In the last five years, there have been over 150 public company mergers where the acquiror used a mixture of stock and cash as consideration to acquire the target.[1] For 25 of these deals, cash comprised between 40% and 50% of the consideration.[2] Determining whether Revlon applies to a mixed consideration deal such as these where the cash/stock split is nearly even remains an open question, but Delaware precedent does provide some guidance.
Under well-settled Delaware law, Revlon is triggered when a board pursues a transaction that constitutes a sale, breakup, or change in control of the company. If Revlon applies, the board must make a good faith attempt to capture the highest value reasonably available for stockholders. Only after the board determines to engage in one of these transactions—not while it is exploring whether or not to do so—does Revlon become applicable.
It is also well-settled Delaware law that a stock-for-stock merger does not trigger Revlon if, after the merger, the stock consideration received by the target’s stockholders stays in a large, fluid, changeable and changing public market (i.e., no controlling stockholders), and the stockholders have the possibility of obtaining a future control premium. In these cases, absent a fiduciary duty breach, a Delaware court will apply the favorable business judgement rule standard of review, which gives deference to decisions by the board.
What is not well-settled is the question of when does Revlon apply to a mixed consideration deal (i.e., part cash, part stock) and when does it not. Put differently, how much of the consideration can be cash without triggering Revlon? Although Delaware courts have not created a bright line rule, they have decided multiple cases considering this question. So, we have some guidance on when—and when not—Revlon is applicable.
- Revlon triggered. The Delaware Court of Chancery has held that Revlon likely applied to a deal where the consideration mix was 50%[3] cash and to a deal where 62%[4] of the consideration was cash. Revlon applied because there was “no tomorrow” for half or more of the stockholders’ investment.
- Revlon not triggered. The Delaware Supreme Court has held that Revlon did not apply to a deal where 34%[5] of the consideration was cash, and the Delaware Court of Chancery has found that Revlon did not apply to deals where 35%[6] of the consideration was cash and where 42%[7] of the consideration was cash. In general, Revlon is not triggered when, after the transaction, (x) there is a “tomorrow” for a substantial majority of the consideration paid to the target stockholders, (y) the stock received by the target stockholders stays in a large, fluid, changeable and changing public market, and (z) the stockholders have the possibility of obtaining a future control premium.[8] In addition, the proper focus of whether Revlon applies is on the mix of pre-merger consideration rather than the target stockholder’s post-merger stake in the combined company.[9]
Based on these cases, if cash comprises 50% or more of the consideration, then it would appear likely that Revlon is triggered. If cash comprises 42% or less of the consideration, then it would appear likely that Revlon is not triggered. But what about between these two bookends? Will Revlon be triggered in a deal where cash comprises more than 42% of the consideration but less than 50%, and if so, where is the line drawn? As you get closer to one bookend or the other, one would think the answer would become more certain. For example, the difference in “tomorrow” for a 49.9% cash deal (particularly if contrived to avoid Revlon under Smurfit-Stone) compared to a 50% cash deal would be negligible at best. Same in the opposite direction. But the question of whether Revlon applies becomes particularly difficult to answer as you near the midpoint – e.g., where 55% of the consideration is stock and 45% is cash.
Unfortunately, these questions currently do not have an answer. And this was noted by Vice Chancellor Slights in Genomic Health, where he acknowledged that “since the [Delaware] Supreme Court has not yet established a bright line rule for what percentage of merger consideration could be cash without triggering Revlon, [his] determination that Revlon is inapplicable [to a merger where 42% of the consideration is cash] is not free from doubt.” Until the Delaware Supreme Court creates a bright line test, or provides more certain guidance, the bookends noted above can serve as guideposts, but practitioners will continue to need to make judgment calls when determining whether Revlon applies to a mixed consideration deal—particularly in the gray area where the cash consideration represents between 42% and 50% of the mixture.
It is also worth noting that the exact mix of cash vs. stock may change during the course of negotiations. The result is that a deal assumed at inception to be outside the scope of Revlon might become a Revlon deal if the percentage of cash consideration increases. In close cases, transaction participants may have no choice but to follow the conservative approach of assuming that Revlon will apply.
[1] Deal Point Data.
[2] Deal Point Data.
[3] In re Smurfit-Stone Container Corp. S’holder Litig., C.A. No. 6164-VCP (Del. Ch. May 24, 2011).
[4] In re Lukens Inc. S’holders Litig., 757 A.2d 720 (Del. Ch. 1999), aff’d sub nom., Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000).
[5] In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59 (Del. 1995).
[6] In re Synthes, Inc., 50 A.3d 1022 (Del. Ch. 2012).
[7] Flannery v. Genomic Health, Inc., C.A. No. 2020-0492-JRS (Del. Ch. Aug. 16, 2021).
[8] Id. at 64-65.
[9] Id. at 65 n.243.
[View source.]
