Medley Capital Corporation (NYSE: MCC), a publicly traded business development company, Sierra Income Corporation, a non-traded BDC, and Medley Management Inc. (NYSE: MDLY), have adjourned today’s special meetings of shareholders in connection with the proposed merger announced in August 2018. Additionally, Medley Capital and Sierra have determined that it is in the best interests of shareholders to decline to pursue an unsolicited proposal from NexPoint Advisors.
The special meetings, originally scheduled for February 8th, were adjourned until early March 2019. The companies cited the government shutdown as the reason for the adjournment, claiming that “during the shutdown, key branches of the U.S. government were unable to process, review and/or approve documentation required to close the mergers.” NexPoint called the adjournment “an evasive tactic.”
As previously reported, Sierra plans 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.
NexPoint submitted a competing proposal to the Medley Capital and Sierra special committees for consideration ahead of the now adjourned February 8th special stockholder meeting. NexPoint is looking to replace Medley Management by establishing a new investment advisory agreement between it and the surviving company.
“Sources have indicated that there is an understanding among the MCC and Sierra independent directors that management would seek the removal of any board member who speaks out against management proposals,” said NexPoint in a statement. “This is evident in the boards’ approval of the merger transaction, which enriches and entrenches underperforming MDLY management, and reinforced by their outright refusal to engage with NexPoint, despite the numerous stockholder benefits offered in the NexPoint proposal.”
Independent proxy advisory firms Glass Lewis & Co. and Institutional Shareholder Services, as well as FrontFour Capital Group LLC, a significant Medley Capital shareholder, recently recommended that Medley Capital shareholders vote against the proposed merger in light of NexPoint’s competing proposal. Proxy advisory firm Egan-Jones Ratings recommended that shareholders vote for the merger.
Relating to the meeting adjournment announcement, NexPoint said that it “finds their statement disingenuous because the shutdown ended almost two weeks ago on January 25, 2019; the government review and/or approvals are related to conditions precedent to closing, not to shareholder approval; it was always unlikely that the government-related items would not be complete prior to the meeting; and recommendations against the merger transaction by Institutional Shareholder Services and Glass Lewis, along with the vocal opposition of many of the largest stockholders, clearly suggest that it was unlikely the requisite vote would be obtained at the February 8 meeting.”
The boards of Medley Capital and Sierra said that after a “rigorous and thorough review,” and in consultation with their respective independent legal and financial advisors, determined not to pursue NexPoint’s competing proposal, claiming that it presents “significant uncertainty” to shareholders and “deprives shareholders of the expected benefits of becoming an internally-managed BDC.”
These benefits, according to the company, include the opportunity to potentially grow third-party assets under management, as well as the potential for an improved market valuation as an internally-managed BDC.
NexPoint calls these claims “vague and unfounded” and said that its competing proposal “increases the certainty of closing because it eliminates the atypical closing conditions, does not have recommendations against it from ISS and Glass Lewis, and is likely to garner support from many of the largest stockholders.”
Medley Capital and Sierra also accuse NexPoint and its affiliate Highland Capital of having a concerning track record as fiduciaries. In response, NexPoint pointed to the “unprecedented $279 million verdict that it and its affiliates obtained in favor of their advised accounts to address the misconduct committed by Credit Suisse.”
Medley Capital and Sierra also took issue with NexPoint’s claim that its proposal provides more than $225 million of incremental value over the merger plan, calling it “unsubstantiated and misleading.”
NexPoint calculated the approximately $226.9 million stockholder consideration as follows: Elimination of MDLY cash payout (30.5 million shares at $4.09/share or approximately $124.9 million), annual management fee savings (1.25 percent over at least three years or $27 million), NexPoint’s payment of $25 million, and $50 million in share purchases ($25 million plus $5 million per quarter for five quarters).
NexPoint pointed to the compensation received by the Medley Capital and Sierra independent directors as “beyond typical industry standards in a structure that incentivizes members to maintain their directorship over pursuing stockholder-friendly initiatives.”
“MCC’s independent directors each received more than $250,000 in annual compensation in the most recent fiscal year, yet on average hold less than $6,000 of MCC stock. Similarly, Sierra’s independent directors each earned an average of $130,000, yet not a single independent director owns Sierra stock, said NexPoint. “This incredible misalignment of interests further calls into question the ability of these independent directors to represent MCC and Sierra stockholders.”
NexPoint also noted that Brook Taube and Seth Taube, the chairmen and CEOs of Medley Capital and Sierra, respectively, and the co-founders and co-CEOs of Medley Management, stand to receive a substantial portion of the $125 million cash payout to Medley Management under the merger transaction.
According to Medley Management’s December 21, 2018 registration statement on Form N-14, “If MDLY’s pre-IPO owners exchanged all of their vested Medley LLC units for shares of MDLY Class A common stock, they would hold 81.4 percent of the outstanding shares…entitling them to an equivalent percentage of economic interests and voting power in MDLY.”
“This ownership amounts to a cash payout of over $100 million and creates an incentive for such insiders to promote the proposal, even if it is detrimental to MCC and Sierra,” said NexPoint.
“NexPoint further believes that any purported benefits of merger transaction are negated by MDLY’s abysmal performance record, which is the worst in the industry in the case of Medley Capital, and drastically below peers in the case of Sierra,” the company said.
“In contrast, said NexPoint, its “proposal externalizes management, engaging an investment advisor with a proven track record in the closed-end fund space. It also eliminates the need for unprecedented exemptive relief from the Securities and Exchange Commission required for the surviving company to own its investment advisor.”
The December 21, 2018 record date for the special meetings has not changed, and Medley Capital, Sierra and Medley Management will continue to solicit proxies from their respective shareholders of record.