CHARLES S. HAIGHT, Jr., Senior District Judge.
In a decision reported at 2015 WL 6408117 (D.Conn. Oct. 23, 2015) ("the October 23 Ruling"), the Court denied in part and granted in part Plaintiff NexPoint Advisors, L.P's ("NexPoint") motion for a preliminary injunction. This decision resolves Plaintiff's motion for partial reconsideration. Doc. 62.
Familiarity with the October 23 Ruling is assumed. The facts and circumstances recited therein are not recounted here. For present purposes, it is sufficient to say that the October 23 Ruling granted NexPoint's motion insofar as it enjoined Defendant TICC Capital Corp. ("TICC") to issue a proxy statement clarifying and correcting certain false or misleading statements contained in an earlier proxy statement TICC addressed to its stockholders with respect to a proposed special meeting of the stockholders (the "Special Meeting"). The declared purposes of the Special Meeting were to vote upon the proposed acquisition of a TICC affiliate, TICC Management, by Benefit Street Partners L.L.C. ("BSP"), and the election of TICC directors in connection with that transaction. The Court held in the October 23 Ruling that certain statements in TICC's earlier proxy statement, soliciting stockholder approval of the transaction at the Special Meeting, violated section 14 of the Securities Exchange Act of 1934, 15 U.S.C. § 78n.
The October 23 Ruling denied NexPoint's motion insofar as it sought to enjoin TICC to include at the Special Meeting a slate of directors nominated by NexPoint, in opposition to directors nominated by TICC, and to allow the stockholders to vote on those opposing slates of nominees as an item of business at the Special Meeting. NexPoint, a TICC stockholder by virtue of an August 2015 purchase of 100 of the company's shares, based its request for that particular injunctive relief upon rights it contends says are conferred upon TICC stockholders by Maryland law, applicable to the case because TICC is a Maryland corporation.
The consequences of the Court's October 23 Ruling were that TICC was required to issue a supplemental and corrective proxy statement, and once having done so, TICC would be enabled to proceed with the Special Meeting, without the inclusion of a slate of directors nominated by NexPoint. During the interim, TICC was enjoined from proceeding with the Special Meeting.
NexPoint's present motion for reconsideration focuses upon the election of directors at the Special Meeting. The motion recites a list of perceived errors the Court committed in the October 23 Ruling on that aspect of the case. One of these is of sufficient substance to require further discussion. That issue relates to the effect of Maryland law upon the rights and obligations of the parties with respect to election of TICC directors at the Special Meeting of TICC stockholders. Plaintiff and Defendants both want that meeting to take place. This action involves their disputes about how the meeting should be conducted.
NexPoint's theory of the case is that the law of a company's state of incorporation governs the rights and obligations of a corporation's officers and directors on the one hand, and its stockholders on the other. Typically those rights and obligations are expressed in a corporation's by-laws and charter. This case is no exception. I am asked to consider various provisions in TICC's by-laws and corporate charter.
The proper interpretation of a corporation's by-laws and charter present questions of state law (including the common law as declared by courts of the state): Maryland law in this case, TICC being incorporated in Maryland. Those questions may also be impacted by pertinent statutes enacted by the legislature of the state of incorporation. This is also such a case. I am asked to consider the effect upon TICC's bylaws and charter of that statute known as the Maryland Unsolicited Takeover Act of 1999, described by one commentator as "by far the most potent antitakeover statute that has appeared to date." Guhan Subramanian, The Influence of Antitakeover Statutes on Incorporation Choice, 150 U. Pa. L. Rev. 1795, 1801 (2002).
NexPoint's complaint against TICC and certain individuals asserts as its fourth cause of action a claim for breach of contract under Maryland law. Doc. 1. The complaint alleges at ¶ 108: "The elements of a breach of contract claim under Maryland common law are the existence of a contractual obligation owed by the defendant to the plaintiff, a breach of that obligation, and damages." NexPoint's theory of the case, expressed in its first brief, is that "defendants' attempt to invalidate NexPoint's nominees and prevent stockholders from voting on a competing slate of directors constitutes a violation of the TICC Bylaws." Doc. 2-1, at 15. Specifically, NexPoint contends:
Id. (internal citation omitted).
