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'Revlon Duties' In The Indian Context

Constituting an independent committee to oversee the sale without relying solely on representations of any person on matters that are easily verifiable

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The ongoing race to acquire Fortis Healthcare presents an interesting case to analyse the duties of directors in the context of a potential sale or transfer of control of a company.

Under laws of state of Delaware (which has been followed by other states as well), 'Revlon duties' require directors to seek the highest price possible for shareholders when a sale of the company or a transfer of control is inevitable. The principles of 'Revlon duties' emanate from the 1986 landmark decision of Revlon, Inc v MacAndrews & Forbes Holdings, Inc., involving the takeover contest for Revlon Inc, in which the Delaware Supreme Court, held that when a company is up for sale, its board's duties change from preservation of the company to maximisation of the company's value for the shareholders' benefit.

While the 'Revlon doctrine' does not expand the fiduciary duties of directors beyond the duty of care and loyalty, the board is required to perform its duties with the specific objective of maximising value. The court, in a later case, held that there is no single blueprint for the board to fulfil its 'Revlon duties'; a pre-sale auction is not mandatory but the directors must ensure that when there is an interested rival bidder, that bidder has the fair opportunity to present a higher-value alternative. The board must have the flexibility to terminate the original transaction and accept the rival bid, where it is viewed to be of higher value. However, the determination of the best offer with the highest 'value' is left to the commercial assessment of the board as long as the board has acted diligently and in good faith.

Under English law, the uncodified duty of directors to act in good faith is read into codified duties such as the duty to exercise independent judgment, the duty to exercise reasonable care, skill and diligence and duty to avoid conflicts of interest, among others. The default position is that the courts are unlikely to interfere with commercial decisions of the board unless they seem to lack good faith or were so irrational that the decision cannot be reasonably considered to be in the best interests of the company. Directors have traditionally been held to be owing no fiduciary duties to shareholders with respect to disposal of their shares in the most advantageous way. However, common law is developing towards a position that in special circumstances, directors are placed in a fiduciary capacity towards the shareholders.

Akin to common law, the Indian Companies Act, 2013 (Act) codifies the duties of directors including:

"    duty of care, skill and diligence;
"    obligation to act in accordance with the articles of association;
"    duty to act in good faith and not achieve undue gain;
"    duty of disclosure and to maintain confidentiality of company information.

Even before the codification of the fiduciary duties of directors under the Act, the Supreme Court observed that directors owe statutory duties to individual shareholders in special circumstances such as a takeover, which are to be considered having regard to the facts. Considering that the Act now expressly provides that a director owes its duty to act in good faith for the benefit of its members as a whole, its employees, shareholders and all other stakeholders, it is unclear whether the board should act for the collective benefit of all stakeholders or should it act to maximise value, in a company sale process.

In India, while directors of a target company do not have a positive duty to undergo an auction process or to fetch the highest price for the shareholders in a company sale, the board has the fiduciary duty to act in good faith. Taking a cue from common law developments, compliance with such fiduciary duties can be justified by the following conduct:

"    Constituting an independent committee to oversee the sale without relying solely on representations of any person on matters that are easily verifiable;
"    Seeking critical information such as value of the company, terms of the offer and potential alternatives and taking informed decisions;
"    Giving opportunity to other bids which have the potential of maximising value; and
"    Not agreeing to onerous exclusivity or break fee terms, other than for justifiable reasons such as timing and certainty of the offer.

There is a presumption in favour of business judgments of the board. Hence, the right process and demonstration of good faith conduct are key to establishing the satisfaction of its fiduciary duties by the board.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Rajat Mukherjee

The author is is a Partner at Khaitan & Co

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Tanvi Kumar

The author is a Principal Associate at Khaitan & Co.

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