Delaware Court Of Chancery Enjoins Stockholder Vote For Inadequate Disclosures
On March 11, 2019, Vice Chancellor Kathaleen S. McCormick enjoined a stockholder vote to approve the proposed combination of Medley Management, Inc. (“Medley Management”) with two affiliates it advised, Medley Capital Corporation (“Medley Capital”) and Sierra Income Corporation (“Sierra”). Medley Capital stockholders FrontFour Capital Group LLC and FrontFour Master Fund, Ltd. (together, “FrontFour”) sued to suspend the vote until competing offers were solicited and additional proxy disclosures were made. Plaintiffs alleged that the merger was not entirely fair because the two controlling stockholders of Medley Management controlled the deal process, and the process and the terms were unfair to Medley Capital, and further claimed that the proxy made inadequate disclosures; plaintiffs also asserted an aiding and abetting claim against Sierra. After expedited litigation and trial, the Court enjoined the vote, ruling that corrective disclosures were necessary but that a go-shop period could not be required because Sierra’s rights under the transaction agreements would be negatively impacted.
The merger was proposed by the two controlling stockholders of Medley Management in June 2018, at a time when the company was enduring significant financial duress, with a two-month timeline for announcement of a deal. Before the merger, Medley Management had twice attempted a sales process that failed to identify a viable counterparty but resulted in the execution of confidentiality agreements with standstill provisions that prevented competing offers for Medley Capital. Though both Medley Capital and Sierra formed a special committee to negotiate with Medley Management, the committees had barely one month to negotiate with Medley Management under the timeframe prescribed by Medley Management, which they never challenged, and the Court noted substantial overlap in advisors among Medley Management and the targets. The Court further found that half of the Medley Capital special committee was closely linked to the founders of Medley Management, and thus concluded that the controlling stockholders of Medley Management “dominated and controlled the [Medley Capital] board with respect to the challenged transactions.” The Court criticized the proxy for “creating the misleading impression that the Special Committee replicated an arm’s-length negotiation” notwithstanding these conflicts of interest. Thus the Court concluded that disclosures as to both the conflicts and third-party expressions of interest were required.
The Court found that even though requiring a go-shop period would have been the most equitable relief available to Medley Capital stockholders, no requirement could be imposed in this case because such relief would “effectively strip Sierra of its contractual rights” under the merger agreement. Citing C & J Energy Servs., Inc. v. City of Miami Gen. Empls.’ and Sanitation Empls.’ Ret. Tr.,107 A.3d 1049, 1071–72 (Del. 2014), the Court explained that Sierra could not be deprived of bargained-for rights by injunction unless plaintiffs proved their aiding and abetting claim against Sierra. While the Court found that plaintiffs succeeded in raising suspicions about the independence of the financial advisor to the Sierra special committee, plaintiffs failed to show that Sierra knowingly participated in the Medley Capital directors’ breach of fiduciary duty. Thus, the Court ruled that plaintiffs were not afforded the equitable remedy of opening the sale back up to the market.