REVLON, INC. V. MACANDREWS & FORBES HOLDINGS, INC.
506 A.2d 173 (1986)
NATURE OF THE CASE: This was a fight over the control of Revlon, Inc. Revlon (D)
directors appealed the grant of a preliminary injunction to MacAndrews (P) shareholders,
which held that Ds breached their duty of care in making concessions during a corporate
auction.
FACTS: A friendly acquisition of Revlon, Inc. by Pantry Pride was discussed in 1985
between their respective CEO's. Pantry suggested a price range of $40-$50 but Revlon
dismissed those figures as considerably below Revlon's intrinsic value. Pantry's board
authorized acquisition of Revlon at $42-$43 or by making a hostile tender offer at $45.
Revlon, Inc, was opposed to any schemes and wanted Pantry to execute a standstill agreement
prohibiting it from acquiring Revlon without the Revlon's approval. The Revlon board met to
discuss the pending hostile bid by Pantry. The price they fixed for the company was $60-$70
per share in parts and mid $50s for the whole. Special counsel proffered the strategy of
Revlon buying back 5 million shares of its outstanding 50 million and that it also adopt a
Note Purchase Rights Plan. Under that plan each Revlon shareholder would receive as a
dividend one Note Purchase Right for each share. That Right entitled them to exchange once
common share for a $65 principal Revlon note at 12% interest with a one-year maturity. The
Right would become effective whenever anyone acquired beneficial ownership of 20% or more of
Revlon's shares unless the purchaser acquired all the company's stock for a cash price at
$65 or more per share. The Rights would not be available to the acquirer and prior to the
20% triggering event the Revlon board could redeem the rights for 10 cents each. Both
proposals were unanimously adopted. Pantry made its first offer at $47.50 per common share
subject to the Rights being eventually destroyed. Revlon met again and advised the
stockholders to reject. On August 29, Revlon commenced its own offer for up to 10 million
shares, exchanging for one share a Senior Subordinated Note of $47.50 principal at 11.75%
interest due 1995 and 1/10th of a share of $9.00 Cumulative Convertible Exchangeable
Preferred Stock valued at $100 per share. Revlon's own board member and an investment banker
opined that the notes would trade at their face value on a fully distributed basis.
Stockholders tendered 87% of the outstanding shares and the company accepted 10 million on a
pro rata basis. The Notes contained covenants that limited Revlon's ability to incur
additional debt, sell assets, or pay dividends unless otherwise approved by independent
management. Both the Rights and the Notes stymied Pantry's attempted takeover. A new offer
was made at $42 per share and even though lower and equal to the last bid, it was rejected.
Revlon was authorized to negotiate with other parties. Pantry's bids rose steadily to $56.25
per share on October 7. Revlon unanimously agreed to a leveraged buyout by Forstmann. Each
stockholder would get $56 cash per share; management would exercise their golden parachutes
and buy stock in the new company with that money. Forstmann would assume $475 million in
debt incurred by the issuance of the Notes and Revlon would redeem the Rights and waive the
Notes covenants for Forstmann. Part of Forstmann's plan was to sell part of Revlon for $335
million. Before the merger, Revlon was to sell its cosmetics and fragrance division to Adler
& Shaykin for $905 million. These transactions would facilitate the purchase by Forstmann.
When the merger, and waiver of the Notes covenants were announced, the market value of those
securities began to fall. By October 7th they had fallen to $87.50. This produced an
avalanche of phone calls from irate noteholders and the Wall Street Journal reported threats
of litigation by these creditors. Forstmann, Pantry and Revlon met but could not reach
agreement and Pantry announced its intention to engage in fractional bidding. Forstmann had
access to Revlon financial data whereas Pantry did not. Forstmann made a new $57.25 offer
based on lock options to purchase Revlon's Vision Care and National Health Laboratories
divisions for $525 million ($100-$175 million below the value ascribed by Revlon's own
investment banker) if another acquirer got 40% of Revlon's shares. Revlon was also required
to accept a no shop provision. The Rights and Notes covenants had to be removed. There would
be a $25 million cancellation fee to be placed in escrow and released to Forstmann if the
new agreement terminated or if another acquirer got 19.9% of Revlon's stock. There would be
no participation by Revlon management in the merger. Forstmann agreed to support the par
value of the Notes by an exchange of new notes. Forstmann demanded immediate acceptance of
its proposal. Revlon accepted unanimously. Pantry which had initially sought injunctive
relief from the Rights plan filed an amended complaint on October 14 challenging the lock
up, the cancellation fee, and the exercise of the Rights and the Notes covenant. Pantry
sought a TRO from Revlon placing assets in escrow or transferring them to Forstmann. Pantry
then raised its bid to $58 cash conditioned upon nullification of the Rights, waiver of the
covenants and an injunction of the Forstmann lockup. The Court of the Chancery prohibited
further transfers of assets and then enjoined the lockup, no shop, and cancellation fee
agreement. The court concluded that the Revlon directors had breached their duty of loyalty
by making concessions to Forstmann, out of concern for their liability to the noteholders,
rather than maximizing the sale price of the company for stockholder benefit.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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