FrontFour Capital Group LLC v. Brook Taube

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
FRONTFOUR CAPITAL GROUP )
LLC, and FRONTFOUR MASTER )
FUND, LTD., on behalf of themselves )
and similarly situated stockholders of )
MEDLEY CAPITAL )
CORPORATION, )
)
Plaintiffs, )
)
v. ) C.A. No. 2019-0100-KSJM
)
BROOK TAUBE, SETH TAUBE, )
JEFF TONKEL, MARK LERDAL, )
KARIN HIRTLER-GARVEY, JOHN )
E. MACK, ARTHUR S. AINSBERG, )
MEDLEY MANAGEMENT, INC., )
SIERRA INCOME CORPORATION, )
MEDLEY CAPITAL )
CORPORATION, MCC ADVISORS )
LLC, MEDLEY GROUP LLC, and )
MEDLEY, LLC )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: March 9, 2019
Date Decided: March 11, 2019
Date Revised: March 22, 2019
A. Thompson Bayliss, J. Peter Shindel, Jr., Daniel J. McBride, ABRAMS &
BAYLISS LLP, Wilmington, Delaware; OF COUNSEL: Lori Marks-Esterman,
Adrienne M. Ward, Nicholas S. Hirst, OLSHAN FROME WOLOSKY LLP, New
York, New York; Attorneys for Plaintiffs FrontFour Capital Group LLC and
FrontFour Master Fund, Ltd.
William M. Lafferty, John P. DiTomo, Daniel T. Menken, Aubrey J. Morin,
MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF
COUNSEL: Jason M. Halper, Nathan M. Bull, Adam K. Magid, Matthew M. Karlan,
CADWALADER, WICKERSHAM & TAFT, LLP, New York, New York;
Attorneys for Defendants Brook Taube, Seth Taube, Jeff Tonkel, Medley
Management Inc., MCC Advisors LLC, Medley Group LLC, and Medley LLC.
Blake Rohrbacher, Kevin M. Gallagher, Kevin M. Regan, Nicole M. Henry,
RICHARDS, LAYTON & FINGER, Wilmington, Delaware; OF COUNSEL:
Matthew L. Larrabee, Paul C. Kingsbery, Shriram Harid, DECHERT LLP, New
York, New York, Joshua D.N. Hess, DECHERT LLP, Washington, D.C.; Attorneys
for Defendant Sierra Income.
Garrett B. Moritz, Eric D. Selden, S. Michael Sirkin, ROSS ARONSTAM &
MORITZ LLP, Wilmington, Delaware; OF COUNSEL: Alan R. Friedman,
Samantha V. Ettari, Jared I. Heller, KRAMER LEVIN NAFTALIS & FRANKEL
LLP, New York, New York; Attorneys for Defendants Mark Lerdal, Karin Hirtler-
Garvey, John E. Mack, and Arthur S. Ainsberg.
McCORMICK, V.C.
Due to the press of time,1 aspects of this decision lack polish or extended
treatment.
March came in like a lion. Snow flurries and gray overcast covered downtown
Wilmington for most of March’s early days. The courthouse witnessed another
flurry of activity during those days as the plaintiffs, FrontFour Capital Group LLC
and FrontFour Master Fund, Ltd. (“FrontFour”), tried their expedited claims to
enjoin transactions orchestrated by twin brothers Brook and Seth Taube.
The challenged transactions, which were announced on August 9, 2018,
would combine an asset management firm founded and majority owned by the Taube
brothers, Medley Management, Inc. (“Medley Management”), with two business
development corporations that Medley Management advises, Medley Capital
Corporation (“Medley Capital”), and Sierra Income Corporation (“Sierra”). If the
transactions proceed, Sierra will acquire first Medley Capital and then Medley
Management in two cross-conditioned mergers, with Sierra as the surviving
1
This litigation commenced on February 11, 2019. The parties stipulated to an expedited
schedule to accommodate a March 31, 2019 drop-dead date under the challenged merger
agreements. Pre-trial briefs were submitted on Monday, March 4. Over 800 trial exhibits
arrived in Chambers on Tuesday, March 5. Trial took place on March 6–7. On the second
day of trial, the acquirer informed the Court that its “rights under the Merger Agreements
will be eviscerated if the Court does not issue a decision on Plaintiffs’ request for an
injunction by 9 a.m. on Monday, March 11.” Post-trial briefs were filed at 8 a.m. on
Saturday, March 9. Daylight savings time began on Sunday, March 10, further depriving
the Court of an hour and confirming Murphy’s law.
1
combined entity (the “Proposed Transactions”). Medley Management will receive
per share $3.44 cash, plus $.065 in cash dividends, and the right to receive .3836
shares of Sierra stock, which represents a premium of approximately 100% to
Medley Management’s trading price. The Taube brothers and their management
team will receive lucrative employment contracts with the combined company.
Medley Capital stockholders, including FrontFour, will receive per share the right
to 0.8050 shares of Sierra stock, which provides no premium against Medley
Capital’s net asset value (“NAV”).
The Taube brothers proposed the transactions in late June 2018. They touted
size/scale, asset quality, and internalized management resulting from the
transactions as beneficial to all of the parties. They set an aggressive timeline to
permit announcement of a deal in early August 2018 in connection with the release
of second-quarter financials. In response to the proposal, each of the three affiliated
entities empowered a special committee to negotiate and, if appropriate, recommend
the transaction. It was July 11th before the Medley Capital special committee had
retained a financial advisor and was prepared to negotiate, leaving only a few weeks
to negotiate under the Taube brothers’ timeline. During that time, the Medley
Capital special committee negotiated a slightly better exchange ratio, secured the
Taube brothers’ agreement to waive payments in connection with a valuable tax
2
receivable agreement (“TRA”), and obtained the opinion of an independent
compensation expert that the Taube brothers’ compensation packets were
reasonable. The committee members also secured for themselves the agreement that
two of the four of them—to be determined through an interview process following
announcement of the Proposed Transactions—would serve on the board of the
combined entity.
From a distance, this process appeared arm’s-length. The December 2018
proxy recommending that the stockholders approve the Proposed Transactions
certainly made it seem that way.
At trial, FrontFour proved otherwise. FrontFour commenced this litigation on
February 11, 2019. They claimed that the Medley Capital directors, who include the
Taube brothers, breached their fiduciary duties to the common stockholders by
entering into the Proposed Transactions. They accused Sierra of aiding and abetting
in those breaches. They also claimed that Medley Capital’s public disclosures failed
to provide several categories of information material to stockholders considering the
Proposed Transactions.
In reality, when the Taube brothers proposed the transactions in June 2018,
Medley Management was facing enormous financial pressure. Medley Management
had engaged in two sales processes in 2017, both of which failed, which left merging
3
with affiliates as Medley Management’s only solution. As part of the 2017 sales
processes, Medley Management had secured standstill agreements from around
thirty potential bidders, which prevented those third parties from proposing
transactions with Medley Capital. During negotiations with one bidder during the
2017 sales process, the Taube brothers had already agreed to give up the TRA for
substantially less consideration than they will receive under the Proposed
Transactions. In 2018, Medley Management received two inbound expressions of
interest for Medley Capital, which they ignored. The Medley Capital special
committees did not know any of this information before this litigation. They were
not told. They did not ask.
In the midst of this informational vacuum, Medley Capital’s special
committee members determined not to run any pre-signing market check or consider
alternative transactions. They made this determination, although around that time at
least one stockholder was agitating for Medley Capital to engage in a sales process.
They capitulated to the aggressive timeline, although Medley Capital had no
business reasons for rushing toward a deal. Then, they insulated the deal from a
post-signing market check by agreeing to deal protections, including a no-shop.
This post-trial decision finds that the Proposed Transactions trigger the entire
fairness test. FrontFour proved that half of the Medley Capital special committee
4
was beholden to the Taube brothers, and thus the Taube brothers dominated and
controlled the board with respect to the Proposed Transactions. Defendants failed
to meet their burden of proving that the Proposed Transactions are entirely fair. The
deal protections of the merger agreement also fail enhanced scrutiny.
As relief, FrontFour seeks a curative shopping process, devoid of Medley
Management’s influence, free of any deal protections, plus full disclosures. One
obstacle prevents the Court from issuing this relief: FrontFour failed to prove that
the acquirer, Sierra, aided and abetted in the other defendants’ breaches of fiduciary
duties. Under the Delaware Supreme Court’s decision in C & J Energy,2 an
injunction may not issue if it would “strip an innocent third party of its contractual
rights” under a merger agreement, unless the party seeking the injunction proves that
the third party aided and abetted a breach of fiduciary duty by the target directors.
Ordering a go-shop despite the no-shop and preventing enforcement of the deal
protections would effectively strip Sierra of its contractual rights.
And so, what came in like a lion goes out like a lamb: Under C & J Energy,
FrontFour’s requested relief must be denied.
2
C & J Energy Servs., Inc. v. City of Miami Gen. Empls.’ and Sanitation Empls.’ Ret. Tr.,
107 A.3d 1049, 1071–72 (Del. 2014).
5
Medley Capital’s stockholders, however, are entitled to corrective disclosures.
The proxy creates the misleading impression that the special committee replicated
arm’s-length negotiations amid the conflicts tainting the Proposed Transactions. To
vote on an informed basis, the stockholders must know the reality—that the majority
of the members of the special committee failed to act independently when
negotiating the Proposed Transactions. Further, the stockholders are entitled to
additional disclosures concerning third-party expressions of interests. On this topic,
disclosures to date have been incomplete or, in one instance, outright false. Any
stockholder vote on the Proposed Transactions is enjoined pending corrective
disclosures consistent with the matters discussed in this decision.
I. FACTUAL BACKGROUND
Trial took place over one and three-quarter days. The record comprises over
800 trial exhibits, live testimony from six fact and two expert witnesses, deposition
testimony from five fact witnesses, and ninety-seven stipulations of fact.3 The
3
The Factual Background cites to: docket entries (by docket “Dkt.” number); trial exhibits
(by “JX” number); the trial transcript (“Trial Tr.”); and stipulated facts set forth in the
Parties’ Pretrial Order (Dkt. 128) (“PTO”). The parties called by deposition John Mack,
Russ Hutchinson on behalf of Goldman Sachs, John Simpson on behalf of Broadhaven,
Jeffrey Young on behalf of Origami, and Thomas Surgent on behalf of NexPoint. The
transcripts of their respective depositions are cited using the witnesses’ last names and
“Dep. Tr.” (e.g., “Mack Dep. Tr.”).
6
parties submitted pre-trial and post-trial briefs. These are the facts as I find them
after trial.
A. The Taube Brothers, the Medley Entities, and Medley Capital
Each of the entities named as a defendant in this action is an affiliate of
Medley Management, a publicly traded asset management firm formed by Brook
and Seth Taube. Brook, Seth, and their younger brother, Chris, control Medley
Management through majority ownership.4 Medley Management is the parent entity
of several registered investment advisors, which manage several funds, including
Medley Capital and Sierra (collectively, the “Medley Entities”). The Medley
Entities’ organizational structure is reflected in the attached chart.5
Medley Capital is a business development corporation (“BDC”) formed by
the Taube brothers in 2011.6 BDCs are special investment vehicles regulated under
the Investment Company Act of 1940 (the “‘40 Act”) and designed to facilitate
4
The three Taube brothers own about 82% of Medley Group LLC. Trial Tr. at 311:17–
312:11 (Taube). Medley Group LLC, in turn, owns 97.7% of Medley Management. Id. at
321:12–14.
5
See Dkt. 136, Ex. A: PDX 001. This decision refers to a number of demonstratives that
summarize the record evidence and were publicly filed by the parties. Referring to charts
has the added bonus of appealing to the visual learner. The Charts need a cipher, as this
decision uses different defined terms to refer to each of the Medley Entities to improve
readability: MDLY = Medley Management; MCC = Medley Capital; SIC = Sierra.
6
PTO ¶¶ II.3, II.5.
7
capital formation for small and middle-market companies.7 Medley Capital
describes its business as “generat[ing] income and capital appreciation by lending
directly to privately held middle market companies . . . .”8 Medley Capital “source[s]
investment opportunities through direct relationships with companies, financial
intermediaries . . . , as well as through financial sponsors.”9 Medley Capital
launched its initial public offering in 2011.10
Medley Capital licenses its name from the Medley Entities.11 Medley Capital
has no employees, offices, or physical assets of its own; all of this is supplied by its
external advisor, MCC Advisors LLC (“Advisors”), a Medley Management
subsidiary. The Medley Entities experience total insider overlap. Every member of
Medley Capital’s management team holds management positions, and each of
7
See generally U.S. Securities and Exchange Commission, Fast Answers: Investment
Company Registration and Regulation Package, available at
https://www.sec.gov/investment/fast-
answers/divisionsinvestmentinvcoreg121504htm.html#P75_10439 (last visited Mar. 7,
2019); Morrison Foerster, FAQs About BDCs, https://media2.mofo.com/documents/faq-
business-development-companies.pdf (last visited Mar. 11, 2019). See also Medley
Capital Corp., Annual Report (Form 10-K) at 30 (Feb. 14, 2018) (“We are classified as a
non-diversified investment company within the meaning of the ‘40 Act, which means that
we are not limited by the ‘40 Act with respect to the proportion of our assets that we may
invest in securities of a single issuer.”).
8
JX 013 at p.4.
9
Id.10
PTO ¶ II.21.
11
JX 051 at p.23.
8
Medley Capital’s inside directors hold board seats in other Medley Entities,
including Medley Management, Advisors, and Sierra.12
Advisors manages Medley Capital pursuant to an Amended and Restated
Investment Management Agreement (the “Management Agreement”) dated January
19, 2014.13 Under that agreement, Medley Capital pays Advisors a base
management fee of 1.75% of Medley Capital’s gross assets and a two-part incentive
fee calculated from net investment income (“NII”) and net capital gains.14 Advisors
has broad discretion in making investment decisions and directing Medley Capital’s
rights under its debt instruments.15 Such external management arrangements are
common among BDCs.16
12
See Dkt. 136, Ex. A: PDX 005 (“Medley Entities: Overlapping Management &
Directors”).
13
JX 004. Advisors provides Medley Capital’s office facilities, equipment, and other
administrative services to Medley Capital pursuant to a separate administration agreement.
PTO ¶ II.23; JX 051 at p.23. For the years ended September 30, 2017, 2016, and 2015,
Medley Capital paid Advisors $3.8 million, $3.9 million, and $4.1 million, solely for
administrative expenses, respectively. Id.14
PTO ¶ II.24; JX 004 § 8.
15
Trial Tr. at 313:17–315:23 (Taube testimony). “We [Advisors] make the loans on behalf
of Medley Capital . . . as the manager, we manage all aspects of the loan from inception
through to repayment, and the board isn’t involved in how we process the loan at any time.”
Id. at 315:7–14.
16
See Trial Tr. at 417:22–418:5 (Hirtler-Garvey).
9
Under the ’40 Act, a majority of Medley Capital’s board of directors (the
“Board”) must be independent, and Medley Capital cannot enter into any transaction
with its external advisor without the approval of a majority of its independent
directors.17 Medley Capital has a seven-member Board divided into three classes.18
The directors are elected by a plurality vote and serve staggered three-year terms.19
Medley Capital’s current Board comprises three inside directors and four
independent directors.20 Medley Capital’s inside directors are Brook Taube, Seth
Taube, and their friend of thirty years, Jeff Tonkel.21 Medley Capital’s outside
directors are John E. Mack, Karin Hirtler-Garvey, Arthur S. Ainsberg, and Mark
Lerdal.22 Mack, Hirtler-Garvey, and Ainsberg joined the Board in 2011.23 Lerdal
joined the Board in 2017.24
17
See 15 U.S.C. § 80a-56; JX 430 at p.14.
18
Medley Capital Corp., Registration Statement Amendment (Form N-2/A) (Nov. 23,
2010), Ex. 99.A.3 (“Medley Capital Certificate of Incorporation”) § 6.3; Id., Ex. 99.B.3
(“Medley Capital Bylaws”) § 3.1 (“The number of directors which shall constitute the
whole of the Board of Directors shall be seven.”).
19
Medley Capital Certificate of Incorporation § 6.3.
20
Medley Capital Corp., Annual Report (Form 10-K) at 72 (Dec. 4, 2018).
21
PTO ¶¶ II.4–6; Medley Capital Corp., Annual Report (Form 10-K) at 72 (Dec. 4, 2018);
Trial Tr. at 318:12–16 (Taube testifying that he has known Tonkel since college).
22
PTO ¶¶ II.7–10.
23
Id. ¶¶ II.7–9.
24
Id. ¶ II.10.
10
Under the ’40 Act, Medley Capital’s independent directors must annually
review and, if appropriate, approve its Management Agreement.25 In the approval
process, the outside directors confer with counsel and review management fee levels
of other BDCs.26 Under the ’40 Act, the Management Agreement must be
terminable at will on 60 days’ notice without a termination fee.27 The outside
directors have never considered Advisors’ performance28 or threatened (or even
considered threatening) to terminate the Management Agreement as part of their
annual review or otherwise.29
In sum, Medley Capital depends on the Taube brothers for its day-to-day
operations, office space, office equipment, staff, and even its name. Medley Capital
has the right to terminate Advisors’ Management Agreement, but has never
25
15 U.S.C. § 80a-15(a)(2).
26
Trial Tr. at 163:10–21 (Ainsberg); Mack Dep. Tr. at 40:21–41:9.
