Relevant Document:
Hearing Agenda
The ad hoc
group of “non-insider” Revlon shareholders suffered a setback today when Judge David S. Jones denied their
motion for the appointment of an official equity committee in Revlon’s chapter 11 cases. Judge Jones ruled from the bench after hearing arguments from the shareholder movants and from the
objectors - the debtors, the official committee of unsecured creditors, the ad hoc group of BrandCo lenders and
Citibank.
Judge Jones began his ruling by telling the parties, “I deny the motion without prejudice to future applications if evolving circumstances warrant.” The ad hoc equity group failed to show that an official equity committee is “necessary” to ensure the adequate representation of shareholders in the chapter 11, he continued, or that there is a substantial likelihood of a “meaningful recovery” to equityholders. All in all, said Judge Jones, the movants failed to meet their burden under the legal standard for appointment of an official equity committee as outlined Judge Stuart Bernstein’s 2016
SunEdison opinion.
First, the court assessed whether shareholders are currently “adequately represented” in the case. Judge Jones noted that the movants suggested that majority shareholder Ron Perelman’s MacAndrews & Forbes (
holder of about 84.8% of the debtors’ equity) has conflicts of interest and may not wish to advance the estates’ interests with respect to Citibank’s
mistaken payments or the BrandCo transactions. “That strikes the court as potentially speculative,” he remarked, but even if it were true, the UCC is “fully motivated to vigorously investigate” those issues and may launch related challenges.
The judge stated that during arguments, he asked the movants’ counsel what steps an official equity committee would take that are “not already being taken” by other parties.
Judge Jones said he “didn’t hear anything plausibly identifying” actions that are not already being taken by the UCC. Quoting
SunEdison, the judge said that the UCC shares equityholders’ interest in “maximizing value and keeping management honest.”
The court also addressed the movants’ concern that protection of “the little guys” - retail shareholders - requires reimbursement of professional fees for an official committee that would advocate on their behalf. Judge Jones emphasized that equityholders may recover “some or all” of their professional fees later in the case if they establish to the court that they made a “substantial contribution” in the chapter 11 proceedings.
“There is no basis to conclude, as of now, that equityholders’ interests are not adequately represented or that the proposed committee is necessary to advance some unique equityholder set of interests,” the judge remarked.
Next, Judge Jones said that the movants failed to show that there is a “substantial likelihood” of a “meaningful recovery” for equity, or put differently, that the debtors are not “hopelessly insolvent.” The only valuation evidence put forward by the ad hoc equity group consisted of current and historical trading prices for Revlon’s publicly traded stock, the judge said, but this is insufficient evidence under the “rigorous governing law.”
The court also pointed out that
Revlon’s unsecured notes are trading at a significant discount to par, “reflecting a separate market assessment that points in the opposite direction” to the stock trading activity. Counsel for the ad hoc equity group did not dispute that $72 million, or roughly 15% to 20% of the unsecured debt issuance, has traded within a “deeply discounted” band since the petition date, the judge commented. Judge Jones added that he “did not hear a response to the argument” that even Revlon’s secured debt trades at a discount.
On valuation, the court clarified that it “makes no prognostication” about the outcome of the case, which may produce a recovery for equityholders. However, the movants have not met their burden of showing that “such a happy outcome” is substantially likely, the judge said.
At this point, Judge Jones said that his findings so far were enough to dispose of the motion, but “there is another reason not to exercise my discretion to appoint another official committee”: costs. The costs of an official equity committee would be burdensome on the estate and “duplicative” of the UCC’s work, he reiterated.
The judge added that the benefits of an official equity committee would be “marginal at best, possibly nothing,” and would be outweighed by the costs of the estate paying for another set of professional fees.
Before rendering his bench ruling, Judge Jones heard arguments from the movants and from the objectors, which echoed their papers. Gregory Pesce of White & Case, speaking for the moving shareholders, asserted that “Revlon today is solvent.” He said that the stock is trading today at nearly $8 a share and that equity has “real value” that “needs to be protected.”
