New York Court Holds That Revlon Standards Are Not Triggered In A Stock-for-Stock Merger Where No Change of Control Results

The recent decision in Badowski v. Corrao, No. 652986/2011, NYLJ 1202642854864 (Sup. Ct. N.Y. County, Commercial Division), is a timely application by a New York court of the limitations of so-called Revlon duties to stock-for-stock mergers.

In Badowski, the court dismissed with prejudice a class action brought by a shareholder of the target (Vertro, Inc.), challenging Vertro's stock-for-stock merger with Inuvo, Inc. The court applied Delaware law under the internal affairs rule because Vertro is incorporated under the laws of Delaware. In applying Delaware law, the court clearly adhered to the principle that Revlon duties are not implicated where the challenged transaction does not result in a true change of control.

Because there was no change of control, the court applied the more deferential "business judgment rule" presumption to the merger decision, and concluded that the complaint failed to plead any viable basis to rebut the presumption that the target's directors, in approving the merger, acted in an informed basis, in good faith, and in the honest belief that their actions were in the best interests of the company. The court further determined that deal protection devices approved by the Vertro board were well within the board's business judgment, and that the proxy statement issued by Vertro did not contain any material non-disclosures.

Revlon duties are implicated when there is a sale of control or where the break-up of the company is inevitable. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). In such circumstances, "the duty of the board . . . change[s] from the preservation of [the company] to the maximization of the company's value at a sale for the stockholders' benefit." Revlon, 506 A.2d at 182. When Revlon duties are triggered, the courts will then apply a less deferential standard of review, i.e., "enhanced" or "heightened" scrutiny. This inquiry, with its subjective and objective components, places on the board the ultimate burden of persuading the court that their motivations were proper and not selfish, and that their actions were reasonable in relation to their legitimate objective. See, e.g., Mercier v. Inter-Tel, Inc., 929 A.2d 786, 810 (Del. Ch. 2007); In re Comverge Inc. S'holders Litig., No. 7368–VCP, 2013 WL 1455827 (Del. Ch. Apr. 10, 2013).

However, as the court in Badowski noted, subsequent Delaware decisions have made it clear that Revlon duties are only triggered when a company...