Revlon Rule

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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

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  2. White Knight

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

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  4. Hostile Takeover

    The acquisition of one company (called the target company) by ...
  5. Board Of Directors - B Of D

    A group of individuals that are elected as, or elected to act ...
  6. Target Firm

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