United States: Securities Update - June 2013


By Todd C. Schiltz

Chancellor Leo E. Strine Jr., on June 25, 2013, rejected statutory and contractual challenges to exclusive forum bylaws adopted unilaterally by the boards of directors of Chevron Corporation and Federal Express Corporation. See Boilermakers Local 154 Retirement Fund, et al. v. Chevron Corp., et al., C.A. No. 7220-CS and Iclub Inv. v. FedEx Corp., C.A. No. 7238 (Del. Ch. June 25, 2013).

The Chancellor determined that, if a board of directors has been granted the authority to adopt bylaws without the approval of shareholders under the certificate of incorporation, then the board has the power under the Delaware General Corporation Law to adopt exclusive forum bylaw provisions and that such a bylaw becomes part of the contractual agreement between the corporation and its shareholders despite the fact the stockholders did not vote to approve it. The Court made clear that shareholder plaintiffs retain the right to challenge the enforcement of exclusive forum bylaws and left open the possibility that the adoption of such bylaws could be challenged as a breach of fiduciary duty.

The Chevron and FedEx boards had adopted bylaws providing that, unless the corporation consented to an alternate forum, a state or federal court located in Delaware would be the sole and exclusive forum for (i) any derivative action brought on behalf of the corporation, (ii) any action asserting breach of fiduciary duty claims, (iii) any action arising under the Delaware General Corporation Law, or (iv) any action governed by the internal affairs doctrine.

Stockholders claimed that the boards exceeded their statutory authority under Delaware law when adopting these provisions. The Court disagreed, holding that the bylaws were permissible under 8 Del. C. § 109(b), which states that bylaws "may contain any provision, not inconsistent with law or the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights and powers or the rights and powers of its stockholders, directors, officers or employees." The Court held that because the exclusive forum bylaws "address internal affairs claims, the subject matter of the actions the bylaws govern relates quintessentially to 'the corporation's business, the conduct of its affairs, and the rights of its stockholders [qua stockholders].'" The Court further held the bylaws were valid because they regulate where stockholders may file suit not whether they may file suit.

The Court also considered and rejected plaintiffs' claim that the bylaws were invalid as a matter of contract law because the boards had adopted the bylaws unilaterally, without the vote of the stockholders. The Court reasoned that the provisions of the Delaware General Corporation Law and the terms of the certificates of incorporation created a contractual framework which put stockholders on notice that a board may unilaterally adopt bylaws under 8 Del. C. § 109(b) and such a unilateral change "is not extra-contractual simply because the board acts unilaterally; rather it is the kind of change that the overarching statutory and contractual regime the stockholders buy into explicitly allows the board to make on its own."

There was significant uncertainty regarding the validity of exclusive forum bylaws prior to the issuance of this opinion and this development could makes such provisions more popular among corporations.


By Troy M. Calkins and Peter B. Wolf

The Staff of the Securities and Exchange Commission's Division of Corporation Finance, on May 30, 2013, issued responses to several Frequently Asked Questions regarding the conflict minerals rule enacted pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Conflict Minerals Statutory Provision). The full text of the FAQs can be found at http://www.sec.gov/divisions/corpfin/guidance/conflictminerals-faq.htm.

As we noted in our September 2012 Client Alert, reporting issuers must make their initial conflict minerals analysis under Rule 13p-1 of the Exchange Act of 1934 (the Exchange Act) and, if necessary, file their initial Form SD and Conflict Minerals Report for the 2013 calendar year by May 31, 2014. The rule requires issuers to make a three-step disclosure analysis:

  • First, an issuer must determine whether it is subject to the Conflict Minerals Statutory Provision as a person for whom conflict minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured by the person.
  • Second, an issuer subject to the Conflict Minerals Statutory Provision is required to conduct a reasonable country-of-origin inquiry, in order to determine whether its conflict minerals originated in the Democratic Republic of the Congo or its adjoining countries (the "Covered Countries"), and to disclose the results of the inquiry on Form SD.
  • Third, an issuer whose conflict minerals did originate in the Covered Countries and did not come from recycled or scrap sources, or who has reason to believe that its conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources, must file a separate Conflict Minerals Report as an exhibit to Form SD and must comply with certain disclosure and auditing requirements.

