I recently blogged about Vice Chancellor Slights’ decision in Flannery v. Genomic Health, (Del. Ch.; 8/21), where he held that a mixed consideration merger consisting of 58% stock and 42% cash didn’t trigger Revlon. Over on ProfessorBainbridge.com, UCLA’s Stephen Bainbridge says that opinion perpetuates an error that’s been committed by a number of Chancery Court opinions over the years, and that under applicable Delaware Supreme Court precedent, even an all cash deal may not trigger Revlon.
Bainbridge originally laid out this argument in his 2013 article, “The Geography of Revlon-Land”, and summarizes it in the blog. In essence, he points to the third prong of the Revlon test identified in the Delaware Supreme Court’s 1994 decision in Arnold v. Society for Savings, which says that “there is no sale or change in control when “[c]ontrol of both [companies] remain[s] in a large, fluid, changeable and changing market.” The change in control test articulated in Arnold makes no mention of a requirement for a stock-for-stock deal, and Bainbridge says that the Chancery Court simply made one up. Here’s an excerpt:
In a series of cases, the Delaware Chancery court invented a fourth trigger:
In transactions, such as the present one, that involve merger consideration that is a mix of cash and stock—the stock portion being stock of an acquirer whose shares are held in a large, fluid market—”[t]he [Delaware] Supreme Court has not set out a black line rule explaining what percentage of the consideration can be cash without triggering Revlon.”
In re NYMEX Shareholder Litig., 2009 WL 3206051 at *5 (Del. Ch. 2009).
In Flannery, VC Slights embraced the NYMEX line of cases clearly erroneous approach to all cash deals:
In an all-cash transaction, Revlon applies “because there is no tomorrow for the corporation’s present stockholders.”
NYMEX and progeny were clearly inconsistent with Arnold. They posit that a mix of cash and stock triggers Revlon, but Arnold’s clear implication is that an acquisition by a publicly held corporation with no controlling shareholder that results in the combined corporate entity being owned by dispersed shareholders in the proverbial “large, fluid, changeable and changing market” does not trigger Revlon whether the deal is structured as all stock, all cash, or somewhere in the middle. The form of consideration is simply irrelevant.
I think this is an intriguing argument. But I don’t think I’d advise a seller’s board that they could safely rely on the view that it’s possible to do an all cash deal without triggering Revlon. The Chancery may have gone off the rails in NYMEX, but however wrong-headed its doctrinal origins may be, the notion that the majority of the consideration must be in stock in order to avoid Revlon is pretty deeply embedded at this point.
-John Jenkins, DealLawyers.com September 3, 2021