As noted infra, the Defendants take an entirely different view of Maryland law as it applies to the conduct of the parties. The October 23 Ruling stated that, in the view the Court took of the case, "the Court need not resolve these contentions of Maryland law." 2015 WL 6408117, at *6 n.4. NexPoint is forcefully (if respectfully) critical of that approach, and argues in its reconsideration motion that the Court "committed legal error" by issuing a ruling which "fails to consider whether Maryland law and the TICC Bylaws permit defendants to create a contingent election of directors." Doc. 62-1, at 3. NexPoint condemns the Court's conclusion that it "did not need to address issues of Maryland law or the TICC Bylaws," in a case in which the "validity of the purported contingency is a threshold issue that cannot be avoided," id., an issue governed by Maryland law.
Counsel for Defendants find no fault with the Court's October 23 Ruling. They urge that NexPoint's motion for reconsideration should be denied summarily, so that TICC can get on with its corporate life, by which counsel mean holding the Special Meeting in the manner Defendants specify in the notice of meeting. However, upon further consideration — or, one should probably say, reconsideration — I conclude that the Court should take Maryland law into account in determining whether NexPoint has made a sufficient showing to obtain a preliminary mandatory injunction. NexPoint's motion for reconsideration is granted to that extent.
Defendants' argument contra is that the wording of § 16(b) of the federal Investment Company Act ("ICA"), 15 U.S.C. § 80a-16(b), forecloses any application of state law that would entitle stockholders to nominate a competing slate of directors in an election called by a corporation to facilitate a transaction under the "safe harbor" provisions of § 15 of the ICA. NexPoint responds that such an interpretation of the ICA would be outrageously wrong and "unprecedented," by which counsel mean that no prior court decision has given § 16(b) that preclusive effect in factual circumstances comparable to those at bar. Nor, it would seem, has any court declined to do so in such circumstances. The wording of the ICA does not include language explicitly addressing the issue. The diametrically opposed interpretations presented by the parties at bar are based upon nuances, perceived public policy, and appeals to those familiar allies of advocates, "plain language" and "common sense," whose appearances on the battlements of litigation can sometimes prove elusive.
On this particular point, the Court's most recent memorandum directed the parties to file supplemental briefs discussing an SEC Release Notice the Court's research had discovered. Doc. 82. The SEC Release Notice said, in announcing amendments to ICA exemptive rules arguably similar to those in the previously enacted § 16(b): "These amendments are not intended to supplant or limit the ability of fund shareholders under state law to nominate independent directors." 2001 WL 6738, at *5 (emphasis added). Counsel's responses were predictable. The brief for NexPoint says that "the SEC Release Notice further shows that Sections 15(f) and 16(b) [of the ICA] do not preclude TICC stockholders from nominating board candidates at the Special Meeting." Doc. 84, at 1. The brief for TICC says that the quoted language from the SEC Release Notice is irrelevant to the questions decided by the Court in the October 23 Ruling; or, if relevant, the release is "entirely consistent with the Court's decision" [Doc. 85], at 1; and, in any event, "there is nothing that the SEC purported to do, or could do, that would allow the Court to disregard the express requirements of the ICA," since the Supreme Court has held that "no deference is due to agency interpretations at odds with the plain language of the statute itself." Id. at 6 (citation omitted).
One cannot quarrel with the proposition that a regulatory agency (such as the SEC) cannot rewrite a statute it is tasked with administering (such as the ICA), thereby making the statute say something quite different from what Congress enacted. But it is not clear beyond all rational debate that the SEC's quoted expressed intention — that the ICA exemptive rule amendments neither supplant nor limit a stockholder's ability to nominate independent directors if that ability is conferred under state law — is at odds with § 16(b) of the ICA, which contains no explicit reference to stockholder rights created by state law. I may take note of what the SEC Release Notice says on that score without ceding an impermissible measure of deference to the agency. The SEC's quoted expression is not determinative of any issue in this case. It is simply some indication that NexPoint's non-textual interpretation of ICA § 16(b) should not be disregarded entirely.
