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Medley Capital: New Legal Challenge To Merger Vote

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New Lawsuit

On March 21, 2019 Law360 reported in an article that a shareholder of Medley Capital (MCC) has filed a class action lawsuit asking the Delaware Chancery Court to stop the proposed shareholder vore about the proposed three-way merger with Sierra Income and Medley Management (MDLY), just days after the same court had declined to block the vote but had much criticism of the insiders and “independent” directors involved.

The suit is brought by a Stephen Altman. He “accuses MCC’s directors of repeatedly adjourning stockholder votes and issuing misleading disclosures about the deal in an attempt to thwart opposition to the proposed transaction. MCC has delayed votes on the deal because it does not have enough stockholder support” Mr Altman contended.

“This action arises from the {MCC’s] board’s failure to disclose all material information concerning the proposed transactions and its manipulation of the MCC stockholder vote through repeated adjournments of the MCC stockholder meeting in order to avoid admitting that MCC’s stockholders” don’t support the merger, the complaint says.

Votes on the proposal have been adjourned three times, and Altman says “each time the meeting was adjourned, had it gone forward and proxies [were] tallied, the proposed transactions would have been disapproved.”

The BDC Reporter does not know how Mr Altman knows this information.

Last week – as we’ve reported – the Delaware Chancery Court declined to block the vote on a technicality.

This new lawsuit – last week’s ruling by Vice Chancellor Kathaleen S. McCormick notwithstanding – asks that the vote be stopped.

Planning Ahead

Even if the shareholder vote proceeds and is approved, the lawsuit asks the “court review and possibly invalidate such action due to ‘the manipulative adjournments due to defendants’ materially misleading and incomplete disclosures’.”

Already the earlier ruling required MCC to provide shareholders with updated disclosures which reveal the conflicts of interest and the controversial actions of Medley insiders and insiders.

To date, as the new lawsuit points out, those initial misleading disclosures have not been updated.

Mr Altman is seeking an “expedited” disposition of the case, claiming the defendants were “moving the goalposts” and repeatedly changing the shareholder vote date because they did not have sufficient votes to pass the merger proposal.

Counterpunch

We also learn in the Law360 article that MCC has filed a lawsuit in New York federal court “against stockholders that opposed the deal, including FrontFour Capital Group LLC”.

Altman said MCC filed the suit in New York to “discourage and punish” opponents of the merger. The New York action seeks to enjoin a group of stockholders from voting until they provide certain disclosures to the U.S. Securities and Exchange Commission that MCC said were not filed as required. The suit also asks the court to bar the stockholder from “engaging in unlawful solicitation activity” in advance of a vote.

MCC’s directors “did not act with a proper purpose but instead acted in bad faith in repeatedly adjourning the MCC stockholders meeting and authorizing” the New York suit, the investor claims.

“These actions were taken to avoid stockholder rejection of the proposed transactions,” the complaint says.

This may explain why we’ve not heard from FrontFour in recent days, even as two “independent” directors of MCC have resigned from the Board of the BDC.

None of the interested parties nor their lawyers had any comment to make about the Law360 story.


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Picking Up The Cheque

This battle for control of MCC and – indirectly – the other two entities – is getting very nasty and expensive reflecting the very high stakes for the insiders involved.

Unfortunately for MCC shareholders all these legal bills – given the nature of the BDC structure – are likely to be paid by MCC, and thus by themselves.

Outside Looking In

As always those of us on the outside, notwithstanding articles like those by Law360, have only a fragmented perspective on what is going on behind the scenes.

For example, we don’t what the current status of the New York lawsuit is and that could change from day to day ?

That’s also the case for the new Altman case, which may have shifted since Law360 wrote its article yesterday.

Friday After The Close ?

Moreover, we wonder if MCC is going to ignore the demand by the Delaware Chancery Court to provide its shareholders with updated – and damning – disclosures.

Perhaps MCC’s lawyers are advising their clients that such an action is permissible under law, or is in a “grey area” worth taking advantage of.

The BDC Reporter does not have the ability to properly weigh the legal matters involved.

Not Forgotten

However, we continue to wonder what has happened to the request made by MCC and Sierra Income to the SBA allowing the transfer of the former’s SBIC licenses to the latter.

This was a condition precedent to the merger, but no update has been provided for weeks.

If the merger is approved but the transfer of the SBA licenses is not, the economics of the transaction – already unfavorable – become even worse for the shareholders of the combined entities.

Going Forward

We will continue to update our readers about every development in this saga.

Minor items will be posted to our Twitter feed and major developments – like these two lawsuits featured above – will result in more Feature articles.

Surprisingly, we remain the only publication we’re aware of that is providing sustained coverage of this controversial merger, and its implications for BDC corporate governance.

As usual 10,000 articles about Apple and nothing about this BDC story (almost) worthy of a Hollywood movie.

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