Thursday, June 13, 2013
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 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 selection clauses.
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 addtional $850,000 for the SEC.