Delaware Chancery Court Provides New Data Point For Application Of Revlon Standard To Mixed Stock And Cash Mergers

In its recent decision in In re Smurfit-Stone Container Corp. Shareholder Litigation,1 the Delaware Chancery Court held that so-called Revlon duties were triggered by a merger in which the target shareholders would receive their consideration half in cash and half in stock, with the stock component resulting in ownership of approximately 45 percent of the combined company.2

Under Revlon,3 a board's actions are reviewed not under the deferential business judgment rule standard, but rather under a heightened standard of reasonableness. When Revlon applies, the board of directors must engage in a process reasonably designed to obtain the best short-term value reasonably available for its shareholders. The Delaware Supreme Court has held that a board might find itself faced with Revlon duties in at least three scenarios:

when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a break-up of the company; where, in response to a bidder's offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company; or when approval of a transaction would result in a sale or change of control.4 Delaware courts have long held that transactions where shareholders receive only cash for their shares result in a change of control for Revlon purposes. In contrast, the courts have determined that the Revlon standard does not apply to a stock-for-stock merger between two publicly traded companies where control shifts from one large unaffiliated group of public shareholders to another.5 But in transactions where there is mixed stock and cash consideration, the guidance has been less than clear. The target company in Smurfit-Stone had argued that because 50 percent of the consideration consisted of common stock of the acquirer and ownership of the post-merger entity would remain widely dispersed in the public market, the transaction was not a change of control for Revlon purposes. Rejecting this argument, Vice Chancellor Parsons noted that the issue was not free from doubt, and that the Delaware Supreme Court has not yet addressed the issue of whether a mixed stock and cash merger constitutes a change-of-control transaction for Revlon purposes. However, valuable guidance and data points can be derived from the Chancery Court's decision in Smurfit-Stone and other existing case law:

Transactions where the cash component is equal to or below 33...