In re Revlon, Inc. S’holders Litig., C.A. No. 4578-VCL (Del. Ch. Mar. 16, 2010)
In an opinion appointing new lead plaintiffs’ counsel, the Court of Chancery criticized the original lead plaintiffs’ attorneys for their failure to engage in meaningful litigation of plaintiffs’ claims prior to agreeing to a proposed settlement of the litigation for non-monetary consideration.
The case arose out of a proposed merger between Revlon, Inc. and its controlling stockholder, MacAndrews & Forbes Holdings Inc. (“MacAndrews”), as a result of which Revlon’s stockholders would receive shares of Series A Preferred Stock in exchange for their shares of Class A common stock. Four representative actions were subsequently filed challenging the proposed merger. After a brief struggle for control of the litigation, the various plaintiffs submitted an agreed upon form of consolidation order in which all of the law firms that filed complaints as Delaware counsel or forwarding counsel were designated as Plaintiffs’ Committee of the Whole (“Original Counsel”). After Revlon’s financial advisor refused to render a fairness opinion on the merger proposal, MacAndrews and Revlon restructured the deal as a tender offer in which Revlon Class A holders could exchange their shares for the same series A Preferred contemplated under the original merger proposal, but with a dividend payment of 12.75%. Thereafter, Original Counsel entered into settlement discussions with defendants and obtained three minor changes to the revised tender offer transaction: 1) an increase on the special dividend payable in the event no change of control takes place within two years; 2) a right for Series A Preferred holders to waive the change of control payment in exchange for converting their shares into Series B Preferred Shares; and 3) MacAndrews’ agreement to eliminate remaining Revlon holders through a short-form merger if enough shares were tendered in the initial tender offer. With these new concessions, the parties entered into a Memorandum of Understanding (“MOU”) and submitted it to the Court for approval. Prior to confirmatory discovery taking place, however, two additional Revlon shareholders filed complaints challenging the tender offer transaction. These new plaintiffs sought to have their cases consolidated with the existing actions and for their attorneys to replace Original Counsel as new lead plaintiffs’ counsel.
In its opinion, the Court found that, having won the contest to be appointed lead counsel, Original Counsel had done little other than negotiate the MOU with defendants’ counsel. The Court noted that Original Counsel had not even served discovery after they were appointed lead counsel. Furthermore, given that Revlon and MacAndrews fully negotiated the revised tender offer transaction prior to Original Counsel being appointed lead counsel, the Court found that Original Counsel had greatly exaggerated its role in helping bring about the revised transaction format. Rather, the Court found the revised tender offer format was much more a result of Revlon’s financial advisor’s refusal to issue a fairness opinion with respect to the original merger proposal. The Court stated that this fact, along with the Special committee’s refusal to recommend the original merger, should have prompted Original Counsel to conduct a meaningful assessment of the claims prior to entering into a settlement. Turning to the actual terms of the settlement, the Court discounted the three minor alterations Original Counsel had secured to the revised tender offer given that the first two alterations were contingent in nature and would only become operative based on variables subject to MacAndrews’ control. Additionally, given MacAndrews’ status as a controlling stockholder, the third alteration was already required to render its tender offer noncoercive and the Court was confident that defendants would have inserted the provision even without Original Counsel’s prompting. As a result, the Court decided to replace Original Counsel with counsel for the new plaintiffs as lead counsel (“New Counsel”) for the consolidated action. The Court also directed New Counsel to investigate a number of issues relating to the litigation through the discovery process, including the actions of Original Counsel in connection with the negotiated settlement and the revised tender offer transaction.