Seth Karpel


In Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., the Delaware Supreme Court established that when a board has effectively placed a company for sale, the directors take on a fiduciary responsibility to obtain maximum value for the corporation’s shareholders.[1]  Under the “Revlon Doctrine,” the directors serve as “auctioneers charged with getting the best price for the stockholders at the sale of the company.”[2]  As such, the path of law and focus of takeover regulation has been on revenue maximization for a target corporation’s stockholders rather than policy aimed at gains to other groups in society.[3]

However, the circumstances that directors find themselves in during a corporate sale do not lend themselves to the ideal environments described in theorized auction models.[4]  In Mills Acquisition Co. v. Macmillan, Inc., the Delaware Supreme Court sought to clarify how, under Revlon, a board could go about auctioning their company.[5]  The court, acknowledging that “the conduct of an auction is a complex undertaking both in its design and execution,” provided much discretion—there is no “standard formula”—so long as a board remains true to its objective of benefitting the stockholders it represents.[6]  The law grants considerable leeway.  But, the notion of “maximization” presents a question.  How can one be certain that a bid was truly the highest a bidding party would have gone?


Prior to the announcement of a merger agreement, there exists a “pre-announcement” or “strategic review” process[7]in which a target board negotiates with individual acquirers or conducts an auction.  The first-price auction[8] is the go-to format[9] for pre-announcement auctions.  Theory tells us, though, that second-price auctions generally have an equal revenue expectation.[10]  I propose an alternative option[11] to the oft-seen model,[12] a construction based on the second-price approach[13] that overcomes some of the valuation and bargaining challenges seen in practice. 

II. The Auction

The target company would first determine a list of potential acquirers, gauge interest and gather useful data points in the company’s valuation of itself.  If the company had an adequate number of interested[14] participants, it would solicit bids in a single round.  The target might establish additional contracted features, such as a cost to participate in the auction or an attractive termination fee, if it felt doing so would encourage best bids.

In order to protect the target’s shareholders and guarantee that the eventual winner of the auction paid at least the reservation price of the target company, the board (with the advantage of the most “inside information” of any party) would submit a bid of their own.[15]  (The value of the second-highest bid will become the consideration in a subsequent merger agreement with the winner.)  The auction would be run through a third party such that no participant would be forced to reveal a losing bid unless it volunteered such information.[16] 

III. Aims Beyond Maximization

A goal of the format is to rid the pre-announcement process from multiple rounds of bidding, or the need for time-consuming haggling between boards and acquirers.  The target company’s “heavy lifting”[17] would take place up front.

With established rules, bidders would feel less need to strategically shade down their bids as part of a “bargaining game.”[18]  Shifting to the second-price model would also limit the amount of capital potential acquirers felt they risked overextending.[19]  On the other hand, there remains little incentive for a participant to shade up.[20]  The target board might not want to inflate its bid because, in the event it won its own auction, it could face pressure from within to disclose its valuation and provide a compelling plan to achieve such results in the market.

Additionally, the second-price model, floored at the target’s valuation of itself, would reallocate agency costs between shareholders and managers.  The shareholders of the acquirer might be less concerned about their managers being overaggressive because their firm will not pay any more than at least one other party would have.  On the other hand, the target’s shareholders would need to have confidence in their board’s valuation ability.  But the target company is best-positioned for such a task and the target’s valuation only backstops what is ex ante a value-maximizing endeavor.  Furthermore, the general principal-agent protections of corporate law would be undisturbed.[21]

IV. Legal Question of “Maximization”

The question is whether this framework would pass the scrutiny of courts because the price produced by the pre-announcement process will not, in most cases, be the highest bid placed.  If the gap between the highest and second-highest bids were great, and the highest bid exceeded the board’s reservation price (leading to a sale), this could be quite embarrassing and give birth to a lawsuit. 

Directors could nonetheless argue that, consistent with Macmillan, the decision to structure their auction in this second-price fashion was undertaken in the interests of maximizing shareholder value.  Directors could cite circumstances that made conducting an auction this way in their best business judgment.[22]  Simply because the choice might be uncommon should not be dispositive as the courts have set forth that there is no “standard formula.”  The key is a broader view of the term “maximize.”

Critically, a board can claim maximization in the sense that there was no guarantee that the highest-bid value would have been produced, ex ante, in the absence of the second-price format.  The board must convey to a court and its shareholders that in sealed auctions in which the highest price wins and is paid, that such value reflects a winning bidder’s guess as to what the second-highest bid would have been.[23]

The court might press as to why, after the bids came in, the board could not have bargained for a value closer to the highest bid.  But this construction’s viability relies on the target to act as an auctioneer committed to its rules.  This auction will not work if bidding firms expect that the target will renege and seek to extract a value closer to the highest (rather than second-highest) bid.  Bidders, as seen in the recent sale of, will simply shade down in anticipation, defeating the benefit of the expedited process.[24]  Distrust in the board’s commitment to their rules would lead back to hedged bids.

In the famous takeover of RJR Nabisco, RJR’s shareholders were paid a significant (35%) premium for their shares.  However, this value, generated through a first-price, sealed-bid construction might not have actually maximized their returns.  The eventual winner, KKR, did not believe the board would honor the auction’s rules and so shaded down its bid in order to have room to raise in subsequent rounds.  The auction was won in the second round, but who’s to say this second bid was not similarly scaled back?[25]

Observed sales processes often involve at least the appearance of a target board, ex post, extracting value from acquirers, giving shareholders and courts the reassuring sense that the directors went to bat for those they represent.  However, there could be an alternative which accepts a process that claims, ex ante, an expected maximization by seeking to minimize concerns that bidders, operating on imperfect information and sense of their competition, might have. 



