The path has gotten muddier in the proposed merger of Medley Management (MDLY) and Medley Capital Corporation (MCC) into Sierra Income Corporation, with MCC shareholders pushing back in advance of a 8 February vote.
The latest opposition to the proposed merger came on 15 January from investment fund BLR Partners and Josh Schechter, who released a statement that urged shareholders to vote against the merger.
In the note, Schechter and BLR argue that the merger is designed to help insiders of the business and not shareholders. The letter’s signers argue this could not have been the best option for MCC or its shareholders.
The independent board of directors “approved a transaction that we believe facially is not in the best interests of shareholders, that transfers significant value to hopelessly conflicted insiders”, the correspondence read.
BLR, which declined further comment, became the fourth MCC shareholder to do so. The latest release echoed those by Roumell Asset Management, Moab Capital Partners and FrontFour Capital Group, all of which in December announced their intentions to vote against the merger. These four shareholders collectively hold over 11 percent of MCC’s common stock.
FrontFour Capital, an event-driven hedge fund, also filed a lawsuit against MCC in the Court of Chancery of the State of Delaware regarding the merger.
In court filings, MCC alleges FrontFour purchased a majority of its shares since the announcement of the merger, and that FrontFour is engaging in “grouping” tactics with other shareholders.
The hedge fund also filed a presentation with the Securities and Exchange Commission to further highlight their opposition to the merger, repeating its assertion that the transaction does not maximise returns for MCC shareholders.
FrontFour Capital could not be reached for comment.
These accusations arise despite MCC’s year-long probe into the best option for the business development company, which has had a declining net asset value per share for the past 18 quarters. The asset manager hired multiple independent counsels to investigate potential options, which concluded that the merger would be the best option for shareholders across the three vehicles.
“This transaction is expected to provide accretion to net interest income and dividend paying capacity for shareholders, as well as the potential for growth in NII and dividends over time,” Brook Taube, Medley’s chief executive, said in a statement to Private Debt Investor.
“In addition, the transaction is expected to provide increased scale and diversification, as well as greater expected liquidity,” he continued. “The MCC independent special committee and board have unanimously recommended the transaction and encourage all shareholders to vote in favor of the proposed merger.”
MCC also filed a presentation with the SEC that highlighted the vehicles’ shift in strategy in 2015 and showed what a combined Sierra portfolio could look like.
This proposed entity would be the second largest internally-managed BDC with a portfolio comprised of 75 percent first-lien loans, 4 percent second-lien, 10 percent equity and 11 percent structured products, according to SEC documents.
The combined company would have 5.32 percent at fair value of its loans on non-accrual status, down from MCC’s current 7.34 percent. The entity would have a net asset value per share of $7.06. These predictions are based on results from the end of the third quarter.
The merger has passed across all three entities’ boards of directors and awaits the shareholder vote and approval from the SEC.
MCC is overseen by Medley Management, a New York-based asset management firm that has $4.8 billion in assets under management.