[1](34): Revlon v. MacAndrews (1986) Pantry Pride Tender Offer

1. [1](34): Revlon v. MacAndrews (1986)Pantry Pride Tender Offer • Pantry Pride (Ronald Perelman) approached Revlon about a friendly acquisition but Revlon rejected the offer • The Board of Pantry Pride authorized a hostile tender offer for all of the outstanding shares of Revlon • Pantry Pride makes a conditional tender offer for all the shares of Revlon at $47.50 in cash per share for the common stock • Note that this offer is not coercive, but it might be inadequate? • Conditional on obtaining financing (junk bond financing with Drexel-Burnham) • Conditional on the Board of Revlon redeeming the “Rights Plan” • Pantry Pride also files a lawsuit arguing that the Rights Plan is a breach of the duty of care of the directors, and thus illegal • So what is the Rights Plan of Revlon? Early Poison Pill

2. [1](35): Revlon v. MacAndrews (1986)Revlon’s First Response • Investment bankers estimate the value of Revlon • Sell Revlon as a whole: “mid 50” dollar range • Breakup value: $60 - $70 per share • Investment bankers construct a two defensive tactics • (1) Tender offer to repurchase 10 million of the outstanding shares • with a $47.50 Note and convertible preferred stock, oversubscribed • New Notes contained covenants restricting new debt, sale of assets, or payment of dividends without approved of the disinterested directors • (2) Rights Plan: Special dividend of one “right” for each share • If any acquiring corporation acquires 20% of Revlon’s outstanding shares (unless they acquire all the outstanding shares for $65 per share or more), then each share can be exchanged for a Revlon one-year note having a principal of $65 and an interest rate of 12%.

3. [1](36): Revlon v. MacAndrews (1986)Revlon’s Second Response • Pantry Pride first initiates a lawsuit to invalidate the Rights Plan • Pantry Pride then raises its conditional offer to $56.25 per share • And Pantry Pride announces that it will match offers by Forstmann • But the Board of Revlon negotiates with Forstmann to fund a management leveraged buyout (MLBO) • Revlon Management and Forstmann would set up a new corporation, borrow money, and merge into Revlon • The debt incurred would then be paid down by selling some Revlon subsidiaries • Management would have a larger equity interest in the new Revlon, but Revlon would have a very high debt/equity ratio • Revlon Management and Forstmann agree to make a tender offer for $57.25 per share in cash for all the shares of Revlon, but demand • “lock-up” option, a “no shop” provision, and a cancellation fee

4. [1](37): Revlon v. MacAndrews (1986)What is a Lock-Up Option? • Lock-Up Options are contingent options to purchase an asset of the target corporation • Granted to the favored acquiring corporation (White Knight) when this corporation agrees to acquire the target corporation • Purchase price is a substantially below the true value of the asset • Contingent on a competing acquiring corporation acquiring control or a blocking fraction of the outstanding shares of the target corporation • Revlon lock-up option: If another acquirer (such as PantryPride) obtains 40% of the outstanding shares of Revlon, then Forstmann can purchase Vision Care and National Health Labs for $525 million • These two subsidiaries are worth between $625 - $700 million

5. [1](38): Revlon v. MacAndrews (1986)What is the Effect of the Lock-Up Option? • If the offer by Pantry Pride is blocked by the Rights Plan, then the MLBO will be successful, and the lock-up option irrelevant • Forstmann will be a co-owner of Revlon and would not exercise the option • If the offer by Pantry Pride is not blocked by the Rights Plan, and is successful in obtaining over 40% of the outstanding shares, then Forstmann will exercise the option • Pantry Pride is planning on breaking up Revlon, but not by selling these two valuable subsidiaries at a discount to Forstmann • Thus, Pantry Pride must also condition its offer on the illegality and elimination of the lock-up option • Pantry Pride amends its existing complaint to challenge the lock-up option as a breach of the duty of loyalty of the directors

6. [1](39): Revlon v. MacAndrews (1986)Ruling on Revlon’s First Response • Was the Stock Repurchase a breach of the duty of care? • No, reasonable response to an initial inadequate offer by Pantry Pride • Was the Rights Plan (Poison Pill) a breach of the duty of care? • No, reasonable response to an initial inadequate offer by Pantry Pride • Was the Rights Plan a breach of the duty of care after Pantry Pride finally raised its offer to $58 per share? • Maybe, but not an issue here because the Board of Revlon redeemed the Rights Plan for any offer above $57.25 • In general, Poison Pills must be redeemed by the Board of Directors in response to an adequate and non-coercive offer

7. [1](40): Revlon v. MacAndrews (1986)Ruling on the Revlon’s Second Response • Was the Lock-Up Option a breach of the duty of care or loyalty? • YES, breach of the duty of care to the corporation and shareholders • At the last price offered by Pantry Pride, there was no “threat” to Revlon • Pantry Pride offer was adequate and non-coercive • Revlon will be broken up, irrespective of who acquires the corporation • YES, breach of the duty of loyalty to shareholders • Directors cannot consider the covenants in the new Notes issued to the shareholders in acquiring 10 million shares (one third of the outstanding shares) • Directors cannot favor their management in providing information and negotiating to sell the corporation on behalf of shareholders • Both offers from Pantry Pride and Forstmann will rely heavily on debt financing, but the current shareholders will receive cash

8. [1](41): Revlon v. MacAndrews (1986)New Revlon Duty? • Does the Business Judgment Rule apply to this case? • NO, there is a new heighten duty when it becomes clear that the corporation will be sold • Is there a Conflict of Interest? • YES, if the Directors favor one acquiring corporation in their own interest and at the expense of the shareholders • What is the nature of this new heighten duty of care and loyalty? • Revlon Duty: When it becomes clear that a target corporation will be sold, the Board has a duty to run a fair auction for the corporation to maximize the price received by the shareholders • When is it clear that the target corporation will be sold? • Certainly if there are two outside bidders each offering an adequate price

9. [1](42): Revlon v. MacAndrews (1986)What is the Nature of the Revlon Duty? • Board cannot disadvantage one bidder over the others bidders • Once a bidder is committed and participating in the auction, lock-up options and other similar options would be a breach of duty • Does the Board have a duty to provide confidential information to all potential bidders? • Presumably Yes, but there are special concerns in providing this information to competitors, to suppliers, or to distributors • Does the Board has a duty to seek other bidders? • The Court also upheld the preliminary injunction against the “no shop” provision in favor of Forstmann as a breach of duty in this case • Can the Board passively consider all bids? • Or must the Board actively seek new bidders? • Is a “no shop” provision an inherent breach of the duty of care?