27
Id. § 80a-15(a)(3); PTO ¶ II.23; see Trial Tr. at 286:20–287:2 (Taube); id. at 162:24–
163:21 (Ainsberg).
28
Trial Tr. at 197:11–14 (Ainsberg) (“Q. . . . [T]he Medley Capital board has never
considered declining to renew Medley Capital Advisors’ contract due to poor performance,
has it? A. It has not.”).
29
Mack Dep. Tr. at 43:10–12 (“Q: Has the Board ever considered terminating the
investment management agreement? A: Not that I’m aware of.”); Trial Tr. at 197:11–14
(Ainsberg) (“Q: . . . [T]he Medley Capital board has never considered declining to renew
Medley Capital Advisors’ contract due to poor performance, has it? A. It has not.”); id.
390:1–5 (Hirtler-Garvey) (“Q: Now, did you ever discuss with your special committee
members or with the other independent directors of the board, I guess, terminating that
contract? A. We have not.”).
11
considered using that right. Termination of that agreement would not extricate
Medley Capital from the Taube brothers’ influence in any event, given the other
points of overlap.
Another salient fact: None of Medley Capital’s fiduciaries (officers and
directors) have interests aligned with the interests of Medley Capital’s common
stockholders.
As to the inside directors and management, their financial interests lie in
Medley Management,30 although the Taube brothers beneficially own just under
15% of Medley Capital’s common stock.31 If the Proposed Transactions close, the
Taube brothers and Tonkel will each receive compensation for their Medley
Management interests, as well as lucrative compensation packages more secure than
the at-will Management Agreement.32
30
The Taube brothers have close to a 100% ownership interest in Management. See PTO
¶ II.5 (“Seth Taube, with Brook Taube, is the beneficial owner of . . . 97.7% of the voting
interests in [Medley Management] common stock”); PDX 001. Tonkel owns 6% of the
units in Medley LLC, which are exchangeable for shares of MDLY Class A stock. PTO ¶
II.6.
31
PTO ¶ II.5 (“Seth Taube, with Brook Taube, is the beneficial owner of 14.6% of Medley
Capital common stock”); Trial Tr. at 281:19–21 (Taube) (“Management and Medley
[Management] have, in combination, approximately 14.9 percent interest in Medley
Capital Corporation shares.”).
32
Under the terms of the Proposed Transactions: Brook Taube will be Chairman and CEO
of the combined company, receive an annual base salary of $600,00, and be eligible for
additional performance-based compensation of $1,200,00 cash and $2,000,000 in restricted
shares; Seth Taube will be Vice Chairman, Senior Executive Vice President, and Senior
12
As to the outside directors, the value of their director fees dwarfs the value of
their Medley Capital common stock.33 Ainsberg, Hirtler-Garvey, and Mack have
each been paid over $1 million for serving on the Board and its committees.34 For
the company’s fiscal year ending September 30, 2018, Ainsberg earned $299,000 as
a Medley Capital director, representing roughly half of his 2018 income. 35 Lerdal
Managing Director of the combined company, receive an annual base salary of $480,000,
and be eligible for additional performance-based compensation of $600,000 in cash and
$1,150,000 in restricted stock; and Tonkel will be President, receive an annual base salary
of $480,000, and be eligible for additional performance-based compensation of $600,000
cash and $1,150,000 in restricted stock. PTO ¶¶ II.69–71.
33
Ainsberg owns only 3,000 shares of Medley Capital stock, which he purchased shortly
after joining the Medley Capital Board (JX 001); Hirtler-Garvey owns only 3,000 shares
of Medley Capital stock, which were purchased shortly after the IPO (JX 003); Mack owns
only 1,000 shares of Medley Capital stock, which were purchased in 2012 (JX 002); and
Lerdal does not own any shares of Medley Capital stock. None of them have elected to
receive Medley Capital stock in lieu of cash compensation since 2011, and none of the
independent directors have acquired shares in Medley Capital since 2012. JX 1–JX 3;
JX 417 at p.559.
34
Each independent director receives an annual fee of $90,000. Medley Capital Corp.,
Annual Report (Form 10-K) at 78 (Dec. 4, 2018). In addition, Chairman of the Audit
Committee receives an annual fee of $25,000, and chairpersons of the Nominating,
Corporate Governance, and Compensation Committees receive annual fees of $10,000. Id.
Other members of the Audit Committee, the Nominating and Corporate Governance
Committee, and the Compensation Committee receive annual fees of $12,500, $6,000, and
$6,000, respectively. Each independent director on the special merger committee received
a one-time retainer of $25,000, the chairman of the special committee receives a monthly
fee of $15,000 and other members receive a monthly fee of $10,000. Id. For Medley
Capital’s fiscal year ending on September 30, 2018, Ainsberg received $299,000, Hirtler-
Garvey received $267,500, Mack received $275,000, and Lerdal received $252,500. Id.
35
JX 622 at pp.7–11.
13
has been paid $288,702 for his two years as Medley Capital director.36 By contrast,
at the deal price, the value of all of the outside directors’ combined common stock
is under $40,000.37 In the Proposed Transactions, two of Medley Capital’s four
outside directors will serve on the Board of the combined company; all four outside
directors interviewed for the position after the Merger Agreement was signed.38
B. Pre-Signing Events
1. Medley Management’s Failed Sales Processes
Since its January 20, 2011 IPO, by every industry measure, Medley Capital
has been in a steady financial decline.39 This decline occurred during a period of
36
Medley Capital Corp., Proxy Statement (Form DEF 14A), Proposal I (Dec. 21, 2017)
(reporting compensation of $36,202 for fiscal year ending Sept. 30, 2017); Medley Capital
Corp., Annual Report (Form 10-K) at 78 (Dec. 4, 2018) (reporting compensation of
$252,500 for the fiscal year ending September 30, 2018).
37
Seven thousand shares x $5.68 per share. JX 700, Medley Capital Corp., Proxy
Statement (Form DEFM14A) (Dec. 21, 2018) (“Medley Capital Proxy”).
38
Mack Dep. Tr. at 102:2–14; Trial Tr. at 387:15–23; JX 379 at p.1.
39
See Dkt. 118, Pls.’ Pretrial Br. at 17, Chart & n.3 (compiling data). Between its IPO and
the announcement date of the challenged transactions, Medley Capital’s stock plummeted
by approximately 72% and its cumulative return was -34%. JX 507 at p.7. The
deterioration in Medley Capital’s net investment income (“NII”), a key metric in measuring
BDC performance and a proxy for BDC earning power, and dividend are particularly
dramatic. Since 2014, NII has plunged by 85% (from $1.58 to $0.23 per share), and the
dividend has fallen by 65% (from $1.48 to $0.52 per share). JX 443 at p.8; Trial Tr. at
194:4–12 (Zenner). Because dividends have exceeded NII, Medley Capital has operated
with an unsustainable shortfall since 2016. Id.
14
sustained stock market and sector share price increases.40 Medley Capital’s
performance is poor compared to its peers.41 Due to Medley Capital’s poor financial
performance,42 Medley Management faced financial pressures.43
In May 2017, Medley Management embarked on a process to consider a range
of strategic transactions.44 Medley Management retained UBS and Credit Suisse to
40
JX 509 at p.7.
41
The S&P BDC Index has had a positive 57% return since 2011. JX 443 at p.3; Trial Tr.
at 469:23–470:2 (Zenner) (testifying that Medley Capital’s performance had been poor
relative to its peers). As of August 9, 2018, Medley Capital had the largest discount to
NAV (53%) of any BDC. JX 343 at p.33. As of year-end, Medley Capital has continued
to languish at a 55% discount to NAV—the single largest NAV discount among the 46
BDCs covered by Raymond James’ investment banking group in their “BDC Weekly
Insight” report (published January 3, 2019) and nearly 3x the BDC average discount of
19%. JX 434 at p.7.
42
At the end of 2017, the Management Agreement appears to have accounted for 21% of
Medley Management’s fee-earning assets under management (“fee earning AUM” or
“FEAUM”). Medley Management, Inc., Annual Report (Form 10-K) at 52–53 (Mar. 29,
2018). FrontFour quantifies the Management Agreement as producing about 30% of
Medley Management’s fee revenue. JX 443 at p.10. Whichever way one computes the
value of the Management Agreement to Medley Management, it is clearly significant.
43
Between 2016 and 2017, base management fees paid to Medley Capital Advisors fell
from $19.5 million to $17.8 million. JX 051. The incentive fee had fallen from $8.0
million to $0.9 million in the same period, and Advisors was likely to lose all of its
incentive fees from Medley Capital in 2018. JX 051 at F-51.
44
Id. at 288:17–289:22; PTO ¶ II.27; Medley Capital Proxy at 57. Medley Management
internally referred to this process as “Project Redwood.” JX 027 (Project Redwood
Management Presentation).
15
conduct outreach.45 Nineteen parties expressed interest and seven executed
confidentiality agreements, but the process ultimately failed.46
In October 2017, Medley Management determined to restart the process and
reach out to potential bidders.47 Medley Management retained Goldman Sachs &
Co. LLC (“Goldman”) and Broadhaven Capital Partners, LLC (“Broadhaven”).48
They invited thirty-eight potential strategic partners to participate in the preliminary
round of a two-round sale process.49 Twenty-four of them executed confidentiality
45
PTO ¶ II.27.
46
Id.; Medley Capital Proxy at 57–58. On July 2017, two interested parties submitted non-
binding bids, but neither bid progressed beyond the initial indication of interest. PTO
¶ II.30; JX 621 (Pls.’ Expert Report of Dr. Kennedy) at ¶ 26 (“one cash proposal included
an acquisition of [Medley Management] and [Advisors], and the other proposed a
combination in exchange for consideration of cash and stock of the combined entity”);
Medley Capital Proxy at 57 (“In July 2017, two of the interested parties submitted non-
binding bids to acquire [Medley Management] and [Advisors]. One of the interested
parties proposed an acquisition of [Medley Management] and [Advisors] for cash, and the
other proposed a combination in exchange for consideration of cash and stock of the
combined entity. However, neither bid progressed beyond the initial indication of
interest.”).
47
Medley Management referred to this process internally as “Project Elevate.” See JX 029
(Project Elevate: Confidential Information Packet). The relevant record materials are: id.;
JX 068 (Project Elevate: January 2018 Discussion Materials); JX 635 (Project Elevate:
Apr. 2018 Process Summary); JX 639 (Project Elevate: July 2018 Process Summary);
JX 646 (Project Elevate: Deal Point List); JX 035 (Project Elevate: Oct. 2017 Discussion
Materials); JX 047 (Project Elevate: First Round Bid Summary Materials); JX 064 (Project
Elevate: Discussion Materials); JX 205 (Project Elevate: July 2018 Process Updates).
48
JX 054 (letter engaging Goldman “as financial advisor in connection with the possible
sale of all or a portion of [Medley Management]”); Medley Capital Proxy at 58.
49
JX 085.
16
agreements.50 Medley Management received three “viable” first-round, non-binding
indications of interest.51 Only one bidder, “Party X,” made a second-round
proposal.52 From January 12, 2018, through January 24, 2018, Medley Management
and Party X engaged in negotiations and exchanged numerous proposals and
counterproposals.53
The confidentiality agreements executed by third parties in Medley
Management’s two sales processes prevented the third-parties from offering to enter
into any transaction with funds managed by Medley Management, including Medley
Capital.54 These restrictions applied for a “standstill period” following execution of
the agreements. The standstill periods ranged from twelve to twenty-four months.55
50
Medley Capital Proxy at 58.
51
Id.
52
JX 057; JX 635 at p.3.
53
Medley Capital Proxy at 58.
54
They prevented the third parties from offering to acquire or be involved in “any
acquisition, transaction, merger or other business combination relating to all or part
of . . . any funds advised by [Medley Management] or acquisition transaction for all or part
of the assets of . . . any funds advised by [Medley Management].” PTO ¶ II.28; see, e.g.,
JX 037 (Schroders Conf. Agr.) § 10.a. The agreements also restricted the third parties’
ability to “encourage, initiate, induce or attempt to induce [Medley Capital] . . . to
terminate, amend or otherwise modify their advisory agreements with [Medley
Management] during the Standstill Period.” PTO ¶ II.29. See, e.g., Schroders Conf. Agr.
§ 10.h.
55
See Dkt. 136, PDX 006 (Summary: Standstill Periods); id. PDX 007 (Summary:
Standstill Periods, cont.).
17
On January 26, 2018, the Medley Capital Board convened a meeting to receive
updates on Medley Management’s sales process.56 Brook Taube reported on the
process as well as the status of negotiations with Party X.57 His report to the Board
was high-level. It omitted information that he had presented to Medley
Management’s board of directors that same day.58 The Board was not informed, for
example, that the arm’s-length parties were only willing to pay premia of 8.4% (one
third-party) – 30.0-55.4% (Party X). They were not told that Party X had dropped
its price due to concerns about the performance of Medley Management. They were
not made aware of the standstill provisions restricting transactions at Medley
Capital. Before this litigation, none of the Board members ever asked for or were
made aware of this information.
If consummated, Party X’s proposal would result in a change of control of
Medley Management, triggering Medley Capital’s approval rights under the
56
JX 065 at p.1.
57
Id. at pp.1–2.
58
Compare JX 067 (including half-page summary of the Goldman process and background
on Party X) with JX 068 (including comprehensive information about the Medley
Management bidding process, the terms of each bid, and financial terms proposed by Party
X).
18
Management Agreement.59 To consider the impact of the Party X proposal on
Medley Capital,60 the Board determined to establish a special committee. 61 The
Board appointed to the committee Ainsberg, Hirtler-Garvey, Mack, and Lerdal, with
Ainsberg as chair (the “Special Committee”).62 The committee retained Kramer
Levin as legal advisors.63
On March 15, 2018, Party X submitted a revised bid that reduced the proposed
purchase price significantly and changed other important terms. 64 Medley
Management determined that the revised proposal was not in the best interests of
Medley Management and terminated discussions.65 On May 2, 2018, Party X
59
JX 065 at p.2 (Jan. 26, 2018 Medley Capital Board meeting minutes, Brook reported that
the contemplated transaction “would result in a change in control due to the fact that
[Medley Capital’s] investment advisory agreement would be assigned to [Party X].”).
60
Trial Tr. at 293:13–24 (Taube) (“You know, when the determination was made to
proceed with [Party X], we identified that, due to the assignment of the contract, that that
was a decision that needed to be made. My recollection is that [the] special committee was
formed so that they could make that decision and determination on their own without the
interested board members.”).
61
JX 065 at pp.2–4.
62
Id.
63
Id. at p.5. The Medley Capital Board approved a $25,000 retainer for each committee
member, a stipend of $15,000 per month for the committee chair, and a stipend of $10,000
per month for all other members. Id.
64
JX 087; Medley Capital Proxy at 59; JX 635 at p.5.
65
PTO ¶ II.40; Medley Capital Proxy at 59.
19
informed Medley Management that it did not intend to continue to pursue a potential
transaction.66
In April 2018, a third-party, Origami Capital Partners, LLC (“Origami”),
reached out to Medley Capital several times to propose a potential transaction.67 On
April 4, 2018, Origami submitted an indication of interest.68 Medley Capital
publicly denied ever receiving that letter.69 But Origami addressed the April 2018
letter to both Brook Taube and Marilyn Adler, a Medley Capital Senior Managing
Director.70 And Adler responded to the letter: “I am excited to tell you that Medley
has agreed to discuss a process for the sale. I’ve given your name as a possible
buyer. I am having a discussion this week and will update you as I know more.”71
Brook Taube still maintains: “It’s not clear to me where the mysterious
66
PTO ¶ II.41.
67
JX 101; JX 107.
68
JX 544.
69
Medley Capital Corp., Current Report (Form 8-K) at 1 (Feb. 13, 2019) (“Contrary to
Origami’s public statements, the Company never received a proposal to buy the SBIC
Subsidiary from Origami until yesterday.”).
70
JX 100. Origami addressed the letter to Adler because it believed at the time that Adler
was instructed to solicit expressions of interest to purchase Medley SBIC. Young Dep. Tr.
at 78:6–7. Knowing that Brook and Adler worked together, Origami contacted the two of
them. Id. at 77:13–15. Origami was “surprised and disappointed that [Brook] refused to
respond.” Id. at 77:16–18.
71
JX 108.
20
correspondence came from.”72 Before this litigation, the Special Committee was not
aware of Origami’s 2018 overtures.
As part of Medley Management’s negotiations with Party X, the Medley
Entities’ founders (the Taube brothers and other executives) agreed to give-up their
TRA,73 which was worth approximately $5.9 million for fifteen years following
Medley Management’s IPO.74 Before this litigation, the Special Committee was not
informed of Medley Management’s negotiations with Party X concerning the TRA.
