(Article from Registered Funds Alert, February 2016)
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Over the past six months, a contentious three-way contest for control of a publicly traded business development company has been unfolding through proxy materials, the press and in court. The situation is noteworthy not only for the salacious accusations and colorful language that has been bandied about by the parties, of which there have been plenty, but also because of the novel strategies they have employed and the unusually complex set of alternatives that have been presented to shareholders as a result.
The conflict began in August 2015, when the board of TICC Capital Corp. (“BDC”), announced that BDC’s Adviser, TICC Management LLC (“TICC Adviser”), had entered into an agreement to sell itself to Benefit Street Partners L.L.C. (“BSP”) for an undisclosed price. As the proposed transaction would have resulted in a change of control of the TICC Adviser, which in turn would automatically terminate the BDC’s current advisory agreement, the sale was conditioned on the BDC’s shareholders approving a new advisory agreement to allow BSP to manage the BDC’s investments after the sale. Towards that end, the BDC’s board formed a special committee that negotiated, presented and endorsed a proposed advisory agreement with BSP, stating that the deal would be in the best interest of BDC shareholders. Such changes of control are common in the industry, and the vast majority of such transactions are approved by shareholders with little fanfare. In this case, however, the proposed BSP agreement was not well received by certain investors.
In particular, the BDC’s largest shareholder, Raging Capital Management LLC (“Raging Capital”), publicly disclosed a letter it penned to the BDC’s board requesting that the board acknowledge “serious shareholder concerns” by engaging an independent investment bank to evaluate all of the options for the BDC’s future, stating that such a review would ensure the board was not “rubber stamping” a deal that would disproportionately benefit existing TICC management (and specifically the three principals of TICC Adviser) at the expense of BDC shareholders.
Within a week of the BSP agreement being publicly announced, NexPoint Advisors, L.P. (“NexPoint”) approached the BDC’s board with an alternate proposal to manage the BDC that expressly maintained the BDC’s investment strategy while offering a lower fee than the proposed agreement with BSP. The BDC’s board rejected NexPoint’s private proposal quickly. Less than a week after their offer was rejected, NexPoint published its alternative proposal publicly and alleged that the BDC board’s rejection of the offer was not preceded by serious negotiation or consideration, and amounted to dereliction of the Board’s duties owed to shareholders.
On September 3, 2015, two weeks after NexPoint publicly disclosed its rejected alternate offer and made the related accusations, the BDC’s board formally announced that it had rejected NexPoint’s proposal because, in the board’s view, the arrangement with BSP was comparatively advantageous due to BSP’s superior resources in origination and portfolio management. Notably, the board also announced a revised BSP agreement that featured a reduction in the annual base management fee from 2.00% to 1.50% of gross assets.
On September 10, a third player, TPG Specialty Lending (“TSLX”), a business development company, offered to acquire the entire BDC in a stock-for-stock transaction, valued at a premium based on then-current share prices. After its initial offer to the BDC’s board was also rejected, TSLX made a public stock-for-stock offer to the BDC’s shareholders and similarly alleged that its private overtures to the BDC’s board were met only with cursory responses and nominal requests for information before the BDC’s board decided to end negotiations. TSLX’s public bid for control proposed that TSLX would remove the TICC Adviser if successful. The BDC’s board brushed aside the accusations that it did not review the proposal on its merits, arguing that it rejected TSLX’s offer because the share price premium was illusory, given it would be non-cash consideration in the form of TSLX shares whose value could change, and that TSLX’s offer actually represented a discount to the BDC’s then most recently reported net asset value.
After rejecting the NexPoint and TSLX offers, the BDC’s board attempted to move forward with the BSP agreement by filing a proxy statement calling for a special meeting to approve the proposed advisory agreement. In response, TSLX filed competing proxy solicitation materials in an attempt to buy the BDC in opposition to management’s proposal. Meanwhile, NexPoint filed a third set of proxy materials nominating a competing slate of six director candidates to give shareholders a direct route to approve its alternate proposal without NexPoint having to negotiate with the BDC’s existing board.
