Revisiting Revlon: Should Judicial Scrutiny of Mergers Depend on the Method of Payment?

Suppose that one corporation, BuyCo, wants to purchase another, TargetCo. If BuyCo uses cash to purchase TargetCo, Delaware courts will apply enhanced scrutiny to the deal, forcing TargetCo’s directors to show that they acted reasonably in pursuit of the highest value reasonably available for the company. If BuyCo uses its own stock to purchase TargetCo—assuming that both corporations are widely held—courts will apply the deferential business judgment rule to the acquisition. But what happens if BuyCo uses a mix of cash and stock in the deal? For corporations contemplating such an acquisition, the level of judicial scrutiny is uncertain.

This Comment tracks the development of a new approach in Delaware law that ignores the method of payment in these situations. The fundamental concern underlying the application of enhanced scrutiny to the actions of target directors who negotiate takeover deals is that they are effectively negotiating away their jobs. This exacerbates agency costs. The concept is intuitive: Imagine that you own a company whose continued existence depends on signing up a big new client. Do you send out the salesman who just put in his two weeks’ notice?

The new approach highlights this commonsense intuition about human behavior. Cash and stock are both currency. The choice of which to use has little to do with the agency costs that justify enhanced scrutiny. Method of payment is not a proxy for structural bias. One benefit of a unifying approach is to remove the confusion presently created by mixed-consideration transactions. Current doctrine treats cash acquisitions and stock acquisitions as fundamentally different from one another. Yet, mixed-consideration acquisitions show that the two currencies serve precisely the same function: giving stockholders value in exchange for their equity stake in the target corporation.