2. Medley Management’s Proposed Transactions with Medley
Capital and Sierra
By May 2018, Brook Taube felt that Medley Management was “under
enormous pressure” financially.75 Wells Fargo noted that Medley Capital’s “NAV
has dropped for a remarkable fifteen quarters,”76 and observed Medley Capital’s
72
Trial Tr. at 373:22–374:1.
73
For some background on TRAs, see Lynnley Browning, Squeezing Out Cash Long After
the I.P.O., New York Times (Mar. 13, 2013), available at
https://dealbook.nytimes.com/2013/03/13/private-equity-squeezes-out-cash-long-after-
its-exit/ (last visited Mar. 9, 2019).
74
Trial Tr. at 246–47 (Sterling).
75
JX 126 (May 9, 2018 email from Brook Taube).
76
JX 078 (Wells Fargo Equity Research Report, Medley Capital: We Were Wrong, But
Staying the Course (Feb. 6, 2018)); see also JX 618 (Defs.’ Expert Report of Dr. Zenner)
at p.56.
21
“severe underperformance.”77 In Mack’s words, by May 2018, Medley Capital’s
credit portfolio was “bottoming out.”78 The management team faced fee waivers at
Medley Capital79 and NAV issues “across the board,” which would have a
“meaningful impact on [Medley Management].”80
Intensifying this pressure, in 2016, the Taube brothers caused Medley LCC, a
subsidiary of Medley Management, to a Master Investment Agreement with
affiliates of Fortress Credit Advisors, LLC (“Fortress”). Under the agreement,
Fortress provided approximately $40 million in capital for Medley Capital projects.
Fortress received a put right that, if exercised, forces Medley to “immediately
redeem” Fortress’s interest.81 This put right can be triggered in if Medley LLC fails
to pay Fortress a preferred distribution or if Medley ceases to control Advisors.82
77
JX 129 (Wells Fargo Equity Research Report, Medley Capital: When the Going Gets
Tough . . . (May 10, 2018)); see also JX 618 (Defs.’ Expert Report of Dr. Zenner) at p.58.
78
Mack Dep. Tr. at 61:16–25.
79
On May 4, 2018, Medley Capital Advisors voluntarily elected to waive $380,000 of the
base management fee payable for the quarter ended March 31, 2018. JX 417 at p.16.
80
JX 126 at p.1. Trial Tr. at 287:18–23 (Taube) (“[W]e were under pressure. And by that
I mean, we were not going to make the quarter. And I think on any quarter, we’re doing
our best to make the earnings that we are targeting. In this quarter, as I recall, a few hundred
thousand dollars was the difference.”).
81
Id. § 6.3.
82
Id. § 6.2.
22
Brook Taube proposed implementing drastic steps, including closing Sierra
Total Return Fund83 to boost cash flow, ending the Sierra distribution to gain $4
million in EBITDA, and imposing other cost saving initiatives to squeeze another
$2 million out of the business.84 On May 9, 2018, Brook even requested that two of
his senior management members agree to defer cash payments owed to them and
take Medley Management stock instead.85 His colleagues declined.86 Before this
litigation, the Special Committee was unaware of the pressures Medley Management
faced during this time period.87 In a candid moment during trial, Ainsberg admitted
that he wished he had known.88
As one solution, the Taube brothers and their team began to contemplate a
three-way combination between Medley Management, Medley Capital, and Sierra.
Sierra is a non-traded BDC specializing in first lien, second lien, and subordinated
debt of middle market companies with annual revenue between $50 million and $1
83
“[A]nother [investment] vehicle that was intended and still does follow in the tracks of
[Sierra].” Trial Tr. at 282:14–17.
84
See JX 119.
85
JX 126 (May 9, 2018 email from Brook Taube).
86
JX 701; JX 133.
87
Trial Tr. at 215–17 (Ainsberg), 287–88 (Taube).
88
Id. at 215:18–217:2.
23
billion.89 Like Medley Capital, Sierra is externally managed by a Medley
Management subsidiary.90 Sierra is much larger than Medley Capital. As of
September 30, 2018, Sierra had total net assets of $687,862,000 and a NAV per share
of $7.05.91
Internally, Medley Management referred to this new proposal as “Project
Integrate.”92 Brook Taube had conceived of this transaction in March 2018 as a
fallback to the Party X deal.93 By May 21, 2018, Project Integrate was at the top of
the list of alternatives, and the management team was “very supportive.”94 By
May 30, 2018, Brook Taube had asked Goldman and Broadhaven to consider the
proposed three-way combination.95
At Sierra and Medley Capital board meetings on June 18 and 19, 2018,
respectively, Medley Management formally introduced the idea of the three-way
89
PTO ¶ II.12; JX 656.
90
Medley Capital Proxy at 21.
91
Id. at 360.
92
See JX 091; JX 092.
93
JX 092 (Mar. 29, 2018 email from Brook: “I like project integrate / Let’s see if we can
defer recapture and tax . . . and keep TRA / That would be good :-)”).
94
See JX 134.
95
JX 140.
24
combination.96 The initial proposal was that each share of Medley Capital stock
would be converted into the right to receive 0.76 shares of Sierra common stock.
Sierra would acquire Medley Management for $3.75 in cash and 0.41 shares of Sierra
common stock.97
The minutes of the January 19, 2019 Board meeting summarize Medley
Management’s rationale behind the proposed transaction.98 In sum, the major
96
JX 162; JX 163; JX 164.
97
JX 164.
98
Those minutes state: “[T]here was an industry-wide push for increased
scale, . . . potential benefits of increased scale include better financing options, investment
opportunities, and cost savings, among other benefits. In particular, by scaling the
institutional manager, [the combined company, “Newco”] would be able to commit capital
for investments alongside strategic partners and other institutional investors. He also
pointed out that the Potential Transaction would create a streamlined organizational
structure allowing for significant reductions in fixed costs and expenses. In addition,
following the Potential Transaction, Newco would experience increased scale and
liquidity. Newco would have approximately $1.2 billion in assets and would be the second
largest internally managed [BDC] and the seventh largest BDC overall. Discussion ensued
among members of the Board. Mr. Taube further noted that compared to externally
managed BDCs, internally managed BDCs traded at a substantial market premium to book,
or net asset value, and that issuing shares while trading at a premium would in and of itself
be accretive. Mr. Taube emphasized, however, that it is not possible to precisely predict
how the market would react to the Potential Transaction.” JX 164 at p.2.
At this point, it bears noting that none of the Board or Special Committee meeting
minutes from June 2018 forward were finalized until after FrontFour commenced this
litigation. Trial Tr. at 419:2–16 (Hirtler-Garvey); JX 293. For that reason, I do not view
them as contemporaneous evidence or give them any presumptive weight, but rather use
them to summarize Defendants’ litigation position.
25
benefits of the proposed transaction touted by the transaction’s proponents are:
increased scale, increased liquidity, diversified asset pool, and internalization.99
Of course, the Proposed Transactions posed significant conflicts. In an effort
to simulate arm’s-length dealings, each of the three entities empowered a special
committee to negotiate and, if appropriate, approve the transaction. Like Medley
Capital, Sierra had formed a special committee in January 2018 to consider the
impact of the Party X transaction;100 the committee had been in a holding pattern
since that time. Each of the committees hired financial advisors. Medley
Management hired Barclays Capital Inc. (“Barclays”);101 Medley Capital hired
Sandler O’Neill + Partners, L.P. (“Sandler”), as discussed below; and Sierra hired
Broadhaven.
Brook Taube facilitated the Sierra special committee’s retention of
Broadhaven. He thought highly of Broadhaven’s Todd Owens,102 having known
99
JX 163 at p.7 (June 19, 2018 Medley Capital Board Presentation); Medley Capital Proxy
at 26; JX 618 ¶ 25; Trial Tr. at 295:8–297:12 (Taube).
100
Medley Capital Proxy at 71 (“[O]n January 26, 2018, [Medley] Management held
meetings with the Medley Capital Board and the Sierra Board . . . [the] Sierra Board
established . . . the Sierra Special Committee . . . and authorized the committee[] to evaluate
the merits of a potential sale of substantially all of [Advisors’] assets to Party X . . . .”).
101
PTO ¶ II.53. The decision to engage Barclays was made at the July 10, 2018 meeting
of the Medley Management special committee. JX 204 at p.2.
102
Trial Tr. at 349 (Taube).
26
him for years.103 However, Medley Management had determined to retain Goldman
only for Project Integrate—“two fees on the Integrate didn’t make sense.”104 So,
Brook Taube agreed to introduce Broadhaven to the Sierra special committee,105
even though Broadhaven was still engaged by Medley Management.106 Brook
Taube suggested the idea to Tonkel on June 6, 2018. Broadhaven terminated its
engagement with Medley Management on June 16, 2018, and pitched the Sierra
special committee on June 18, 2018.107 The Sierra special committee formally
retained Broadhaven on June 29, 2018.108 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.109
103
Id. at 348.
104
Id. at 301; see also id. at 349 (“We had made the decision only to pay Goldman going
forward.”).
105
Id.
106
Trial Tr. at 300:21–301:3 (Taube) (B. Taube giving reasons for recommending
Broadhaven to the [Sierra] special committee); JX 151 (June 13, 2018 email from B. Taube
telling Broadhaven that they were “on deck” to pitch on June 18, 2018).
107
JX 158; JX 151; JX 162.
108
JX 031.
109
See JX 191 at p.4; JX 031.
27
3. Medley Capital’s Special Committee Process
On June 19, 2018, the Medley Capital Board expanded the scope of the
Special Committee’s charter to consider the Proposed Transactions.110 The Special
Committee was empowered to evaluate and negotiate any proposed business
combination, hire independent legal and financial advisors, determine whether the
transaction was in the best interests of Medley Capital’s stockholders, and
recommend the approval or rejection of the transaction.111
a. What the Special Committee did.
The Special Committee retained a financial advisor. They interviewed two
candidates. Ainsberg and Hirtler-Garvey participated in person; Mack and Lerdal
participated by phone.112 On June 21, 2018, at Brook Taube’s recommendation, the
committee members interviewed Medley Management’s recent financial advisor,
110
JX 164.
111
Id. at pp.6–8.
112
Trial Tr. at 170:9–171:3 (Ainsberg); id. at 299:19–300:1 (Hirtler-Garvey). But see
Mack Dep. Tr. at 71:12–17 (“Q. And were you involved in the hiring of a financial
advisor? A. I was not involved in the interview process. However, all of the members of
the committee reviewed the submitted materials and voted on the hiring of the financial
advisor.”).
28
Credit Suisse.113 On June 22, 2018, the committee interviewed Sandler.114 The
committee members met again on June 22 and 25, 2018, to select financial advisors,
and they determined to retain Sandler.115 Ainsberg signed Sandler’s engagement
letter on June 29, 2018.116 Sandler gained access to the data room that day.117
The Special Committee next met on July 11, 2018, to consider the Proposed
Transactions.118 Chris Donohoe of Sandler gave a presentation to give the
committee “a solid grounding in understanding what Medley Capital looked like,
what the other companies coming in would look like, and what a combined company
113
Trial Tr. at 299:23–300:14 (B. Taube recommended Credit Suisse); JX 177 (June 21,
2018 Credit Suisse pitch book).
114
JX 189 (Sandler engagement letter); JX 175 (June 22, 2018 Sandler pitch book); JX 187
(Email from B. Taube to J. Tonkel describing terms of Sandler engagement).
115
JX 175; JX 430; Trial Tr. at 170–71 (Ainsberg). Mack explained his reasons for
selecting Sandler: “[T]hey gave a very good presentation and they were a lot cheaper than
the other guy.” Mack Dep. Tr. at 72:2–4. In Ainsberg’s view: “[Sandler] had extensive
experience in the BDC space. They’re a very highly regarded investment banker. I had
known the firm for many years reputationally. I had never done any business with them.
They had known the folks at [Medley Management] but hadn’t had any important
retention . . . for a period of years.” Trial Tr. at 171:8–17. And Ainsberg agreed that
Sandler’s “pricing for their assignment was significantly less than Credit Suisse, so
finances were a factor.” Id.
116
PTO ¶ II.49; Medley Capital Proxy at 71.
117
JX 703; Trial Tr. at 236:2–237:6 (Sterling).
118
JX 209 at 2–4.
29
would look like . . . .”119 They authorized Sandler to negotiate on their behalf.120
The committee’s goals in these negotiations was to obtain “greater value for [the
Medley Capital] stockholders” and “make sure that the combined company was
better positioned to succeed.”121 To reach those goals, the committee (through
Sandler) asked for cash consideration.122 In the alternative, they authorized Sandler
to push for less cash to leave the combined company.123 Sandler negotiated on the
founders’ TRA and the management team’s post-closing compensation.124 Finally,
Sandler set out to “ensure that the disinterested shareholders of [Medley Capital] had
representation and say in the management of the combined business” through board
representation in the combined company.125
Sandler began to negotiate on July 11, 2018.126 Through negotiations, the
founders agreed to waive the annual TRA payment,127 Sierra agreed to permit two
119
Trial Tr. at 240:2–241:8 (Sterling); JX 208; JX 209.
120
Trial Tr. at 242:2–14 (Sterling).
121
Id. at 243:17–18.
122
Id. at 243:21–244:4.
123
Id.
124
Id. at 173–74 (Ainsberg); id. at 244:5–14 (Sterling).
125
Id. at 244:15–19 (Sterling); id. at 395:9–16 (Hirtler-Garvey) (“That was an idea that
they brought forward that we thought was a great idea.”).
126
JX 707.
127
Trial Tr. at 246:12–247:6 (Sterling).
30
Medley Capital directors to join their Board,128 and Sierra agreed to a higher
exchange ratio than originally proposed.129 At Sandler’s request, Sierra obtained a
compensation expert’s opinion concerning the management compensation
packages.130 The opinion was provided on August 3, 2018,131 with a supporting
presentation.132 Sierra did not agree to any cash consideration for Medley Capital
stockholders.133
On July 29, 2018, Medley Management, Medley Capital, and Sierra reached
final agreement on the ratios.134 In the preceding three weeks, the Special
Committee had met eight times.135
128
JX 509 at p.5; JX 723 at 10; Trial Tr. at 244:15–19 (Sterling).
129
Trial Tr. at 245:18–24, 246:5–8 (Sterling) (testifying that negotiations achieved a ratio
that was equal to Medley Capital’s “equity value or book value in the form of NAV”).
130
JX 288.
131
The one-sentence letter reads: “It is our professional opinion that the employment
agreements and the executive compensation packages attached to the merger agreement
are reasonable.” JX 641.
132
JX 299; Trial Tr. at 247:21–248:1.
133
Id. at 246:1–4. See generally id. at 173–76 (Ainsberg).
134
JX 280.
135
See Dkt. 134, Defs.’ Demonstrative SC-D-01 (Medley Capital Special Committee
Meetings Between Retention of Sandler O’Neill and Announcement of Merger). See also
JX 208 (July 11, 2018 Sandler presentation deck); JX 209 (July 11, 2018 board minutes);
JX 223 (July 17, 2018 Sandler presentation deck); JX 225 (July 17, 2018 board minutes);
JX 228 (July 18, 2018 Sandler presentation deck); JX 229 (July 18, 2018 board minutes);
JX 235 (July 20, 2018 Sandler presentation deck); JX 236 (July 20, 2018 board minutes);
JX 247 (July 20, 2018 Sandler presentation deck, draft); JX 248 (July 23, 2018 board
31
After settling on the economic terms, the parties focused on the legal terms of
the merger agreement.136 The Special Committee met four more times.137 The
record concerning negotiations of the deal protections is sparse. At least one
document reflects that, as of August 8, 2018, the termination fee was still being
negotiated.138
On August 9, 2018, Sandler presented its opinion to the Special Committee
that the Medley Capital Merger Consideration was fair to Medley Capital
stockholders from a financial point of view.139 On August 9, 2018, the Special
Committee approved Medley Capital’s merger agreement with Sierra.140
b. What the Special Committee did not do.
Out of the gate, the Special Committee failed to assert control over the timing
of the process. At the June 2018 Medley Capital Board meeting, Medley
minutes); JX 257 (July 26, 2018 Sandler presentation deck); JX 259 (July 26, 2018 board
minutes); JX 266; JX 278 (July 27, 2018 Sandler presentation deck); JX 268 (July 27, 2018
board minutes) JX 279 (July 28, 2018 board minutes).
136
Trial Tr. at 177–78 (Ainsberg).
137
JX 295 (Aug. 2, 2018 board minutes); JX 308 (Aug. 6, 2018 board minutes); JX 321
(Aug. 8, 2018 board minutes); JX 319 (Aug. 9, 2018 Sandler presentation deck, draft);
JX 333 (Aug. 9, 2018 Sandler presentation deck); JX 335 (Aug. 9, 2018 board minutes);
JX 640 (Sandler Summary of Synergies).
138
JX 332 at p.6.
139
PTO ¶ II.58; JX 333 (Sandler Fairness Opinion Presentation deck).
140
Id. ¶ II.59.