It is perhaps useful to compare this case to a popular outdoor game from a gentler age: lawn croquet. A formation of metal wickets are displayed on a stretch of lawn with a wooden stake at the end. A player wins the game by being the first to drive a wooden ball with a mallet though each of the wickets and hit the stake. The stake is guarded by the last two wickets, which are in front of the stake, in line with each other, and separated by a considerable distance. To win the prize, a player must drive his or her ball through the first of these two wickets, and then drive the ball though the second wicket, and then drive the ball so that it hits the stake.
We may think of the stake in this energetically contested litigation as the mandatory preliminary injunction NexPoint seeks, which would require TICC to include NexPoint's slate of directors at the Special Meeting election, count votes or proxies in their favor, and install them as directors if they win, whether or not the TICC stockholders approve the new advisory agreement with BSP. Two wickets are aligned on the way to that stake: the ICA wicket and the Maryland Law wicket. NexPoint must drive its ball though each of them: through the ICA wicket by showing that the ICA does not preclude NexPoint from nominating and electing directors under state law; and through the Maryland Law wicket by showing that Maryland law gives NexPoint the right to nominate and elect TICC directors at the Special Meeting.
NexPoint must drive its litigation ball through both wickets to reach the preliminary injunction stake. That is to say: NexPoint's preliminary injunction motion fails, even if its ball safely passes though the ICA wicket, if thereafter NexPoint cannot move its ball through the Maryland Law wicket. Upon reconsideration, I am persuaded that in declining to consider Maryland law at all, the October 23 Ruling was deficient. The better course on the underlying preliminary injunction motion is to consider whether Maryland law gives NexPoint the right to nominate and elect TICC directors at the Special Meeting, whatever the proper conclusion may be on whether the ICA precludes the effort.
NexPoint bases its breach of contract claim on the allegation that the TICC officers and directors breached a contractual obligation found in Article II, Section 11(b)(iii) of the TICC corporate bylaws by refusing to recognize a slate of directors nominated by NexPoint for election at the Special Meeting.
TICC responds by invoking the Maryland Unsolicited Takeover Act, Md. Gen. Corp. Law ("MGCL") § 3-804. This act, known popularly (at least in some circles) as "the anti-takeover statute," provides in § 3-804(b) that "notwithstanding any provision in the charter or bylaws, the number of directors of a corporation shall be fixed only by vote of the board of directors." Section 3-804(c) provides in pertinent part:
MGCL § 3-804 is an optional statute in Maryland, in the sense that a Maryland corporation can choose whether or not to be subject to its provisions. TICC elected in its charter to be governed by the anti-takeover statute. Its corporate charter, at Article V § 5.1., adopts and repeats the language of the statute.
The argument TICC makes with respect to this statute's effect upon the case at bar is straightforward. Its most recent brief says: "NexPoint has no right under Maryland law to by-pass TICC's board and elect directors who the TICC directors affirmatively oppose." Doc. 85, at 9. That is so, the argument continues, because "Maryland law prohibits NexPoint from filling board vacancies over the board's objection." Id. The pertinent provision in Maryland law is found in MGCL § 3-804(c), which TICC's brief contends
Id. (internal citations omitted).
While NexPoint arrays itself in the armor of a champion of TICC stockholders' rights, it clearly covets TICC's seemingly lucrative business as an investment adviser, and seeks by its opposing slate of director nominees to take over TICC. This is the sort of attempted corporate takeover the Maryland legislature addressed in the Unsolicited Takeover Act, of which § 3-804(c) forms a part. At first blush, even at second, it would appear that the preliminary injunction NexPoint seeks with respect to the nomination and election of TICC directors at the Special Meeting would, if granted, violate the strictures of Maryland's anti-takeover statute.