The FAQs clarify certain aspects of Rule 13p-1, including:

  • Who the rule applies to

    • All issuers that file reports under Sections 13(a) or 15(d), including voluntary filers, must comply with the rule.1
    • An issuer must include all of its consolidated subsidiaries in its analysis under the rule.
    • An issuer engaging in mining activities is not considered to be manufacturing the mined minerals.
    • An issuer that conducts an IPO is subject to the rule, but does not have to file its initial Form SD until after the first reporting calendar year that beings no sooner than eight months after the effective date of its IPO registration statement.
  • When conflict minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured by the issuer

    • The packaging or container sold with a product is not considered to be part of the product under the rule. Thus, conflict minerals are not considered necessary to the functionality or production of a product due to conflict minerals contained in the product's package or container. Packaging or containers are, however, considered products in their own right if the issuer manufactures and sells them independent of a separate product.
    • Utilizing equipment that contains conflict minerals to provide a service does not subject an issuer to the Conflict Minerals Statutory Provision under the rule. Nor does subsequently selling the equipment.
  • Who must conduct a reasonable country–of-origin inquiry

    • An issuer that manufactures or contracts to manufacture products that include generic components that contain conflict minerals is required to conduct a reasonable country-of-origin inquiry with respect to the conflict minerals included in the generic component, even where the issuer has not contracted to manufacture the generic component.
    • An issuer that specifies that a logo, serial number or other identifier be etched or otherwise marked on a generic product that is manufactured by a third party is not "contracting to manufacture" that product.
  • What must the Conflict Minerals Report filed with Form SD contain

    • Aside from the requirement that the description of the issuer's products in the Conflict Minerals Report filed as an exhibit to Form SD must state clearly that the products "have not been found to be DRC conflict free" or are "DRC conflict undeterminable," an issuer may describe its products as it sees fit based on the facts and circumstances and in terms commonly understood within the issuer's industry.
    • An issuer whose products are determined to contain conflict minerals from the Covered Countries, but that are "DRC conflict free," must file a Form SD with a Conflict Minerals Report; however, the issuer is not required to disclose the products containing the conflict minerals in the Conflict Minerals Report.
  • What are the consequences of failing to timely file a Form SD

    • Failing to timely file a Form SD regarding conflict minerals does not cause an issuer to lose its eligibility to use Form S-3.

The foregoing is a summary of the FAQs. Companies intending to rely on any of these FAQs are cautioned to read the FAQs in their entirety.

The National Association of Manufacturers continues to challenge the conflict minerals rule on an expedited basis in the United States District Court for the District of Columbia, with oral argument on July 1, 2013. Pending the outcome of this challenge, reporting issuers should continue to prepare for their initial disclosure due May 31, 2014.


By Brian J. Lynch

On June 13, 2013, the SEC entered into a cease and desist order and imposed an $850,000 civil money penalty against Revlon, Inc. (Revlon) in connection with a 2009 "going private" transaction (the Revlon SEC Order). This article identifies some of the significant challenges in executing a going private transaction and highlights particular aspects of the Revlon deal that can serve as a teaching lesson for planning and minimizing potential risks and delays in future going private transactions.

Background of Revlon Going Private Transaction.The controlling stockholder of Revlon, MacAndrews & Forbes Holdings Inc. (M&F), made a proposal to the independent directors of Revlon in April of 2009 to acquire, by way of merger (the Merger Proposal), all of the Class A common stock not currently owned by M&F (the Revlon Minority Stockholders). The Merger Proposal was submitted as a partial solution to address Revlon's liquidity needs arising under an impending maturity of a $107 million senior subordinated term loan that was payable to M&F by a Revlon subsidiary. A portion of this debt (equal to the liquidation value of the preferred stock issued in the Merger Proposal) would be contributed by M&F to Revlon, as part of the transaction. This was submitted as an alternative in lieu of potentially cost-prohibitive and dilutive financing alternatives (or potentially unavailable financing alternatives) during the volatile credit market following the 2008 sub-prime mortgage crisis.

