On June 13, 2013, the Securities and Exchange Commission (SEC) issued an order instituting settled administrative proceedings in which Revlon, Inc. (NYSE: REV) (Revlon) agreed to an $850,000 settlement with the SEC for violating provisions of Section 13(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 13e-3(b)(1)(iii) under the Exchange Act. Rule 13e-(b)(1)(iii) prohibits an issuer in a going-private transaction from engaging in any act, practice or course of business that operates or would operate as a fraud or deceit upon any person. While Rule 13e-(b)(1) cases are relatively rare, the deceptive acts prong of Rule 13e-(b)(1) captures deceptive practices that may lack certain elements required to show a scheme or artifice to defraud under Exchange Act Rule 10b-5.

Going-private transactions often present opportunities for minority shareholder abuse by issuers because the negotiations are rarely negotiated at arm's length. For this reason, Schedule 13E-3 requires a discussion of the purposes of the transaction, any alternatives considered by the company and whether the transaction was fair to unaffiliated shareholders. The schedule also requires disclosure of reasons for any abstention or disagreement by directors and whether a majority of independent directors approved of the transaction.

According to the SEC order, Revlon engaged in "ring fencing," conduct designed to conceal an unfavorable third-party opinion regarding the terms of Revlon's going private transaction, especially regarding the adequacy of consideration being offered to minority shareholders participating in Revlon's 401(k) plan.

In 2009, Revlon's 57 percent majority shareholder MacAndrews and Forbes Holdings, Inc. (M&F) proposed a voluntary exchange offer under which minority shareholders would have the option to exchange common shares for newly issued preferred shares with certain financial characteristics. The common stock would then be used to reduce a maturing $107 million term loan owed to M&F.

Under the initial voluntary exchange offer, the minority shareholders would receive an annual dividend payment of 12.75 percent (paid quarterly), and, at the end of four years, Revlon would pay tendering shareholders $5.21 per share for the preferred stock. Minority shareholders would not be able to participate in any appreciation of Revlon's publicly traded common stock, except in the event of a change in control.

Under the Employee Retirement Income Security Act (ERISA), the trustee of Revlon's 401(k) plan could only allow participants to tender their shares if the transaction provided for "adequate consideration." The trustee informed Revlon that a third-party financial valuation would be required in order to determine whether the consideration was in fact adequate. Revlon initially resisted this requirement and went so far as to propose several alternatives. For example, Revlon proposed that the trustee could simply conclude that the consideration was adequate, or the trustee could obtain a legal opinion as opposed to a financial adviser opinion. Revlon would have been required to disclose any reports, opinions or appraisals related to the consideration offered to shareholders under Item 1015 of Regulation M-A.

The trustee retained a New York-based valuation firm to conduct the third-party adequate consideration determination. Revlon was aware that the firm had been retained for this purpose; moreover, Revlon reimbursed the trustee for the cost of the determination.


The SEC order enumerates the following three acts that it describes collectively as "ring-fencing":

  1. To conceal the result of the adequate consideration determination, Revlon amended the trust agreement with the trustee to mandate that documentation or reports prepared by or for the trustee not be disclosed to Revlon, its affiliates, any employee of Revlon or its affiliates, or any participant in the 401(k) plan under any circumstances, unless required by a court order. Revlon also insisted upon additional amendments to the trust agreement, stating that the trustee had sole authority to determine whether to allow 401(k) plan members to tender their shares, despite the existence of a similar provision to that effect.
  2. Revlon directed the trustee to engage the third-party advisor, independent of Revlon's involvement and without Revlon being a party to the engagement letter, although Revlon reimbursed the trustee for the cost of the engagement.
  3. Revlon specifically prohibited the trustee from communicating any information to Revlon regarding the adequate consideration determination beyond whether or not the trustee would permit the 401(k) plan participants' tendering of shares.

In July 2009, the trustee prepared a draft letter to the 401(k) plan participants disclosing the independent third-party adequate consideration analysis. Revlon reviewed the draft letter and proposed substantial revisions. Revlon's revised letter, which was ultimately sent to shareholders, stated that the plan trustee would disregard shareholders' tender instructions if following them "would result in a non-exempt prohibited transaction under [ERISA]."

The third-party adviser ultimately found that the consideration was inadequate and 401(k) plan shareholders were prohibited from tendering their shares. However, pursuant to Revlon's instructions and the amended trust agreement, none of the minority shareholders or any independent directors were informed of the valuation. Thus, the remaining tendering minority shareholders had no information concerning the adequate consideration determination.

The exchange offer was launched on August 10, 2009 and subsequently amended on August 27, September 3 and September 24, 2009. The final amendment disclosed that Revlon had increased the dividend and exchange price per share to be paid to tendering shareholders. When the offer closed on October 8, 2009, 9.3 million shares were tendered and 46 percent of the Class A common stock not beneficially owned by M&F was converted under the terms of the offer.

Revlon's third amended exchange offer contained materially misleading statements characterizing the process conducted by the independent board members as "full, fair and complete" despite the ring-fencing acts engaged in by Revlon. Additionally, Revlon's filings construed the voluntariness of the transaction as a positive factor, stating that unaffiliated shareholders — including the 401(k) plan members — could voluntarily decide whether to tender their shares.

In addition to monetary sanctions of $850,000, the order requires Revlon to cease and desist from further violations of Exchange Act Section 13(e) and Rule 13e-3(b)(1)(iii).

Press release: http://www.sec.gov/news/press/2013/2013-110.htm

Order: http://www.sec.gov/litigation/admin/2013/34-69750.pdf