Pantry Pride Inc. won the battle for control of Revlon Inc. yesterday after the Delaware Supreme Court took away Revlon's chief takeover defense against Pantry Pride.
In a major ruling that also may limit the ability of other corporations to protect themselves from a hostile bid, the court limited the ability of directors to use an antitakeover technique know as a "lock-up" agreement under certain circumstances.
In the case decided yesterday, Revlon had agreed to be acquired by the New York investment firm of Forstmann Little & Co. after receiving a hostile takeover bid from Pantry Pride. To ensure that Forstmann Little would be the winning suitor and to discourage other bids, Revlon granted Forstmann Little options, known as "lock-up agreements," to purchase certain Revlon assets at prices below their market value. The lock-ups were excercisable if anyone besides Forstmann Little acquired 40 percent of Revlon.
Charging that it had not been given a fair chance to bid, Pantry Pride sued Revlon in Delaware, alleging that the company's directors had breached their duty to shareholders by agreeing to be acquired by Forstmann Little for a price below what it was willing to pay. Pantry Pride, a Florida-based operator of retail stores, charged that the lock-up was an illegal device that was not in the best interest of Revlon shareholders.
Last week, the Delaware Chancery Court ruled in Pantry Pride's favor, and yesterday the Delaware Supreme Court affirmed that ruling. The significance of the decision goes beyond this particular takeover fight, because lock-ups have been used frequently in merger agreements.
The decision in Delaware yesterday is part of an evolving body of case law that recognizes that shareholders and directors often have divergent interests. The Delaware Court increasingly has intervened in cases where it appears that directors of target companies have failed in their duty to protect shareholders.
Revlon, signaling defeat yesterday after a long and hard-fought takeover battle, said its directors and top management were tendering their shares to Pantry Pride. Pantry Pride's tender offer, which was scheduled to expire at midnight last night but could be extended, offers Revlon stockholders $58 a share. Forstmann Little was offering $57.25 a share.
"We are both surprised and dismayed," said merger expert Arthur Fleischer Jr., an attorney with Fried, Frank, Shriver, Harris and Jacobson, who represented Forstmann Little. "It has these underlying overtones of a general review by the courts of defensive tactics by target companies' boards of directors."
Fleischer said the full impact of the decision will not be known until the Delaware Supreme Court issues a written opinion. However, he said the Chancery Court ruling indicates a desire to limit the use of lock-ups under certain circumstances.
The court's decision is seen by some as a further erosion of the business-judgment rule. Over the years, that legal concept has limited the role of the courts in overruling business decisions made prudently by directors.
Sources familiar with the Delaware ruling yesterday said one of the critical elements in the case was the use of lock-ups to prevent Pantry Pride from bidding.The lower court said that, once Revlon directors decided to sell the company, they had a duty to shareholders to maximize value. However, sources said, by granting lock-ups to Forstmann Little, which had agreed to pay $57.25 a share, and by blocking Pantry Pride's efforts to pay 75 cents a share more, the Revlon directors did not fulfill their duty to protect shareholders.
The lower court did not agree with Revlon's assertion that it had the right to take these steps because Pantry Pride's financing for the multibillion-dollar deal was shaky. Sources said, the ruling sets a new standard for corporate directors of takeover targets. As a result, directors may have to pay more attention to maximizing value for shareholders rather than taking steps which guarantee that the suitor of their choosing wins the takeover battle.
Sources familiar with takeover defenses said the ruling does not mean that lock-ups no longer can be used. However, it could mean that directors granting lock-ups will have to prove that they also are taking steps to maximize shareholder value.
This ruling could have a major impact on a case pending in federal court in New York, where Hanson Trust PLC is suing SCM Corp. After Hanson launched a hostile takeover bid for SCM, SCM agreed to be acquired by Merrill Lynch. To ensure that Merrill would be the winning suitor and to discourage Hanson, SCM granted lock-ups to Merrill Lynch, even though Hanson is offering SCM shareholders a higher price. That case is expected to resume on Monday and the parties have agreed not to take any action before they meet in court.
Revlon stock rose 5/8 to 57 7/8 yesterday, while Pantry Pride rose 3/4 to 8 1/4.