry Pride offering a higher bid.

RELATED TERMS
  1. Takeover

    A corporate action where an acquiring company makes a bid for ...
  2. White Knight

    A white knight is an individual or company that acquires a corporation ...
  3. Anti-Takeover Measure

    Measures taken on a continual or sporadic basis by a firm's management ...
  4. Board Of Directors - B Of D

    A group of individuals that are elected as, or elected to act ...
  5. Hostile Takeover

    The acquisition of one company (called the target company) by ...
  6. Target Firm

    A company which is the subject of a merger or acquisition attempt. ...
Related Articles
  1. Fundamental Analysis

    Mergers And Acquisitions: Understanding Takeovers

    In the dramatic world of M&As, battleground terms meld with bizarre metaphors to form the language of the game.
  2. Options & Futures

    Bloodletting And Knights: Medieval Investment Terms

    From bloodletting to ye olde black knights, things on Wall Street are getting downright medieval!
  3. Options & Futures

    The Basics Of Mergers And Acquisitions

    Learn what corporate restructuring is, why companies do it and why it sometimes doesn't work.
  4. Investing Basics

    What are historic cases of companies failing to do their due diligence?

    Learn about the America Online-Time Warner merger. Explore how America Online's stock was not properly valued due to poor due diligence.
  5. Stock Analysis

    Breaking Down the Halliburton Baker Hughes Deal

    Halliburton is using a downturn to get bigger and stronger in the long term, and the company is getting Baker Hughes at a reasonable price as a result.
  6. Brokers

    Key Differences Between M&A Advisors And Business Brokers

    For a buy, sale or partnership for one's business, one needs brokers and advisors to proceed ahead. Here are the key differences between business brokers and M&A advisors.
  7. Trading Strategies

    Selecting Mergers & Acquisitions Advisories For Small Businesses

    Mergers and acquisitions advisories aren't just for big players. Many advisory firms cater to small and medium businesses.
  8. Investing

    M&A Advisory Business Boutiques: How The Small Shops Are Capturing Large M&A Deals

    M&A advisory boutiques are becoming a big business, giving large investment banks a run for their money.
  9. Chart Advisor

    This ETF Offers Easy Access To Big Pharma

    Pharma investing isn't for everyone, but sector-specific ETFs, such as the iShares Dow Jones U.S. Pharmaceuticals ETF, have started to change the game.
  10. Investing

    The Top Reasons Why M&A Deals Fail

    A significant number of M&A transactions result in failure. Here are the top reasons, with examples, of why it happens.

You May Also Like

Hot Definitions
  1. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  2. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  3. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  4. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  5. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  6. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
Trading Center