NexPoint seeks to avoid this impact of § 3-804(c) by drawing a distinction between present directors filling board vacancies by appointment and by calling an election pursuant to the corporate bylaws for the purpose. Its argument on the point is recapitulated in a recent brief, [Doc. 77], at 5:
NexPoint's contention, in sum, is that when TICC gave initial notice of an election of directors at the Special Meeting, before any takeover aspirant had appeared on the scene, it locked itself into a general election and abandoned, as a matter of Maryland law, the protection the state's anti-takeover statute might otherwise have given TICC and its sitting directors, suddenly and unexpectedly confronted by NexPoint's unsolicited (and manifestly unwelcome) takeover campaign.
The contentions of counsel pose an interesting question of Maryland law. NexPoint must prevail on the point in order to pass through the Maryland Law wicket and arrive at the preliminary injunction stake. Moreover, NexPoint is seeking a mandatory preliminary injunction, and is required to make "a clear showing that the moving party is entitled to the relief requested." October 23 Ruling, 2015 WL 6408117, at *5 (citing and quoting Second Circuit cases). But NexPoint cites no Maryland cases, academic commentary or other authority to support its interpretation of Maryland law in this area.
In these circumstances, I am unable to conclude that NexPoint has made a clear showing that Maryland law favors, or at least does not preclude, the relief NexPoint seeks in its preliminary injunction. The result is that NexPoint's motion for reconsideration is granted, to the extent that the Court declined to take Maryland law into consideration. Having now done so, and for the reasons stated, the Court adheres to the October 23 Ruling, denying a preliminary injunction with respect to the election of TICC directors.
I have also considered NexPoint's other submissions in support of its motion for reconsideration. They are without substance as a basis for reconsideration and require no discussion.
The second subject raised by the most recent submissions is the text of a proxy statement supplement TICC must send to its stockholders, in order to lift the Court's present injunction barring the Special Meeting. Disputes on that aspect of the case were foretold by the October 23 Ruling, which required counsel for TICC to send a draft of the proposed language to counsel for NexPoint to see if those counsel had any comments. They did, and have submitted a draft of their own.
It now falls to the Court to decide what the proxy statement supplement must say and what it will not be allowed to say. The following discussion tracks and is based upon the particular statements in the original proxy statement which the Court held in the October 23 Ruling violated section 14(a) of the 1934 Exchange Act.
1. Annexes One and Two to this Ruling contain instructions for the contents of the proxy statement supplement to be sent to stockholders. Annex One is the draft submitted on behalf of TICC. Annex Two is the draft submitted on behalf of NexPoint. The Court has marked up these drafts to indicate what the final version must contain. The mark-ups consist of brackets designated by letters, thus
2. The Court could not accept either draft presented by counsel. The proxy statement supplement in its final form will purport to be declarations of present TICC officers and directors addressed to TICC stockholders. The submitted drafts were written by the trial attorneys in the case. It is asking too much of counsel to resist the temptation to place positive words (explanatory, exculpatory, placatory) in the mouths of those you represent, and negative words (confessional, self-incriminating, self-deprecatory) in the mouths of those your client is suing, even though the words in question have little or nothing to do with the particular proxy statement whose imperfections are at issue.
3. The Court's purpose in this exercise is to strip the parties' proposed proxy statement supplements of these excesses, and present to the stockholders an accurate, neutral and unimpassioned recitation of important facts (albeit seemingly from the mouths and minds of TICC officers and directors). It must be recalled that as the date of the Special Meeting approaches, both sides are at liberty to extend the proxy war with additional and more partisan statements (so long as they do not violate the securities laws).
4. Once the proxy statement supplement in its Court-approved form has been sent to stockholders, TICC may reschedule the Special Meeting, on a date not earlier than two weeks from the date on which stockholders may be expected to have received the proxy statement supplement.
The Court now sets forth its instructions with respect to the contents of the proxy statement supplement TICC must send to its stockholders.
* The document begins with that portion of Annex One enclosed within the brackets marked "A."
* The document continues with that portion of Annex Two enclosed within brackets marked "B," as amended by the handwritten additions and deletions.
