In Governance, Revlon Means a Lot More Than Personal Care Products
Consideration of a major acquisition or a sale of a company is one of the most complex situations that directors can find themselves in. Things can move fast, and there are various standards to consider from business judgment to entire fairness to Revlon.
When contemplating the sale of a company, it is prudent to have an investment bank and law firm advising you. It is also important to be aware of the Revlon Standard. And, when a decision has been made to sell the company and the selling shareholders have no meaningful, ongoing interest in a newly combined company, the board must adhere to “Revlon” and make a reasonable effort to obtain the highest immediate value—as opposed to the ability to consider long-term value under the business judgment rule.
The Revlon Standard emerged in the context of the purchase of Revlon by Ronald Perelman, then the CEO of Pantry Pride and a budding activist. This ultimately five-times-married and a one-time billionaire was ironically reportedly liquidating assets in 2022 in the wake of Revlon’s bankruptcy reorganization where he lost his majority stake in the company.
But back in 1985, the Revlon board did not want him as the company’s new owner, fearing his plan to break up the company, and rejected his initial offer of as much as $45 per share (which was approximately the stock price at the time). Under pressure from Perelman, the Revlon board started to search for a friendly suitor.
It began discussions with the private equity firm Forstmann Little for a deal at $56 per share, and with the advice of probably the most prominent M&A lawyer since the advent of contemporary deals, Marty Lipton—cofounder of Wachtell Lipton, who continues to practice law and be active today—Revlon adopted two antitakeover steps to try to prevent Perelman’s unwanted efforts: it planned to repurchase 5 million shares (of nearly 30 million outstanding shares), and it put in place a “poison pill” allowing shareholders to exchange each share of Revlon for a note in the principal amount of $65 with a 12 percent interest rate and a one-year maturity if anyone acquired 20 percent or more of Revlon’s shares.
The “poison pill” is said to have been invented by Lipton in the early 1980s as a defense against the growing issue of hostile takeovers by unwanted outsiders. With it, if a hostile bidder acquires a designated percentage of a company’s shares, shareholders gain the right to either exchange their shares for a premium or buy shares at a discount, both of which drive up the price for an unfriendly suitor.
Poison pills hypothetically make companies unable to be acquired at an economically rational price. They are often effective as threats to prevent premature actions, but even at the height of their use, they were rarely triggered; typically, takeovers at what is seen to be fair value are usually agreed upon.
The Revlon board ultimately settled on a deal with Forstmann Little at a price only slightly greater than Perelman’s bid and worth less when considering the time value of money, as Perelman was offering to make a tender offer that would close promptly, whereas the LBO would require financing, a shareholder meeting, and a vote that would take more time as well as other steps and protections such as a “no shop” or inability to contact or even respond to any interested party.
This meant that value would likely not be maximized. The Delaware Supreme Court stopped the sale to Forstmann Little, and Perelman acquired Revlon for $58 per share. “The decision is important,” wrote the New York Times just after the ruling, “because it established that while it may be perfectly legal to set up certain roadblocks, such as poison pills, to give directors more time to bargain, it appears to be illegal for directors to construct too many roadblocks and to chill bidding rather than make bidding possible.”
Most board actions are evaluated under the business judgment that gives boards wide latitude as long as they are sensitive to the duties of care and loyalty described that I wrote about here and seek to maximize long-term shareholder value. But when a sale of the company is imminent and the shareholders will not have a tomorrow, Revlon reminds us that directors must seek to maximize immediate value.
I write about this and more in my book, On Board: The Modern Playbook for Corporate Governance – How to Oversee Companies with Care and Loyalty, will be published by Radius on June 24. I’d be delighted if you would preorder it on Amazon here or contact me for bulk purchase information at jff@jonathanffoster.com
.