SEC Penalizes Revlon

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In 2009, Tom Perelman attempted to take Revlon private.  The Securities and Exchange Commission recently announced that Revlon agreed to pay an $850,000 penalty to settle accusations that it deceived shareholders and independent directors in connection with the failed takeover.

Antonia Chion, an associate director in the SEC’s division of enforcement said, “Going private transactions create opportunities for shareholder abuse and can have coercive effects on minority shareholders.  By erecting informational barriers, Revlon kept critically important information from its board and, in turn misled investors.”

Revlon’s attorney, Colleen Mahoney of Skadden, Arps, Slate, Meagher & Flom did not respond to requests for comment. 

Perelman gained control of the company in 1985 in what was considered a hostile takeover.  According to securities filings, Perelman’s investment firm, MacAndrews and Forbes, controls approximately ¾ of Revlon shares.

In 2009, Revlon went through significant financial troubles.  For several years, the company posted losses and lost market share to competitors L’Oreal, Estée Lauder, and Procter & Gamble in addition to having a heavy debt burden.

Perelman attempted to solve the company’s problems by offering to buy out minority shareholders and take the company private.  However, an independent financial advisor concluded that the proposed deal was unfair to Revlon and the minority shareholders.

After his deal to take it private fell apart, Perelman attempted to execute an exchange offer where the minority shareholders would swap their stock for preferred shares.  This deal would have helped Revlon pay off a substantial loan owed to MacAndrews and Forbes.  Since Perelman was on both sides of the deal, the transaction’s fairness was questioned.  This led Revlon to ask independent board members for a deal assessment, which then led to review by a financial advisor.

The financial advisor concluded that similar to the going private transaction, the exchange offer was unfair.  He said that the preferred shares being offered were not equal to the value of the common stock.

The SEC said that Revlon went to great lengths to hide that decision from the retirement plan members.  Along with other deceitful maneuvers, the company altered its agreement with the trustee to ensure that the trustee would not share the adviser’s opinion with Revlon shareholders.  In securities filings, Revlon also misrepresented that the board’s process was “full, fair and complete.”

In the SEC order, Revlon’s conduct was described as “ring fencing,” withholding vital information from minority shareholders which would’ve helped them decide whether to exchange their shares.  The agency said that the company’s board could not fairly evaluate the adequacy of the exchange offer, because of Revlon’s misconduct.

Frank Aquila a corporate lawyer at Sullivan and Cromwell not involved in the case said, “In short, this result underscores that a controlling shareholder cannot play hide the ball when it wants to acquire the shares it does not own.”

Revlon shares have performed well recently, increasing approximately 40 percent over the last year.  In trading Thursday, the stock increased approximately 3.7 percent to $20.64. Currently, the company’s market value is approximately $1 billion.


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