* The first proxy statement disclosure the Court held was inadequate related to the benefits to be received by Cohen, Royce and Rosenthal if the BSP Transaction was consummated. See 2015 WL 6408117, at *9. The Court has rewritten that disclosure in its entirety. The following language in boldface must appear next in the supplement. That boldfaced text reflects the Court's rulings on the arguments of counsel, in briefs and at oral argument, that addressed this subject.
* Following this boldfaced passage, the proxy statement supplement continues with that portion of Annex Two enclosed within the brackets marked "C," as amended by hand.
* The supplement continues with that portion of Annex Two enclosed within the brackets marked "D," followed immediately by that portion of Annex One within the brackets marked "E," as amended by hand.
The proxy statement supplement will take the form mandated by these instructions. Its text will then be regarded as complete. No alterations, amendments or additions are permitted.
If Defendants desire to proceed with the previously noticed Special Meeting, TICC must send to each stockholder of record a copy of the proxy statement supplement. When that has been accomplished, Defendants are directed to file and serve upon Plaintiff copies of the proxy statement supplement as transmitted to stockholders, proof of that transmission, and a calculation of the date by which all stockholders may reasonably be expected to have received the supplement. Defendants may re-notice and re-schedule the Special Meeting, on a date not earlier than fourteen (14) calendar days after that calculated date of receipt.
For the foregoing reasons, the Court makes this Order:
1. For the foregoing reasons, the Plaintiff's motion [Doc. 62] for reconsideration of the Court's prior Ruling [Doc. 59], granting in part and denying in part Plaintiff's motion [Doc. 2] for a preliminary injunction, is GRANTED IN PART and DENIED IN PART.
2. Upon reconsideration, the Court amends the bases for its prior Ruling, so as to include a consideration of Maryland law and related issues. Having made that consideration, the Court ADHERES to its prior Ruling [Doc. 59].
4. If Defendants wish to proceed with a Special Meeting of the TICC stockholders, the corporation must send to all stockholders of record a proxy statement supplement in a form which complies with this Ruling.
5. To vacate the preliminary injunction currently in force, Defendants must file and serve a copy of the proxy statement supplement sent to stockholders, together with proof of transmission, and a calculation of the date by which stockholders could reasonably be expected to have received the supplement (depending upon the means of transmission).
6. Defendant TICC Capital Corp. may re-notice and re-schedule the previously noticed Special Meeting of Stockholders, to take place on a date not earlier than fourteen (14) calendar days after the transmission receipt date calculated under Paragraph 5 of this Order.
All the foregoing is SO ORDERED.
This supplement (the "Supplement") supplements and amends the proxy statement dated September 3, 2015 (the "Proxy Statement") related to the Special Meeting of Stockholders (the "Special Meeting") of TICC Capital Corp. ("TICC" or the "Company") to vote on, among other proposals, the approval of a new investment advisory agreement between TICC Management, LLC (the "Adviser") and the Company and the election of six director nominees named in the Proxy Statement, both of which are subject to and will be effective upon the closing of the transaction (the "Transaction") between the Adviser and an affiliate of Benefit Street Partners L.L.C. ("BSP"). Except as described below, the information provided in the Proxy Statement continues to apply. Capitalized terms used in this Supplement, but not otherwise defined herein, have the meanings ascribed to those terms in the Proxy Statement. To the extent information below differs from, updates or conflicts with the information contained in the Proxy Statement, the information below is the more current information and supersedes the information in the Proxy Statement. The Company urges you to carefully read the Supplement and the Proxy Statement in their entirety.
