Stephen M. Bainbridge, Directors as Auctioneers—A Concise Guide to Revlon-Land (2011).
“Motive” is a legal concept no longer reserved for criminal lawyers. Motive matters in M&A litigation, too, according to UCLA law professor Stephen Bainbridge in his e-book, Directors as Auctioneers—A Concise Guide to Revlon-Land. This notion is not unique to Bainbridge, as Chancellor Leo E. Strine, Jr. of the Delaware Court of Chancery recently reaffirmed:
As Revlon itself made clear, the potential sale of a corporation has enormous implications for corporate managers and advisors, and a range of human motivations, including but by no means limited to greed, can inspire fiduciaries and their advisors to be less than faithful to their contextual duty to pursue the best value for the company’s stockholders.
Yet, despite this apparent agreement about Revlon’s core principles, Bainbridge contends that the Court of Chancery has been misapplying them. Bainbridge specifically criticizes the line of Court of Chancery decisions that turn on the form of merger consideration rather than on the directors’ motivations and potential conflicts of interest.
Bainbridge begins the book with a guided tour through “Revlon-Land,” including Revlon’s history and policy foundations in the “veritable flood of academic writing” from the 1980s about the proper role of a target board in the context of an unsolicited takeover bid. Bainbridge identifies and analyzes the emergence of two leading policy proposals.
First, Bainbridge focuses on Professors Ronald Gilson and Lucian Bebchuk, who argued that a target board should be permitted to use takeover defenses only to achieve a higher-priced offer, and that defenses deployed by the target board to fend off the bidder and remain independent should be illegal. This is contrary to Delaware law. Bainbridge dismisses this approach as unworkable because it would place the target board’s legal advisors in a quandary, paralyzed by the risk of trying to predict which takeover defenses would generate a topping bid and which would not. Consequently, rational companies desirous of the security that takeover defenses provide would erect them prophylactically on the proverbial clear day before receiving an unsolicited takeover bid, thereby choking the market for corporate control.