What is the '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.

BREAKING DOWN '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. Board Of Directors - B Of D

    A group of individuals that are elected as, or elected to act ...
  2. "Just Say No" Defense

    A strategy used by corporations to discourage hostile takeovers ...
  3. Black Knight

    A company that makes a hostile takeover offer for a target company. ...
  4. Hostile Bid

    A specific type of takeover bid that is presented directly to ...
  5. Inside Director

    A board member who is an employee, officer or stakeholder in ...
  6. Duty Of Loyalty

    A director's responsibility to act at all times in the best interests ...
Related Articles
  1. Insights

    Revlon to Acquire Elizabeth Arden (REV, RDEN)

    Revlon plans to acquire Elizabeth Arden in a $14/share plus debt deal.
  2. Insights

    Why Revlon Bought Elizabeth Arden (REV, RDEN)

    What’s the synergy between these two established beauty product companies, beyond the usual product line consolidation?
  3. Investing

    Revlon Agrees to Buy Elizabeth Arden

    After the bell Thursday, cosmetics giant Revlon (NYSE: REV) announced a deal to buy industry peer Elizabeth Arden (NASDAQ: RDEN) for $14 per share in cash, which values the company at roughly ...
  4. Investing

    What are the fiduciary responsibilities of board members?

    Find out what fiduciary duties a board of directors owes to the company and its shareholders, including the duties of care, good faith and loyalty.
  5. Investing

    Warding Off Hostile Takeovers

    The purpose of this article is to provide a general overview of hostile corporate takeovers, while highlighting a general course of action against such activity. This article provides basic information ...
  6. Investing

    What Does the Board of Directors Do?

    Every public company must have a board of directors. These boards establish administrative policies including the hiring and firing of executives, the distribution of dividends, and executive ...
  7. Investing

    The Basics Of Corporate Structure

    CEOs, CFOs, presidents and vice presidents: learn how to tell the difference.
  8. Small Business

    What is a Takeover?

    A takeover happens when one company makes a bid to acquire a target company.
  9. Investing

    Corporate Takeover Defense: A Shareholder's Perspective

    Find out the strategies corporations use to protect themselves from unwanted acquisitions.
  10. Managing Wealth

    Retired Execs: How Much Do Corporate Boards Pay?

    If you have the right skill set, getting a seat on a company board can be a lucrative and stimulating way to spend some of your new free time.
RELATED FAQS
  1. What is a staggered board?

    A staggered board of directors (also known as a classified board) is a board that is made up of different classes of directors. ... Read Answer >>
  2. How can a company resist a hostile takeover?

    Learn about some of the defense strategies a public company's board of directors might employ to prevent a hostile bidder ... Read Answer >>
  3. Under what circumstances might a company decide to do a hostile takeover?

    Learn about why companies use a hostile takeover to gain control of another company, and understand the different methods ... Read Answer >>
  4. What's the difference between a merger and a hostile takeover?

    Understand the difference between a merger and a hostile takeover, including the different ways one company can acquire another, ... Read Answer >>
  5. What happens to the shares of a company that has been the object of a hostile takeover?

    Learn about the effect on the share price of companies that are targets of hostile takeovers, which are tactics used by famed ... Read Answer >>
  6. What is the difference between a hostile takeover and a friendly takeover?

    Learn about the difference between a hostile takeover and a friendly takeover, and understand how proxy fights and tender ... Read Answer >>
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center