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As I recently shared on DealLawyers.com, the Chancery Court’s recent decision in Drakes Landing Associates v. Tilden Park Capital Management (Del. Ch.; 7/26) answered a significant issue of first impression — whether Revlon applies to the board of a public benefit corporation navigating a change-of-control transaction. The decision summarizes the facts as follows:

Two of a public benefit corporation’s lenders proposed a financing transaction that would provide the company with $20 million in urgently needed financing. As part of the financing, the debt owed by the company to the two lenders would convert into equity, increasing the lenders’ stock holdings from around 25% to nearly 85%, and diluting the other stockholders. The public benefit corporation appointed an independent and disinterested special committee to evaluate the transaction. The special committee in turn retained independent legal and financial advisors and ultimately approved the deal.

The parties agreed that the financing was a change-of-control transaction to which Revlon would apply if the company was not a PBC, but disagreed on whether and how a company’s status as a PBC impacts Revlon‘s application. VC Cook said that this turned on whether Revlon is treated as imposing a standard of conduct (obtain the best price reasonably available) or a standard of review (enhanced scrutiny). A Richards Layton & Finger alert on the decision explains his analysis:

The Court held that the traditional Revlon obligation to seek the best price reasonably available for stockholders does not apply as a standard of conduct to PBC directors because, under Section 365(a) of the Delaware General Corporation Law (the “DGCL”), PBC directors are required to balance stockholders’ pecuniary interests, the interests of persons materially affected by the PBC’s conduct and the public benefits stated in the PBC’s certificate of incorporation.  The Court explained that Revlon’s price-maximization mandate conflicts with Section 365(a)’s express balancing requirement, and that PBC directors cannot be required to pursue the highest value reasonably available for stockholders to the exclusion of the corporation’s public-benefit purpose and affected stakeholders.  The Court nevertheless left open whether a modified form of enhanced scrutiny—referred to by the Court as “PBC enhanced scrutiny”—could apply to a change-of-control transaction involving a PBC as a standard of review, under which the Court would examine whether the directors’ balancing of these interests fell outside the range of reasonableness.

The Court did not directly decide this question because it found that the challenged transaction, which was approved by an independent special committee, invoked the statutory protections applicable to decisions of PBC directors under Section 365(b) of the DGCL.  Section 365(b) provides, in relevant part, that with respect to director decisions implicating Section 365(a)’s balancing requirement, a director “will be deemed to satisfy such director’s fiduciary duties to stockholders and the corporation if such director’s decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.”  Because the plaintiffs conceded that the special committee members were disinterested and independent, and their allegations regarding the adequacy of the committee’s market check expressed concerns only about stockholders’ pecuniary interests without challenging the committee’s consideration of the other interests implicated by the statutory balancing test, the Court dismissed the plaintiffs’ fiduciary duty and related aiding and abetting claims.  The Court also suggested that even if the corporation were not a PBC, the fiduciary duty claims would have been dismissed under Delaware’s new statutory safe harbor, Section 144 of the DGCL.

RLF says the key takeaways are that:

– PBCs are never subject to a “singular obligation to maximize stockholder value.”

– Section 365(b) of the DGCL serves as a “statutory business judgment rule” that provides significant protection against challenges to the decisions of PBC directors.

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– Meredith Ervine