NexPoint Advisors Brings to Light Numerous Concerns About Independent Directors of Medley Capital Corporation and Sierra Income Corporation, Questions Directors’ Ability to Represent Stockholders’ Interests
DALLAS, February 7, 2019 — NexPoint Advisors, L.P. (“NexPoint“) announced today its significant concerns about the corporate governance of both Medley Capital Corporation (“MCC”; NYSE:MCC; TASE:MCC), a closed-end investment company that is regulated as a business development company (“BDC”), and Sierra Income Corporation (“Sierra”), a non-traded BDC, specifically as it relates to the independence of the Board of Directors of MCC (the “MCC Board”) and the Board of Directors of Sierra (the “Sierra Board”).
Both the MCC and Sierra Boards employ independent directors who are responsible for representing the interests of their respective stockholders; yet, both Boards have not only supported the proposed merger involving Medley Management Inc. (“MDLY”; NYSE:MDLY), Sierra and MCC (the “Merger Transaction”), which favors MDLY management over MCC and Sierra stockholders, but they have also decided not to pursue any of the stockholder benefits in NexPoint’s superior proposal (the “NexPoint Proposal”). The Boards refused to even engage in discussions about the NexPoint Proposal, despite NexPoint’s express willingness to negotiate on all proposal terms.
The recent announcements from MDLY, Sierra and MCC augment these concerns; these public communications contain deficient explanations for the Boards’ inaction and misleading information.
The below details the recent announcements from MDLY, MCC and Sierra and highlights the issues they raise for stockholders.
MDLY, MCC and Sierra’s disingenuous announcement adjourning the Feb. 8 Special Meetings of Shareholders:
In a joint statement issued February 5, 2019, MCC, Sierra and MDLY announced that it has become necessary to adjourn the February 8, 2019 Special Meetings of Shareholders due to the U.S. government shutdown. NexPoint finds this statement disingenuous because: (i) the shutdown ended almost two weeks ago on January 25, 2019; (ii) the government review and/or approvals are related to conditions precedent to closing, not to shareholder approval; (iii) it was always unlikely that the government-related items would not be complete prior to the meeting; and (iv) recommendations AGAINST the Merger Transaction by Institutional Shareholder Services (“ISS“) 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.
NexPoint believes the adjournment is an evasive tactic from the MDLY insiders in the face of the failed prospects of the flawed Merger Proposal; the adjournment merely provides an opportunity for MDLY insiders to regroup and identify a path forward that enriches MDLY management at the expense of MCC and Sierra stockholders.
MCC and Sierra’s cursory announcement rejecting the NexPoint Proposal:
In a joint statement issued February 6, 2019, MCC and Sierra announced that their respective Boards had “unanimously and independently determined to decline to pursue the unsolicited proposal put forth by NexPoint,” based on a “rigorous and thorough review, consistent with their fiduciary duties” and “in consultation with their respective independent legal and financial advisors.” Each of these statements is discussed further below:
Regarding the “rigorous and thorough review, consistent with fiduciary duties”:
Neither the Special Committee to the Sierra Board (the “Sierra Special Committee”) nor the Special Committee to the MCC Board (the “MCC Special Committee”) made any attempt to communicate with NexPoint regarding its proposals, save for a single email from counsel to the Sierra Special Committee acknowledging receipt. This in no way constitutes a “rigorous and thorough review” process, particularly since NexPoint repeatedly expressed to the MCC and Sierra Boards its willingness to consider other terms or assets that the Boards may determine are necessary or advisable in order to proceed with the NexPoint Proposal.
Regarding the “consultation with their respective independent legal and financial advisors”:
This statement attempts to imply that these advisors recommended that the Special Committees ignore the superior NexPoint Proposal. This, in NexPoint’s view, is highly unlikely, especially since two leading independent proxy advisory firms, ISS and Glass Lewis, recommended that stockholders vote AGAINST the Merger Transaction following the emergence of the NexPoint Proposal.
Furthermore, the judgment of the legal advisors is questionable to begin with; presumably, those same legal advisors allowed the disclosure of the plan for MDLY to receive all $125 million of cash consideration in the Merger Transaction, a material fact for stockholders, to be buried on page 273 of the proxy/prospectus in a mosaic of information.
Regarding the fact that “[each of the Special Committees] is comprised of independent directors:”
NexPoint has reason to believe that MCC and Sierra’s independent directors (Arthur Ainsberg, Karin Hirtler-Garvey, Mark Lerdal and John E, Mack for MCC, and Oliver T. Kane, Valerie Lancaster-Beal and Stephen R. Byers for Sierra) have longstanding relationships with brothers Brook and Seth Taube, MDLY co-founders and co-CEOs, that challenge the directors’ independence. Additionally, 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. 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.
