Revlon Rule: What it is, How it Works, Considerations

What is the Revlon Rule

The Revlon rule is the legal principle stating that a company’s board of directors shall make a reasonable effort to obtain the highest value for a company, when a hostile takeover is imminent. This represents somewhat of a shift in responsibility, because boards of directors are primarily tasked with preventing takeovers from happening in the first place. However, once a takeover is deemed unavoidable, the Revlon rule kicks in, and the board consequently directs its focus towards securing the highest value for their stakeholders, as part of its inherent fiduciary obligation.

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 that 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.

Thumbing a Nose at the Revlon Rule

What Warren Buffett wants Warren Buffett gets. In March 2015, H.J. Heinz Company and Kraft Foods Group, Inc. entered into a definitive merger agreement with the backing of Mr. Buffett. The agreement contained a no-shop provision, effectively barring Kraft's board of directors from seeking a superior deal for Kraft shareholders under the spirit of the Revlon Rule. Whether the board acted independently to ignore the rule or was intimidated to sign a no-shop clause is not clear. It is a fact that Kraft was not shopped to other potential bidders, and the Buffett-backed group captured the company on its own terms.