In Does Revlon Matter: An Empirical and Theoretical Study, available here, we empirically examine the impact of the seminal case of Revlon v. MacAndrews & Forbes Holdings, 506 A.2d 173 (Del. 1986), on the takeover process. Our study employs a novel M&A dataset of 1,913 transactions from 2003-2017 and contains details such as the number of bidding rounds, timing of bids, bid premiums, and indicators for single versus multiple bidding parties.
We find, essentially, that Revlon matters, at least for Delaware firms. For Delaware incorporated firms, Revlon deals result in more protracted negotiations, more rounds of bidding, more bidders, and higher deal premiums. However, these results do not hold for states outside of Delaware that have also adopted Revlon. When we exclude Delaware-incorporated firms, we find no differences in any key variables for Revlon and non-Revlon deals. Revlon matters, but it matters only in Delaware.
Our results do not appear to be driven by other transaction-specific characteristics. For example, although we find, consistent with other studies, that private equity buyers pay significantly lower premiums (up to 8% lower on average), our other results remain qualitatively similar, indicating that private equity transactions do not drive our results. Nor are our results driven by the unique characteristics of “mergers of equals” (MOEs), whereby the parties deliberately do not seek out other bidders or focus on premium because the transaction value is in the strategic combination of the companies. In a series of robustness tests, we find significant bidding in non-Revlon transactions, a fact inconsistent with the idea that MOEs drive our results.
So, given our findings that Revlon matters, what can we say about how it matters? A clue is offered by the different results between states adopting Revlon. Although several states have adopted the doctrine, we find that it has an effect in Delaware alone. We explain this finding by reference to the more active and focused Delaware judiciary, which has a core competency in M&A transactions. Delaware courts have thus been more willing to substantively review and intervene in transactions which violate Revlon. This may be true even today, where Delaware courts intervene considerably less often than they did in the 1980s. In other states, the threat of judicial intervention is less credible, and Revlon therefore is less meaningful.
Seeing Revlon as a flexible monitoring standard suggests a course for its future evolution. We follow corporate law theory in justifying judicial intervention in M&A as a constraint on managerial rent-seeking at a time when opportunism is relatively unconstrained by other norms. Judicial intervention may thus be less necessary when other constraints retain their force. But when, as in final period sale-of-the-company transactions, alternative constraints weaken, the case for judicial intervention strengthens.
These considerations provide insight into the debate surrounding two recent Delaware decisions that seem to substantially restrict the scope of Revlon-duties. Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), eliminated breach of fiduciary duty claims if full disclosure was made prior to the shareholder vote. Read together with C&J Energy Services v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, 107 A.3d 1049 (Del. 2014), which purported to limit the ability of Delaware courts to grant injunctions under Revlon, Corwin would seem to confine Revlon either to transactions involving materially inadequate disclosure or to transactions in which a third-party bidder seeks an injunction. Yet our results hold even when we control for these cases. We suggest two interpretations for this non-result. First, it may be that in spite of the ways in which Corwin and C&J change the law, M&A practitioners continue to advise clients based on prior norms and practices. Alternatively, it may be that notwithstanding Corwin and C&J, Delaware courts have found ample space for judicial review albeit through different mechanisms.
Ultimately, our results indicate that while Revlon matters, it matters in an ecosystem where there is the potential for judicial review and intervention by a competent judiciary. The lesson of Revlon may thus be that a standard alone is insufficient – it is the implementation and oversight which counts. As for the criticism of C&J and Corwin, such criticism may be overstated to the extent that Revlon’s core precept – access for judicial intervention into substantively biased transactions – is preserved.