Quick facts
- Mechanism: sell, spin off, or grant an option over the most valuable assets
- Usual form: a lock-up option granted to a friendly bidder
- Legal test: permitted only where untainted by director interest or breach
- Key case: Revlon v. MacAndrews & Forbes (Del. 1986)
- Cost: the value leaves whether or not the defence works
The crown jewel defense removes the thing the bidder came for. A target sells, spins off, or grants an option over its most valuable assets, so that acquiring the company no longer delivers the prize.
It is the bluntest defence available, because the damage it does is real and does not reverse if the bidder walks away.
In plain English
Every other defence on this site makes a takeover harder. This one makes the company worth less. That is the mechanism, not a side effect.
Boards reach for it when the alternatives have run out, which is exactly when their judgement is least trusted by a court reviewing it afterwards.
The usual form: a lock-up option
In practice the assets are rarely sold outright during a live bid. Instead the target grants a friendly bidder an option to buy them, exercisable if a hostile acquirer succeeds. The hostile bidder then faces a choice: win the company and lose the assets, or withdraw.
Revlon v. MacAndrews & Forbes Holdings, Inc. records precisely such an arrangement. Forstmann Little's improved offer of $57.25 per share was conditioned on "a lock-up option to purchase Revlon's Vision Care and National Health Laboratories divisions for $525 million, some $100 to $175 million below the value ascribed to them by Lazard Freres, if another acquiror got 40% of Revlon's shares." Revlon also had to accept a no-shop provision.1
Read the structure carefully. The option was priced below the divisions' appraised value, and it triggered on a rival succeeding. Its purpose was not to raise money. It was to make the rival's victory worthless.
What the court actually held
Delaware did not outlaw the technique. "Lock-ups and related agreements are permitted under Delaware law where their adoption is untainted by director interest or other breaches of fiduciary duty," the court said, before adding: "The actions taken by the Revlon directors, however, did not meet this standard."1
The distinction the court drew is about effect on the auction. Inducements that "entice other bidders to enter a contest for control of the corporation, creating an auction for the company and maximizing shareholder profit" are defensible, and a white knight "might only enter the bidding... if it receives some form of compensation to cover the risks and costs involved."1
A lock-up that draws a bidder in is legitimate. A lock-up that ends the bidding is not.
Revlon's failed because by that point the company was going to be sold, and the directors' role had "changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company."1 A structure designed to stop a higher bid is incompatible with that duty.
The proportionality question
Before a sale becomes inevitable, a defensive measure is judged under Unocal, which asks whether the directors had reasonable grounds to perceive a threat and whether the response was "reasonable in relation to the threat posed."2
A crown jewel disposal struggles on the second limb. Selling the best assets below value to defeat a bid the board considers too low is difficult to describe as proportionate, because the shareholders end up worse off than if the bid had simply been rejected.
Why boards rarely use it now
Three reasons.
The value is permanently gone, at a price set under time pressure by a seller everyone knows is desperate. The legal exposure is high, because it invites exactly the challenge Revlon lost. And better alternatives exist: a poison pill blocks accumulation without destroying anything, and it can be redeemed the moment the board changes its mind.
The technique survives mainly as the reason courts scrutinise deal protections at all. Modern break-up fees and go-shop provisions are calibrated against the line Revlon drew.
Where boards did find a use for it
Air Products & Chemicals, Inc. v. Airgas, Inc. shows the more common modern posture: hold the defences, keep the pill in place, and use the time to argue about value rather than dismantle the company.3
Delay is cheaper than destruction, and it is far easier to defend.
What this means for a founder
You will not option away a division to escape a bid. The transferable idea is narrower and more useful: assets can leave a company without the company being sold.
Intellectual property assigned to a founder's separate entity, a key customer contract novated elsewhere, a subsidiary spun out to a friendly holder. Each of these moves value out of the corporation, and each will be examined closely in the diligence of any future transaction.
If a transaction of that kind is ever proposed to you, the questions are the ones a court would ask: was it approved by disinterested directors, was the price supportable, and did it serve the company or someone at the company. Get those answers recorded when the transaction happens, because reconstructing them years later under hostile questioning is a much harder exercise.
Related reading
- White Knight covers the friendly bidder these lock-ups are usually granted to
- Break-Up Fee covers the deal protection that replaced crown jewel lock-ups
- Go-Shop Provision covers the clause designed to keep an auction open
- Poison Pill covers the reversible alternative