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Smith v. Trinko LLP

Court of Chancery of Delaware

April 16, 2014

TRINKO, LLP; Plaintiffs,

Submitted: January 17, 2014

Robert J. Katzenstein, David A. Jenkins, Michele C. Gott, Kelly A. Green, SMITH, KATZENSTEIN & JENKINS LLP, Wilmington, Delaware; Robert I. Harwood, Daniella Quitt, Samuel K. Rosen, HARWOOD FEFFER LLP, New York, New York; Curtis V. Trinko, Jennifer E. Traystman, C. William Margrabe, LAW OFFICES OF CURTIS V. TRINKO, LLP, New York, New York; Attorneys for Plaintiffs.

P. Clarkson Collins, Jr., Edward M. McNally, Bryan J. Townsend, MORRIS JAMES LLP, Wilmington, Delaware; Steven B. Feirson, Sabrina L. Reliford, DECHERT LLP, Philadelphia, Pennsylvania; Attorneys for Defendants.


LASTER, Vice Chancellor.

The plaintiffs are law firms who successfully prosecuted a class action lawsuit on behalf of the stockholders of Revlon, Inc., against Revlon's controlling stockholder and its board of directors. The plaintiffs' litigation efforts resulted in a significant monetary settlement for the class. The defendants are investment funds and entities affiliated with the Fidelity financial services group. Collectively, the Fidelity defendants held or controlled shares constituting approximately 75% of the class. After the plaintiffs began pursuing their case, but before the plaintiffs settled on behalf of the class, the Fidelity defendants settled their claims for (i) $3.25 per share plus (ii) a contingent payment based on any additional amount that the plaintiffs obtained for the rest of the class. The plaintiffs ultimately settled for $5.50 per share, and the Fidelity defendants collected their contingent payment. Through this action, the plaintiffs seek to recover an award of attorneys' fees and expenses from the Fidelity defendants for the benefits that their efforts conferred. This post-trial decision awards $3, 986, 777 to the plaintiffs.


The case was tried on October 30 and 31, 2013. The parties introduced 202 documentary exhibits and relied on deposition testimony from seven witnesses. Three witnesses testified live at trial. The plaintiffs bore the burden of proving their claims by a preponderance of the evidence.

A. The Merger Proposal

MacAndrews & Forbes Holdings Inc. is Revlon's controlling stockholder. Before the events giving rise to this litigation, Revlon had two classes of stock outstanding. Revlon's Class A Common Stock was (and is) listed on the New York Stock Exchange. Revlon had issued 48, 250, 163 shares of Class A Common, of which 20, 042, 428 were owned by the public and the balance by MacAndrews & Forbes (directly or through affiliates). Revlon had issued 3, 125, 000 shares of Class B Common Stock, all owned by MacAndrews & Forbes. Through its equity ownership, MacAndrews & Forbes controlled 75% of Revlon's voting power. The board of directors of Revlon (the "Board") consisted of four representatives from MacAndrews & Forbes and eight directors whom Revlon described as independent under the NYSE listing standards.

On April 13, 2009, MacAndrews & Forbes proposed to cause Revlon to effectuate a merger though which each publicly traded share of Revlon's Class A Common would be converted into the right to receive shares of a newly created Series A Preferred Stock that would not be listed on any securities exchange (the "Merger Proposal"). In response to the Merger Proposal, the Board formed a special committee with a mandate to evaluate the Merger Proposal, negotiate its terms, and recommend to the board whether or not to proceed with the transaction (the "Special Committee").

After the announcement of the Merger Proposal, four purported class actions were filed in this court against MacAndrews & Forbes and the members of the Board. Each of the complaints ignored the fact that MacAndrews & Forbes only had made a negotiable proposal and there as yet was no transaction to challenge. All of the complaints were skimpy on the details and suggested a lack of meaningful pre-suit investigation. After filing, the plaintiffs' law firms (collectively, "Old Counsel") engaged in a short-lived squabble over who would control the litigation, then agreed to consolidate their cases under a leadership structure where everyone had a role.

