The Revlon Divergence: Evolution of Judicial Review of Merger Litigation

In the United States, a significant majority of business entities incorporate in Delaware. That state’s law, therefore, applies in a great deal of litigation attacking actions taken by corporate directors and officers. For over 30 years, stockholder lawsuits challenging mergers have predominantly been governed by the principles formulated in the seminal Revlon decision(1) issued by the Delaware Supreme Court in 1986, which held that boards of directors engaging in a change-in-control transaction have a fiduciary obligation to seek the highest value reasonably available. A series of recent decisions by the Delaware courts, however, caused three significant alterations to judicial review of merger litigation. In a recently published article, I conduct a detailed analysis of the cumulative effects of those changes, which are dramatic.

First, the Delaware courts have limited the availability of preliminary injunctions in merger-challenge cases. In general, the courts will not enjoin a transaction merely because of a poor sales process. Instead, seemingly all but the most flawed deals will go to the stockholders for a vote. Second, in the case of Corwin(2), the Delaware Supreme Court held that transactions approved in an uncoerced vote by fully informed and disinterested stockholders are considered cleansed of fiduciary wrongdoing and any claims relating to the transaction will be reviewed under the business judgment rule. Subsequent cases have clarified that, if all of Corwin’s prerequisites are satisfied, the appropriate standard of review is waste. This is a nearly impossible pleading burden for a merger as it involves showing that ‘no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.’(3) Before Corwin, a breach of fiduciary duty claim against the board of directors relating to a merger could be pursued post-closing. Now, if Corwin applies, such claims are not viable. A large amount of case law already exists concerning when a stockholder vote is deemed fully informed. Considerably less case law addresses Corwin’s other prongs, and they remain areas of ongoing judicial development. My article provides a comprehensive survey of the relevant law on these issues and also examines how the courts may interpret Corwin’s other requirements.

Together, the first two developments have cabined the universe of litigation claims that can be asserted by stockholders seeking to challenge a merger. The third strand of development cuts in the other direction and concerns cases that apply a more stringent version of Revlon when there are undisclosed conflicts of interest. In my paper, I refer to this variety of scrutiny as Revlon-Plus review. So far, only a small number of cases address this issue, but those decisions consistently hold that fiduciaries and corporate advisors that fail to disclose potential conflicts of interest to the board of directors will face intense scrutiny of their decisions in any subsequent litigation.

The interplay between, in particular, Corwin and Revlon-Plus remains uncertain. It is clear, however, that the battle lines in merger litigation have been redrawn significantly through these recent developments. Whereas previously the same level of scrutiny applied to all lawsuits challenging mergers approved by independent boards, the contemporary doctrine has diverged into a weak form of review that applies to most cases and a strong version of Revlon that affects, in an outcome-determinative way, a small number of cases. The ‘classic’ version of Revlon exists now only as a residual category capturing misfit cases that do not satisfy the requirements of the new regime. This doctrinal shift empowers stockholders while placing conflicted fiduciaries and corporate advisors in the plaintiffs’ crosshairs.

Brandon Mordue is a legal practitioner based in Cleveland, Ohio and a guest contributor to the Oxford Business Law Blog.

(1) Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc, 506 A 2d 173 (Del. 1986).

(2) Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015).

(3) In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 748–49 (Del. Ch. 2005) (citations omitted), aff’d sub nom. Brehm v. Eisner, 906 A.2d 27 (Del. 2006).