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. 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

    A company which is the subject of a merger or acquisition attempt. ...
RELATED FAQS
  1. Why are the terms 'merger' and 'acquisition' always used together if they describe ...

    The terms "merger" and "acquisition" are used together because they both describe processes by which two companies become ... Read Full Answer >>
  2. What level of mergers and acquisitions is common in the chemical sector?

    The level of mergers and acquisitions (M&As) in the chemicals sector has surged to an all-time high since the turn of ... Read Full Answer >>
  3. How can a company buy back shares to fend off a hostile takeover?

    There are several reasons why a company may choose to repurchase some or all of the outstanding shares of its stock. This ... Read Full Answer >>
  4. How does the level of mergers and takeovers in the Internet sector compare to the ...

    The level of mergers and takeovers in the Internet sector is higher than in the broader market. The Internet sector contains ... Read Full Answer >>
  5. What business structures expose entrepreneurs to unlimited liability?

    A company that seeks to expand through a horizontal integration can achieve economies of scale, economies of scope, increased ... Read Full Answer >>
  6. What are the benefits of investing in a money market fund?

    The U.S. Department of Justice, or DOJ, and the Federal Trade Commission, or FTC, use the Herfindahl-Hirschman Index, or ... Read Full Answer >>
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

    American Airlines & US Airways Merger: It Matters!

    While the two airlines' merger creates a new giant in the industry and reduces choice for consumers and employees, investors should benefit.
  5. Economics

    What is a Management Buyout?

    A management buyout, or MBO, is a transaction where a company's management team purchases the assets and operations of the business they manage.
  6. Fundamental Analysis

    Explaining Enterprise Multiple

    The enterprise multiple is a ratio used to value a company as if it was going to be acquired.
  7. Chart Advisor

    3 Basic Material Stocks Poised For A Pop

    After large market swings such as the one seen on March 30, 2015, it is not surprising to see traders become more tolerant towards taking on risk.
  8. Stock Analysis

    Will Kraft-Heinz Be a Winner?

    Kraft and Heinz are now one. This should present a profitable long-term investment opportunity, but isn't likely to be smooth sailing at first.
  9. Investing

    WhatsApp: The Best Facebook Purchase Ever?

    WhatsApp is Facebook's largest acquisition to date. What makes it worth the major price tag?
  10. Fundamental Analysis

    Private vs Public Equity: What's Best?

    What is the better way for a company to attract investors; by making its stock available for sale to whoever wants some, or by petitioning rich people?

You May Also Like

Hot Definitions
  1. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  2. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  3. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  6. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
Trading Center