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.

Related or Semi-related Video

Finance: What is a poison pill?4 Views

00:00

Finance allah shmoop what is a poison pill O romeo

00:08

romeo Wherefore out the ac Well if you can't have

00:12

me nobody can have me pill lug dead dead alright

00:17

that's poison pill allah romeo and juliet and performed by

00:20

your friends here and the corporate version Well it isn't

00:23

all that different In fact there are really two flavors

00:25

of poison pill flintstones chewable lt's called flip ins which

00:29

allow current shareholders to buy a ton more shares at

00:33

a big discount toe where their shares are currently trading

00:36

flippen like if the shares are at forty bucks each

00:39

current shareholder than gets allowed to buy five shares for

00:42

ten bucks each for each share that they currently own

00:45

and have owned for the last in a year About

00:48

that would be a flipping well this flip in process

00:51

dilutes the company dramatically making it harder for an outside

00:55

takeover soldier to come in and you know just buy

00:57

the company that's a flip in the non chewable flintstone

01:01

flavor that you have to actually swallow is called ah

01:03

flip over which comes is a mandate from the board

01:07

allowing current shareholders to buy the shares of the acquirer

01:11

After the merger at a big discount it basically destroys

01:14

enormous value in the combined company making It tastes like

01:17

a bitter moth to ah hungry bat so you know

01:21

he spits it out The basic idea in these poison

01:23

pill defense strategies is to deal with hostile takeovers And

01:28

a lot of those came during the junk bond era

01:30

in the nineteen eighties when cheap high risk capital was

01:33

liquid Lee easily available almost anywhere and companies felt vulnerable

01:39

to short term quick buck wall street sharpies who looked

01:42

great in a dark suit and usually had awesome hair

01:45

So yeah people for details carefully watch wall street the

01:48

first one the good one the one with michael douglas

01:51

when he still had hair and what you don't really 00:01:54.212 --> [endTime] hear there is he said Shmoop is good yeah

Up Next

Finance: What is a Corporate Raider?
37 Views

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...

Finance: What is a Pac Man Defense?
21 Views

A Pac-Man defense is a strategy for defending against a hostile takeover. Or...against unwelcome houseghosts.

Find other enlightening terms in Shmoop Finance Genius Bar(f)