Revlon, Inc. v. Macandrews & Forbes Holdings, Inc.

506 A.2d 173 (1986)

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Nature of the Case

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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 lockup, 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.