As soon as a leadership structure was established, all litigation activity ceased. The next item on the docket after the June 24, 2009 consolidation order was an August 14, 2009 letter advising the court that the parties had entered into a memorandum of understanding to settle the case.

B. The Exchange Offer

Meanwhile, on May 6, 2009, the Special Committee was formally constituted. Its membership comprised all of the Revlon directors other than the representatives of MacAndrews & Forbes. The Special Committee hired a legal advisor and a financial advisor. After conducting diligence and attempting to value the Series A Preferred, the financial advisor expressed concern about the fairness of the Merger Proposal. On May 22, the Special Committee conveyed those concerns to MacAndrews & Forbes and expressed a strong preference for an all-cash transaction.

As originally proposed, each share of the Series A Preferred would have (i) carried a liquidation preference of $3.74 per share, (ii) paid quarterly cash dividends equal to 12.5% of the liquidation preference per year, (iii) been entitled to mandatory redemption four years after issuance at a price equal to the liquidation preference plus accrued but unpaid dividends, (iv) been entitled to a contingent payment if a sale of Revlon was consummated within certain parameters and not later than two years after the merger, (v) received $1 if a sale of Revlon was not consummated within two years, and (vi) carried voting rights comparable to the Class A Common but without the right to vote on any merger, combination, or similar transaction (subject to certain exceptions). After hearing the Special Committee's concerns, MacAndrews & Forbes stood firm on its proposed structure, but offered to raise the dividend on the Series A Preferred from 12.5% to 12.75% and increase the liquidation preference from $3.74 to $4.75 per share. In return for these changes, the Series A Preferred no longer would entitle the holder to a contingent payment in the event of a sale of the company or a $1.00 per share special dividend in the event that no change of control transaction was consummated within two years.

On May 28, 2009, the Special Committee's financial advisor indicated that it could not render an opinion that the Merger Proposal was fair from a financial point of view to holders of the Class A Common, either under the initial or improved terms. Later that day, the Special Committee advised MacAndrews & Forbes that the Special Committee could not recommend either alternative.

While this was going on, the Special Committee's counsel was discussing with MacAndrews & Forbes's counsel how the transaction might be restructured so it could move forward without the impediment of the Special Committee and its financial advisor. The lawyers hit upon the idea of Revlon launching a tender offer in which Class A Common holders could exchange their shares for the same Series A Preferred (the "Exchange Offer"). The Exchange Offer would not be conditioned on special committee approval but would include a non-waivable majority-of-the-minority tender condition. After learning from its counsel about this alternative path, the Special Committee disbanded.

Between June 10 and July 22, 2009, MacAndrews & Forbes negotiated the terms of the Exchange Offer with the management team of its controlled subsidiary. They agreed that the Series A Preferred would have the same terms contemplated by the Merger Proposal but would pay a dividend of 12.75%. On July 29 the Board authorized Revlon to proceed with the Exchange Offer. The Board declined to make any recommendation to the Class A Common stockholders on whether to tender their shares.

C. Fidelity's Role

While developing the eventually withdrawn Merger Proposal and the subsequently employed Exchange Offer, MacAndrews & Forbes consulted with the Fidelity defendants. In early 2009, before making a proposal to Revlon, MacAndrews & Forbes representatives discussed the contemplated transaction with Tom Soviero, the portfolio manager of several Fidelity funds, and Nate Van Duzer, a Fidelity managing director who focused on special situations for Fidelity's mutual fund business. After MacAndrews & Forbes made its proposal, the Special Committee's financial advisor discussed the Merger Proposal with Fidelity representatives.

The Fidelity representatives generally favored the Merger Proposal, at least in part because the Fidelity funds had idiosyncratic reasons for wanting to dispose of their Class A Common. The Fidelity funds that held the Class A Common were high-yield funds that had originally invested in Revlon debt, then exchanged that debt for Class A Common in 2004. The investment profile of the Class A Common did not match the investment criteria that the fund managers were supposed to follow. An instrument with a yield would match up better with the funds' investment criteria. The MacAndrews & Forbes proposal offered the fund managers an opportunity to realign their Revlon holdings with the investment criteria of the funds they managed.

