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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Friday, June 14, 2013

Revlon Settles SEC Charges It Misled Shareholders in Going Private Transaction

The SEC charged Revlon with misleading shareholders during a "going private transaction."  An SEC investigation found that during a voluntary exchange offer to satisfy a significant debt to its controlling shareholder, Revlon engaged in "ring fencing" that deprived its independent board members from knowing critical information: the transaction's consideration had been deemed inadequate by a third party who evaluated whether current and former employees invested in Revlon common stock through the company's 401(k) plan could exchange their shares.  Revlon agreed to settle the SEC's charges and pay an $850,000 penalty.

According to the SEC's order instituting settled administrative proceedings, controlling shareholder MacAndrews and Forbes (M&F) asked Revlon in 2009 to offer minority shareholders the option to exchange their common stock shares on a one-for-one basis for preferred shares with certain financial characteristics. The exchanged shares would then be provided to M&F to pay down Revlon's debt. The trustee administering Revlon's 401(k) plan decided that 401(k) members could tender their shares only if a third-party financial adviser made an "adequate consideration determination," which involved assessing whether the value of the preferred stock 401(k) members would receive was at least equal to the fair market value of the exchanged common stock shares. The third-party financial adviser ultimately found that the consideration offered in the transaction was inadequate for tendering 401(k) shareholders.

The SEC's order finds that Revlon, In an attempt to avoid a potential disclosure obligation, engaged in what one employee termed as "ring fencing" to avoid receiving the adequate consideration determination from the third-party adviser:

•Revlon amended the trust agreement it had with the trustee to ensure that the trustee would not share the adequate consideration determination with Revlon.
•Revlon ensured that it was not a party to any engagement letter concerning the adequate consideration determination.
•Revlon directed the trustee to inform Revlon of its decision whether to allow 401(k) members to tender their shares without any reference to the adequate consideration determination.
•In a notice sent to the 401(k) members and publicly filed as an exhibit to the exchange offer documents, Revlon removed the explicit term "adequate consideration" and replaced it with citations to ERISA statutes.

The SEC's order finds that Revlon violated Section 13(e) of the Securities Exchange Act of 1934 and Rule 13e-3(b)(1)(iii), which prohibits issuers and their affiliates in going private transactions from directly or indirectly engaging in any act, practice, or course of business that operates or would operate as a fraud or deceit.

http://lawprofessors.typepad.com/securities/2013/06/revlon-settles-sec-charges-it-misled-shareholders-in-going-private-transaction.html

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