32
Management presented an aggressive timeline, which contemplated that the parties
would execute definitive transaction agreements and announce a transaction by July
31, 2018.141 This made sense for Medley Management, which had shopped itself for
more than a year prior to that point. By contrast, Medley Capital had not undertaken
any strategic process before the June meeting.142 Between its January 26, 2018
formation and the June 19, 2018 Board meeting, the Special Committee did not hold
any meetings, retain a financial advisor, or engage in any substantive discussions
with the Taube brothers or other members of Medley Management about a strategic
transaction.143 Unlike Medley Management, the Special Committee was starting
from scratch. Unlike Medley Management, the Special Committee had no reason to
rush deliberations. Yet, the committee capitulated to the timeline Medley
Management proposed.
Then, throughout the negotiations, Brook Taube pressured the Special
Committee to stick to the aggressive timeline. He denies this,144 but
141
See JX 163.
142
See JX 702.
143
See Medley Capital Proxy at 59–71. Despite the lack of any visible work, the Medley
Capital Special Committee was paid a total of $280,000 between January and June 2018.
JX 164 at p.6.
144
Trial Tr. at 355:3–6 (Taube) (“Q. You were pushing the special committees of all of
these entities to get a deal done; right? A. I was not.”).
33
contemporaneous documents prove otherwise.145 In a July 11, 2018, email to the
Medley Management Board, Brook Taube emphasized that “[t]ime is not in our
favor given performance, inquiries, letters, etc.”146 He specifically flagged the
possibility of “unwanted interloping” and emphasized that it was “real and should
be taken seriously by the board.”147 He went on to underscore the fact that the
transaction represented a “100% premium and a great deal” for Medley
Management.148 On July 27, 2018, Brook instructed Medley Management and
Goldman to advise Medley Capital that they “have a fiduciary obligation to close.”149
That same day, he emailed Broadhaven: “Make this happen!!!!!!”150 On July 31,
2018, Brook Taube emailed Jeff Tonkel while Tonkel was on a “Sierra call with
145
Compare Trial Tr. at 352 (“We wanted to have a process that was timely but sensible.”)
with JX 289 (“Thursday board meetings are the time to push these guys hard in person.”)
(emphasis added); JX 269 (“I want to agree on ONE suggestion (not a menu) and tell them
they are better off . . . or at least no worse off . . . and have a fiduciary obligation to close”)
(emphasis added); JX 275 (“Make this happen!!!!!! If not . . . I don’t know what to say).
See also Simpson Dep. Tr. at 623:23–225:2 (“Brook was pushing very hard – we advised
the Special Committee that we had talked to Brook and that he was pushing very hard for
his position.”).
146
JX 212 at p.3.
147
JX 212 at p.3.
148
Id. at p.4.
149
JX 269.
150
JX 275. Brookhaven’s corporate representative, John Simpson, advised the Sierra
special committee “that Brook was pushing very hard . . . that [Broadhaven] had talked to
Brook and that he was pushing very hard for his position.” Simpson Dep. Tr. at 224–25.
34
Tony.”151 He instructed Tonkel: “Thursday board meetings are the time to push
these guys hard in person.”152 On August 1, 2018, Brook reported to the Medley
Management Board that “[w]e and Goldman continue to believe the risk is
substantial if we announce earnings without simultaneously announcing this
deal.”153 On August 5, 2018, Lerdal texted Brook Taube: “Are we on track?
Anything you need from me?” Taube responded: “Let’s talk soon / Pushing Hard
:-)”154
The Special Committee did not analyze the value of Medley Management, or
understand what Medley Management would obtain in the Proposed Transactions,
although in effect Medley Capital and Medley Management were competing for
consideration. The Medley Management transaction and Medley Capital/Sierra
Merger were cross-conditioned, and the new, combined company would own
Medley Management post-closing.
151
JX 289.
152
Id. (emphasis added).
153
JX 292.
154
JX 717 at p.1 (emphasis added). Brook Taube did not produce text messages in
discovery. Trial Tr. at 358. FrontFour was forced to press for them. Dkt. 127. Lerdal
produced this text message after Brook Taube’s deposition. Trial Tr. at 359:5–9.
35
The Special Committee did not consider alternative transactions,155 although
disgruntled stockholders were publicly advocating for a sale process as of April
2018. In a letter to the Board dated April 17, 2018, one Medley Capital stockholder
wrote: “We believe the Board of Directors should immediately undertake a serious
effort to sell the business (the underlying investment portfolio and the Management
Agreement). We believe there is an attractive market for [Medley Capital’s]
investment portfolio well above where [Medley Capital’s] current stock trades.”156
Although the Special Committee was broadly empowered, they laser-focused on
only one option. Sandler corroborated—they viewed their role as evaluating the
three-way combination only.157
The Special Committee did not conduct a pre-signing market check. When
asked why, Hirtler-Garvey said she was happy with the transaction at hand.158 She
wanted a deal with Medley Management. Ainsberg testified to his belief that the
2017 Medley Management sales processes “effectively” checked the market for
155
JX 569 (“Medley Capital did not contact any third parties for the purpose of exploring
an Alternative Medley Capital Transaction between May 1, 2017 and execution of the
Medley Capital Merger Agreement”).
156
JX 105. See also Trial Tr. at 20:8–13 (Lorber).
157
Trial Tr. at 231:18–232:14 (Sterling).
158
Id. at 419:17–420:4 (Hirtler-Garvey).
36
Medley Capital.159 He believed that Party X’s offer had the potential to result in a
deal with Medley Capital.160 Mack went further, testifying that he understood the
Party X transaction to be geared toward a deal with Medley Capital, not with Medley
Management.161 This, of course, was wrong. Brook Taube testified, and
contemporaneous evidence reflects, that the 2017 sales processes and negotiations
with Party X aimed to develop strategic transactions and generate potential bidders
for Medley Management, not Medley Capital.162 Medley Capital was not
“effectively” shopped.
159
Id. at 182:2–183:4 (Ainsberg) (“We didn’t shop the company because, if one steps back
and thinks about the history of [Medley Management], starting in 2017, even before the
Goldman Sachs and Brookhaven involvement, Medley Management undertook a process
with both Credit Suisse and UBS to look at the marketplace to see if there would be an
opportunity to come together with a group. And when [Medley Management] was doing
that, as we discussed earlier, that involves [Medley Capital], because [Medley Capital]
effectively would have to approve a transaction in some shape, manner, or form. So
effectively what happened, both at the time of the Credit Suisse/UBS and at the time of the
Goldman/Broadhaven reach-out to the street, many, many significant players in the street
knew about it, that [Medley Management] was interested in the transaction. So this
business effectively was -- was looked at. Now, did they look at our -- I don’t know what
they looked at, effectively, when they were looking at it, these other entities. I don’t know
what documents they were provided with. But you would assume that they, early on, before
our current transaction, that these folks looked at various documents of the entities.”).
160
Trial Tr. at 225–28 (Ainsberg).
161
Mack Dep. Tr. at 57:10–25. Mack also testified that he did not know or think about
who Goldman Sachs was working for. Id. at 99:20–25. “They were – they were trying to
shop to see whether there was a deal out there, but I’m not sure that I ever thought about
who they were working for.” Id. at 99:25–100:4.
162
Trial Tr. at 289:21–293:24 (Taube); JX 022 (Benefit Street Partners non-binding
proposal to Medley Management); JX 035 (Project Elevate Discussion Materials); JX 038
37
Although Medley Management’s prior two sales processes informed the
Special Committee’s decision not to conduct a pre-signing market check, the
committee members did nothing to inform themselves of basic aspects of those two
sales processes. As discussed above, one member did not know that the process
aimed to generate a deal for Medley Management, not Medley Capital.163 No one
asked about the terms of the potential Party X transaction or any other proposal
received by Medley Management as part of those processes.
Critically, none of the committee members knew that approximately thirty
confidentiality agreements contractually foreclosed potential third parties from
proposing a transaction with Medley Capital. Of the thirty agreements, only two
standstill periods expired before the Proposed Transactions were announced on
August 9, 2018.164 The other twenty-eight agreements restricted potential
counterparties during the entire period that the Special Committee was negotiating
the Proposed Transactions.165
(Project Elevate Preliminary Proposal Instructions); JX 031 (Broadhaven engagement
letter).
163
Mack Dep. Tr. at 57:3–25.
164
See Dkt. 136, PDX 006 (Summary: Standstill Periods); id. PDX 007 (Summary:
Standstill Periods, cont.).
165
See Dkt. 136, Ex. A: PDX 006 (Summary: Standstill Periods).
38
When asked about the standstill agreements during his deposition, Mack
stated his belief that “[t]his is a management issue, not a director [issue].” 166 He
thought that more signed standstill agreements would be beneficial for Medley
Capital.167 He admitted, “I was not familiar with the specifics,” and disclaimed any
interest in being informed: “I may not want to know how sausage is made.”168
The Special Committee did not probe meaningfully into the value of Medley
Management. Medley Management’s financial projections forecasted “hockey
stick” growth in the outer years of the forecast based on revenue from new projects
and clients.169 Sandler ran a sensitivity analysis, but lacked much of the information
that was concerned with whether the NII benefit from the deal was just projected
growth, or whether there was underlying value and earnings to support the figures.170
Also, the Special Committee did not know about two expressions of interest
from third parties concerning a transaction with Medley Capital. The first was from
Origami, discussed above. The Special Committee did not learn of Origami’s 2018
166
JX628 at 52:7–10 (“You have to delegate things to the management. Directors direct.
I’m sorry. Directors direct, managers manage.”).
Mack Dep. Tr. at 53:13–15 (“The fact is, as you -- as I think about it, the more the
167
merrier. It’s -- then it’s just become a part of a process.”).
168
Mack Dep. Tr. at 53:13–22.
169
JX 341 at p.28.
170
Trial Tr. at 254:5–11 (Sterling).
39
outreach until Origami publicly disclosed it in February 2019.171 The second was
from Lantern, which executed a confidentiality agreement on May 23, 2018, as part
of the Medley Management sales process.172 On July 3, 2018, Tom Schmidt of
Lantern reached out to Goldman about its interest in acquiring Medley Management
and potentially recapitalizing Medley Capital.173 Schmidt followed up on July 10.174
He followed up again on July 20, this time expressing frustration.175 On July 30,
Lantern submitted an indication of interest.176 Among other things, Lantern
explained that it was “interested in exploring alternatives for providing a significant
cash infusion of new capital into Medley Capital to the extent it is prudent.”177
Lantern’s recapitalization idea did not reach the Special Committee before execution
of the Merger Agreement.
171
Id. at 213:10–23 (Ainsberg).
172
JX 137.
173
JX 197.
174
JX 213.
175
JX 234 (“I have not been able to get you guys to respond since Tuesday. Left messages
at the office for you as well as email. Not trying to be difficult but would like some input
on scheduling. If I need to get to NYC I will do that. Thank you.”).
176
JX 286.
177
JX 283 at p.2 (emphasis added).
40
C. The Proposed Transactions
On August 9, 2018 the Special Committee unanimously recommended that
the Board approve the merger agreement with Sierra (the “Merger Agreement”).178
Medley Management, Medley Capital, and Sierra announced the Proposed
Transactions on August 9, 2019.179
The Merger Agreement contains a series of deal protection provisions.
Section 7.10 of the Merger Agreement prevents Medley Capital from soliciting or
engaging with parties submitting “Competing Proposals” unless it constitutes a
“Superior Proposal” or is likely to lead to one.180 “Competing Proposal” is defined
178
PTO ¶ II.59; JX 336.
179
JX 350.
180
JX 317 (Merger Agr.) § 7.10(d) (“Notwithstanding anything to the contrary contained
in this Agreement, at any time prior to the date that [Medley Capital] Stockholder Approval
is obtained (in the case of [Medley Capital]) or [Sierra] Stockholder Approval is obtained
(in the case of [Sierra]), in the event that [Medley Capital] (or its representatives on
[Medley Capital’s] behalf) or [Sierra] (or its representatives on [Sierra’s] behalf) receives
a Competing Proposal from any Third Party, (i) [Medley Capital] and its representatives or
[Sierra] and its representatives, as applicable, may contact such Third Party to clarify any
ambiguous terms and conditions thereof (without the [Medley Capital] Board or [Sierra]
Board, as applicable, being required to make the determination in clause (ii) of this Section
7.IO(d)) and (ii) [Medley Capital] and the [Medley Capital] Board and its representatives
or [Sierra] and the [Sierra] Board and its representatives, as applicable, may engage in
negotiations or substantive discussions with, or furnish any information and other access
to, any Third Party making such Competing Proposal and its representatives and Affiliates
if the [Medley Capital] Board or [Sierra] Board, as applicable, determines in good faith
(after consultation with its outside financial advisors and legal counsel) that (A) such
Competing Proposal either constitutes a Superior Proposal or could reasonably be expected
to lead to a Superior Proposal and (B) failure to consider such Competing Proposal could
41
as an offer to acquire 20% or more of Medley Capital’s securities or assets or a
liquidation.181 “Superior Proposal” is defined as a Competing Proposal that is on
terms more favorable, from a financial point of view, than the Merger Agreement
reasonably be expected to be inconsistent with the fiduciary duties of the directors of
[Medley Capital] or [Sierra], as applicable, under Applicable Law; provided, that (x) such
Competing Proposal did not result from any material breach of any of the provisions set
forth in this Section 7.10, (y) prior to furnishing any material non-public information
concerning [Medley Capital] or [Sierra], as applicable, [Medley Capital] or [Sierra], as
applicable, receives from such Third Party, to the extent such Third Party is not already
subject to a confidentiality agreement with [Medley Capital] or [Sierra], as applicable, a
confidentiality agreement containing confidentiality terms that are not less favorable in the
aggregate to [Medley Capital] or [Sierra], as the case may be, than those contained in the
Confidentiality Agreement (unless [Medley Capital] or [Sierra], as applicable, offers to
amend the Confidentiality Agreement to reflect such more favorable terms) (it being
understood and agreed that such confidentiality agreement need not restrict the making of
Competing Proposals (and related communications) to [Medley Capital] or the [Medley
Capital] Board or to [Sierra] or the [Sierra] Board, as the case may be) (an ‘Acceptable
Confidentiality Agreement’) and (z) [Medley Capital] or [Sierra], as the case may be, shall
(subject to the terms of any confidentiality agreement existing prior to the date hereof)
promptly provide or make available to the other party any material written non-public
information concerning it that it provides to any Third Party given such access that was not
previously made available to the other party or its representatives.”) (emphasis original).
181
Id. § 1.1 (“‘Competing Proposal’ means any inquiry, proposal or offer made by any
Third Party: (a) to purchase or otherwise acquire, directly or indirectly, in one transaction
or a series of transactions (including any merger, consolidation, tender offer, exchange
offer, stock acquisition, asset acquisition, binding share exchange, business combination,
recapitalization, liquidation, dissolution, joint venture or similar transaction), (i) beneficial
ownership (as defined under Section 13(d) of the Exchange Act) of twenty percent (20%)
or more of any class of equity securities of [Medley Capital] or [Sierra], as applicable, or
(ii) any one or more assets or businesses of [Medley Capital] or its Subsidiaries or [Sierra]
or its Subsidiaries that constitute twenty percent (20%) or more of the revenues or assets
of [Medley Capital] and its Subsidiaries, taken as a whole, or [Sierra] and its Subsidiaries,
taken as a whole, as applicable; or (b) any liquidation of [Medley Capital] or [Sierra], in
each case other than the Merger and the other transactions to occur at Closing in accordance
with this Agreement.”) (emphasis original).
42
and is as likely to close.182 Section 7.10(e) of the Merger Agreement provides that
the Medley Capital Board may not make an “Adverse Recommendation Change” or
enter into any agreement (other than a confidentiality agreement), subject to a
fiduciary out.183 Section 9.4 of the Medley Capital Merger Agreement provides for
182
Id. (“‘Superior Proposal’ means any bona fide written Competing Proposal made by a
Third Party that the [Medley Capital] Board or the [Sierra] Board, as applicable, determines
in good faith, after consultation with its outside financial advisors and legal counsel, and
taking into account the terms and conditions of such proposal, the party making such
proposal, all financial, legal, regulatory and other aspects of such proposal, as well as the
likelihood of consummation of the Competing Proposal relative to the Merger and such
other factors as the [Medley Capital] Board or [Sierra] Board, as applicable, considers to
be appropriate, is more favorable to [Medley Capital’s] stockholders or [Sierra’s]
stockholders, as applicable, from a financial point of view than the Merger and the other
transactions contemplated by this Agreement (including any revisions to the terms of this
Agreement committed to by [Sierra] to [Medley Capital] in writing in response to such
Competing Proposal made to [Medley Capital] or by [Medley Capital] to [Sierra] in writing
in response to such Competing Proposal made to [Sierra] under the provisions of Section
7.10(f); provided however, for these purposes, to the extent relevant to the Competing
Proposal in question, all percentages in subsections (a)(i) and (a)(ii) of the definition of
Competing Proposal shall be increased to fifty percent (50%).”) (emphasis original).