In late May 2009, MacAndrews & Forbes informed Fidelity that the Merger Proposal was being restructured to take the form of the Exchange Offer and asked Fidelity to execute a support agreement by which the Fidelity funds would commit to tender their shares. MacAndrews & Forbes also asked Fidelity to review disclosures in draft Exchange Offer materials that described Fidelity's intention to tender. MacAndrews & Forbes hoped to use either a support agreement from Fidelity or an expression of Fidelity's intention to tender as an indication of fairness. If Revlon's other stockholders were not advised or did not understand that the Fidelity funds had idiosyncratic reasons for wanting to dispose of their Class A Common, then Revlon's stockholders might infer that what was good for Fidelity was good for them.

Fidelity declined to execute a support agreement. Fidelity also stated in a letter to Revlon dated July 29, 2009, that any decision Fidelity made relating to the Exchange Offer should not be relied on by any third parties—including the Revlon board—as an endorsement of the transaction. Fidelity asked that the Exchange Offer materials include these admonitions.

During the same period, Fidelity representatives had discussions with Revlon about Fidelity Management Trust Company ("FMTC"), which acted as the directed trustee for Revlon's 401(k) plan. As a directed trustee, FMTC had to follow the instructions of plan participants to tender their shares into the Exchange Offer, unless those instructions would violate ERISA. ERISA required that any exchange of plan participant shares be supported by adequate consideration. Because the Exchange Offer involved exchanging shares of publicly traded Class A Common, which had an observable market price, for shares of new Series A Preferred, which had no market price, FMTC needed grounds to believe that the Exchange Offer provided adequate consideration for the Class A Common. Otherwise, FMTC could not permit the plan participants to tender.

FMTC asked Revlon to obtain an opinion from a financial advisor to the effect that the Exchange Offer provided adequate consideration for the Class A Common (the "Adequate Consideration Opinion"). Revlon did not want to seek such an opinion and argued vigorously against it. Fidelity insisted, and Revlon eventually agreed to pay for an Adequate Consideration Opinion from Duff & Phelps LLC and to indemnify the firm for its work. But Revlon imposed two critical conditions. First, FMTC, rather than Revlon, would have to retain Duff & Phelps. Second, FMTC had to agree not to disclose the opinion to Revlon. Duff & Phelps opined that the consideration in the Exchange Offer was not adequate, and FMTC therefore did not permit any participants in the Revlon 401(k) plan to tender their shares into the Exchange Offer.

On August 10, 2009, Revlon launched the Exchange Offer. Revlon knew about the existence of the Duff & Phelps opinion. Revlon also knew that FMTC was not permitting any participants in the Revlon 401(k) plan to tender, which necessarily meant that Duff & Phelps had opined that the consideration was inadequate. Revlon nevertheless did not disclose the existence or contents of the Duff & Phelps opinion—or the view expressed by Duff & Phelps—in the Exchange Offer materials. The Exchange Offer materials did include multiple references to the Fidelity funds' intent to tender into the Exchange Offer and cited the Fidelity funds' intentions as a factor that the Revlon board and MacAndrews & Forbes considered in assessing the fairness of the offer.

D. Old Counsel Help Close The Deal.

As of September 10, 2009, the deadline for the Exchange Offer, fewer than half of Revlon's minority holders of Class A Common had tendered their shares. Revlon extended the Exchange Offer until September 17, but garnered only a small number of additional shares. To get around this problem, the Board sought to reduce the number of shares required to meet the minimum tender condition, which operated as a de facto waiver of the non-waivable condition. Old Counsel agreed to an amended memorandum of understanding that blessed this change.

After another extension, the Exchange Offer closed on October 7, 2009, satisfying the new, lower tender condition. The Fidelity funds tendered 6, 933, 526 shares of Class A Common Stock, representing 74.26% of the total 9, 336, 905 shares tendered.