On October 7, 2015, NexPoint Advisers, L.P. ("NexPoint") brought suit in the United States District Court for the District of Connecticut (the "Court") against the Company, the Company's Board of Directors (the "Board of Directors" or the "Board") and the Company's President. NexPoint's complaint alleged that the defendants violated Section 14(a) of the Securities Exchange Act of 1934, breached the fiduciary duty of candor under Maryland law, and breached the Company's Bylaws by failing to recognize NexPoint's director nominees. NexPoint sought (i) a temporary restraining order prohibiting the Company from canceling or rescheduling its October 27, 2015 Special Meeting or altering the size or composition of the Board of Directors, and (ii) a preliminary injunction requiring the Company to issue additional disclosures and recognize NexPoint's six director nominees. On October 8, 2015, the Court issued a temporary restraining order pending a hearing on NexPoint's preliminary injunction motion, which was held on October 16, 2015.
On October 23, 2015, the Court denied NexPoint's preliminary injunction motion insofar as it sought to require the Company to recognize NexPoint's director nominees, and granted it in part with respect to certain of NexPoint's disclosure claims. The Court ordered (the "Order") the Company to correct certain statements made in prior proxy materials and provide certain additional disclosures. The Order set a schedule for the defendants to file a draft of corrective proxy materials with the Court, for NexPoint to state its agreement or any objections to those proposed disclosures, and for the Court to resolve any disputes and then set (a) a date by which defendants must file and mail to the Company's stockholders the finalized corrective proxy materials, and (b) the earliest date on which the Company may hold the Special Meeting.
The full text of the Order appears in Annex A to this Supplement. On October 27, 2015, to comply with the Order, defendants filed the proposed corrective disclosures set forth below (the "Proposed Proxy Statement Supplement") with the Court and applied to the Court for the ability to set the date of the Special Meeting during the week of November 16, 2015.
Additionally, as previously disclosed, the Company has postponed the October 27, 2015 meeting in accordance with the Order and will announce a date for a rescheduled meeting as soon as the Court permits.
The first bullet in the section is amended and restated as follows:
Messrs. Cohen, Rosenthal and Royce, or their respective affiliates (collectively, the "Sellers") own and/or control all of the issued and outstanding limited liability company membership interests of the Adviser and have entered into a purchase agreement with an affiliate of BSP (the "BSP Affiliate") pursuant to which the BSP Affiliate will acquire control of the Adviser (the "Purchase Agreement"). Pursuant to the Purchase Agreement, if the New Advisory Agreement is approved by the Company's stockholders and certain other conditions are satisfied, including the election of certain independent directors to fill vacancies on the Board of Directors to be created at the closing of the Transaction and the other conditions described in the Proxy Statement, the BSP Affiliate will acquire 100% of the membership interests in the Adviser and manage the Adviser. BSP will be the managing member of the BSP Affiliate.
Pursuant to the Purchase Agreement, at the closing of the Transaction, the Sellers will receive, in exchange for their ownership interests in the Adviser, (i) a 24.9% economic interest in the BSP Affiliate and (ii) the potential for a cash distribution of up to $10 million. The BSP Affiliate was solely formed to acquire the membership interests of the Adviser. The Sellers will have no management role or responsibilities in the Company or the Adviser and no voting rights on any matters relating to the Company. The Sellers will have consent rights with respect to affiliate transactions, the incurrence of additional indebtedness at the BSP Affiliate and certain additional business activities of the BSP Affiliate. After the closing of the Transaction, BSP will have the right, beginning on the second anniversary of the closing, to purchase the Sellers' interests in the BSP Affiliate at fair market value.
The closing of the Transaction is contingent upon, among other things, the approval of the New Advisory Agreement by the Company's stockholders and the election of independent directors to fill vacancies on the board to be created as of closing of the Transaction.
The third to fifth paragraphs on page 24 of the Proxy Statement are amended and restated as follows:
On August 7, 2015, subsequent to the public announcement of the terms of the New Advisory Agreement, representatives of NexPoint Advisors, L.P. ("NexPoint") contacted counsel to the Company, Sutherland Asbill & Brennan LLP, and indicated that NexPoint would be submitting an unsolicited proposal to the Board to become the Company's investment adviser.
