M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Friday, July 11, 2014

Revlon's high bar

You know the drill. A merger is announced and immediately a number of lawsuits are filed.  Of course, they allege Revlon duties, yada yada…  But what does it take for one of these typical Revlon claims to survive a motion to dismiss?  A lot.  In Dent v Ramtron, Vice Chancellor Parsons reminds us just how hard it is to make a case that a board has run afoul of enhanced review under Revlon where a board has the protection of a 102(b)(7) exculpatory provision:

In that regard, if the corporation’s certificate contains an exculpatory provision pursuant to 8 Del. C §102(b)(7) barring claims for monetary liability against directors for breaches of the duty of care, the complaint must state a nonexculpated claim, i.e., a claim predicated on a breach of the directors‟ duty of loyalty or bad faith conduct.

A factual showing that, for example, a majority of the board of directors was not both disinterested and independent would provide sufficient support for a claim for breach of loyalty to survive a motion to dismiss.  “A director is considered interested where he or she will receive a personal financial benefit from a transaction that is not equally shared by the stockholders.”  “Independence means that a director’s decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences,” such as where one director effectively controls another. Moreover, as to any individual director, the disqualifying self-interest or lack of independence must be material, i.e., “reasonably likely to affect the decision-making process of a reasonable person . . . .”

Well-pled allegations that the board did not act in good faith also would state a claim for breach of the duty of loyalty sufficient to survive a motion to dismiss.  In general, “bad faith will be found if a ‘fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.’” Alternatively, notwithstanding approval by a majority of disinterested and independent directors, a claim for breach of duty may exist “where the decision under attack is so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.”

So, unless the suit you are filing immediately upon announcement of a deal can allege that directors didn’t act in good faith or a majority of directors were interested and that the disqualifying interest was material, then, well your claim isn’t going very far and it's going to get the business judgment presumption. Revlon is a high bar for plaintiffs.

-bjmq

http://lawprofessors.typepad.com/mergers/2014/07/revlons-high-bar.html

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