The Delaware Court of Chancery has halted a vote on the proposed Medley/Sierra merger until investors are provided with corrective disclosures on the deal.
Last month, FrontFour Capital filed a stockholder class action lawsuit accusing publicly-traded business development company Medley Capital Corporation (NYSE: MCC) and its board of breaching their fiduciary duties to shareholders in connection with the proposed merger between the company and its affiliates Sierra Income Corp and Medley Management. The lawsuit sought to block the merger vote and enjoin enforcement of certain provisions of the merger plan.
Medley Management Inc. (NYSE: MDLY), Sierra, and other affiliates were accused of breaching their fiduciary duties, while Sierra, Medley Management and others were accused of aiding and abetting the alleged breaches.
FrontFour Capital, a significant Medley shareholder, has been an outspoken opponent of the proposed merger that was announced in August 2018.
As previously reported, Sierra, a non-traded BDC, is seeking to acquire Medley Capital and Medley Management, with Sierra being the surviving company that would be structured as a publicly-traded BDC. Medley Capital and Sierra are both controlled by Medley Management.
The court ruled that Medley Capital’s directors breached their fiduciary duties in entering into the proposed merger, but rejected the claim that Sierra aided and abetted those breaches.
The court denied FrontFour’s requests to permanently halt the proposed merger and require Medley to conduct a “shopping process” on the terms proposed in their complaint.
The court ordered the defendants to issue corrective disclosures and halt a vote of Medley stockholders on the proposed merger until the disclosures have been made and stockholders have had the opportunity to assimilate the information.
“To vote on an informed basis, the stockholders must know the reality — that the majority of the special committee members failed to act independently when negotiating the proposed transaction,” wrote Vice Chancellor Kathaleen McCormick in her decision.
Defendants named in the complaint include Brook Taube (chairman, CEO and president), Seth Taube (director), Jeffrey Tonkel (director), Arthur S. Ainsberg (director), Karin Hirtler-Garvey (director), John E. Mack (director), and Mark Lerdal (director). The Taube brothers co-founded and are majority owners of Medley Management.
“FrontFour proved that half of the Medley Capital special committee is beholden to the Taube brothers, and thus the Taube brothers dominated and controlled the board with respect to the challenged transactions,” the court’s decision said.
Medley Capital said that it is currently considering all available options, including appealing the court’s decision.
FrontFour has publicly condemned the merger, claiming “the contemplated transaction is the result of a highly flawed process that significantly undervalues the equity of MCC, transfers value to MDLY shareholders at the expense of MCC shareholders and secures the position of a management team that has a track record of destroying significant shareholder value.”
Independent proxy advisory firms Glass Lewis & Co. and Institutional Shareholder Services, as well as FrontFour Capital Group, recommended that shareholders vote against the proposed merger, while proxy advisory firm Egan-Jones Ratings recommended that shareholders vote for the merger.