The SEC found the beauty giant to be engaged in ‘ring fencing’ that deprived its independent board members from knowing critical information during a voluntary-exchange offer to pay down debt owed to its controlling shareholder. However, it should be noted that to date, Revlon hasn’t admitted to or denied the agency's findings.
Going private transactions can occur in many forms and typically involve the 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.
"Going-private transactions create opportunities for shareholder abuse and can have coercive effects on minority shareholders," says the SEC's division of enforcement associate director, Antonia Chion. "By erecting informational barriers, Revlon kept critically important information from its board and, in turn, misled investors."
Trust agreement amended
According to the Commission, MacAndrews & Forbes Holdings which owns 76 percent of Revlon's shares, asked the beauty giant back in 2009 to offer minority shareholders the option to exchange their common shares on a one-for-one basis for certain preferred shares. The exchanged shares would then be provided to MacAndrews & Forbes to pay down Revlon's debt.
It further revealed that Revlon went on to direct the trustee to inform of its decision whether to allow 401(k) members to tender their shares without any reference and in a notice sent to the 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.
"Revlon amended the trust agreement it had with the trustee to ensure that the trustee would not share the adequate consideration determination with Revlon and ensured that it was not a party to any engagement letter concerning the adequate consideration determination."
In reality, SEC says 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. Thus, the company's shareholders were deprived of the opportunity to receive revised, qualified, or supplemental disclosures, including any that might have informed them of the adequate consideration determination.