Ron Perelman Takes Revlon

In 1985, Ronald Perelman was not supposed to be able to buy Revlon. He ran MacAndrews & Forbes, a controlled holding company built around licorice extract and jewelry, and Revlon was a famous, glamorous, far larger cosmetics business. Under the old rules of corporate America, an outsider of Perelman’s size simply could not reach a target of Revlon’s size.

The junk-bond market changed that arithmetic. Financed by Drexel Burnham Lambert’s high-yield machine, Perelman could put real money, billions of it, behind a hostile bid. Size was no longer a defense.

The defense

Revlon’s management did not go quietly. The board deployed the full toolkit of mid-1980s takeover defense: a poison pill to make open-market accumulation punishing, asset sales designed to make the company less appealing, and ultimately a lock-up arrangement favoring a friendlier, management-aligned buyer, a private equity firm brought in as a so-called white knight.

Perelman’s response was simple and relentless. He kept raising his bid.

The courtroom

The contest ended in front of the Delaware Supreme Court, and the decision became one of the most cited rulings in American corporate law.

The court drew a sharp line. A board may use defensive measures to protect the company and its shareholders from a threat to corporate policy. But once the breakup or sale of the company has become inevitable, once the company is genuinely in play, the board’s role changes fundamentally. It can no longer act as a defender. It becomes an auctioneer, and its single duty is to secure the highest price reasonably available for shareholders.

The defenses a board may use to remain independent are not the defenses it may use once the company is already for sale.

Favoring one bidder for reasons other than price, to protect management, to punish a raider, was no longer permitted once that line was crossed.

”Revlon duties”

Perelman won Revlon. But the deal’s true legacy is the doctrine that carries its name. Lawyers and bankers still speak of “Revlon duties” and “Revlon mode”, the moment a board’s obligations flip from defense to maximizing price.

Every contested takeover since 1985 has been fought, at least partly, over the question of whether the target is in Revlon mode yet. A cosmetics deal became a permanent fixture of the law.