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.
Related or Semi-related Video
Finance: What is a Pac Man Defense?21 Views
Finance a la shmoop what is a pacman defense?
[Pacman eating] yeah well wacka wacka to you too...Hostile takeovers are rare in real life not so
rare in pac-man but when they do happen there exists a whole cadre of strategies
behind defending them at least from the company's perspective being taken over
there and pac-man defense is inarguably the best named strategy of all of
them in essence what happens when we'll say an angry competitor let's call him
blinky Inc tries to buy an angrier competitor let's call them inky inc.
well blinky would be buying shares of inky in the open marketplace filing to [Blinky and inky appear]
go past 15% ownership and eventually own enough shares to elect its own Board of
Directors and make a takeover happen well in a Pac Man defense as blinky is
snarfing up shares of inky, inky buys shares of blinky sort of turning the
tables you know like this and while you're gobbling up that competition and [Pacman gobbling competition]
don't forget to eat a bunch of cherries or a strawberry every once in a while
because you know you still need your fruits and veggies
Up Next
What is a Corporate Raider? A corporate raider is a predatory investor who purchases a significant bloc of stock or debt in a public company in ord...
There are two types of "poison pills" - flip-ins, which allow shareholders to buy at a discount, and flip-overs, which allow them to buy shares aft...