Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.

Pantry Pride made a hostile tender offer for Revlon at $45 per share, which the board considered grossly inadequate. In response to the tender offer, Revlon adopted a poison pill plan and made a self-tender offer for over 33% of its outstanding shares. Under the poison pill plan, shareholders were able to exchange shares for a $65 principal note at 12%. Pantry Pride increased its offer for Revlon and Revlon responded by entering into a leveraged buyout with Forstmann Little, which the court held was a valid exercise of business judgment. However, as part of the leveraged buyout, Revlon granted Forstmann a lock-up option to purchase two of Revlon's divisions. The lock-up option prevented other firms from bidding on the company's assets.

A lock-up, or no-shop provision, while not per se illegal, is impermissible under the Unocal standards when a board's primary duty becomes that of an auctioneer responsible for selling the company to the highest bidder. The court held that "Favoritism for a white knight to the total exclusion of a hostile bidder might be justifiable when the latter's offer adversely affects shareholder interests, but when bidders make relatively similar offers, or dissolution of the company becomes inevitable, the directors cannot fulfill their enhanced Unocal duties by playing favorites with the contending factions. Market forces must be allowed to operate freely to bring the target's shareholders the best price available for their equity."

Fundamental Change Transactions | Hostile Offers