183
Id. § 7.10(e) (“Except as otherwise provided in this Agreement, (i) the [Medley Capital]
Board shall not effect [a Medley Capital] Adverse Recommendation Change and the
[Sierra] Board shall not effect [a Sierra] Adverse Recommendation Change (each, an
‘Adverse Recommendation Change’), (ii) [Medley Capital] Board shall not approve or
recommend, or allow [Medley Capital] to execute or enter into, any letter of intent,
memorandum of understanding or definitive merger or similar agreement with respect to
any Competing Proposal (other than an Acceptable Confidentiality Agreement), and (iii)
the [Sierra] Board shall not approve or recommend, or allow [Sierra] to execute or enter
into, any letter of intent, memorandum of understanding or definitive merger or similar
agreement with respect to any Competing Proposal (other than an Acceptable
Confidentiality Agreement); provided however, that notwithstanding anything in this
Agreement to the contrary, if at any time prior to the receipt of [Medley Capital]
Stockholder Approval (in the case of [Medley Capital]) or the [Sierra] Stockholder
Approval (in the case of [Sierra]), [Medley Capital] or [Sierra], as the case may be, has
43
a $6 million “Termination Fee,” which Medley Capital must pay if either party
terminates the Medley Capital Merger Agreement after the Medley Capital Board
effects an “Adverse Recommendation Change,” or if Medley Capital terminates the
Medley Capital Merger Agreement to enter into a definitive agreement contemplated
by a Superior Proposal.
received a Competing Proposal that its board of directors has determined in good faith
(after consultation with its outside financial advisor and legal counsel) constitutes a
Superior Proposal, the [Medley Capital] Board or [Sierra] Board, as applicable, may (x)
make an Adverse Recommendation Change in connection with such Superior Proposal if
the board of directors effecting the Adverse Recommendation Change determines in good
faith (after consultation with its outside financial advisor and legal counsel) that failure to
make an Adverse Recommendation Change could reasonably be expected to be
inconsistent with the fiduciary duties of the [Medley Capital] Board or [Sierra] Board, as
applicable, under Applicable Law, and/or (y) authorize, adopt or approve such Superior
Proposal and cause or permit [Medley Capital] or [Sierra], as applicable, to enter into a
definitive agreement with respect to such Superior Proposal concurrently with the
termination of this Agreement in accordance with Section 9.1(g) or 9.1(i), as applicable,
but in each case only after providing the Notice of Adverse Recommendation or Notice of
Superior Proposal, as applicable, and entering into good faith negotiations as required by
Section 7.lO(f).”) (emphasis original).
44
Employment contracts connected to the merger provide for lucrative positions
for Medley Management’s senior management.184 The cost of these employment
contracts exceeds the estimated synergies arising from the Proposed Transactions.185
D. Post-Signing Events
1. FrontFour’s Reaction
FrontFour beneficially owns 1,674,946 shares of Medley Capital common
stock, which constitutes approximately 3.1% of Medley Capital’s outstanding
shares.186 FrontFour first learned of the Proposed Transactions when they were
publicly announced on August 9, 2018.187
184
Trial Tr. at 405:13–20 (Hirtler-Garvey). Brook Taube will be Chairman and CEO of
the combined company and will receive an employment package that includes a base
$600,000 annual salary and a $3.2 million incentive bonus comprising $2 million in
restricted stock units and $1.2 million in cash. PTO ¶ II.69. Seth Taube will be Vice
Chairman, Senior Executive Vice President and Senior Managing Director of the combined
company and will receive an employment package, with a base $480,000 annual salary and
a $1.75 million incentive bonus comprising $1.15 million in restricted stock units and
$600,000 in cash. PTO ¶ II.70. Tonkel will serve as President of the combined company
and will receive an employment package, with a base $480,000 annual salary and a $1.75
million incentive bonus comprising $1.15 million in restricted stock units and $600,000 in
cash. PTO ¶ II.71.
185
Trial Tr. at 405:16–406:3 (Hirtler-Garvey).
186
Dkt. 128, Pretrial Order (“PTO”) ¶ II.1; JX466; JX 720. FrontFour is on the “smaller
scale of hedge funds. Assets under management are . . . about $150 million.” Trial Tr.
at 11, 55 (Lorber).
187
Id. at 16.
45
FrontFour’s corporate representative, David Lorber, testified at trial that he
was “perplexed” by the announcement.188 He believed that Medley Management
had performed poorly over the prior five years, “erod[ing] significant NAV value,
as well as stock price,” yet “Medley Management was receiving an excessive
amount of value” in the Merger Transactions.189
A FrontFour analyst reached out to Medley Capital to “better understand the
transaction”190 and eventually was placed in contact with Medley Capital’s risk
management officer, Sam Anderson.191 They spoke on the phone in late
September.192 FrontFour was not aware during that call that Anderson was also a
senior managing director of Medley Management.193 During the call, FrontFour’s
representative asked why the proxy had not yet been issued.194 Anderson responded
suggesting that the parties to the Merger Transactions were having difficulty
188
Id.
189
Id. at 16:11–18:6.
190
Id. at 18:19–24.
191
Id. at 24:19–24.
192
Id. at 24:22–23.
193
Id. at 24:6–18.
194
Id. at 25:10–16.
46
agreeing on the disclosures, which raised concerns for FrontFour.195 After the call,
FrontFour asked to be placed in contact with Medley Capital’s independent
directors.196 Instead, Brook Taube responded. He promised to “revert back.”197 He
did not timely do so.198
On November 2, 2019, FrontFour nominated Lorber and Clifford Press as
candidates for election as directors at Medley Capital’s next annual meeting of
stockholders.199 On November 20, 2018, FrontFour obtained a telephonic meeting
with Ainsberg and Hirtler-Garvey.200 John Fredericks, Medley Capital’s Chief
Compliance Officer—who is also Medley Management’s General Counsel and
Sierra’s Chief Compliance Officer—joined the call and did all of the talking.201 On
195
As Lorber described: “[Anderson] said to Steve [FrontFour’s representative], ‘have you
ever done a merger before?’ Steve said, ‘you know, yes, I have.’ And Sam said, ‘have
you ever done a three-way merger?’ Steve said, ‘no, actually I haven’t.’ And then Sam
said, ‘well, it’s very difficult to get three parties to agree on what actually happened.’ That
was quite alarming. Given that what actually [happened] should be factual. It shouldn’t
be difficult to get people to agree on what actually happened.” Id. at 25:10–24.
196
Id. at 26.
197
Id.
198
Id. at 27:16–20.
199
JX 396. Lorber testified that this was the deadline for nomination letters. Trial Tr.
at 29. Medley Capital has not noticed the 2019 annual meeting. Id. at 31.
200
JX 409; Trial Tr. at 27–28. The meeting was held telephonically, as Medley Capital
refused FrontFour’s request for an in-person meeting. Id. at 28.
201
Id. at 28.
47
November 27, 2018, Medley Capital responded to questions raised by Lorber on the
call.202 On December 13, 2018, FrontFour issued an open letter to stockholders
opposing the Proposed Transactions.203
2. Medley Capital’s Public Disclosures
During an investors call on August 10, 2019, Medley Capital management
represented that the proxy statement would be filed within weeks.204 Medley Capital
issued the proxy statement on December 21, 2019.205 It was flawed.206 On
January 11, 2019, FrontFour commenced litigation in this Court pursuant to 8 Del.
C. § 220 to compel Medley Capital to produce book and records for inspection.207
After an initial scheduling conference with the Court, Medley Capital voluntarily
202
JX 409.
203
JX 421.
204
JX 365 (Transcript of Aug. 10, 2018 Medley Investor Conference Call re: Merger
Overview) at p.2 (“there will be further detail in our proxy which will file in the next few
weeks”); Trial Tr. at 25:10–14 (Lorber).
205
See Medley Capital Proxy.
206
It claimed that, “because each of the proposals submitted included various conditions
and carve-outs, and different forms of consideration, some of which was contingent, and
in light of the fact that none were binding, it would be both impracticable and speculative
to assign a particular value to any such proposal.” Id. at 57 (emphasis added); see also id.
at 59. But it was possible to derive enterprise, equity and corresponding per-share values
for Medley Management (as well as implied premium calculations) from each of the IOIs;
Medley Management and its advisors did exactly that when communicating internally.
JX 705.
207
C.A. No. 2019-0021-KSJM.
48
produced to FrontFour stocklist materials and certain core documents concerning the
Merger.208 On January 30, 2019, FrontFour raised questions regarding the adequacy
of the disclosures in the Proxy.209 On February 5, 2019, Medley Capital issued the
Proxy Supplement and postponed the stockholder vote until March 8, 2019.210
3. Multiple Third Parties Express Interest in Medley Capital
After Medley Capital issued the proxy, multiple third parties expressed
interest in entering into an alternative transaction with Medley Capital.
 ZAIS. On January 2, 2019, ZAIS submitted a letter proposing that the
Special Committee appoint ZAIS as the new investment advisor for the
sole purpose of managing an orderly sale or liquidation of Medley
Capital.211 ZAIS requested the opportunity to meet the Special
Committee to share its views. The Special Committee met to consider
the proposal on January 9, 2019.212 Nobody acting on behalf of the
Special Committee ever contacted ZAIS. On January 24, 2019, Brook
Taube instructed ZAIS that the Medley Capital Merger Agreement
prohibited contact.213
 NexPoint. On January 24, 2019, NexPoint Advisors, L.P. (“NexPoint”)
submitted a letter of intent proposing that Medley Capital terminate the
Management Agreement and replace Advisors with NexPoint, which
would charge a lower fee and make a cash payment to Medley
208
Id. at Dkt. 17 (Oral Argument on Pls.’ Mot. to Expedite and the Court’s Ruling).
209
JX 706.
210
JX 513.
211
JX 432.
212
JX 439.
213
JX 459; Trial Tr. at 366:22–367:10 (Taube).
49
Capital.214 On January 31, 2019, NexPoint made a second proposal
contemplating the combination of Medley Capital and Sierra and the
retention of $100 million in cash otherwise earmarked for Medley
Management stockholders in the Proposed Transactions.215 NexPoint
also proposed to pay $25 million to the combined company for the
benefit of stockholders, to provide a reduced fee structure and lowered
costs (resulting in at least $9 million in annual savings), and to purchase
at least $50 million of combined company shares over a five-quarter
period.216
On February 1, 2019, NexPoint made both its proposals
public.217 On February 6, 2019, Medley Capital and Sierra issued a
press release indicating that their respective special committees had
unanimously determined not to pursue the second NexPoint
Proposal.218 The press release purported to identify the reasoning
behind the determinations by the Special Committees. But Medley
Management had drafted the press release before the Special
Committee had even made its determination.219
 Origami. On February 11, 2019, Origami issued an open letter to the
Medley Capital Board, proposing to buy 100% of the interests of
Medley Capital’s wholly owned subsidiary, Medley SBIC, for $45
million cash.220 Origami also disclosed that it had reached out several
times during the spring of 2018 and sent a formal letter on April 4, 2018
214
JX 458.
215
JX 472.
216
Id.
217
JX 488. After NexPoint made its proposals public, ISS changed its recommendation to
voting against the Proposed Transactions. ISS initially recommended voting in favor of
the merger based on the theory that it was the better of two bad options. JX 463 at p.2
(describing the Proposed Transactions as “the better of the two underwhelming options
available to shareholders”).
218
JX 524.
219
JX 514.
220
JX 544.
50
expressing interest but had never received a response.221 On
February 14, 2019, Origami sent another letter clarifying and
reiterating its interest in a potential transaction.222 On February 19,
2019, Medley Capital rejected Origami’s proposal.223
 Marathon. On March 1, 2019, Marathon Asset Management L.P.
(“Marathon”) submitted a letter to the Special Committee proposing
that Medley Capital remain as an independent company, terminate the
Management Agreement, and enter into a new management contract
with Marathon.224
The Special Committee held meetings to consider the multiple expressions of
interest. But nobody reached out to ZAIS, except to confirm that the Merger
Agreement prohibited contact.225 Nor has anyone acting on behalf of the Special
Committee contacted NexPoint or Origami, despite their expressed willingness to
improve their proposals.226 The Special Committee has never asked for a waiver of
the non-solicitation provisions of the Merger Agreement to enable discussions with
221
See id; see also JX 101.
222
JX 557.
223
JX 564.
224
Medley Capital Corp., Non-Management Solicitation Material (Form DFAN14A)
(Mar. 6, 2019).
225
JX 459; Trial Tr. at 366:22–367:10 (Taube).
226
Trial Tr. at 188:21–189:1 (Ainsberg); id. at 424:2–425:3 (Hirtler-Garvey).
51
any of these potential counterparties, nor has it attempted to secure better terms from
the Taube brothers. 227
In sum, the Special Committee considered each offer, but did not engage with
any competing bidder, and seems to question the need to do so.228 Their attitude is
best captured by Lerdal in a text to Brook Taube. Around the time of the Special
Committee meeting at which the ZAIS offer was considered, Lerdal texted Brook
Taube: “Are we going to respond to every f**ksake on the planet?”229
E. The Litigation
FrontFour commenced this litigation on February 11, 2019, and amended the
complaint the next day to reflect the Origami offer.230 Defendants stipulated to an
227
Also, as discussed above, in May 2018, Lantern expressed an interest in a possible
transaction that involved a recapitalization of Medley Capital. JX 138. On July 3, 2018, a
Lantern representative again reached out to Goldman: “[A]ny chance we can talk today? I
have been speaking with Todd Owens [of Broadhaven] about our interest in acquiring
[Medley Management] and recapitalizing Medley Capital. Thanks!” JX 197. By that time,
Project Integrate was underway. The Special Committee was unaware of this offer when
they were negotiating the Proposed Transactions, and it has never been disclosed to Medley
Capital stockholders. Despite a call that apparently took place between Lantern and “the
company” in late July 2018, followed by an email to Russ Hutchinson, no one from Medley
Capital pursued Lantern’s proposal. JX 254; Trial Tr. at 188:21–189:1 (Ainsberg) (“Q.
And what happened with respect to the proposals, at least at the – what’s happened so far
with respect to the proposals? That is to say, Zais, NexPoint, and Origami. A. They’ve
all been rejected.”).
228
Trial Tr. at 222:16–225:7 (Ainsberg); id. at 423:5–425:3 (Hirtler-Garvey).
229
JX 717 at p.11.
230
Dkt. 1; Dkt. 8 (“Am. Compl.”).
52
expedited schedule, and the parties agreed to hold trial before the March 8, 2019
stockholder vote.231 The parties substantially completed document production by
February 24, 2019, took twelve depositions between February 26 and March 4, 2019,
and submitted pretrial briefs and a form of pretrial order on March 4, 2019. 232 A
pretrial conference was held on March 5, 2019.233 Trial took place on March 6 and 7,
2019.234
II. ANALYSIS
The Amended Complaint asserts three counts: Count I contends that the Taube
brothers, Tonkel, and the Special Committee members breached their fiduciary
duties to FrontFour and the members of the Class in connection with the approval of
the Proposed Transactions.235 Count I challenges the Proposed Transactions under
the entire fairness standard (the “Entire Fairness Claim”), and the deal protections
of the Merger Agreement under enhanced scrutiny (the “Enhanced Scrutiny Claim”).
Count II contends that the Medley Capital directors breached their fiduciary duty of
231
Dkt. 63; Dkt. 79.
232
Dkt. 271, 81, 116, 117, 118, 124.
233
Dkt. 128, PTO ¶ II.130.
234
Dkt. 133.
235
Am. Compl. ¶¶ 144–52.
53
disclosure (the “Disclosure Claims”).236 Lastly, Count III contends that Medley
Management, Sierra, Advisors, and two other Medley Entities—Medley Group and
Medley LLC—aided and abetted in the other Defendants’ breaches of fiduciary
duties.237
A. Entire Fairness Claim
“Delaware has three tiers of review for evaluating director decision-making:
the business judgment rule, enhanced scrutiny, and entire fairness.”238 Entire
fairness review arises “when the board labors under actual conflicts of interest,”239
such as when a controlling stockholder stands on both sides of a challenged
transaction240 or when a controlling stockholder competes with the minority
stockholders for consideration.241
236
Id. ¶¶ 153–60.
237
Id. ¶¶ 161–67.
238
Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011).
239
Id.240
Kahn v. Tremont Corp. (Tremont II), 694 A.2d 422, 428 (Del. 1997); Kahn v. Lynch
Commc’n Sys., Inc., 638 A.2d 1110, 1115 (Del. 1994); Weinberger v. UOP, Inc., 457 A.2d
701, 710 (Del. 1983).
241
In re John Q. Hammons Hotels Inc. S’holder Litig., 2009 WL 3165613, at *12 (Del. Ch.
Oct. 2, 2009), interlocutory appeal refused, 984 A.2d 124 (Del. 2009) (TABLE); see In re
Delphi Fin. Gp. S’holder Litig., 2012 WL 729232, at *12 n.57 (Del. Ch. Mar. 6, 2012)
(applying entire fairness where the controlling stockholder received differential merger
consideration); see also In re Primedia, Inc. S’holders Litig., 67 A.3d 455, 487 (Del. Ch.
