The Securities and Exchange Commission (SEC) recently announced that Revlon has agreed to pay an $850,000 fine to resolve charges that it misled investors regarding a “going private” transaction. These transactions generally involve a company delisting and deregistering its stock and cashing out their shareholders so the company or a private equity firm can acquire all of the outstanding shares.
In the current case, Revlon and its controlling shareholder, MacAndrews and Forbes Holdings, proposed a going-private, voluntary exchange offer transaction to bring down the company’s debt. Under the terms of the transaction, Revlon’s minority shareholders could decide whether to exchange their Revlon common stock shares for newly issued preferred stock.
Revlon’s 401(k) plan was administered by a Massachusetts trust company, which determined that it could only allow 401(k) members to tender their shares in the exchange offer if a third-party financial adviser found that the exchange offer provided for “adequate consideration.” To ensure the transaction proceeded smoothly, the SEC alleged that Revlon engaged in various acts of “ring-fencing “to avoid receiving an opinion from the adviser who ultimately found that the terms of Revlon’s proposed “going-private” transaction did not provide for adequate consideration to 401(k) plan participants.
According to the SEC’s order, these acts included:
- 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 ultimately concluded that Revlon’s disclosures concerning the Board’s process were materially misleading because Revlon had concealed from both its Board and minority shareholders that it had engaged in “ring-fencing.” In addition, Revlon’s conduct deprived minority shareholders of the opportunity to receive revised, qualified, or supplemental disclosures, including any that might have informed them of the adviser’s adequate consideration opinion.