In response to the Merger Proposal, Revlon formed a special committee of the Board (the Special Committee) to evaluate the Merger Proposal. The Special Committee retained a financial advisor and separate counsel to assist in its evaluation of the Merger Proposal. Four lawsuits were filed in Delaware between April 24 and May 12 of 2009 challenging various aspects of the Merger Proposal.

On May 28, 2009, the Special Committee was informed by its financial advisor that it would be unable to render a fairness opinion on the Merger Proposal, and thereafter the Special Committee advised M&F that it could not recommend the Merger Proposal. In early June of 2009, the Special Committee disbanded, but the independent directors subsequently were advised that M&F would make a voluntary exchange offer proposal to the full Revlon Board of Directors (the Exchange Offer). Revlon's independent directors thereafter chose to continue to utilize counsel that served to advise the Special Committee, but they elected not to retain a financial advisor for assistance with the forthcoming M&F Exchange Offer proposal, because they were advised that the securities to be offered in the Exchange Offer would be substantially similar to those issuable through Merger Proposal. As a result, they did not believe they could obtain a fairness opinion for the Exchange Offer consideration. The Board of Directors of Revlon (without the interested directors participating in the vote) ultimately approved the Exchange Offer without receiving any fairness opinion with respect to the Exchange Offer.

On September 24, 2009, the final terms of the Exchange Offer were set and the offer was launched. The Exchange Offer, having been extended several times, finally closed on October 8, 2009, with less than half of the shares tendered for exchange out of all Class A shares held by the Revlon Minority Stockholders. On October 29, 2009, Revlon announced third quarter financial results that exceeded market expectations, but these results were allegedly consistent with the financial projections disclosed in the Exchange Offer. Following these announced results, Revlon's Class A stock price increased. These developments led to the filing of additional litigation in Delaware Chancery Court.

The Revlon SEC Order and Associated Rule 13e-3 Considerations. A subset of the Revlon Minority Stockholders consisted of participants in a Revlon 401(k) retirement plan, which was subject to obligations under the Employee Retirement Income Security Act of 1974, as amended (ERISA) and a trust agreement (the Trust Agreement) between Revlon and the Plan's trustee (the Trustee). Provisions of ERISA and the Trust Agreement prohibited a 401(k) Plan participant's sale of common stock to Revlon for less than "adequate consideration."

During July of 2009, Revlon became actively involved with the Trustee to control the flow of information concerning any adequate consideration determination, to prevent such information from flowing back to Revlon and to prevent such information from flowing to 401(k) participants (and ultimately Revlon Minority Stockholders); certain amendments to the Trust Agreement were requested by Revlon and agreed to by the Trustee to effect these purposes. This also had the additional effect of preventing the independent directors of Revlon from being aware that an adequate consideration opinion would be rendered for the benefit of Revlon's 401(k) Plan participants.

On September 28, 2009, the financial advisor to the 401(k) Plan rendered an adverse opinion that the Exchange Offer did not provide adequate consideration to 401(k) Plan participants. As a result, the Trustee informed 401(k) Plan participants, as previously directed by Revlon, that the 401(k) Plan Trustee could not honor tender instructions because it would result in a "non-exempt prohibited transaction under ERISA." Revlon Minority Stockholders, including 401(k) Plan participants, were generally unaware that an unfavorable adequate consideration opinion had been delivered to the Trustee.

In the Revlon SEC Order, the SEC concluded that Revlon engaged in a series of materially misleading disclosures in violation of Rule 13e-3. Despite disclosure in the Exchange Offer that the Revlon Board had approved the Exchange Offer and related transactions based upon the "totality of information presented to and considered by its members" and that such approval was the product of a "full, fair and complete" process, the SEC found that the process, in fact, was not full, fair and complete. The SEC particularly found that the Board's process "was compromised because Revlon concealed from both minority shareholders and from its independent board members that it had engaged in a course of conduct to 'ring-fence' the adequate consideration determination." The SEC further found that "Revlon's 'ring-fencing' deprived the Board (and in turn Revlon Minority Stockholders) of the opportunity to receive revised, qualified or supplemental disclosures including any that might have informed them of the third party financial advisor's determination that the transaction consideration to be received by the 401(k) members . . . was inadequate."

