Is There A "Revlon Duty" In California?

There are certain seminal Delaware corporate law cases that are so well known that corporate lawyers are wont to assume that they have been adopted and followed everywhere.  One such case is Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (1986).  In that case, the Delaware Supreme Court famously proclaimed that once the board of directors authorized a sale of the company, their "role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company".  Id. at 182.  In Delaware, Revlon has been cited and interpreted in hundreds of decisions.

Despite its notoriety in Delaware, Revlon is nearly unknown in California jurisprudence.  Only one Court of Appeal has cited the case.  Kirschner Bros. Oil v. Natomas Co., 185 Cal. App. 3d 784 (1986) arose out of the sale of Natomas Company, a California corporation, to Diamond Shamrock Corporation.  The plaintiffs were holders of Natomas' preferred stock who alleged a breach of fiduciary duty on the part of Natomas directors.  The Court of Appeal noted that in Revlon the Delaware Supreme Court had held that a board of directors breached its fiduciary duty of loyalty to equity shareholders by affording noteholders rights beyond those fixed by their contracts.  In light of this authority, the Court of Appeal concluded that "the fiduciary duty of the directors of Natomas did not include the obligation to negotiate or structure the reorganization such that the preferred shareholders would receive rights and privileges in excess of their entitlement under the certificate of determination." Id. at 797 (footnote omitted).  While the Court of Appeal in Natomas followed Revlon, it did not expressly adopt the famous principle quoted above.

There is another more famous reported involving Natomas.  In Gaillard v. Natomas Co., 173 Cal. App. 3d 410 (1985), the Court of Appeal took up the question of whether Natomas' directors breached their fiduciary duties in approving certain severance arrangements for the company's executives.  Kirschner was a direct action while Gaillard was a derivative suit.