E. Revlon's Third Quarter Earnings

Approximately three weeks after the Exchange Offer closed, Revlon made a pre-market announcement of positive earnings for the third quarter (the "Earnings Surprise"). Revlon's stock price shot up from a closing price of $5.75 on October 28, 2009, to a closing price of $8.24 per share on October 29. The stock continued to rise thereafter.

On December 21, 2009, the Delaware law firm of Smith Katzenstein & Furlow LLP (now Smith Katzenstein & Jenkins LLP) filed two new putative class actions challenging the Exchange Offer. In the first case, Smith Katzenstein's co-counsel was the Law Offices of Curtis V. Trinko, LLP. In the second case, Smith Katzenstein's co- counsel was Harwood Feffer LLP. These three law firms are the plaintiffs in the current litigation. This decision refers to them collectively as "New Counsel."

Unlike the original four actions, which challenged a negotiable proposal, the complaints filed by New Counsel challenged an actual transaction—the Exchange Offer—and asserted that its terms were substantively unfair. With challengers on the scene, Old Counsel roused themselves. On January 6, 2010, Old Counsel filed an amended complaint, and on January 12, they moved to consolidate the two new actions with the prior consolidated action and asked the court to confirm the original leadership structure. The defendants sought to enforce their settlement agreement with Old Counsel. Pursuant to that agreement, Old Counsel had favored the defendants with a capaciously broad and synonym-encrusted release on behalf of a non-opt-out class encompassing all Revlon stockholders from April 20, 2009, through the consummation of the Exchange Offer, together with "their successors in interest and transferees, immediate and remote." Ex. A to Defs.' Mot. To Enforce Settlement Agreement at 9-10, In re Revlon, Inc. S'holders Litig., Consol. C.A. No. 4578-VCL (Del. Ch. Jan. 8, 2010). The settlement agreement contemplated releases

by the Plaintiffs and the Class, fully finally and forever compromising, settling, extinguishing, discharging and releasing with prejudice, and an injunction barring, any and all claims, demands, actions or causes of action, rights, liabilities, damages, losses, obligations, judgments, suits, matters and issues of any kind or nature whatsoever, whether known or unknown (including Unknown Claims (as defined below)), contingent or absolute, suspected or unsuspected, disclosed or undisclosed, that have been or could have been asserted in the Delaware Actions or in any court, tribunal or proceeding (including, but not limited to, any claims arising under federal or state law, or any other law or regulation, including claims relating to alleged fraud, breach of any duty, negligence or violation of federal or state securities laws) by or on behalf of the Plaintiffs and any and all of the members of the Class (and the Plaintiffs' and Class members' present or past heirs, executors, estates, administrators, predecessors, successors, assigns, parents, subsidiaries, associates, affiliates, employers, employees, agents, consultants, insurers, directors, managing directors, officers, partners, principals, members, attorneys, accountants, financing, legal and other advisors, investment bankers, underwriters, lenders, and any other representatives of any of these persons and entities), whether individual or class, legal or equitable, against any and all Defendants in the Actions, and/or any of their families, parent entities, associates, affiliates or subsidiaries and each and all of their respective past, present or future officers, directors, stockholders, representatives, employees, attorneys, financial or investment advisors, lenders, consultants, insurers, auditors, accountants, investment bankers, commercial bankers, engineers, advisors or the agents, heirs, executors, trustees, general or limited partners or partnerships, personal representatives, estates, administrators, predecessors, successors and assigns of any of them, including without limitation, Barclays, its affiliates and their respective directors, officers, employees, advisors and other representatives (collectively, the "Released Persons") which the Plaintiffs or any member of the Class ever had, now has, or hereafter can, shall or may have by reason of, arising out of, relating to or in connection with the allegations, facts, events, transactions, acts, occurrences, statements, representations, misrepresentations, omissions or any other matter, thing or cause whatsoever, or any series thereof, ...

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