What Are Revlon Duties and How Do They Impact Corporate Sales?

Revlon duties are a critical aspect of corporate governance during the sale of a company. These fiduciary responsibilities require board members to prioritize shareholders’ interests, particularly in maximizing shareholder value during a sale. Understanding these duties is essential for board members and investors navigating sales or mergers. Beyond compliance, Revlon duties shape decision-making and impact corporate sales strategies. When companies engage with financial advisors and explore offers, adherence to these duties ensures the focus remains on securing the best outcome for shareholders.

Triggering Circumstances for Revlon Duties

Revlon duties are activated in specific scenarios that fundamentally alter a company’s trajectory, particularly when a change in control is imminent. Common triggers include sales, mergers, or takeover bids. The Delaware Supreme Court’s decision in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. established that when a company is for sale, the board’s role shifts from preserving the entity to maximizing the sale price for shareholders. This precedent highlights the importance of recognizing when these duties are triggered, as it directly shapes the board’s strategic decisions.

These duties are not limited to outright sales. They may also apply in transactions where a change of control occurs, such as when a single entity gains a controlling interest. For instance, in a merger where the target company’s shareholders will hold a minority stake in the combined entity, Revlon duties may arise since shareholders’ influence diminishes, requiring the board to secure the best financial outcome at the point of sale.

Determining when Revlon duties are triggered requires a nuanced understanding of the transaction’s structure and its impact on shareholder control. Legal advisors play a critical role in guiding boards through this assessment, ensuring compliance and mitigating risks of litigation.

Board Accountability in a Sale

The board of directors bears significant responsibility during a company’s sale, as their decisions directly affect shareholder outcomes. Board members must exercise their fiduciary duties diligently, aligning actions with shareholders’ best interests. This requires a thorough evaluation of the company’s financial health, market conditions, and potential buyers, while maintaining transparency and ethical standards.

A key responsibility is conducting due diligence. This includes examining financial statements, assets, liabilities, and any potential legal or regulatory issues. The board must also evaluate the strategic fit of potential buyers and how their offers align with shareholder value. Informed decision-making is central to fulfilling fiduciary obligations.

Negotiations are another critical aspect of board accountability. Board members must ensure the terms of the sale, including price, payment terms, and contingencies, are favorable to shareholders. Tax implications must also be considered, as they affect net proceeds. These efforts collectively demonstrate the board’s commitment to its fiduciary responsibilities.

Evaluating Multiple Offers

When faced with multiple offers, the board must assess each proposal thoroughly, as they can vary significantly in financial and strategic implications. Monetary value is important, but terms such as restrictive covenants or earn-out provisions must also be evaluated. Boards should analyze offers using financial metrics like net present value (NPV), internal rate of return (IRR), and EBITDA multiples to understand their full impact.

Regulatory considerations are equally important. Compliance with antitrust laws and other statutory requirements, such as the Hart-Scott-Rodino Antitrust Improvements Act, is crucial to avoid penalties or delays. Boards must ensure any proposed transaction aligns with these regulations to safeguard the sale’s success.

Financial Advisors’ Role

Financial advisors play a key role in guiding boards through the complexities of corporate sales. Their expertise includes financial analyses, market assessments, and strategic recommendations, all of which are essential for optimizing shareholder outcomes. Advisors evaluate potential synergies and risks using tools like discounted cash flow (DCF) and comparative company analysis to provide actionable insights.

Advisors also help boards navigate market volatility and economic uncertainty by leveraging their knowledge of market trends and investor sentiment. Their networks can uncover opportunities that might otherwise remain unseen, further enhancing the board’s ability to secure the best possible outcome.

Potential Litigation for Noncompliance

Failure to comply with Revlon duties exposes boards to significant legal risks, including shareholder lawsuits. Shareholders may allege breaches of fiduciary duty if the sale process appears flawed or if the final transaction undervalues the company. Courts scrutinize whether boards acted in good faith, were informed, and exercised due care. The Delaware Chancery Court frequently hears cases involving alleged failures to fulfill Revlon obligations.

Litigation often arises when boards favor certain buyers without adequately considering competing offers. For example, accepting a lower bid due to personal relationships or conflicts of interest can lead to claims of failing to maximize value. Courts examine whether boards conducted a fair process, including engaging independent advisors and soliciting multiple bids. A robust “market check” often serves as a defense against such claims.

Another common issue is inadequate disclosure to shareholders. Boards must provide all material information about the sale, including financial projections, valuation methodologies, and potential conflicts of interest. Omitting critical details, such as financial advisors’ fee structures contingent on deal completion, can lead to allegations of bias and breach of duty. To mitigate these risks, boards should ensure proxy statements and disclosures are comprehensive and accurate.