Corporate Governance

Of Pilgrims and Puritans and the Role of Delaware Courts: In re Revlon (The Courageous Board)

By J Robert Brown Jr.

The criticism of plaintiffs' counsel can also be juxtaposed against VC Laster's treatment of management.  From all appearances, the tender offer submitted to shareholders was a bad deal.  As the opinion describes:

• This was a case in which the financial advisor to the Special Committee refused to render a fairness opinion on the same Series A Preferred that, with one change, would be offered in the Exchange Offer. This was a case where the Special Committee declined to recommend the Original Merger. This was a case where the Schedule TO indicated that counsel to MacAndrews & Forbes and counsel to the Special Committee then cooked up the Exchange Offer as an alternative.

Moreover, when matters got to the entire board, it wasn't much  better.

• It was now up to the full Board to consider the Exchange Offer. The Outside Directors decided they would like Gibson Dunn to continue representing them. They decided that Barclays' assistance was no longer needed. No other financial advisor was retained. According to the Schedule TO, the Outside Directors believed they could not obtain a fairness opinion for the Exchange Offer.

Nonetheless, the board authorized the transaction, albeit with some modifications.  In other words, directors with fiduciary obligations to shareholders approved the transaction. In submitting the matter to shareholders, the board declined to make any recommendation on whether or not shareholders should tender their shares. 

One might expect the behavior of the board in submitting the matter to shareholders despite the belief on the unavailability of a fairness opinion, would draw similar criticism.  After all, the opinion is replete with criticism of plaintiffs counsel for not adequately representing the interests of shareholders.   This board looks to suffer from some of the same concerns. 

Yet it was quite the reverse.  VC laster not only doesn't criticize management, he describes their actions in heroic terms.  As the opinion notes:  "the Revlon Board courageously declined to make a recommendation to stockholders as to whether to tender their shares.?"

Courage would have been stopping the exchange offer.  The refusal to make a recommendation likely arose less out of courage and more out of a far more practical concern:  The desire to avoid liability.  As Virginia Bankshares teaches, an opinion expressed by directors on the fairness of a transaction can constitute securities fraud if lacking in a reasonable basis.  Had the directors recommended the exchange offer, given the absence of a fairness opinion, they may have found themselves defending a fraud suit in federal court. 

In short, plaintiffs counsel are Pilgrims and repeat filers.  Management was courageous. 

Primary materials are, as usual, posted on the DU Corporate Governance website.

Full post as published by The Race to the Bottom on May 03, 2010 (boomark / email).