Significance of the Revlon SEC Order. The Revlon Order underscores the significance of transparency and fairness being extended to all unaffiliated stockholders in a Rule 13e-3 transaction, including the 401(k) Plan participants whose shares represented only 0.6 percent of the Revlon Minority Stockholder holdings. Importantly, the SEC took exception to the fact that Revlon actively prevented the flow of information regarding fairness and found that the information should have been provided for the benefit of these participants, as well as all Revlon Minority Stockholders. This result ensued despite the fact that Revlon's Exchange Offer disclosures noted in detail the Special Committee's inability to obtain a fairness opinion for the Merger Proposal and the substantially similar financial terms of the preferred stock offered in both the Merger Proposal and the Exchange Offer transactions.

Going Private Transactions are Subject to Heightened Review by the SEC and Involve Significant Risk, Including Personal Risk. Going private transactions are vulnerable to multiple challenges, including state law fiduciary duty claims and wide ranging securities law claims, including claims for private damages as well as SEC civil money penalties. In the Revlon transaction, the SEC Staff conducted a full review of the going private transaction filings. Despite the significant substantive changes in disclosure brought about through the SEC comment process, the SEC subsequently pursued an enforcement action and prevailed against Revlon for civil money penalties.

Although the SEC sanction was limited in scope to Revlon, it is worth noting that the SEC required each of Revlon, M&F and M&F's controlling stockholder, Ronald Perelman, to acknowledge (i) personal responsibility for the adequacy and accuracy of disclosure in each filing; (ii) that Staff comments do not foreclose the SEC from taking action including enforcement action with regard to the filing; and (iii) that each may not assert staff comments as a defense in any proceeding initiated by the SEC or any other person under securities laws. Thus, in planning a going private transaction, an issuer and each affiliate engaged in the transaction (each, a Filing Person) must make these acknowledgements, which expose each Filing Person (including certain affiliates who may be natural persons) to potential damages and sanctions.

The SEC also requires Filing Persons to demonstrate in excruciating detail the basis for their beliefs regarding the fairness of the transaction. These inquiries typically focus on the process followed in pursuing and negotiating the transaction, the procedural fairness associated with such process, and the substantive fairness of the overall transaction, including financial fairness. As a result of this, each Filing Person (including certain natural persons) in a going private transaction should be prepared to diligently satisfy cumbersome process and fairness requirements as part of the pre-filing period deliberative process, and later stand behind extensive and detailed disclosures that demonstrate and articulate the basis of the procedural and substantive fairness of the transaction, including financial fairness.

Damages and Penalties in Going Private Transactions Can Be Significant. It is worth noting that civil money penalties and settlements that have been announced to date by Revlon for its Exchange Offer going private transaction is approximately $30 million. After factoring in professional fees, it would not be surprising that the total post-closing costs, penalties and settlements approach 50 percent of the implied total transaction value of all securities offered in the Exchange Offer transaction. From this experience, it is obvious that costs, damages and penalties can be a significant component of overall transaction consideration, and these risks must be factored in as part of overall transaction planning at the outset.

Given the risks of post-transaction damages and costs, it is essential that future going private transactions be structured and executed by Filing Persons with the foregoing considerations in mind in order to advance a transaction with full transparency, a demonstrably fair procedural process and deal consideration that is substantively fair and demonstrably supportable as fair from a financial point-of-view.


1. With the exception of registered investment companies that are required to file reports pursuant to Rule 30d-1 under the Investment Company Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Troy M. Calkins
Similar Articles
Relevancy Powered by MondaqAI
Drinker Biddle & Reath LLP
McDermott Will & Emery
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Drinker Biddle & Reath LLP
McDermott Will & Emery
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions