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From Securities Regulation Daily, June 13, 2013

SEC Charges Revlon with "Ring-Fencing" to Avoid Disclosing A Consideration Determination to Shareholders

By Rodney F. Tonkovic, J.D.

The SEC has charged cosmetics manufacturer Revlon Inc. with fraudulent conduct during a going-private transaction. The Commission found that Revlon violated Exchange Act provisions prohibiting issuers in going private transactions from conduct that operates or would operate as a fraud or deceit. The Commission has announced that Revlon agreed to settle the charges and pay an $850,000 penalty (Release No. 34-69750, June 13, 2013).

According to the Commission, in 2009 Revlon owed a significant debt to its controlling shareholder, who proposed a going-private transaction. The exchanged shares would then be provided to the controlling shareholder to pay down the debt.

Certain of the minority shareholders held shares under Revlon's 401(k) plan. The plan was administered by a trustee who decided that the 401(k) members could tender their shares only if a third-party financial adviser determined that the exchange offer provided for "adequate consideration." The third-party financial adviser ultimately found that the consideration offered in the transaction was inadequate.

Revlon, however, attempted to avoid disclosing the adequate consideration determination to shareholders. The order states that Revlon engaged in "ring-fencing," that is, a series of acts made in an effort to avoid receiving the adviser's adequate consideration determination and any potential obligation to disclose. For example, Revlon amended the trust agreement to ensure that the trustee would not share the adequate consideration determination with Revlon. Revlon also instructed the trustee to inform it of the trustee's decision whether to allow 401(k) members to tender their shares without making any reference to the adequate consideration determination.

Neither Revlon's minority shareholders nor its independent board members knew about either the adequate consideration determination or the "ring-fencing." The Commission found that Revlon's conduct resulted in materially misleading disclosures to its shareholders. While Revlon represented in the offering documents that the board’s process in evaluating and approving the exchange offer was full, fair, and complete, this was not the case due to the "ring-fencing". That deprived the board and shareholders of the opportunity to receive revised, qualified, or supplemental disclosures, including any that might have informed them of the adequate consideration determination.

The Commission concluded that Revlon violated Exchange Act Section 13(e) and Rule 13e-3(b)(1)(iii). Without admitting or denying the SEC's findings, Revlon agreed to a cease-and-desist order against committing violations of these provisions and the financial penalty.

TopStory: MainStory Enforcement FraudManipulation

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