Does Revlon Matter? An Empirical and Theoretical Study

Abstract

We empirically examine whether and how the doctrine of enhanced judicial scrutiny that emerged from Revlon and its progeny actually affects M&A transactions. Combining hand-coding and machine learning techniques, we assemble data from the proxy statements of publicly announced mergers over a fifteen year period, 2003-2017, ultimately assembling a dataset of 1,913 unique transactions. Of these, 1,167 transactions are subject to the Revlon standard, and 553 are not. After subjecting this sample to empirical analysis, our results show that Revlon does indeed matter for companies incorporated in Delaware. We find that for Delaware Revlon deals are more intensely negotiated, involve more bidders, and result in higher transaction premiums than non-Revlon deals. However, these results do not hold for target companies incorporated in other jurisdictions that have adopted the Revlon doctrine.

Our results shed light on the implications of the current state of uncertainty surrounding Revlon and provide some direction for courts going forward. We theorize that Revlon is a monitoring standard, the effectiveness of which depends upon the judiciary’s credible commitment to intervene in biased transactions. The precise contours of the doctrine are unimportant provided the judiciary retains a substantive avenue for intervention. Recent Delaware decisions in C&J and Corwin have been criticized for overly restricting Revlon, but we suggest that such concerns are overstated so long as Delaware judges continue to monitor the substance of transactions. Thus, in applying these decisions Delaware judges should focus not on procedural aspects but the substantive component of transactions which Revlon initially sought to regulate.

Keywords: Corporate Law, M&A, enhanced scrutiny, Revlon duties, takeovers, merger litigation, Corwin, Fiduciary Duties, Delaware, empirical, machine learning, negotiation process, deal premium

JEL Classification: K22