September 27, 2022

Do Revlon Duties Have an Expiration Date?

There’s been an almost non-stop flow of opinions from Chancellor McCormick relating to discovery disputes in Twitter v. Musk.  If you’re a litigator, I’m sure those will be right up your alley and I’d refer you to The Chancery Daily’s Twitter feed, which is doing an awesome job providing blow-by-blow coverage of the lawsuit. But as a transactional lawyer, my eyes kind of glaze over when it comes to this kind of thing. On the other hand, a few weeks ago, Prof. Rob Anderson raised a hypothetical question involving the Twitter deal that I thought was pretty interesting:

In the Musk-Twitter transaction, one of the “conditions” of specific performance is that Twitter must have “confirmed” as shown below. Assuming that is intended to be legally binding, it’s an unconditional promise to close, with no fiduciary outs, in a Revlon mode deal? Suppose that Twitter “confirms” this and a topping bid for $64.20 materializes the next day? What happens?

In response, I pointed out that the merger agreement would tie Twitter’s hands pretty tightly to Musk’s deal in this scenario.  Why? Because Twitter’s stockholders have already approved that deal, and under Section 6.5 of the merger agreement, Twitter would no longer have the ability to discuss a potential superior proposal or to terminate the deal & accept one if it emerged.  Specifically, Section 6.5(c) and (d) provide that Twitter’s ability to do either of those things ends upon “receipt of the Company Stockholder Approval.”

That may be what the merger agreement says, but is that consistent with a board’s obligations under Revlon, which requires the board to maximize immediate stockholder value in a sale transaction?  Wouldn’t the board be breaching that obligation if it couldn’t accept that $64.20 offer – even it emerged at the very last minute?

The answer to that question appears to be “no,” because Delaware precedent indicates that a target board doesn’t have to retain the ability to consider alternative transactions after the deal’s been approved by target stockholders in order to satisfy Revlon. In that regard, a 2009 ABA Deal Points article on Delaware’s “sign & consent” procedure notes that this procedure is premised on the conclusion that “it generally is acceptable for any “outs” in a merger agreement to expire upon obtaining the stockholder vote, such that the board’s fiduciary duties in respect of alternative transactions are discharged at such point.”

The article cites the Chancery Court’s 1991 decision in In re Mobile Communications Corp. of Am. Inc., (Del. Ch.; 1/91), which concluded that the target had no contractual obligation, following stockholder approval, to consider alternative transactions, as support for this proposition, although that conclusion is also implicit in the Optima and Openlane decisions upholding sign & consent.

John Jenkins