54
FrontFour argues that the Proposed Transactions should be reviewed under
Delaware’s most onerous standard,242 entire fairness. The Taube brothers stand on
both sides of the Proposed Transactions, so entire fairness applies if they are deemed
controllers. FrontFour bears the burden of proving by a preponderance of the
evidence facts necessary to trigger entire fairness. If entire fairness is triggered,
Defendants bear the burden of proving by a preponderance of the evidence that the
Proposed Transactions are entirely fair.
1. Entire Fairness Applies Because the Taube Brothers Are
Controllers.
The Taube brothers beneficially own less than 15% of Medley Capital, and
those shares are subject to “echo voting” requirements. Although a majority
stockholder is a controlling stockholder as a matter of law,243 a minority stockholder
2013) (applying entire fairness where “the [m]erger conferred a unique benefit on” the
controlling stockholder).
242
In re Trados Inc. S’holder Litig., 73 A.3d 17, 44 (Del. Ch. 2013).
243
Lynch, 638 A.2d at 1113 (observing that a stockholder becomes a fiduciary if it “owns
a majority interest in . . . the corporation” (internal quotation marks omitted)); see In re
PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006) (Strine,
V.C.) (“Under our law, a controlling stockholder exists when a stockholder . . . owns more
than 50% of the voting power of a corporation . . . .”); Williamson v. Cox Commc’ns, Inc.,
2006 WL 1586375, at *4 (Del. Ch. June 5, 2006) (“A shareholder is a ‘controlling’ one if
she owns more than 50% of the voting power in a corporation.”).
55
can also be deemed a controller.244 In determining whether a minority stockholder
is a controller, the level of stock ownership is not the predominant factor, and an
244
See Lynch, 638 A.2d at 1113 (observing that a stockholder becomes a fiduciary if it
“exercises control over the business affairs of the corporation” (emphasis original)); In re
Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293, at *19 (Del. Ch. Mar. 28, 2018)
(concluding on a motion to dismiss that it was reasonably conceivable that Musk, owner
of 22.1% of company’s common stock, was a controller based on well-pled facts related to
“Musk’s voting influence, his domination of the Board during the process leading up to the
[challenged acquisition] against the backdrop of his extraordinary influence with the
Company generally, the Board level conflicts that diminished the Board’s resistance to
Musk’s influence, and the Company’s and Musk’s own acknowledgement of his outsized
influence”); Calesa Assocs. v. Am. Capital, Ltd., 2016 WL 770251, at *10–12 (Del. Ch.
Feb. 29, 2016) (concluding on motion to dismiss that it was reasonably conceivable that
stockholder owning 26% of the company’s stock exercised actual control where the
plaintiff alleged instances of actual control beyond the fact that the stockholder “exercised
duly obtained contractual rights to its benefit and to the detriment of the company”); In re
Zhongpin Inc. S’holders Litig., 2014 WL 6735457, at *7–8 (Del. Ch. Nov. 26, 2014)
(concluding on motion to dismiss that it was reasonably conceivable that stockholder
owning only 17.3% of the company’s stock was a controller because the stockholder was
CEO and the company’s 10-K stated that the stockholder effectively controlled the
company), rev’d on other grounds sub nom. In re Cornerstone Therapeutics Inc. S’holder
Litig., 115 A.3d 1173 (Del. 2015); Williamson, 2006 WL 1586375, at *4–5 (concluding on
a motion to dismiss that it was reasonably conceivable that two stockholders, owning
collectively 17.1% of the company’s stock, jointly controlled the company based on their
ability to nominate two of the five directors, their ability to influence the flow of revenue
into the corporation, and their potential “veto” power over certain corporate decisions); In
re Cysive, Inc. S’holders Litig., 836 A.2d 531, 535, 551–52 (Del. Ch. 2003) (Strine, V.C.)
(finding post-trial that a stockholder owning 35% of the company’s stock controlled the
company because he was a “hands-on” “Chairman and CEO of [the company],” and
because he had the ability to “elect a new slate [of independent directors] more to his liking
without having to attract much, if any, support from public stockholders” through his
familial ties with the company’s other stockholders); O’Reilly v. Transworld Healthcare,
Inc., 745 A.2d 902, 912–13, 915–16 (Del. Ch. 1999) (concluding on motion to dismiss that
it was reasonably conceivable that a 49% stockholder exercised actual control where the
plaintiff alleged that the stockholder forced the board to comply with its terms on the
merger through threats).
56
inability to exert influence through voting power does not foreclose a finding of
control.245
Under Delaware law, a plaintiff can demonstrate that a minority stockholder
exercised de facto control by showing that: (a) the stockholder “actually dominated
and controlled the majority of the board generally”; 246 or (b) the stockholder
“actually dominated and controlled the corporation, its board or the deciding
committee with respect to the challenged transaction.”247
245
See Tesla, 2018 WL 1560293, at *14 (“[T]here is no absolute percentage of voting
power that is required in order for there to be a finding that a controlling stockholder
exists.” (quoting PNB Hldg., 2006 WL 2403999, at *9)); Calesa Assocs., 2016 WL 770251,
at *11 (explaining that there is “no correlation between the percentage of equity owned and
the determination of control status”); see In re Crimson Expl. Inc. S’holders Litig., 2014
WL 5449519, at *10–12 (Del. Ch. Oct. 24, 2014) (collecting cases discussing when a
stockholder may be considered a controlling stockholder).
246
Tesla, 2018 WL 1560293, at *13; In re Rouse Props., Inc., 2018 WL 1226015, at *12
(Del. Ch. Mar. 9, 2018) (citing Sciabacucchi v. Liberty Broadband Corp., 2017 WL
2325152, at *17 (Del. Ch. May 31, 2017); Cysive, 836 A.2d at 531, and Lynch, 638 A.2d
at 1114–15); see In re Primedia Inc. Deriv. Litig., 910 A.2d 248, 257 (Del. Ch. 2006)
(“[T]he plaintiffs need not demonstrate that [the alleged controller] oversaw the day-to-day
operations of Primedia. Allegations of control over the particular transaction at issue are
enough.”).
247
Rouse, 2018 WL 1226015, at *12 (citing Williamson, 2006 WL 1586375, at *4); Tesla,
2018 WL 1560293, at *13; see also Basho Techs. Holdco B, LLC v. Georgetown Basho
Inv’rs, LLC, 2018 WL 3326693, at *27 (Del. Ch. July 6, 2018) (“Broader indicia of
effective control also play a role in evaluating whether a defendant exercised actual control
over a decision. Examples of broader indicia include ownership of a significant equity
stake (albeit less than a majority), the right to designate directors (albeit less than a
majority), decisional rules in governing documents that enhance the power of minority
stockholder or board-level position, and the ability to exercise outsized influence in the
57
FrontFour has proven facts necessary to trigger entire fairness under the
second theory. Specifically, FrontFour has proven that at least half of the Special
Committee members were not independent from the Taube brothers when
negotiating the Proposed Transactions. Under Delaware law, calling a director
“independent” does not make it so. To be independent, a director “must act
independently.”248 An independent director should demonstrate “the care, attention
and sense of individual responsibility to the performance of one’s duties . . . that
generally touches on independence.”249
Mack, who did not testify at trial, demonstrated a lack of independence
through his deposition testimony, where:
 Mack spoke to Brook Taube on the phone frequently, at least weekly,
about business matters.250
board room, such as through high-status roles like CEO, Chairman, or founder.” (footnotes
omitted)).
248
Telxon Corp. v. Meyerson, 802 A.2d 257, 264 (Del. 2002) (emphasis added); see also
Tesla, 2018 WL 1560293, at *17 (“Even an independent, disinterested director can be
dominated in his decision-making by a controlling stockholder.”).
249
Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984) overruled on other grounds by Brehm
v. Eisner, 746 A.2d 244 (Del. 2000); accord Tremont II, 694 A.2d at 430; Telxon, 802 A.2d
at 264.
250
Mack Dep. Tr. at 16–17.
58
 Mack knew that the Taube brothers managed Medley Capital’s
investments, but couldn’t identify any other person involved in
managing Medley Capital’s portfolio.251
 Mack had no idea what Medley LLC was, who owned it, or the role it
played in the Taube brothers’ control of the Medley family of
entities.252
 Mack had no understanding of what Medley Management’s business
was in 2017.253
 Mack could not identify the Taube brothers’ or Tonkel’s roles at
Medley Management, the very source of their conflicts.254
 Mack did not know that the Taube brothers controlled Medley
Management, and did not think it was important to consider their
ownership of Medley Management in evaluating the Proposed
Transactions.255
 Mack “was not familiar with the specifics” of the transaction process
and “may not want to know how sausage is made.”256
 Based on a call with Brook Taube, Mack believed Goldman Sachs was
engaged to assist Medley Capital.257
251
Id. at 23–24.
252
Id. at 30–31.
253
Id. at 44.
254
Id.
255
Id. at 31.
256
Id. at 53.
257
Id. at 46–47.
59
 Mack did not believe the standstill provisions should have been
reviewed by the Board, calling it a “management issue, not a director
[issue]” and suggesting “the more the merrier.”258
 Mack did not think it was important for the Medley Capital Board to be
informed when Medley Management entered contracts that were
binding on Medley Capital.259
 Mack had no idea whether Medley Capital paid performance fees to
Advisors in 2017, or how the fees Advisors collected from Medley
Capital affected Advisors’ ability to pay its employees.260
 Mack believed that the Party X proposal was geared toward a deal with
Medley Capital, not Medley Management.261
 Mack could not recall whether he considered having Sandler perform
any form of a market check.262 Instead, he relied on Brook Taube for
his purported knowledge that “we were looking at strategic
alternatives.”263
 Mack did not believe that Medley Capital had ever solicited the market
on its own behalf and was indifferent about the failure to do so.264
258
Id. at 52–53.
259
Id. at 52–53.
260
Id. at 63.
261
Id. at 57. Until his deposition, Mack “never really thought about the entities” involved
in the proposal. Id. at 118; see id. (“I thought it was Medley Capital, but I would say that’s
just me not digging into who the parties are.”).
262
Id. at 73.
263
Id. at 53.
264
Id. at 72–73.
60
 Mack did not think the personal interests of the Taube brothers in
closing the Proposed Transactions were relevant considerations in
evaluating the transactions.265
 Mack did not have any understanding as to the significance of the
Taube brothers’ Medley Capital stockholdings or how they came to
hold that position.266
 Mack was completely unaware as to the financing arrangement that the
Taube brothers had with Fortress, which intensified the “enormous
pressure” that drove the Taube brothers’ decision to pursue the
Proposed Transactions.267
 Mack did not think the fund’s recent performance was an important
consideration in the annual review of Advisors’ contract with Medley
Capital. Mack stressed the Board would consider comparisons to the
fees and legal restrictions of comparable advisory arrangements, but did
not think that recent performance was particularly important.268
 The lack of cash consideration for Medley Capital stockholders in the
Proposed Transactions raised no concerns for Mack, even in the face of
the large cash component that Medley Management was going to
receive in the transactions.269
 Mack was indifferent to the compensation levels that would be paid to
senior management in the combined company, even in the face of
conversations concerning the fact that the compensation packages
could potentially eliminate the benefits touted for Medley Capital
stockholders in the Proposed Transactions. 270 Mack was satisfied that
265
Id. at 32.
266
Id. at 33–34.
267
Id. at 34–35.
268
Id. at 42–43.
269
Id. at 79.
270
Id. at 82–83.
61
it was a concern for Sierra’s board because they were negotiating and
deciding the compensation, rather than the Medley Capital Board.271
The record also reflects that half of Mack’s annual income in the past three
years had come from his service on the Board, making him susceptible to wanting
to stay in the good graces of the Taube brothers.272
Lerdal was similarly susceptible to Brook Taube’s outsized influence as
Medley Capital’s founder.273 Lerdal desired to continue as director after formation
of the combined company. He curried favor from Brook Taube during the selection
process. When he was not selected, he contacted Brook Taube for other personal
favors. The record reflects that Lerdal, who did not testify at trial, was loyal to Brook
Taube, not the Medley Capital common stockholders:
 Lerdal shared information about the Special Committee’s process with
Brook.274
271
Id. at 80–81, 83.
272
Id. at 10–11.
273
See Basho Techs., 2018 WL 3326693, at *27 (explaining that a broader indicia of
effective control includes “the ability to exercise outsized influence in the board room, such
as through high-status roles like CEO, Chairman, or founder”).
274
JX 717 at p.11 (text message chain on January 9, 2019 at 2:56 p.m.: Lerdal: “Old ladies
and their schedules . . .”; Brook: “Whoa”; Lerdal: “Recommendation will be forthcoming.
Proper response. Your question was the proper one.”; Brook: “Which one?”; Lerdal: “Are
we going to respond to every f**ksake on the planet?”)
62
 Lerdal personally kept Brook up to date on market interest in Medley
Capital, warning him by text on August 15, 2018 that the company “has
some bargain hunters.”275
 Four days before approving the merger, Lerdal asked Brook: “Are we
on track? Anything you need from me?”276 The two talked on the
phone soon thereafter.
 The day the Special Committee approved the Proposed Transactions,
Lerdal praised Brook as the “architect” of the deal and stated that he
was “excited for the future whether the Sierra guys give me the nod or
not.”277
 When the Special Committee decided to turn down a bidder in February
2019, Lerdal texted Brook: “Hang in there brother. The deal is still the
best option.”278 The two then exchanged an additional fourteen
messages.
 When Brook Taube suggested that the “predictable naysayers” would
be the first people removed from their positions during the Proposed
Transactions, Lerdal was quick to support the idea, texting “Freak the
naysayers.”279
 Lerdal requested personal updates by text on the merger behind-the-
scenes from Brook, asking “How do we look?” on October 9, 2018.
Brook responded that there was “[G]ood news yesterday from [the
SEC]” and that the deal was “Read[y] to go when ‘advisors’ stop
fussing.”280
275
Id. at p.4.
276
Id. at p.1.
277
Id. at p.2.
278
Id. at p.4.
279
Id. at p.4.
280
Id. at p.5.
63
 Lerdal’s texts effortlessly wove ingratiating personal adoration with
business details. On October 26, 2018, he texted Brook that he had
played a game of golf in Brook’s honor, and offered “an open invitation
to visit and I’ll host any time.”281
 In an August 1, 2017 email, Lerdal complained that the Taube brothers
gave the Board “too much information,” asserted that the company
could not pay him enough to make him continue being diligent and
thorough, and bragged about how he would conduct himself in future
litigation against the company.282
In short, the majority of the members of the Special Committee lacked
independence from the Taube brothers.
The Special Committee also sat supine in negotiations concerning the
Proposed Transactions, allowing the Taube brothers to dominate the process by:
setting the deal structure; controlling the flow of information; withholding
information; withholding details about Medley Management’s own value and the
existence of offers from third parties; locking out “interlopers” through standstill
agreements, deal protections, and an aggressive timeline; and rushing the
committee’s deliberations. In the end, the Special Committee allowed Medley
Management to extract a huge premium while Medley Capital stockholders received
none.
281
Id. at pp.6–7.
282
JX 023.
64
The Special Committee deferred to the Taube brothers although the
committee had ample negotiating leverage—the ability to terminate the
Management Agreement or simply reject the deal, either of which would have had
devastating consequences for Medley Management. Terminating the Management
Agreement would trigger Fortress’s rights under the joint venture. Rejecting the
deal would foreclose Medley Management’s only viable solution to the enormous
financial pressure they labored under.
It bears noting that there is nothing inherently wrong under Delaware law with
the structure of the Medley Entities. Most BDCs have corporate structures similar
to Medley Capital and Sierra—they rely on external advisors for management,
administration, office space, staff, and other aspects of their existence. As a critical
counterbalance to management’s extensive control over the day-to-day operations,
the ’40 Act requires that the majority of the directors on BDC boards are independent
from management. At no point in time is this protection more critical than in the
context of a conflicted transaction. In this case, FrontFour has demonstrated that the
Taube brothers are controllers not because of flaws inherent in the structure of
BDCs, but rather, because those tasked with standing independent from the Taube
brothers willfully deferred to their authority.
65
2. The Proposed Transactions Are Not Entirely Fair.
“The concept of fairness has two basic aspects: fair dealing and fair price.”283
Although the two aspects may be examined separately, “the test for fairness is not a
bifurcated one as between fair dealing and price. All aspects of the issue must be
examined as a whole since the question is one of entire fairness.”284 Defendants bear
the burden of demonstrating that fair dealing and fair price.285
Fair dealing “embraces questions of when the transaction was timed, how it
was initiated, structured, negotiated, disclosed to the directors, and how the
approvals of the directors and the stockholders were obtained.”286 “The scope of this
factor is not limited to the controller’s formal act of making the proposal; it
encompasses actions taken by the controller in the period leading up to the formal
proposal.”287 “Particular consideration must be given to evidence of whether the
283
Weinberger, 457 A.2d at 711.
284
Id.285
Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995) (defendants must
prove “to the court’s satisfaction that the transaction was the product of both fair dealing
and fair price” (emphasis original) (internal quotation marks omitted)).
286
Id. at 1162 (citing Weinberger, 457 A.2d at 711).
287
In re Dole Food Co., Inc. S’holder Litig., 2015 WL 5052214, at *26 (Del. Ch. Aug. 27,
2015).