On August 11, 2015, NexPoint delivered to the Board a proposal to act as the Company's new investment adviser. The proposal stated that NexPoint intended to maintain the Company's existing investment strategy and that NexPoint's core competencies were within the existing investment strategy. NexPoint also proposed to reduce TICC's existing base management fee by 50% for a period of three years and, in addition, to waive the first $5 million of the base management fee. NexPoint also indicated that it intended to purchase $10 million of the Company's common stock in one or more open-market purchases following the approval of a new investment advisory agreement with NexPoint by the Board and the Company's stockholders.
Upon receiving the proposal, the Board of Directors formed a special committee (the "Special Committee" or the "Committee"), comprised of the Company's three non-interested directors (the "Non-Interested Directors"), as such term is defined in the Investment Company Act of 1940, as amended (the "1940 Act"). Mr. Steven P. Novak was selected as the chairman of the Special Committee in light of his nearly 40 years of experience in the investment management industry, including founding Palladio Capital Management, founding Unterberg Harris Capital Management, serving as Director of Research at C. E. Unterberg, Towbin, and serving in senior investment officer or senior portfolio manager roles at Sanford C. Bernstein & Company, Inc., Harris Bankcorp and Forstmann Leff Associates. The Board also determined that Mr. Novak's prior experience as the chairman of the board or as a director at multiple companies, as well as chair of certain of these companies' audit committees, further qualified him to serve as the Chairman of the Special Committee, as did the fact that he is a Chartered Financial Analyst. The other members of the Special Committee, Mr. G. Peter O'Brien and Ms. Tonia Pankopf, also each have extensive experience in the investment industry. The Special Committee was initially advised by Blank Rome LLP, which serves as the independent counsel to the Non-Interested Directors of the Company's Board of Directors.
On August 17, 2015, the Special Committee met to discuss NexPoint's indication of interest with counsel. The Special Committee discussed the SEC enforcement action against Highland Capital Management, L.P. ("Highland"), an affiliate of NexPoint, which was made public in 2014, and expressed concerns regarding the involvement of Highland principals in the management of the Company. The Special Committee also expressed concerns about the performance history of Highland Distressed Opportunities, Inc., a business development company ("BDC") sponsored by Highland, which was ultimately merged into an affiliated fund. After extensive discussion, the Special Committee determined that it would be advisable to obtain additional information regarding NexPoint's investment advisory business in order to more fully evaluate the NexPoint proposal. The Special Committee subsequently directed counsel to distribute to NexPoint's representatives a request for information regarding its investment advisory business, similar to the information that the Board of Directors would consider in its evaluation of an investment advisory agreement under Section 15(c) of the 1940 Act. The questionnaire asked questions regarding, among other items, NexPoint's investment decision-making process, personnel and methods of investment analysis, NexPoint's investment performance and asset allocation, the terms of the proposed advisory agreement, the compensation of NexPoint under the proposal, the financial condition and stability of NexPoint and possible conflicts.
At a meeting on August 25, 2015, the Special Committee, assisted by Blank Rome LLP, reviewed NexPoint's responses. In its review, the Special Committee took into consideration the fact that the responses (1) did not contain details the Special Committee had requested pertaining to the historic asset allocation of funds managed by NexPoint and (2) indicated that NexPoint would continue to maintain the Company's current investment strategy and exposure to collateralized loan obligation vehicles ("CLOs"). The Special Committee discussed that NexPoint's strategic commitment to CLOs was inconsistent with the Board of Directors' desire to transition the portfolio over time into self-originated middle-market loans and to gradually reduce the Company's exposure to CLOs. The Board of Directors had previously considered a decision to gradually steer the Company away from CLO investments and return to middle-market lending based on stockholder feedback. The Special Committee also considered NexPoint's lack of loan origination capabilities comparable to BSP's origination platform and experience. After discussing the materials and these concerns, the Special Committee determined that it would be advisable to obtain additional information from NexPoint regarding its investment professionals and investment allocations and directed Blank Rome LLP, as independent counsel to the Special Committee, to request additional information from NexPoint's representatives to address these follow-up questions.
