The board of Sierra Income Corporation, a non-traded business development company, has started a formal review process to evaluate strategic alternatives for the company.
Strategic alternatives typically include the sale of the company’s assets, a listing of its shares on a national securities exchange, or a merger with another entity.
The board’s special committee, comprised of “independent” directors has engaged Broadhaven Capital Partners as its financial advisor, a firm previously engaged by both Sierra and its affiliate Medley Management (NYSE: MDLY), as discussed below. There is no timetable set for the conclusion of the review process.
The Taube brothers co-founded and are majority owners of Medley Management (NYSE: MDLY), an alternative asset management firm which controls Sierra and several private investment vehicles.
In August 2018, the Taube’s attempted to merge affiliates Sierra, Medley Capital (formerly NYSE: MCC), and Medley Management – with Sierra as the surviving company – but were unsuccessful following a public battle with one of Medley’s largest shareholders, FrontFour Capital, who sued the company in the Delaware Chancery Court. The Chancery court judge halted the merger vote in March 2019 until investors were provided with corrective disclosures on the deal.
“Medley Management engaged in two sales processes in 2017, both of which failed, leaving merging with affiliates as Medley Management’s only solution,” the judge wrote in his opinion.
During the second sales process in October 2017, Medley Management retained both Broadhaven and Goldman Sachs to reach out to potential bidders – before the idea of a three-way merger proposal, dubbed “Project Integrate,” was formerly introduced to the Sierra and Medley Capital boards in mid-2018.
Medley Management decided to keep Goldman as its sole financial advisor for “Project Integrate.”
Brook Taube agreed to introduce Broadhaven to the Sierra special committee while the firm was still engaged by Medley, court documents claim. Within days of terminating its engagement with Medley, Broadhaven pitched to the Sierra special committee and was formally retained as its financial advisor shortly thereafter.
According to the judge, “Although Broadhaven terminated its Medley Management engagement without receiving any payment, the Sierra special committee agreed to make an up-front payment of $1 million, the same amount Broadhaven would have earned as a transaction fee if the Medley Management strategic process had concluded successfully.”
The judge said that the court could not permanently stop the merger proposal because “FrontFour failed to prove that the acquirer, Sierra, aided and abetted in the other defendants’ breaches of fiduciary duties,” even though “conflicted insiders tainted the process.”
“At trial, FrontFour succeeded in raising suspicions concerning the independence of the Sierra special committee’s financial advisor, Broadhaven,” the judge stated. “Broadhaven’s conflicts alone, however, do not prove that Sierra knowingly participated in the other defendants’ fiduciary breach. Broadhaven did act as Sierra’s agent, and Sierra knew that Broadhaven had previously worked for Medley Management. But this is the extent of Sierra’s [intent or knowledge of wrongdoing] FrontFour proved at trial.”
The Securities and Exchange Commission has launched a formal investigation into Medley Management, and more recently, the SEC’s Department of Enforcement served Wells notices to six pre-IPO company owners, including the Taube brothers and various current and former executives.
Sierra is a non-traded business development company that invests primarily in first lien senior secured debt, second lien secured debt and, to a lesser extent, subordinated debt of middle market companies in a broad range of industries with annual revenue between $50 million and $1 billion.