66
special committee was truly independent, fully informed and had the freedom to
negotiate at arm’s length.”288
In this case, the timing, structure, initiation, and negotiation of the Proposed
Transactions were conceived for the purpose of—and did—advance the Taubes’
interest at the expense of Medley Capital’s other stockholders. In the events leading
up to the Proposed Transactions, the Taube brothers created an informational
vacuum, which they then exploited. The Special Committee was not truly
independent and did not negotiate at arm’s length. In sum, Defendants have not
proven that the Proposed Transactions were the product of fair dealing.
The second aspect of the entire fairness inquiry is fair price. Fair price “relates
to the economic and financial considerations of the proposed merger, including all
relevant factors: assets, market value, earnings, future prospects, and any other
elements that affect the intrinsic or inherent value of a company’s stock.”289
288
Lynch, 638 A.2d at 1120–21. See also In re Tele–Commc’ns, Inc. S’holders Litig., 2005
WL 3642727, at *10 (Del. Ch. Dec. 21, 2005) (“[A]n important element of an effective
special committee is that it be fully informed in making its determination.”); Tremont II,
694 A.2d at 431 (“In evaluating this claim the Court of Chancery correctly stated that “[a]
controlling shareholder . . . must disclose fully all material facts and circumstances
surrounding the transaction.”) (citing Kahn v. Tremont Corp. (Tremont I), 1996 WL
145452, at *15 (Del. Ch. Mar. 21, 1996)).
289
Lynch, 638 A.2d at 1115 (citing Weinberger, 457 A.2d at 711).
67
The primary evidence presented at trial on the issue of fair price consists of
the opinions of the parties’ respective experts.290 Defendants offered the testimony
of Dr. Marc Zenner, who performed regression analyses intended to show the
benefits of size/scale, asset quality, and internalized management.291 That analysis
did not support the propositions for which it was offered. One analysis explained
only 11% of the variation in p/NAV multiples.292 The other was not statistically
significant and lacked explanatory power.293 Zenner also conducted a comparable
transactions analysis, but 50% of his “transactions” were offers that never resulted
in an actual merger.294 Zenner did not opine on the value of Medley Capital, a fair
price to acquire Medley Capital, or the value of the combined company if the
Proposed Transactions were to occur. He opined that the process used by various
investment banks was reasonable, but an expert cannot simply vouch for the work
of someone else.295 Zenner opined that Medley Capital’s trading price following the
290
See Trial Tr. at 427:3–502:21 (Zenner examination); JX 618 (Zenner Report); Trial Tr.
at 94:6–152:20 (Kennedy examination); JX 621 (Kennedy Report).
291
JX 621 (Kennedy Report).
292
Trial Tr. at 475–76 (Zenner).
293
Id. at 474–75.
294
Id. at 491–92.
295
See, e.g., Va. Power Energy Mktg., Inc. v. EQT Energy, LLC, 2012 WL 13034278, at *1
(E.D. Va. May 9, 2012) (holding that a “comment upon the opinion of another expert . . . is
not a proper subject for expert opinion evidence”).
68
announcement of the proposed transaction supported a finding of fair price. Zenner,
however, was unable to exclude other possible causes of Medley Capital’s stock
price bump in response the Proposed Transactions.296
By contrast, FrontFour’s expert Dr. William Kennedy credibly testified that
the fair value of Medley Capital is $5.07 per share and the price being offered is well
below that.297
Ultimately, this is a case in which a deeply flawed process obscures the fair
value of Medley Capital. The record reveals that the Taube brothers obstructed any
pre-signing price competition from “interlopers.”298 The two aspects of the entire
fairness standard interact.299 Just as “[a] strong record of fair dealing can influence
the fair price inquiry, . . . process can infect price.”300 Any inability to determine the
296
Trial Tr. at 488:3–8 (Zenner).
297
Trial Tr. at 96–98, 103–111 (Kennedy).
298
In re Appraisal of Dell Inc., 2016 WL 3186538, at *36 & n.36 (Del. Ch. May 31, 2016)
(“[T]he bulk of any price competition occurs before the deal is signed.”), aff’d in part,
rev’d in part sub nom. Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd, 177
A.3d 1 (Del. 2017).
299
Dole, 2015 WL 5052214, at *34.
300
Reis, 28 A.3d at 467; accord Ross Hldg. & Mgmt. Co. v. Advance Realty Gp., LLC,
2014 WL 4374261, at *33 (Del. Ch. Sept. 4, 2014) (“Robust procedural protections may
support a determination that price was fairly within a range of reasonable values, and a
failure of process may prevent a Court from reaching such a conclusion.”); see William
Penn P’ship v. Saliba, 13 A.3d 749, 758 (Del. 2011) (“Merely showing that the sale price
was in the range of fairness, however, does not necessarily satisfy the entire fairness burden
when fiduciaries stand on both sides of a transaction and manipulate the sales process.”);
69
degree to which the flawed process infected the price works to Defendants’
detriment, as they bear the burden of proof on this issue.301
B. Enhanced Scrutiny Claim
The parties engaged in a robust dispute concerning whether deal protections
or the Proposed Transactions in their entirety are subject to and pass enhanced
Gentile v. Rossette, 2010 WL 2171613, at *9 (Del. Ch. May 28, 2010) (“From a tainted
process, one should not be surprised if a tainted price emerges.”); Bomarko, Inc. v. Int’l
Telecharge, Inc., 794 A.2d 1161, 1183 (Del. Ch. 1999), as revised (Nov. 16, 1999), aff’d,
766 A.2d 437 (Del. 2000) (“[T]he unfairness of the process also infects the fairness of the
price.”); HMG/Courtland Properties, Inc. v. Gray, 749 A.2d 94, 116 (Del. Ch. 1999)
(holding that the defendants did not satisfy their burden by showing that the price was
“within the low end of the range of possible prices that might have been paid in negotiated
arm’s-length deals” where “[t]he process was . . . anything but fair”); Tremont II, 694 A.2d
at 432 (“[H]ere, the process is so intertwined with price that under Weinberger’s unitary
standard a finding that the price negotiated by the [special committee] might have been fair
does not save the result.”).
301
Auriga Capital Corp. v. Gatz Props., 40 A.3d 839, 857–58 (Del. Ch. 2010), aff’d 59
A.3d 1206 (Del. 2012). See also id. at 874–75 (“[The defendant] has argued throughout
this litigation that [the property] was worth less than its debt and thus any surplus over zero
was a fair price, but I cannot accept this as true based on the record before me. [The
defendant] himself is responsible for this evidentiary doubt. He fended off [a potential
buyer], gave incomplete information to [the appraiser hired by the LLC], and did not
promote a fair Auction process. Thus, I do not view the Auction process as generating a
price indicative of what [the property] would fetch in a true arm’s-length negotiation.
Rather, the evidence suggests that [the property] was worth more than what [the defendant]
paid. [The defendant] was not motivated to bid his best price because he knew that he was
the only bidder before he finalized his offer . . . The fact that we do not have concrete
evidence of what a fully negotiated third-party deal would have produced is [the
defendant’s] own fault, and such ambiguities are construed against the self-conflicted
fiduciary who created them.”).
70
scrutiny.302 Any Delaware law enthusiast would relish the opportunity to dilate on
the issues raised, but the press of time requires a more direct approach.
FrontFour challenges three deal protections in the Merger Agreement: a no-
shop, an adverse-recommendation-change requirement, and a termination fee.303
Enhanced scrutiny applies to deal protections, and the burden lies on Defendants to
justify those protections.304 Defendants cannot meet that burden here.
302
FrontFour urges the Court to apply enhanced scrutiny to the entirety of the Proposed
Transactions, not just the deal protections. They argue that, “as conceived, the entire
Transaction is an improper defensive measure implemented by [Medley] Management to
advance its own interests . . . .” Pls.’ Post-Trial Br. at 65.
303
More specifically, the deal protections are: (1) a no-shop provision preventing each
party from attempting to undermine the Merger Agreement by soliciting other bids, subject
to a “Superior Proposal” fiduciary out; (2) an “adverse recommendation change”
requirement that the Medley Capital Board recommend that the stockholders vote in favor
of the merger, subject to a fiduciary out; and (3) a “termination fee” provision requirement
the payment of $6 million to Sierra under certain conditions. Defendants’ expert quantifies
the termination fees as 2.79% of the deal value, and FrontFour does not dispute this
computation. JX 618 at p.31.
304
See Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1151 (Del. 1989); Mills
Acq. Co. v. Macmillan Inc., 559 A.2d 1261, 1288 (Del. 1988). “Deal protections” are
provisions of a merger agreement that compensate a jilted third party if the target does not
consummate the deal or obstructs disruption of the deal by another transaction. Leo E.
Strine, Jr., Categorical Confusion: Deal Protection Measures in Stock-for-Stock Merger
Agreements, 56 Bus. Law. 919, 922 (2001) [hereinafter Categorical Confusion]. Under
default rules of the Delaware General Corporation Law, a stockholder can sell control of
the company in the minimum number of days permitted under federal securities law. Id.at 924 & n.14. Deal protection measures disturb this natural ordering by obstructing a
stockholders’ ability to engage in other transactions once a merger agreement is signed.
Further, mergers require stockholder approval. To be effective, the stockholder vote must
be “meaningful and voluntary.” See 8 Del. C. § 251(c). By safeguarding the merger, deal
71
The suite of deal protections at issue would pass muster under most
circumstances, but not in this case. The Court’s analysis is fact intensive and context
specific.305 Due to extreme process flaws that led to the Proposed Transactions, the
deal protections are not within the range of reasonableness.306
Of the three challenged deal protections, the no-shop is the primary offender.
No-shop provisions paired with a fiduciary out are not unique.307 No-shop
protections encroach on the voluntary nature of the stockholder vote. Williams v. Geier,
671 A.2d 1368, 1387 (Del. 1996).
305
La. Mun. Police Emps.’ Ret. Sys. v. Crawford, 918 A.2d 1172, 1181 n.10 (Del. Ch.
2007) (“The inquiry, by its very nature fact intensive, cannot be reduced to a mathematical
equation.”); id. (“Our courts do not ‘presume that all business circumstances are identical
or that there is any naturally occurring rate of deal protection, the deficit or excess of which
will be less than economically optimal. . . . [A] court focuses upon the real world risks and
prospects confronting [directors] when they agreed to the deal protections.”) (internal
quotation marks and citation omitted); see also In re BioClinica, Inc. S’holder Litig., 2013
WL 5631233, at *8 (Del. Ch. Oct. 16, 2013) (“a no-solicitation provision, a poison pill, a
reasonable termination fee, information rights, and a top-up option . . . in the context of an
otherwise reasonable sales process, have been found non-preclusive” (emphasis added));
In re Cogent, Inc. S’holder Litig., 7 A.3d 487, 501–09 (Del. Ch. 2010) (assessing the
preclusive effect of deal protections individually and “in the aggregate”); Orman v.
Cullman, 2004 WL 2348395, at *6 (Del. Ch. Oct. 20, 2004) (noting that deal protection
devices may be unreasonable even if not coercive or preclusive); Stahl v. Apple Bancorp,
Inc., 16 Del. J. Corp. L. 1573, 1587 (Del. Ch. Aug. 9, 1990) (Allen, C.) (“Thus, where it is
applicable, Unocal requires a judicial judgment finely focused upon the particulars of the
case.”).
306
Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 935 (Del. 2003).
307
See, e.g., In re Cogent, 7 A.3d at 502 & n.40 (collecting decisions) (“Potential suitors
often have a legitimate concern that they are being used merely to draw others into a
bidding war. Therefore, in an effort to entice an acquirer to make a strong offer, it is
reasonable for a seller to provide a buyer some level of assurance that he will be given
adequate opportunity to buy the seller, even if a higher bid later emerges.”).
72
provisions are used to entice acquirers to make a strong offer by contractually
eliminating the risk that the acquirer is a stalking horse used to generate a bidding
war.308 That justification has no application here. The Proposed Transactions are
among affiliated entities. All of the parties were aware, when negotiating the deal
protections, that there was no pre-signing auction or market check and no risk that
Sierra was being used as a stalking horse. There was also no risk that Medley Capital
would lose the “bird in hand” if the transaction was shopped.309
Incrementally, the other two deal protections are also problematic. The
adverse-recommendation-change provision310 unduly cabins the Board.311 Although
308
Id. at 502.
309
Interestingly, Defendants’ expert, Dr. Marc Zenner, presented a comparable
transactions analysis related to deal protection devices. In that analysis two-thirds of his
comparable set involved a pre-signing formal auction. Of course, this renders the set not
comparable to the Proposed Transactions. Trial Tr. at 494–95. It also supports the notion
that no-shops are outside of the range of reasonableness absent a pre-signing market canvas
or efforts to assess potential price competition pre-signing. See Forgo v. Health Grades,
Inc., C.A. No. 5716-VCS, at 16:18–20 (Del. Ch. Sept. 3, 2010) (TRANSCRIPT) (“Well,
you know, if you’re not going to do as much on the front end, you got to make sure the
back end works.”).
310
Merger Agr. § 7.10(e).
311
See generally In re Complete Genomics, Inc. S’holder Litig., C.A. No. 7888-VCL, at 17
(Del. Ch. Nov. 9, 2012) (TRANSCRIPT) (stating that placing restrictions on a board’s
“ability to change its recommendation” that mirror “the types of conditions and procedures
frequently and historically used to regulate a target’s contractual ability to terminate a
merger agreement and accept a superior proposal” is “fraught with peril”). This Court
provided a definitive summary of the relevant issues in In re Primedia, Inc. Shareholders
Litigation:
73
the termination fee is not unreasonable on its own, in combination with the other
deal protections, it too falls outside the range of reasonableness.312
C. Disclosure Claims
“[T]o establish a violation of the duty of disclosure, [a plaintiff] must prove
that the omitted fact would have been material to the stockholder action sought.” 313
The materiality standard requires that fiduciaries disclose all facts which “under all
the circumstances . . . would have assumed actual significance in the deliberations
Delaware law requires that a board of directors give a meaningful, current
recommendation to stockholders regarding the advisability of a merger
including, if necessary, recommending against the merger as a result of
subsequent events. This obligation flows from the bedrock principle that
when directors communicate publicly or directly with shareholders about
corporate matters, the sine qua non of directors’ fiduciary duty to
shareholders is honesty. The duty of loyalty, which mandates that directors
act in stockholders’ best interests, consequently requires ensuring an
informed stockholder vote. The obligation to change as recommendation
prior to a stockholder vote can be further viewed as a duty to update a prior
material statement. A board may not suggest or imply that it is
recommending the merger to the shareholders if in fact its members have
concluded privately that the deal is not now in the best interest of the
shareholders. In light of these principles, the target board must have an
ability to make a truthful and candid recommendation consistent with its
fiduciary duties—and this duty will be applicable whether or not there is a
superior offer.”
67 A.3d 455, 491–92 (Del. Ch. 2013) (internal quotations and citations omitted) (emphasis
added).
312
See In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813, 840 (Del. Ch. 2011)
(enjoining defensive measures not because the defensive measures themselves failed
enhanced scrutiny but because they were “the product of a fiduciary breach”).
313
Unanue v. Unanue, 2004 WL 2521292, at *10 (Del. Ch. Nov. 3, 2004).
74
of the reasonable shareholder.”314 “A material fact is one that a reasonable
stockholder would find relevant in deciding how to vote. It is not necessary that a
fact would change how a stockholder would vote.”315 “A material fact is one that a
reasonable investor would view as significantly altering the ‘total mix’ of
information made available.”316 However, once fiduciaries have “traveled down the
road of partial disclosure,” they must “provide the stockholders with an accurate,
full, and fair characterization of [the] events.”317
Controlling stockholders “have large informational advantages that can only
be imperfectly overcome by the special committee process, which almost invariably
involves directors who are not involved in the day-to-day management of the
subsidiary.”318 Accordingly, controllers owe “a duty of complete candor when
314
In re Novell, Inc. S’holder Litig., 2013 WL 322560, at *13 (Del. Ch. Jan. 3, 2013)
(citation omitted).
Klang v. Smith’s Food & Drug Ctrs., Inc., 702 A.2d 150, 156 (Del. 1997) (footnotes
315
omitted).
316
Zaucha v. Brody, 1997 WL 305841, at *5 (Del. Ch. June 3, 1997); see Novell, 2013 WL
322560, at *13 (explaining that material facts are those which, “under all the circumstances
. . . would have assumed actual significance in the deliberations of the reasonable
shareholder.” (citation omitted)).
317
Arnold v. Soc’y for Sav. Bancorp., Inc., 650 A.2d 1270, 1280 (Del. 1994); see also
Rodgers v. Bingham, C.A. No. 2017-0314-AGB, at 81 (Del. Ch. June 1, 2017)
(TRANSCRIPT).
318
In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 450 (Del. Ch. 2002).
75
standing on both sides of a transaction and must disclose fully all the material facts
and circumstances surrounding the transaction.”319
Applying these principles, FrontFour has proven that Defendants violated
their duties of disclosure to inform stockholders of the process that led to the
Proposed Transactions and the expressions of interest from third parties.
