Revlon Rule

Most of us probably don’t think about Revlon too often unless we’re in the market for some new nail polish or a crimping iron. But, back in 1985, Revlon, Inc. changed the face of hostile business takeovers forever, and not just by putting a bunch of makeup on it.

Back in ’85, a company called MacAndrews and Forbes Holding, Inc. (a.k.a. Pantry Pride) wanted to take over Revlon. There was a bunch of drama, but what basically happened was this: Pantry Pride tried to perform a hostile takeover. Revlon attempted to negotiate a better share repurchase plan for the shareholders. While they were negotiating with Pantry Pride, they were also discussing a friendlier takeover by another company.

Pantry Pride caught wind of this and got so annoyed that they decided to sue. The Delaware Supreme Court ruled that, in cases of an imminent takeover, the board of directors’ primary responsibility is to the shareholders, not to themselves or the ongoing operations of the company. In other words, they should’ve taken the sweet repurchase deal Pantry Pride offered, and never should’ve started talking with that other company behind their back.

This is what’s known as the “Revlon rule,” and it was a big change in legal precedent. Before this case, it wasn’t unusual for a board of directors to continue to act in the best interests of the company, even in the face of a hostile takeover and to the detriment of the shareholders. This case said acting in the interests of the company is good…right up to the minute that hostile takeover becomes imminent. Once that happens, it’s time to switch gears and focus on getting the shareholders as good of a deal as they possibly can.