Further undercutting their ability to represent stockholder interests, the Boards’ independent directors receive compensation well 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 over $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. This incredible misalignment of interests further calls into question the ability of these independent directors to represent MCC and Sierra stockholders.
Additionally, NexPoint believes the judgment of Karen Hirtler-Garvey and John E. Mack, independent directors of MCC, is increasingly conflicted in the case of the Merger Transaction, as they are guaranteed two independent board seats in the combined MCC and Sierra post-merger (the “Surviving Company”).
Of note, MDLY insiders Brook Taube, MCC CEO and Board Chairman, and Seth Taube, Sierra CEO and Board Chairman, are also uniquely incentivized to ensure the Merger Transaction is completed; in their position as MDLY co-founders and co-CEOs, they stand to receive a substantial portion of the $125 million cash payout to MDLY under the Merger Transaction, regardless of the impact to MCC and Sierra. In fact, according to MDLY’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% 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 to MDLY insiders and creates an incentive for such insiders to promote the proposal, even if it is detrimental to MCC and Sierra.
Further, MDLY insiders, despite their roles at MCC and Sierra, are incentivized to secure a fee structure that provides undue management fees to MDLY from the Surviving Company post-merger, as the fee stream directly benefits such insiders.
Regarding the claim that the $225 incremental value of the NexPoint Proposal is misleading:
In their announcement declining to review the NexPoint Proposal, MCC and Sierra claim that the $225 million in net value in favor of stockholders is unsubstantiated and misleading; however, NexPoint disclosed the exact calculation of such value in its press release dated February 5, 2019. MCC and Sierra did not provide any data refuting this calculation, and instead relied only on vague allegations.
Regarding the misleading statement that “NexPoint’s proposal deprives shareholders of the expected benefits of becoming an internally-managed BDC”:
MCC, Sierra and MDLY assert that the Merger Transaction will yield expected benefits as an internally managed BDC. A true internalization involves the termination of any investment advisory contract; however, the Merger Transaction will leave the same fees in place in a separate adviser entity.
Additionally, an internally managed BDC trades better when return on equity (“ROE”) improves via the internalization of management. This typically comes from the efficiencies of eliminating the advisory entity costs in favor of the lower cost of management employee overhead. None of those efficiencies are expected in the Merger Transaction, thus ROE is expected to remain unchanged.
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 MCC, and drastically below peers in the case of Sierra. In contrast, the NexPoint 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 (“SEC”) required for the Surviving Company to own its investment advisor.
Regarding the unfounded claim that the NexPoint Proposal “presents significant uncertainty” to shareholders:
The claim about the uncertainty of the NexPoint Proposal is vague and unfounded. To the contrary, the NexPoint Proposal increases the certainty of closing because it: (i) eliminates the atypical closing conditions, such as the need for unprecedented and unlikely exemptive relief from the SEC; (ii) does not have recommendations against it from ISS and Glass Lewis; and (iii) is likely to garner support from many of the largest stockholders, based on recent public statements.
Regarding the allegation that NexPoint and its affiliates have a concerning track record:
The claim that NexPoint and its affiliates have a concerning track record is belied by NexPoint’s leading track record of performance, which vastly outperforms that of MDLY.
In addition, NexPoint’s merits as fiduciaries are evidenced by the unprecedented $279 million verdict that NexPoint and its affiliates obtained in favor of their advised accounts to address the misconduct committed by Credit Suisse.
Regarding the remaining flawed assertions in the announcement:
The announcement contains a number of additional assertions that tout other expected benefits of the Merger Transaction. Ironically, the purported valuation, balance sheet, earnings, distribution and share repurchase benefits will be, or at least are likely to be, greater under the NexPoint Proposal.
For these reasons and others set forth in its February 1, 2019 press release, NexPoint encourages stockholders of MCC and Sierra to vote AGAINST the Merger Transaction on or before the Special Meeting, expected in early March 2019.
About NexPoint Advisors, L.P.
NexPoint, together with its affiliates, is a multibillion-dollar global alternative investment manager founded in 1993 by Jim Dondero and Mark Okada. A pioneer in the leveraged loan market, the firm has evolved over 25 years, building on its credit expertise and value-based approach to expand into other asset classes. Today, NexPoint and its affiliates operate a diverse investment platform, serving both institutional and retail investors worldwide. In addition to high yield credit, the firm’s investment capabilities include public equities, real estate, private equity and special situations, structured credit, and sector- and region-specific verticals built around specialized teams.
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