In Carr v. New Enterprise Associates Inc., C.A. No. 2017-0381-AGB (Mar. 26, 2018), a corporation (the seller), sold a warrant with an option to purchase all of the stock of the corporation. The warrant transaction was conditioned upon the buyer purchasing another company in which the controlling stockholder of the seller was the largest investor. A minority stockholder sued the controlling stockholder of the seller and its directors alleging breach of fiduciary duty.

The seller argued that the transaction was a grant of the option to buy the seller and not a change in control or sale of the company subject to the dictates of Revlon. The Court rejected the idea that option transactions could never be subject to Revlon duties. Instead, the applicability of Revlon to an option transaction would likely depend on its “conditionality and specific features”. The Court suggested two examples to illustrate this point: (1) Revlon would apply when the option was unconditional and immediately exercisable; and in contrast, (2) Revlon might not apply if the option was contingent upon material contingencies that neither party could control.

BOTTOM LINE: Once again, substance over form matters. An unfettered right to exercise a “warrant” may subject a sale to Revlon duties.