The New Revlon: Court of Chancery Guidance Regarding Pursuit of Stockholder Litigation
May 3, 2010
In In re Revlon, Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL (Del. Ch. Mar. 16, 2010), the Court of Chancery replaced lead representative plaintiffs and their counsel after concluding that the plaintiffs and their counsel failed to litigate the case adequately and exaggerated their litigation efforts in filings submitted to the Court.
The case arose after Revlon, Inc.’s announcement that its controlling stockholder, MacAndrews & Forbes Holdings Inc., offered to acquire all of Revlon’s publicly traded common stock in exchange for a new series of preferred stock. Within three weeks of this announcement, four lawsuits were filed by law firms the Court characterized as “frequent filers” — plaintiffs’ firms that regularly bring representative actions on behalf of stockholders with small ownership stakes. A flurry of litigation followed as the law firms fought for control of the litigation. According to the Court, all litigation activity stopped after the parties agreed to consolidate the actions and appoint two of the law firms as co-lead counsel.
The Court described the initial litigation activity as “the opening steps in the Cox Communications Kabuki dance,” referring to In re Cox Communications, Inc., 879 A.2d 604 (Del. Ch. 2005). According to the Court, in the Cox Communications “ritual,” representative plaintiffs hastily file complaints after disclosure of a corporate transaction and litigate for control of the case. Once the leadership structure is settled, however, litigation activity stops and the plaintiffs seek a settlement and attorneys’ fees. The defendants, meanwhile, proceed forward with the transaction and become willing to enter into a settlement, pay a modest attorneys’ fee award and obtain a broad, transaction-wide release. The Court found the facts before it followed form as the parties to the litigation agreed to minor changes to the transaction and signed a memorandum of understanding (“MOU”) to settle the action.
In the Court’s opinion, however, a number of events should have alerted the plaintiffs’ counsel that the proposed transaction warranted closer attention and more vigorous litigation efforts. For example, the transaction was originally structured as a merger until the financial advisor to Revlon’s special committee indicated that it could not provide a fairness opinion. The special committee then disbanded, and Revlon restructured the transaction as a tender offer even though Revlon’s outside directors did not believe they could obtain a fairness opinion for the tender offer either. Additionally, the Court noted case law suggesting that the Revlon board’s involvement with the tender offer could result in the application of the stringent entire fairness review to the transaction. Moreover, the tender offer did not receive a recommendation from an independent committee, and after the MOU was signed, an insufficient number of shares were tendered to satisfy a minimum tender condition. The Court was critical of the plaintiffs’ response — consenting to an amendment to the minimum tender condition so it would be met.
After the tender offer closed and Revlon announced third quarter results which exceeded expectations, several other stockholders filed separate actions. The existing lead plaintiffs’ counsel reacted by filing an amended complaint and moving to consolidate the new actions into the prior consolidated action and to confirm the then-existing leadership structure. The Court, however, was concerned that the only real litigation activity occurred when there was a dispute over control of the case and counsel’s path to a fee. The Court was also critical of representations in the MOU and court filings that may have exaggerated lead counsel’s role in the settlement and litigation. Consequently, the Court appointed the plaintiffs that had filed the new actions as new lead plaintiffs and gave decision-making authority to the one firm the Court did not consider to be “entrepreneurial litigators” who manage a portfolio of cases to maximize returns through attorneys’ fees. The Court also ordered the newly appointed lead counsel to investigate the negotiations of the MOU and the work done by the law firms they replaced.