Revlon Rule - Explained
What is the Revlon Rule?
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Table of ContentsRevlon Rule DefinitionA Little More on What is the Revlon RuleThumbing a Nose at the Revlon RuleAcademic Research
What is the Revlon Rule?
When a hostile takeover is about to occur and is inevitable, a company's board of directors makes a satisfactory effort to get the company the highest possible value they can get. This is known as the Revlon Rule. This rule is characterized by a little explanation of a board of directors' fiduciary duties. It is generally restricted to the protection of a company from external imminent danger. All conditions being normal, it is not demanded of a director to make negotiations with an enemy who bids with hostility. Under the U.S. legal system, a fiduciary duty is a legal term that describes the relationship between two parties that necessitates one to act solely in the interest of the other.
How Does the Revlon Rule Work?
The case between Revlon, Inc. and MacAndrews & Forbes Holdings, Inc., which was tried before the Delaware Supreme Court resulted in the Revlon Rule. The court generally didn't draw its merit of a merger except the plaintiff could prove the failure of the board of directors to act in due care of the company. This rule has been used by judges to treat cases involving a company's sale since 1985. An important legal precedent that moved the board of directors' role away from preserving the company to increase the company's short-term shareholders' financial gains was set by the Revlon Rule. These Revlon duties resulted in a thorough inspection on the decisions made by a board.
Thumbing a Nose at the Revlon Rule
With the backing off Mr. Buffet, Heinz Company and Kraft Foods Group, Inc. agreed on a definitive merger agreement in March 2015. A no-shop provision was listed in this agreement which successfully prevented the board of directors of Kraft Foods Group, Inc. from seeking a better deal for Kraft shareholders under the spirit of the Revlon Rule. The reason why the board of directors decided to turn a blind eye on the rule has been unclear. It is unknown whether it was an independent decision or the board was daunted and signed the no-shop clause. The Buffet-backed group got the company on its own terms. This resulted in the saying "What Warren Buffett wants Warren Buffett gets".
- What are the major causes of corporate governance issues?
- What are the access to information issues?
- What are decision-making structure issues?
- What are the power struggle or competition issues?
- What are hostile takeovers and defenses to hostile takeovers?
- Revlon Rule
- What are benefit-alignment issues?