The objectors had pointed out that even the debtors’ unsecured bonds trade at a discount, Pesce noted. However, he argued that the comparison of stocks with bonds is “not apples to apples, it’s not apples to oranges, it’s apples to watermelons. It’s just a totally inappropriate comparison.” He emphasized that stocks are more liquid and traded by “little guys” in contrast to the institutional investors who trade in the company’s bonds.
Pesce said that the objectors have tried to “paint Revlon as a so-called ‘meme stock’ just like Hertz.” However, he asserted, “that’s tantamount to saying that the bankruptcy filing itself is the reason for the stock rally,” when in reality, the stock price is similar to what it was pre-bankruptcy. When Judge Jones asked about why the UCC cannot maximize the value of the estate in a way that would also benefit shareholders, Pesce emphasized that the UCC has no fiduciary duty to equityholders.
Reiterating a point from his clients’ brief, Pesce said the UCC may not be incentivized to object to talc claims. “We also want to make sure that whatever solution might be offered by junior creditors to the committee is offered to equityholders,” he added.
Pesce also reprised the movants’
argument that the debtors may exhibit favoritism to MacAndrews & Forbes at the expense of other equityholders, for example, because retaining $2.6 billion in tax attributes or reinstating debt may require MacAndrews & Forbes to remain a substantial shareholder. The objectors’ position that equityholders are already adequately represented in the case “are the words of foxes in the henhouse and should be viewed as such,” he commented.
The court then heard from the objectors. Kyle Kimpler of Paul Weiss, on behalf of the debtors, contended that there are already “at least five other stakeholders who either directly represent shareholder interests” or who have “similar or parallel interests.” The debtors have fiduciary duties to shareholders, he emphasized.
Kimpler also said that 85% equityholder MacAndrews & Forbes is clearly trying to protect its interest, not only by acting as a board member, but by hiring Wachtell and Greenhill. In addition, he continued, the UCC and the 2016 term loan lender groups have expressed interest in investigating “the very claims” the ad hoc equity group has suggested that an official equity committee would pursue.
Kimpler also asserted that the ad hoc equity group itself has sophisticated members and is already ably represented by White & Case. He pointed out that the group member with the largest holdings is Christopher Mittleman of Mittleman Investment Management LLC. “This is not a retail shareholder. This is not a mom-and-pop. This is a sophisticated money manager,” he insisted.
Kimpler added that the other group members, Adam Gui and Kevin Barnes, have likewise actively participated in the
LATAM and
Ruby Tuesday chapter 11 cases.
Kimpler stressed that the Office of the U.S. Trustee has already declined to appoint an official equity committee at the request of the White & Case group. Moreover, the group’s most recent
Rule 2019 statement revealed that “today they own less than 300,000 shares,” he highlighted - a 70% reduction from July 28. “These are not the actions of a constituency that thinks there is long-term value there,” he contended.
Both Kimpler and Robert Stark of Brown Rudnick, on behalf of the UCC, attacked the movants’ reliance on stock trading prices. Stark called valuation a “very serious business” and argued that a party asserting the likely solvency of the debtors had “better come with some really good evidence,” but the movants had offered none. The ad hoc equity group has only offered trading data, leaving a “yawning gap of missing evidence” on valuation, he argued.
Stark said that the trading prices for the stock and the unsecured notes show only “schizophrenia” in the market. “No one can tell you where Revlon is going,” he told the court: “Debt sees a lot of risk, equity believes in an ebullient future.”
Elliot Moskowitz of David Polk, counsel for the ad hoc group of BrandCo lenders, spoke briefly to assert that the UCC is not a “patsy” that can be swayed by other case parties. The committee engages in plenty of pushback with other parties and the BrandCo group is now experiencing that firsthand, said Moskowitz, after being served with extensive Rule 2004 discovery requests from the UCC.