On February 14, 2016, the SEC settled an enforcement action against CVR Energy for providing misleading disclosure about the fees payable to CVR’s two financial advisors in connection with CVR’s defense of a hostile tender offer by affiliates of Carl Icahn in 2012. The SEC did not impose any civil penalties, however, due to CVR’s cooperation with the commission in its investigation.

In the order, the SEC found that CVR violated Section 14(d)(4) of the Exchange Act, and Rule 14D-9 thereunder, when it failed to sufficiently disclose a summary of the material terms of its compensation arrangements with its financial advisors in its Schedule 14D-9, as required under Item 5 of the Schedule. The SEC found that CVR had disclosed that the fees payable to its financial advisors were “customary” when, in fact, the fees were not customary.

According to the order, CVR had agreed to pay each of its financial advisors alternative fees in the amount of: $9 million (in the event CVR remained independent), $4 million (at the board’s discretion), $6 million (upon the announcement of any sale transaction), and a “sale fee” (in the event of a “sale transaction,” in the amount of 0.525% of the aggregate consideration). Ultimately, the hostile bidder prevailed and CVR was sold to the hostile bidder in a transaction that the board continued to believe was inadequate. In connection with the sale, the company paid its two financial advisors the sale fee in an aggregate amount of $36 million.

According to the SEC Order, the fee arrangement was unusual because the “sale fee” was payable upon completion of any sale transaction, even if CVR was sold to the hostile bidder at the original bid price or if the company was sold for an amount that the board believed was inadequate and not in the best interests of the stockholders. The SEC found that, more typically, a higher “sale fee” or “success fee” is payable only when the advisor’s services result in the stockholders retaining their shares or obtaining appropriate value for their shares through a board-approved tender offer or other sale of the company. It stated that in this more typical arrangement, the fee incentives are better aligned with the interests of the stockholders to maximize the value of their shares. The SEC then concluded that CVR’s disclosure (that the fees were “customary”) was misleading, and deprived the stockholders of material disclosures regarding potential conflicts of interest by its investment advisors in violation of the Exchange Act.

Last November, the SEC issued guidance on banker fee disclosures for tender offers under Item 5 of Schedule 14D-9. The C&DIs clarified that disclosure is required of all material terms for compensation, including the types of fees payable to financial advisors. See our blog post describing the new C&DIs. The SEC’s enforcement order covers similar ground but appears to be independent of that guidance and based predominantly on CVR’s misleading and incomplete disclosure of its unusual fee arrangements. Going forward, companies should be cognizant of the SEC’s new guidance in light of heightened enforcement by the SEC of disclosure requirements in the activism context generally. When responding to a tender offer, companies will need to consider, on a case by case basis, whether alternative fee arrangements or other material terms of its banker compensation arrangement must be disclosed.

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