Principal and Surety

In June 1985, Ronald O. Perelman of Pantry Pride met with Michel C. Bergerac of Revlon to discuss a friendly acquisition at prices between forty and fifty dollars per share. Bergerac rejected the overture as below the company's intrinsic value. On August 14, Pantry Pride's board authorized Perelman to acquire Revlon either by negotiation in the forty two to forty three dollar range or by hostile tender offer at forty five dollars per share. All further discussions were rebuffed when Bergerac conditioned talks on execution of a standstill agreement. On August 19, the Revlon board met specially to consider the impending threat of a hostile bid by Pantry Pride. Lazard Freres advised the directors that forty five dollars per share was a grossly inadequate price for the company. Martin Lipton recommended that the company repurchase up to five million of its nearly thirty million outstanding shares and adopt a Note Purchase Rights Plan. Under this plan, each Revlon shareholder would receive as a dividend one Note Purchase Right for each share of common stock. The Rights entitled the holder to exchange one common share for a sixty five dollar principal Revlon note at twelve percent interest with a one-year maturity. Felix Rohatyn and William Loomis of Lazard Freres explained to the board that Pantry Pride's financial strategy for acquiring Revlon would be through junk bond financing followed by a break-up of Revlon and the disposition of its assets. With proper timing, such transactions could produce a return to Pantry Pride of sixty to seventy dollars per share while a sale of the company as a whole would be in the mid fifty dollar range. Pantry Pride made its first hostile move on August 23 with a cash tender offer for any and all shares of Revlon at forty seven dollars and fifty cents per common share and twenty six dollars and sixty seven cents per preferred share. The offer was subject to obtaining financing and the Rights being redeemed. On August 29, Revlon commenced its own offer for up to ten million shares. It exchanged for each share of common stock tendered one Senior Subordinated Note of forty seven dollars and fifty cents principal at eleven point seven five percent interest due in nineteen ninety five and one-tenth of a share of nine dollar Cumulative Convertible Exchangeable Preferred Stock valued at one hundred dollars per share. Revlon stockholders tendered eighty seven percent of the outstanding shares and the company accepted the full ten million shares on a pro rata basis. Pantry Pride announced a new tender offer at forty two dollars per share on September 16 conditioned upon receiving at least ninety percent of the outstanding stock. The Revlon board held a regularly scheduled meeting on September 24 and rejected the latest Pantry Pride offer. Pantry Pride remained determined in its efforts and continued to make cash bids for the company. It offered fifty dollars per share on September 27 and raised its bid to fifty three dollars on October 1 and then to fifty six dollars and twenty five cents on October 7. On October 3, the Revlon board met to consider Pantry Pride's fifty three dollar bid and to examine possible alternatives. Both Forstmann and Adler & Shaykin made proposals. As a result, the directors unanimously agreed to a leveraged buyout by Forstmann. The terms of this accord were as follows: each stockholder would get fifty six dollars cash per share; Forstmann would assume Revlon's four hundred seventy five million dollar debt incurred by the issuance of the Notes; and Revlon would redeem the Rights and waive the Notes covenants for Forstmann or in connection with any other offer superior to Forstmann's. Part of Forstmann's plan was to sell Revlon's Norcliff Thayer and Reheis divisions to American Home Products for three hundred thirty five million dollars. Before the merger, Revlon was to sell its cosmetics and fragrance division to Adler & Shaykin for nine hundred five million dollars. On October 12, Forstmann made a new fifty seven dollars and twenty five cents per share offer based on several conditions. The principal demand was a lock-up option to purchase Revlon's Vision Care and National Health Laboratories divisions for five hundred twenty five million dollars if another acquiror got forty percent of Revlon's shares. Revlon also was required to accept a no-shop provision. There would be a twenty five million dollar cancellation fee to be placed in escrow and released to Forstmann if the new agreement terminated or if another acquiror got more than nineteen point nine percent of Revlon's stock. The board unanimously approved Forstmann's proposal because it was for a higher price than the Pantry Pride bid, it protected the noteholders, and Forstmann's financing was firmly in place. The board further agreed to redeem the rights and waive the covenants on the preferred stock in response to any offer above fifty seven dollars cash per share. Pantry Pride, which had initially sought injunctive relief from the Rights plan on August 22, filed an amended complaint on October 14 challenging the lock-up, the cancellation fee, and the exercise of the Rights and the Notes covenants. Moreover, on October 22, Pantry Pride again raised its bid with a cash offer of fifty eight dollars per share conditioned upon nullification of the Rights, waiver of the covenants, and an injunction of the Forstmann lock-up. On October 15, the Court of Chancery prohibited the further transfer of assets and eight days later enjoined the lock-up, no-shop, and cancellation fee provisions of the agreement. The trial court concluded that the Revlon directors had breached their duty of loyalty by making concessions to Forstmann out of concern for their liability to the noteholders rather than maximizing the sale price of the company for the stockholders' benefit. The Supreme Court of Delaware granted this expedited interlocutory appeal to consider for the first time the validity of such defensive measures in the face of an active bidding contest for corporate control.