1. Process Disclosures
The Proxy describes the deployment of three different special committees to
mitigate conflicts and replicate arm’s-length bargaining.320 The description creates
the misleading impression that the Special Committee process at Medley Capital
was effective. In reality, during the negotiation process, the Special Committee was
disabled by its ignorance of: the details of the bids made for Medley Management
during Project Elevate; the “enormous pressure” facing Medley Management and
the Taubes;321 and the standstill agreements that forbade potential transaction
partners from presenting proposals directly to Medley Capital without Medley
319
Kahn v. Lynch Commc’n Sys., Inc., 669 A.2d 79, 88 (Del. 1995).
320
See JX 430 at 72–73.
321
See Morrison v. Berry, 191 A.3d 268, 287–88 (Del. 2018), as revised (July 27, 2018)
(reversing trial court’s dismissal of disclosure claim after concluding that “stockholders
were entitled to know the depth and breadth of the pressure confronting the Company”
given “the Company chose to speak on the topic”).
76
Management’s consent. These process failures and others identified in this decision
are material to stockholders considering the Proposed Transactions.
The Proxy and Medley Capital’s other public filings disclose certain of these
process flaws now, but they fail to mention that the Special Committee only learned
of these items after the execution of the Merger Agreement (and in some cases only
after this litigation began).322 The timing of the Board’s knowledge is a critical fact
that would impact any stockholder’s assessment of the quality of the transaction
process.323
2. Other Indications of Interest—Lantern, NexPoint, Origami,
and ZAIS
Following FrontFour’s January 30, 2019 letter to the Medley Capital Board,324
Medley Management disclosed on February 5, 2019 certain terms of eleven
322
See Trial Tr. at 203–217 (Ainsberg); id. 409–416 (Hirtler-Garvey); JX 628 at pp.13–15.
323
See In re Rural Metro, 88 A.3d 54, 94 (Del. Ch. 2014) (concluding after a trial that, at
the time they approved the transaction, the [directors] were unaware of RBC’s last minute
efforts to solicit [a] buy-side financing role from Warburg . . . and did not know about
RBC’s manipulation of its valuation metrics,” and holding that, “[u]nder the circumstances,
the Board’s decision to approve Warburg’s bid lacked a reasonable informational basis and
fell outside the range of reasonableness.”); In re Del Monte Foods Co. S’holders Litig.,
2011 WL 2535256, at *10 (Del. Ch. June 27, 2011) (fee award opinion emphasizing that
lead counsel “uncovered facts not previously known to the [target] board” that “empowered
the [target] directors to re-evaluate their prior decisions and reliance on [their financial
advisor]”).
324
JX 706.
77
indications of interest. It characterized each as a “non-binding indication of interest
received by Medley Management.”325 Medley Capital separately issued
supplemental disclosures regarding offers made by NexPoint on January 31, 2019,
to replace Medley Management as manager, and Origami on February 11, 2019, to
acquire Medley SBIC.
Defendants never disclosed to stockholders that Lantern had expressed
interest in a recapitalization transaction with Medley Capital, or that Lantern had
executed a standstill agreement with Medley Management that prohibited it from
making its recapitalization proposal directly to Medley Capital.326
Defendants also never disclosed ZAIS’s January 2, 2019 proposal to replace
Medley Management as Medley Capital’s investment advisor for the “explicit task
of managing an orderly sale or liquidation of Medley Capital.”327 Nor have
Defendants disclosed Brook Taube’s January 24, 2019 rejection of ZAIS’s proposal
on behalf of Medley Capital, citing the non-solicitation provision in the Medley
Capital Merger Agreement.328 Text message correspondence between Brook Taube
325
JX 513 at pp.3–4.
326
JX 138 at p.4; Trial Tr. at 340–43 (Taube).
327
JX 432.
328
JX 459.
78
and Lerdal on the day of the Special Committee’s January 9, 2019 meeting shows
that Medley Management coordinated with the Special Committee regarding
whether and how to respond to ZAIS. None of this was disclosed. 329
Stockholders cannot make a fully informed decision regarding the Proposed
Transactions unless they know about Lantern’s expressed interest in a
recapitalization, the ZAIS proposal, and Brook Taube’s response citing the Medley
Capital Merger Agreement.330
Further, on February 13, 2019, Defendants publicly denied that Medley
Management received an offer from Origami to purchase Medley SBIC in April
2018.331 Medley Capital’s February 13 press release stated: “Contrary to Origami’s
public statements, the Company never received a proposal to buy the SBIC
Subsidiary from Origami until yesterday. Origami did not propose to buy the equity
of the SBIC subsidiary for 60% of its fair market value or at any price last April as
329
See Trial Tr. at 366 (Taube); JX 717 at p.11 (“Proper response forthcoming . . . Are we
going to have to respond to every f**ksake on the planet?”).
330
See In re Topps Co., 926 A.2d 58, 77 (Del. Ch. 2007) (issuing an injunction after finding
that proxy statement misrepresented competing bidder’s acquisition proposals and failed
to disclose CEO’s potentially bid-deterring statements to the market).
331
JX 553 at p.3.
79
suggested by Origami’s press release.”332 This disclosure creates the impression that
Origami fabricated the fact of the proposal.
Origami did not fabricate the fact of the proposal. In fact, Medley Capital
received an April 11, 2018 letter from Origami addressed to Brook Taube and
Marilyn Adler, Senior Managing Director, Medley Capital, expressing “interest in
purchasing 100% of Medley Capital Corporation and its affiliates’ interest in Medley
SBIC.”333 Adler responded, dispelling any notion that the email failed to transmit.334
Whether Brook Taube never saw Origami’s proposal, as he contends, is irrelevant
to the truth: Medley Management received it. “Whenever directors communicate
publicly or directly with shareholders about the corporation’s affairs, with or without
a request for shareholder action, . . . the sine qua non of directors’ fiduciary duty to
shareholders is honesty.”335 Medley Capital must correct its disclosures regarding
Origami.336
332
Id.333
JX 100.
334
JX 108 (“I am excited to tell you that Medley has agreed to discuss a process for the
sale. I’ve given your name as a possible buyer. I am having a discussion this week and
will update you as I know more.”); Trial Tr. at 374–75 (Taube).
335
Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998).
336
In re Topps Co., 926 A.2d at 77 (issuing injunction after finding that proxy statement
misrepresented competing bidder’s acquisition proposals).
80
D. Aiding and Abetting
To establish an aiding and abetting claim against Sierra, FrontFour was
required to prove that Sierra knowingly participated in the other Defendants’ breach
of fiduciary duty.337 This is “a stringent standard that turn[s] on proof of scienter.”338
FrontFour bears the burden for the aiding and abetting claim.339
“The adjective ‘knowing’ modifies the concept of ‘participation,’ not
breach.”340 The underlying wrong does not have to be knowing or intentional; it can
be a breach of the duty of care.341 Under Section 876(b) of the Restatement (Second)
of Torts, knowing participation exists when a third party:
(a) does a tortious act in concert with the other or pursuant
to a common design with him, or
337
See Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001) (setting out the elements
of an aiding and abetting claim).
338
In re MeadWestvaco S’holders Litig., 168 A.3d 675, 688 (Del. Ch. 2017) (alteration in
original) (internal quotation marks omitted); see Allied Capital Corp. v. GC-Sun Hldgs.,
L.P., 910 A.2d 1020, 1039 (Del. Ch. 2006).
339
Dole, 2015 WL 5052214, at *3.
340
Rural Metro, 88 A.3d at 97.
341
Singh v. Attenborough, 137 A.3d 151, 152–53 (Del. 2016) (ORDER); see RBC Capital
Markets LLC v. Jarvis, 129 A.3d 816, 862 (Del. 2015) (affirming imposition of liability on
financial advisor who aided and abetted the board’s breach of its duty of care). See
generally Restatement (Second) of Torts § 876 cmt. d (1979) (explaining that secondary
liability can attach where the underlying breach “is merely a negligent act” and “applies
whether or not the [underlying wrongdoer] knows his act is tortious”).
81
(b) knows that the other’s conduct constitutes a breach of
duty and gives substantial assistance or encouragement to
the other to so conduct himself, or
(c) gives substantial assistance to the other in
accomplishing a tortious result and his own conduct,
separately considered, constitutes a breach of duty to the
third person.342
For purposes of a board decision, the requirement of participation can be
established if the third party “participated in the board’s decisions, conspired with
[the] board, or otherwise caused the board to make the decisions at issue.” 343 In
particular, a third party can be liable for aiding and abetting a breach of the duty of
care if the third party “purposely induced the breach of the duty of care . . . .”344 The
342
Restatement (Second) of Torts § 876(b) (1979); see In re PLX Tech. Inc. S’holders
Litig., 2018 WL 5018535, at *47–50 (Del. Ch. Oct. 16, 2018); Anderson v. Airco, Inc.,
2004 WL 2827887, at *2–3 (Del. Super. Nov. 30, 2004).
343
Malpiede, 780 A.2d at 1098.
344
RBC Capital, 129 A.3d at 842 (upholding finding of aiding and abetting where financial
advisor inexplicably modified its precedent transaction analysis); In re Wayport Litig., 76
A.3d 296, 322 n.3 (Del. Ch. 2013) (“[A] non-fiduciary aider and abettor could face
different liability exposure than the defendant fiduciaries if, for example, the non-fiduciary
misled unwitting directors to achieve a desired result.”); Del Monte, 25 A.3d at 836(holding that investment bank’s knowing silence about its buy-side intentions, its
involvement with the successful bidder, and its violation of a no-teaming provision misled
the board); Goodwin v. Live Entm’t, Inc., 1999 WL 64265, at *28 (Del. Ch. Jan. 25, 1999)
(granting summary judgment in favor of defendants charged with aiding and abetting a
breach of the duty of care but suggesting that such a claim could proceed if “third-parties,
for improper motives of their own, intentionally duped the Live directors into breaching
their duty of care”); see also Mills Acq., 559 A.2d at 1283–84, 1284 n.33 (describing
management’s knowing silence about a tip as “a fraud on the Board”). Cf. Singh, 137 A.3d
at 152 (“[A]n advisor whose bad-faith actions cause its board clients to breach their
situational fiduciary duties . . . is liable for aiding and abetting.”); Technicolor, 663 A.2d
82method of facilitating the breach can include “creating the informational vacuum”
in which the board breaches its duty of care.345
A court’s analysis of whether a secondary actor “knowingly participated” is
necessarily fact intensive. Illustrative factors include the following:
 The nature of the tortious act that the secondary actor participated in or
encouraged, including its severity, the clarity of the violation, the extent
of the consequences, and the secondary actor’s knowledge of these
aspects;
 The amount, kind, and duration of assistance given, including how
directly involved the secondary actor was in the primary actor’s
conduct;
 The nature of the relationship between the secondary and primary
actors; and
 The secondary actor’s state of mind.346
at 1170 n.25 (“[T]he manipulation of the disinterested majority by an interested director
vitiates the majority’s ability to act as a neutral decision-making body.”).
345
Rural Metro, 88 A.3d at 97 (holding that a party is liable for aiding and abetting when
it “participates in the breach by misleading the board or creating the informational
vacuum”); see Mesirov v. Enbridge Energy Co., Inc., 2018 WL 4182204, at *15 (Del. Ch.
Aug. 29, 2018) (sustaining claim for aiding and abetting against financial advisor for
preparing misleading analyses and creating an informational vacuum); In re TIBCO
Software Inc. S’holders Litig., 2015 WL 6155894, at *25 (Del. Ch. Oct. 20, 2015) (same);
In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at *48 (Del. Ch. Sept. 4, 2014)
(holding that interested director aided and abetted breach of duty by failing to adequately
explain valuation, thereby misleading the board and creating an informational vacuum),
aff’d sub nom. Fuchs v. Wren Hldgs., LLC, 129 A.3d 882 (Del. 2015) (TABLE).
346
Dole, 2015 WL 5052214, at *42.
83
At trial, FrontFour succeeded in raising suspicions concerning the
independence of the Sierra special committee’s financial advisor, Broadhaven.
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 scienter FrontFour proved at trial.
Broadhaven was not “the fiduciary and primary wrongdoer.”347 Nor was
Broadhaven a “representative of the [Sierra] who either controls [Sierra] or who
occupies a sufficiently high position that [its] knowledge is imputed to [Sierra].”348
FrontFour provided no window into the deliberations on the Sierra side of the
negotiations to permit the Court to conduct the fact-intensive inquiry demanded.
FrontFour did not call any of the Sierra special committee members live or by
deposition. FrontFour adduced no evidence that the Taube brothers controlled the
Sierra portion of the process or dominated the Sierra board. FrontFour did not brief
their aiding and abetting claim before or after trial.349
347
PLX, 2018 WL 5018535, at *49.
348
Id.349
Because FrontFour failed to brief the claim, it was waived. See In re IBP, Inc. S’holders
Litig., 789 A.2d 14, 62 (Del. Ch. 2001) (explaining that a party waived its argument by not
raising it in its opening post-trial brief); Zaman v. Amadeo Hldgs., Inc., 2008 WL 2168397,
84
Accordingly, FrontFour has failed to prove that Sierra aided and abetted in the
other Defendants’ breaches of fiduciary duties.
E. Remedy
To recap, FrontFour has proven that: Conflicted insiders tainted the process
that led to the Proposed Transactions. The Special Committee negotiated with
willful blinders, not knowing: the value that third-parties had placed on Medley
Management; that Medley Management felt “enormous pressure” to enter into a
transaction; that standstill agreements prevented third parties from coming forward;
and that Medley Management—not Medley Capital—was shopped in the 2017 sale
process on which they relied when determining not to conduct a pre-signing market
check. Compounding these problems, the Special Committee agreed to deal
protections preventing an effective post-signing market check.
At this stage, the most equitable relief for the Medley Capital stockholders
would be a curative shopping process, devoid of Medley Management’s influence,
free of any deal protections, plus full disclosures. Thereafter, if no better proposal
surfaces, the Medley Capital stockholders would have the opportunity to cast a fully
at *15 (Del. Ch. May 23, 2008) (explaining that the party waived a defense by failing to
raise it in its answer and its pre-trial brief because “[t]hey gave no fair notice”).
85
informed vote for or against the Proposed Transactions. This relief is precisely what
FrontFour seeks.
Yet, ordering such relief would require the Court to blue-pencil Sierra’s
merger agreement with Medley Capital (and, by implication, its cross-conditioned
agreement with Medley Management) so that Medley Capital could solicit additional
competing bids in contravention of the no-shop provision. In other words,
FrontFour’s requested relief would keep Sierra “on the hook” to purchase Medley
Capital in case the “go-shop” process fails to yield a better offer. Such a revision of
the Merger Agreements would deny Sierra the benefit of its bargain and force Sierra
to comply with terms to which it never agreed.
Under the Delaware Supreme Court’s decision in C & J Energy,350 an
injunction may not issue if it would “strip an innocent third party of its contractual
rights” under a merger agreement, unless the party seeking the injunction proves that
the third party aided and abetted a breach of fiduciary duty by the target directors.
FrontFour has failed to prove that Sierra aided and abetted in the breaches of
fiduciary duties. Under these circumstances, C & J Energy leaves this Court no
350
107 A.3d 1049, 1054, 1071–72 (Del. 2014).
86
discretion—the most equitable remedy for Medley Capital stockholders cannot be
granted.
To ensure that Medley Capital stockholders are fully informed on any vote on
the Proposed Transactions, FrontFour is entitled to corrective disclosures consistent
with this decision, and Defendants are enjoined from consummating the Mergers
until such disclosures have been made.351 FrontFour may also pursue a damages
claim by amending their complaint, if FrontFour so chooses.
III. CONCLUSION
For the foregoing reasons, the Court holds that Medley Capital’s directors
violated their fiduciary duties in entering into the Proposed Transactions. Medley
Capital is ordered to issue corrective disclosures in accordance with this decision
and to permit the stockholders sufficient time in advance of any stockholder vote to
assimilate the information. Judgment on Counts I and II of the Amended Complaint
are entered in favor of FrontFour to the extent set forth in this decision, and judgment
351
See In re MONY Gp. Inc. S’holder Litig., 852 A.2d 9, 32–33 (Del. Ch. 2004) (enjoining
a transaction until “necessary supplemental disclosure” is made and noting that because
the remedy “can be accomplished quickly, there is no basis to believe that an injunction
will result in any harm to . . . the defendants”); Matador Capital Mgmt. Corp. v. BRC
Hldgs., Inc., 729 A.2d 280, 300 (Del. Ch. 1998) (enjoining a transaction until “corrective
disclosures consistent with the matters discussed herein” were made and disseminated);
see also State of Wisc. Inv. Bd. v. Bartlett, 2000 WL 193115, at *2 (Del. Ch. Feb. 9, 2000)
(enjoining a transaction to provide time for the stockholders “to assimilate information
necessary to assure that they may cast an informed vote”).
87
on Count III is entered in favor of Defendants. FrontFour’s request to permanently
enjoin the Proposed Transactions is denied.352
352
The parties have not briefed the issue of class certification and this decision does not
resolve it.
88