The SEC has just imposed an $850,000 civil penalty on
Revlon for misleading disclosures in the run up to its going-private
transaction that were the subject of litigation (2009-2010) before the Chancery
Court. Vice Chancellor Laster's opinion in In re Revlon S'holder Litig [an enhanced version of this opinion is available to lexis.com
subscribers] got a lot of attention - in part because of his
tongue-lashing of plaintiff's counsel as well as his approval in dicta of forum
The original Revlon transaction called for MacAndrews
& Forbes to acquire 100% of the publicly-traded Class A shares. Public
shareholders wouldn't receive cash in the transaction. Rather, they would get
new Series A Preferred Stock (unlisted) instead. The board was unable to get
Barclays to issue a fairness opinion, prompting a change in the structure. Rather
than a merger, the board restructured the transasction to be an exchange offer,
thus doing away for the messy necessity of special committees and fairness
opinions. Vice Chancellor Laster didn't agree.
Turns out the SEC, which scrutinizes 13e-3 disclosures,
didn't either. In
its order the SEC laid out what it thought was misleading about
Revlon's 13e-3 disclosures:
49. Revlon's third amended exchange offer filing included
a section, prominently displayed in bold, entitled "Position of Revlon as to
the Fairness of the Exchange Offer." As a general matter, Revlon disclosed in
this section the view of its Independent Board members concerning the fairness
of the transaction.
52. Revlon disclosed: "The Board of Directors approved
the Exchange Offer and related transactions based upon the totality of the
information presented to and considered by its members." Second, in a related
disclosure, Revlon, in disclosing the positive factors it considered for the
exchange offer, noted that "the exchange offer . . . [was] unanimously approved
by the Independent Directors . . . who were granted full authority to evaluate
and negotiate the Exchange Offer and related transactions."
53. As represented by Revlon to its minority
shareholders, the Board's process in evaluating and approving the exchange
offer was full, fair, and complete. The Board's process, however, was not full,
fair, and complete. In particular, the Board's process was compromised because
Revlon concealed - both from minority shareholders and its Independent Board
members - that it had engaged in a course of conduct to "ring-fence" the
adequate consideration determination.
54. Accordingly, Revlon's disclosures about the Board's
evaluation of the exchange offer were materially misleading to minority
shareholders. Moreover, Revlon's "ring-fencing" deprived the Board, and in
turn, minority shareholders of the opportunity to receive revised, qualified,
or supplemental disclosures, including any that might have informed them of the
third party financial adviser's determination that the transaction
consideration to be received by 401(k) members in connection with the
transaction was inadequate.
55. Third, Revlon materially misled minority shareholders
when it stated that unaffiliated shareholders - which included Revlon's 401(k)
members - could decide whether to voluntarily tender their shares. Revlon cited
the voluntary nature of the exchange as a positive factor on which the Board
relied in approving the exchange offer.
56. In fact, all minority shareholders - as well as its
Independent Board members - were unaware that Revlon's 401(k) members would not
be able to tender their shares if an adviser found that the consideration offered
for their shares was inadequate. Moreover, Revlon's non-401(k) minority
shareholders were not on equal footing with Revlon's 401(k) members because
Revlon's 401(k) members received protection as a result of the adviser's
finding that 401(k) members were not provided adequate consideration.
OK, so that's not very pretty. Although the SEC does give
13e-3 filings extra scrutiny, it's not as often that they come in after a
transaction and impose fines, so an administrative proceeding here is uncommon.
Plaintiff's counsel in Delaware ultimately settled claims in this case for $9.2 million. Fidelity settled its claims with the
company on its own got $19.9 million. Now, tack onto that an additional $850,000
for the SEC.
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