Olshan Obtains Injunction Blocking Proposed Three-Way Merger: Court of Chancery Finds that Conflicted Directors Breached Fiduciary Duties by Agreeing to Preclusive Deal Terms in an “Informational Vacuum”

Two separate Law360 articles (subscription required) reported on Olshan’s March 11, 2019 victory for clients FrontFour Capital Group LLC and FrontFour Master Fund, Ltd. on claims that the Board of Directors of Medley Capital Corporation (“MCC”) breached their fiduciary duty in approving a merger transaction with MCC’s affiliates, Medley Management, Inc. (“MDLY”) and Sierra Income Corporation (“SIC”), in expedited proceedings filed one month ago. Litigation Partners Lori Marks-Esterman and Adrienne Ward led the effort, assisted by Nicholas Hirst and members of Olshan’s Activist team, including Steve Wolosky, Ron Berenblat and Ryan Nebel.

MCC is a publicly traded business development corporation (BDC). MDLY, through affiliates, manages both MCC and SIC, a privately-held BDC. Various members of MDLY management, including twin brothers Brook and Seth Taube, MDLY’s Co-CEOs, serve as officers and directors of MCC, MDLY and SIC. The deal was announced August 8, 2018. On its face, the merger consideration appeared to undervalue MCC and overvalue MDLY, with only MDLY stockholders receiving a cash payment, an obvious concern given that Taubes and MDLY management hold over 80% of the economic interest in MDLY. The Proxy filed December 21, 2018 referenced an unsuccessful effort to shop MDLY but gave little detail. Expedited discovery obtained in January 2019 through a books and records demand under DGCL §220 revealed that while MDLY had indeed undergone a vigorous, year-long shop process from mid-2017 to mid-2018, the Taubes provided minimal, non-substantive information to MCC’s independent directors who, for their part, “did not ask.” In June 2018, when presented with the proposed merger, the independent directors, who had formed a Special Committee, failed to consider any other strategic alternatives for MCC or to negotiate a post-signing shop period. FrontFour’s complaint for breach of fiduciary duty and duty of disclosure and aiding and abetting said breaches followed.

After a two-day trial, the Court concluded that the Special Committee lacked independence and the Taubes pushed the merger through on an “aggressive timeline” while withholding material information from the Special Committee in order to alleviate the “enormous financial pressure” facing MDLY and secure “lucrative employment contracts” for themselves. The Court found that the Special Committee “sat supine” during negotiations over the proposed transaction, allowing the Taube brothers to dominate the process and extract a “huge premium” on behalf of MDLY stockholders while MCC stockholders received none. The Court further found that “that the price being offered is well below” MCC’s fair value.  Applying the entire fairness standard, the Court enjoined the proposed transaction pending corrective disclosures.

Read the Law360 articles here and here. The decision can be read here.