NexPoint’s strategy of attempting to seize control of the BDC’s board at the special meeting to vote on the BSP advisory contract was met with resistance. In early October, the BDC’s board took the position that NexPoint’s proposed slate of nominees would not be considered a valid item of business at the special meeting and refused to add NexPoint’s nominees to the ballot, prompting NexPoint to initiate litigation. NexPoint initially received a temporary restraining order requiring the BDC’s board to allow NexPoint’s directors to appear on the ballot, but in late October, a federal district court judge sided with the BDC’s board and held that NexPoint’s nominees were invalid because any expansion or restructuring of the board to be voted on at the special meeting was conditioned on the advisory contract with BSP first receiving approval.
The district court judge was, however, persuaded that the BDC’s board made material omissions and misleading statements in its communications to shareholders, including finding that the BDC’s board failed to disclose the extent to which certain key individuals would benefit from the proposed BSP transaction. The judge also noted that the BDC’s board misled investors by implying that the law firm it had retained as special counsel and the investment bank it had retained had advised the board when it rejected NexPoint’s proposals, when they were in fact only retained to advise the BDC’s board after it had rejected the offer.
Following the district court’s first decision to allow the shareholder vote to take place without NexPoint’s slate of directors, the BDC’s board attempted to make the required disclosures and revisions to its proxy materials, but did so concurrently with an announcement that it had reached an agreement with the BDC’s largest shareholder, Raging Capital, to secure Raging Capital’s support for the BSP agreement. Under that agreement, Raging Capital agreed to vote all of its shares in favor of approving the BSP advisory contract in exchange for Raging Capital receiving the right to appoint an independent director to the BDC’s Board and BSP agreeing to further discount its base annual management fees by 0.25%, resulting in a base fee of 1.25%, for the first two years of the new contract’s term (a decrease from the 2.00% fee contemplated in the original agreement the BDC’s board reached with BSP in August). TSLX increased its bid price by approximately 3.00% in response to this development.
NexPoint continued to press on in the courts with some success. NexPoint successfully argued that the BDC board’s revised disclosures were still inadequate and, in the end, the judge penned the disclosure himself. The language of the final disclosure was unsparing, and included specific mention that the BDC’s board had failed, twice, to adequately disclose that certain key individuals stood to gain up to $10 million in a cash distribution and that they would own 24.9% of the new adviser. The district court judge did not, however, reverse his decision that the shareholder meeting could proceed without NexPoint’s slate of directors. NexPoint then turned to the Second Circuit Court of Appeals for relief, but, on December 9, 2015, the appellate court refused to delay the repeatedly rescheduled shareholder meeting any further. Though its decision did not reach the merits as to whether NexPoint’s directors would have been valid or invalid, the appellate court noted that it viewed efforts to continue to block the proxy vote from occurring as a bigger threat to shareholder democracy than the alleged misconduct of the BDC’s board in keeping the NexPoint directors off of the ballot.
Free from the threat of further injunctions on that front, the BDC’s board pushed forward with its plan for a special shareholder meeting, setting a date of December 22, 2015 for the vote. In an effort to further appease critics of the BSP agreement, the BDC conducted a share buyback program and repurchased more than $20 million worth of shares in the weeks leading up to the vote. The BDC’s board began using the argument that a “no” vote would not result in a positive change for the BDC, because failure to approve the BSP advisory agreement would result in the BDC implementing a new investment strategy without the resources of BSP.
The BDC’s board’s actions were not enough to convince shareholders, however, and the BSP agreement was rejected by shareholders. Despite soliciting votes since August, the BSP agreement reportedly oSubhead5625nly received the support of 36% of outstanding shares. Both NexPoint and TSLX were quick to praise the result and did not mince their words. “We believe TICC’s stockholders recognized the repeated, in our view, egregious misconduct of the Board in attempting to implement a windfall insider transaction through deception and specious assessment of our superior management proposals,” said a NexPoint representative. TSLX’s management stated that, “TICC stockholders are demanding real change in the management and governance of TICC. If the TICC Board of Directors is unwilling to fulfill its fiduciary duty and move swiftly to engage with us . . . . TICC stockholders have other viable avenues for change, including taking direct action to terminate the existing investment advisory agreement . . . .”
In sum, the months of competition between BSP, NexPoint and TSLX thus far has resulted in the TICC Adviser retaining control of the BDC’s activities. Both NexPoint and TSLX have expressed their continued interest in the BDC, while BSP’s statement expressed only disappointment in the result of the shareholder vote. It is not immediately clear what the future holds for TICC and whether the situation is sui generis or is a bellwether for increased activism in the business development company universe.