When a Delaware company board pursues a transaction that would result in a change in corporate control, Delaware law subjects the board to an enhanced duty to maximize short-term value for the corporation’s shareholders. This duty is called a Revlon duty because it emerged from a series of cases beginning with Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.1 A board that fails to fulfill this duty faces remedies ranging from court-ordered conflict disclosure to an injunction against the proposed transaction. Despite the disruptive potential of imposing Revlon duties, the Delaware Supreme Court has not exhaustively categorized transactions triggering Revlon. Recently, in C&J Energy Services, Inc. v. City of Miami General Employees’ & Sanitation Employees’ Retirement Trust,2 the Delaware Supreme Court determined that a corporate board had met its duties under Revlon. The C&J court reached its decision assuming, without deciding, that Revlon applied. However, the Delaware Supreme Court could have looked to the ample protections afforded C&J shareholders and determined that the transaction did not trigger Revlon duties.
C&J is a publicly listed, Delaware-incorporated oilfield services provider.3 In 2013, C&J began looking for acquisitions; by early 2014, Nabors, a company with oilfield services business, appeared to be a viable target.4 C&J’s management perceived strategic value in a combination since C&J could put Nabors’s services assets to work more effectively than Nabors.5 The transaction6 could create additional value through a lower corporate tax rate if structured so that Nabors would become the parent company.7 C&J would merge with a new Nabors subsidiary, aptly named “C&J,” and trade under C&J’s previous stock ticker.8 Old C&J shares would be exchanged for new ones such that the Nabors corporation would own 53% of the resulting company and prior C&J shareholders the remaining 47%.9
The transaction agreement contained several provisions that kept certain kinds of control in the hands of C&J’s old shareholders.10 First, old C&J stockholders could choose four of the seven initial board members.11 Second, corporate action normally requiring a majority shareholder vote would require a two-thirds vote for five years after the transaction.12 Third, for the same five-year period, Nabors would be prohibited from increasing its stake in C&J.13 Finally, if significant assets or the whole company were sold, all shareholders would be entitled to receive the same pro rata consideration.14 C&J’s board unanimously approved the transaction on June 24, 2014.15
After the transaction’s announcement, C&J shareholders sued the C&J corporation, its board, and Nabors in the Delaware Court of Chancery alleging breaches of fiduciary duty and seeking an injunction halting the completion of the proposed transaction.16 In a bench opinion, Vice Chancellor Noble enjoined the merger for thirty days.17 While the Vice Chancellor made no factual findings, he determined that the plaintiffs had a reasonable probability of success on their claim that C&J’s board breached its fiduciary duty of care by arranging the transaction without fulfilling its Revlon duties.18 The opinion identified as “the major problem” the fact that C&J’s board did not approach the transaction as a sale of the whole company.19 Having determined, albeit without providing explicit reasoning, that the transaction triggered Revlon, the Vice Chancellor explained that the board’s process was insufficient under Revlon’s heightened requirements.20 The Vice Chancellor faulted the board for taking “no steps to sell or shop” C&J beyond its negotiation with Nabors.21 He also found that the arrangement by which members of the old C&J board would hold guaranteed five-year terms on the new C&J board “raise[d] concern.”22 Based on these considerations, the Vice Chancellor found a sufficient likelihood of a breach of the duty of care.23 The court issued a thirty-day injunction ordering the C&J directors to “solicit [buyers] interest[ed]” in C&J.24
The Delaware Supreme Court reversed. Chief Justice Strine, writing for a unanimous court, held that even if Revlon duties applied, C&J’s board acted sufficiently in line with those duties to defeat a preliminary injunction.25 The opinion declined to determine if protections for C&J shareholders in the merger agreement were sufficient to avoid triggering Revlon duties because of the minimally developed record.26 The C&J court found that the Chancery Court had incorrectly applied Revlon to the board’s decisionmaking process. After reiterating that Revlon stands for a board’s duty, when it “engages in a change of control transaction,” to “not take actions inconsistent with achieving the highest immediate value reasonably attainable,”27 the Chief Justice characterized the Chancery opinion as mandating “a pre-signing active solicitation process”28 whenever the board lacked “impeccable knowledge.”29 The Supreme Court noted that no single checklist exists to fulfill Revlon duties30 and, specifically, that the Chancery erred in requiring “impeccable knowledge,” and in considering an active sale process to be the only method of obtaining such knowledge.31 The opinion observed that Revlon requires reasonable, not perfect, decisionmaking, and that the Chancery Court’s other findings suggested that the board acted reasonably.32 Further, the Supreme Court characterized the board as having worked to mitigate the transaction’s potential negative consequences for shareholders.33 Beyond the protection for shareholders once the transaction was completed, the opinion also looked favorably on the merger agreement’s minimal deal protections.34 Finally, the Supreme Court noted that C&J’s stockholders would have the opportunity to vote to accept or reject the transaction.35 In sum, the Supreme Court found that even if the transaction had triggered Revlon duties, the C&J board had fulfilled them. In addition to determining that the Chancery Court’s substantive findings were incorrect, the C&J court criticized the Chancery’s procedural basis for issuing the injunction.36 The Delaware Supreme Court reversed the Chancery Court’s decision based on those procedural faults in addition to its finding that C&J’s board met the duties required of it if Revlon had applied.37
While the C&J court reached its conclusion by assuming that the transaction triggered Revlon duties, it could have reached the same result by analyzing whether Revlon applied at all. Had the court done so, it would have found that the transaction’s protections for minority shareholders distinguished it from a Revlon-triggering change of control. While courts have generally invoked Revlon duties to protect shareholders who are about to become minority shareholders, they have emphasized that Revlon applies only when a transaction threatens shareholders’ valuable benefits of control.38 Because the C&J-Nabors transaction specifically protected C&J shareholders from surrendering these benefits through supermajority voting and provision for pro rata payment in future sales, Revlon duties should not have applied. Thus, because the C&J transaction was not a Revlon-invoking change of control, the C&J board should not have been required to enter Revlon’s “radically altered state”39 that requires boards to abandon their typical long-term focus to instead “act reasonably to maximize short-term value of the corporation for its stockholders.”40
While the precise triggers for Revlon are contested,41 case law indicates that Delaware courts should look at transactions holistically to determine whether soon-to-be minority shareholders are really giving up their benefits of control — that is, if Revlon is triggered — before examining the extent to which a corporate board complied with Revlon’s duties. Revlon itself involved a sale of the whole company; the board’s actions and attendant circumstances made a breakup of the enterprise “inevitable.”42 Later cases elucidated other circumstances triggering Revlon duties,43 but there is no definitive and exhaustive list.
