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Indiana Law Journal

Document Type

Article

Publication Date

Winter 2021

Publication Citation

96 Indiana Law Journal 429 (2021)

Abstract

Under the Revlon doctrine, courts are to apply a higher level of scrutiny in certain takeover situations in an attempt to control potential conflicts of interest that might prejudice target shareholders. However, the doctrine has always had sufficient “play in the joints” that one might reasonably wonder whether it has much of an effect in practice on short-term shareholder returns. Additionally, in recent years, the trend in Delaware’s Revlon jurisprudence seems to be to defer to the target board as long as there are no glaring conflicts of interest. Taken together, these facts raise concern over the continued relevance of the Revlon doctrine.

It turns out this concern is justified. In this Article, I present evidence that Revlon has a significant effect on the type of sales process that target boards adopt—when in Revlon mode, they pursue active market checks with greater frequency, engage with more potential bidders and receive more bids. However, this difference in process has no discernible effect on shareholder returns, whether measured as abnormal market returns upon deal announcement or deal premia. And yet, there is still evidence, in this study and others, that conflicts of interest abound.

In other words, the modern incarnation of Revlon no long appears up to the task for which it was intended. Consequently, I argue that courts should reorient the doctrine around a robust review of the types of conflicts of interest that might actually harm target shareholders. Additionally, if as the Delaware Supreme Court has indicated, target shareholders might ratify the types of problems Revlon was intended to address through the mandatory statutory merger vote requirement, it will be necessary to adopt additional securities disclosure rules to provide shareholders with sufficient information to make an informed ratification decision.

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