On June 13, 2013, the Securities and Exchange Commission (“SEC”) charged Revlon with violating federal securities laws when the company misled shareholders during a going private transaction. Specifically, the SEC found 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.
In its investigation, the SEC found that in connection with a voluntary exchange offer to satisfy a significant debt to its controlling shareholder, Revlon erected “informational barriers” or engaged in what one employee termed as "ring fencing" that deprived the Revlon independent board members from knowing critical information (i.e., a third-party financial adviser found that the consideration offered in the transaction was inadequate for tendering 401(k) shareholders). The trustee administering Revlon's 401(k) plan determined that 401(k) members could only tender their shares if a third-party financial adviser made an "adequate consideration determination," which involved assessing whether the value of the preferred stock 401(k) participants would receive was at least equal to the fair market value of the exchanged common stock shares.
The SEC's order determined that, in an attempt to avoid a potential disclosure obligation, Revlon undertook a number of actions to avoid receiving the adequate consideration determination from the third-party adviser, including the following:
- 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 the company of its decision whether to allow 401(k) members to tender their shares without any reference to the adequate consideration determination; and
- In a notice sent to the 401(k) participants 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 found that Revlon's ring-fencing conduct resulted in various materially misleading disclosures to its shareholders. For example, Revlon represented in its offering documents that its board's process was full, fair, and complete in determining the fairness of the exchange offer. In fact, however, the process was compromised because Revlon's board was unable to consider the adequate consideration determination as part of its process to evaluate and ultimately approve the offer. Revlon agreed to settle the SEC's charges and pay an $850,000 penalty.