One Revlon-triggering change of control, identified in Paramount Communications Inc. v. QVC Network Inc.,44 is a transaction resulting in a company having a single controlling shareholder when the company was previously broadly held.45 The QVC court’s reasoning identified the soon-to-be minority shareholders’ loss of control and premium for that control as valuable assets requiring protection.46 Revlon duties applied because this was the minority shareholders’ “last chance.”47 The C&J plaintiffs used this part of QVC to argue that Revlon applied.48 The QVC court, however, did not create a per se rule. Instead, it emphasized that Delaware courts should look to the totality of the transaction — not just the appearance of a new majority shareholder — to determine if there is a Revlon-triggering change of control. Before turning to its analysis of what minority shareholders would lose, the QVC court observed that there were no “devices” to protect the minority’s voting power after the merger.49 The opinion reiterated the analytical importance of the absence of such protections in concluding that Revlon applied.50 Delaware courts are infrequently presented with the sorts of protective devices envisioned by QVC,51 so they tend to skip the QVC court’s preliminary inquiry. But when a court is called upon to address whether a transaction triggers Revlon, QVC’s holistic inquiry would provide a better framework than a formalistic inquiry that looks only for a nominal change in control. Such a holistic inquiry not only fits more comfortably with Delaware’s context-sensitive judicial decisionmaking,52 but also better protects shareholders than an overinclusive, formalistic inquiry would.53
One recent Delaware decision indicates how a court can approach novel transactions, like C&J’s, with a holistic analysis, like QVC’s, to determine if Revlon duties apply. The precise facts of In re Smurfit-Stone Container Corporation Shareholder Litigation54 are not comparable to C&J, but the opinion’s style of analysis provides a useful template for approaching first-impression Revlon-trigger questions.55 The Smurfit court began by identifying two bases for evaluation: “relevant judicial precedent” and the transaction’s “economic implications.”56 In analyzing the economic implications, the court reviewed three issues. First, the “no tomorrow” problem: Smurfit’s shareholders had no future opportunities to participate in the company’s gains to the extent they were cashed out.57 Second, the court considered whether the shareholders would be able to obtain a control premium in the future for all of their existing holdings.58 Third, the Vice Chancellor assessed the effect of the transaction on the ability of shareholders to exert themselves in corporate governance.59 By looking at these economic and governance considerations, the Smurfit court correctly reflected the shareholder-protective goals that Revlon serves: boards are compelled to maximize short-term value when some shareholders will give up their valuable benefits of control.60 Smurfit demonstrates that Delaware courts can and do analyze possible Revlon transactions in a holistic fashion to serve these purposes.
If the C&J court had reviewed the C&J–Nabors transaction with a holistic analysis of change of control like that found in QVC and Smurfit, it would have concluded that the transaction did not trigger Revlon. The C&J–Nabors merger agreement contained features best understood as the protective devices to which the QVC court referred because they address that opinion’s governance and voting concerns. Other devices addressed the QVC and Smurfit courts’ economic concerns.
The C&J–Nabors merger agreement contained terms intended to protect old C&J shareholders’ voting power in a manner similar to QVC’s shareholder-protective measures. The devices affected corporate governance: bylaw amendments, stock issuance and repurchase, and the sale of the company would require a two-thirds shareholder vote.61 The devices also constrained Nabors’s ability to change the size of its stake in C&J.62 The minority would be well protected from attempts by third parties to obtain control or significant influence over C&J. Thus, the devices protect an important component of the minority shareholders’ valuable asset: their ability to participate meaningfully in the high-level management of the company.63 Accordingly, the provisions of the transaction itself prevent future loss of control at the hands of Nabors, making the key rationale for imposing Revlon duties inapplicable to the C&J transaction.
The C&J transaction’s future-consideration provision protects another aspect of the soon-to-be minority shareholders’ valuable asset: the control premium. This term prevents old C&J shareholders from losing their control premium by requiring that if the new C&J or “major assets” are sold, every shareholder will receive pro rata consideration of “the same type.”64 Unlike the transaction in Smurfit (which provided no assurance that the soon-to-be minority would share fully in future corporate gains), C&J’s minority stockholders would share equally in the price a party acquiring the company would be willing to pay. This term addresses a primary concern of Revlon head-on: a self-interested board might approve a transaction that restricts current shareholder access to control premia in the future.65 More importantly, the pro rata element prevents Nabors from receiving extra consideration for providing its majority stake to another party.66 The protective devices agreed to as part of the merger, taken together, mean that for five years the minority C&J shareholders would be in much the same position they occupied before this transaction.67
Revlon protections are not necessary in every change of control transaction. Had the C&J court determined that Revlon did not apply to the transaction at hand, it would have made clear that when boards engage in transactions in which their shareholders continue to enjoy the valuable benefits of control through protective devices, those boards are free to focus on creating long-term value otherwise constrained under Revlon scrutiny.