## Facts

- A hostile bidder, acting through a subsidiary, sought to acquire Revlon through a negotiated deal or tender offer; Revlon’s board rejected the initial approach.
- Revlon adopted takeover defenses, including a poison pill and a leveraged share repurchase financed with notes.
- As bidding escalated, Revlon solicited a competing bidder to serve as a “white knight” and entered negotiations for an acquisition at a stated per-share price, with indications the bidder might increase its offer.
- Revlon ultimately agreed to a transaction with the competing bidder that included (1) a lock-up option for key business divisions if the bidder were outbid, (2) an exclusivity/no-shop provision, and (3) a $25 million cancellation fee.
- The board justified preferring the competing bidder in part by citing concerns for other constituencies, including noteholders, and by expressing concerns about the hostile bidder’s financing and potential post-transaction breakup.
- The Delaware Court of Chancery preliminarily enjoined the lock-up, no-shop, and cancellation fee, finding they effectively terminated an active auction and were impermissible in the circumstances.
- Revlon, its directors, and the favored bidder appealed; the Delaware Supreme Court reviewed the preliminary injunction on an expedited basis.

## Issues

1. When a sale or breakup of the company becomes inevitable, what fiduciary obligations govern directors’ conduct in responding to competing bids?
2. Whether lock-up options, no-shop provisions, and termination fees are permissible when adopted during an active bidding contest for corporate control.
3. Whether directors may prefer non-stockholder constituencies over stockholders once the company is in a sale-of-control process.

## Decision

- The Delaware Supreme Court affirmed the preliminary injunction.
- Once the sale or breakup of the company became inevitable, the board’s role shifted from defending the corporation to obtaining the best available price for stockholders.
- The lock-up option, no-shop provision, and cancellation fee were invalid on these facts because they ended or materially impeded further bidding and favored one bidder despite ongoing competition.
- The board could not justify deal protections and bidder preference primarily to protect noteholders when the company was in a sale process requiring focus on stockholder value.

## Legal Principles

- When a company enters a transaction or process in which sale or breakup becomes inevitable, directors’ duties narrow to maximizing immediate stockholder value and securing the highest price reasonably attainable.
- Defensive measures are subject to enhanced scrutiny; directors must show a proper corporate purpose and reasonable relation between the response and the threat, consistent with duties of care, loyalty, and independence.
- Lock-ups, exclusivity provisions, and termination fees are not per se unlawful, but are improper when they preclude or chill higher bids and terminate an active auction without a stockholder-value justification.
- Consideration of other constituencies may be permissible in responding to takeover threats, but in a sale context any such consideration must be rationally related to stockholder benefit and cannot displace the obligation to seek the best price.

## Conclusion

The court held that once Revlon was effectively for sale, the directors were required to act as auctioneers for stockholders and could not deploy deal protections that foreclosed higher bids or prefer a bidder to protect non-stockholder interests; the injunction against the lock-up, no-shop, and cancellation fee was therefore affirmed.


Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)