[1] Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)

[2] Revlon, at 182.

[3] Peter Cramton and Alan Schwartz, Using Auction Theory to Inform Takeover Regulation, 7 The J. of L., Econ., & Org. 27, 29 (1991).

[4] Theoretical models are often more restrictive than the contexts found in reality.  One deviation, is that in a corporate auction there might be no winner (i.e., the board determines that the ultimate price is below its reserve price and that it will not sell).  B. Espen Eckbo, Corporate Takeovers: Modern Empirical Developments, Tuck Sch. of Bus. Working Paper No. 2011-92, at 16 (2011) (  Furthermore, a target board might offer differing treatment to a bidder if it does so out of a determined necessity to advance the best interests of its shareholders. Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1286 (Del. 1989).  The process also cuts against theory in that a company’s board could expect to earn higher revenue by revealing the full extent of its private information to interested acquirers…which would likely not be in its business interests.  Nobel Prize Committee, Improvements to Auction Theory and Inventions of New Auctions, 14 (2020) (  (Henceforth cited at “Nobel Prize.”)

[5] Steven B. Katz, Designing and Executing a ‘Fair’ Revlon Auction, 17 Fordham Urb. L. J. 163, 172 (1989).

[6] Macmillan, at 1286-87.

[7] These processes can be found described in “Background of Merger” (or similar) sections of proxy statements.  See e.g., Cloudera Inc., Proxy Statement (Schedule 14A), at 31 (July 19, 2021).

[8] In a first-price auction, the potential buyers submit private (“sealed”) bids.  Whoever placed the highest bid wins and pays that amount.  Nobel Prize, at 7.

[9] The model of the pre-announcement auction is well summarized by Hansen (2001).  Robert Hansen, Auctions of Companies, 39 Econ. Inquiry30, 30-32 (2001).  Generally, the company for sale will hire advisors and determine potential buyers to contact.  It will ask interested potential bidders to sign agreements under which the company will share confidential information, so that the bidders may develop a better valuation of the firm.  Of those who sign the agreements, some will place preliminary and non-binding indications of interest and a subset of those will place subsequent sealed bids to the board, who will determine a winner.  Boards decide the number of rounds of bidding.

[10] Nobel Prize, at 13.

[11] “Good auction design is not ‘one size fits all’ and must be sensitive to the details of the context.”  Paul Klemperer, What Really Matters in Auction Design, 16 J. of Econ. Persp. 169, 184 (2002)

[12] An illustrative example is Medallia Inc.’s sale to Thoma Bravo (announced July 2021).  Medallia Inc., Proxy Statement (Schedule 14A), at 32-41 (Sep. 14, 2021).

[13] In the Second-price (sealed-bid) auction, bidders submit bids privately and the highest bidder wins but pays the second highest bid.  Nobel Prize, at 7.  The dominant strategy for participants is to simply bid their true valuation, as the auction winner will ultimately pay less than or equal value.  Paul Klemperer, Auction Theory: A Guide to the Literature, 13 J. of Econ. Surveys No. 3, 227, 230 (1999).

[14] “Interested” meaning that the bidding company agrees to pay up in the event that it wins the auction.

[15] This quirk follows from the notion that if “a party is not a seller at a certain price, they are a better buyer” where here, those best positioned to produce a bid reflecting the target company’s true value – the management, board and their hired advisors – are that party.

[16] It might be felt that such information would be damaging to business interests.

[17] Such as finding participants for the auction, contracting mechanisms to solicit best bids and valuing itself.  This auction format is just anoption for directors to consider.  A board might find that their circumstances simply do not lend themselves to such a construction or these upfront costs too high.

[18] Cramton and Schwartz, at 31, 42. 

[19] Susan Athey and Philip A. Haile, Identification of Standard Auction Models, 70 Econometricia 2107, 2123, 2128 (2002)(  Shareholders of acquiring firms would feel equally or better positioned to share in any extra value returned by the business combination. Cf. Michael Bradley & Anand Desai, Synergistic Gains from Corporate Acquisitions and Their Division Between the Stockholder of Target and Acquiring Firms, 21 The J. of Fin. Econ. 3, 13 (1988)(showing that target shareholders capturing much of the surplus created from business combinations).

[20] One only risks paying more than her true value.

[21] The acquiring shareholders still have the ability to discipline poor management as holders of the surviving entity while shareholders of the target company have the extra defense that acquiring shareholders often do not – the ability to vote on the proposal’s ultimate acceptance.  Cramton and Schwartz, at 42.

[22] A board pressed for time might favor a one round auction, for example.

[23] Nobel Prize, at 10.

[24] Inc., Proxy Statement (Schedule 14A), at 27-28 (Aug. 30, 2021) (“Although the Board of Directors believed that Thoma Bravo had been the high bidder based on the parameters established for the bidding process, and that there was a risk of Thoma Bravo abandoning the process if Thoma Bravo believed that the Board of Directors was changing the process in response to a second bid by Sponsor A that was submitted after the single round of bidding, the Board of Directors, nevertheless, determined that it would be in the best interests of stockholders to treat the Sponsor A unsolicited bid as the new high bid, and accordingly the Board of Directors was prepared to enter exclusivity with Sponsor A unless Thoma Bravo matched or exceeded the price per share offered in Sponsor A’s second bid”).

[25] Steven B. Katz, Designing and Executing a ‘Fair’ Revlon Auction, 17 Fordham Urb. L. J. 163, 163-64 (1989).