On August 27, 2015, NexPoint's representatives responded to these follow-up questions and also proposed a phone call between its representatives and the Special Committee to address any questions or concerns. In its response, NexPoint also indicated a willingness to further extend its proposed 50% reduction in the base management fee under a new investment advisory agreement for an additional year.
On August 27 and 28, 2015, the Special Committee reviewed the responses NexPoint provided, including data showing that the asset allocation in the NexPoint Credit Strategies Fund (the "Fund") (which NexPoint had indicated was most analogous to the Company), included distressed debt, asset backed securities (including CLOs) and equities, with exposure to structured products ranging from 25 to 27% and equities ranging from 25% to 50% of the Fund in any given quarter over the prior ten quarters. The Special Committee recognized that although the Fund had a good performance record, the Special Committee believed its performance record has been generated based on a strategy significantly weighted to equities, a strategy that is not typical for a BDC. As a result, the Special Committee believed that the Fund's performance record was of limited use in comparing NexPoint's track record against that of BSP. The Special Committee also noted that the data provided by NexPoint revealed that NexPoint's research effort was roughly equally divided between equity analysts and credit analysts, which is also not typical of a BDC.
Based on these deliberations, the Special Committee believed that the Company and its stockholders would be better served by BSP, which the Special Committee viewed as having a superior strategy, reputation, institutional relationships, track record, investment skills and the quality of its management team relative to NexPoint. Specifically, the Special Committee noted that BSP's expertise in credit origination and investment, BSP's philosophy of management, historical performance and methods of operation and the education and experience of BSP's large team of investment and research professionals could provide significant advantages to the Company in its strategic transition away from investing in CLOs. As a result of such deliberations, the Special Committee determined that BSP would be a better investment adviser for the Company, notwithstanding the proposed NexPoint fee structure, and continued to support its recommendation to the Company's stockholders to approve the New Advisory Agreement. In light of this determination, the Special Committee determined that a meeting with NexPoint would not be productive and decided not to engage with NexPoint in negotiations regarding its proposed investment advisory agreement. Notwithstanding such determination, the Special Committee requested that the Company's management seek to obtain more favorable terms from BSP with respect to the New Advisory Agreement.
On September 1, 2015, NexPoint further extended its proposed 50% reduction in the base management fee under a new investment advisory agreement for an additional year and provided an additional $20 million of fee concessions or share purchases.
On September 2, 2015, The Company's management engaged in further discussions with BSP consistent with the Special Committee's directive, and BSP agreed to permanently lower the base management fee payable under the New Advisory Agreement to an annual rate of 1.50% of the Company's gross assets from an annual rate of 2.00% of the Company's gross assets. Also, various members and affiliates of BSP and the Adviser agreed to purchase a minimum of $20 million of the Company's common stock within 12 months after the closing of the Transaction. The Special Committee reviewed both revised proposal and determined that NexPoint's proposed lower management fee did not address the Special Committee's concerns regarding NexPoint's suitability as the Company's investment adviser. The Special Committee determined to continue to recommend the New Advisory Agreement to the Company's Board of Directors and stockholders. The Board of Directors subsequently determined that the New Advisory Agreement continued to be in the best interests of the Company and its stockholders.
THE TRUE FACTS ARE THAT ON September 22, 2015, the Special Committee retained Wachtell, Lipton, Rosen & Katz ("Wachtell Lipton") as its legal adviser and on September 24, 2015, the Special Committee retained Morgan Stanley & Co. LLC ("Morgan Stanley") as its financial adviser, neither of whom advised the Special Committee during the prior evaluation of NexPoint's proposal.
On September 28, 2015, the Special Committee met with Morgan Stanley and Wachtell Lipton to review again the New Advisory Agreement and the proposal from NexPoint. The Special Committee, with the aid of its legal and financial advisers, discussed the alternatives facing the Company and their respective advantages or disadvantages. After careful consideration and with the concurrence of its financial and legal advisers, the Special Committee resolved to continue to recommend the New Advisory Agreement to the Company's Board of Directors and stockholders.
On October 2, 2015, the Company filed a letter to stockholders recommending that they vote in favor of the BSP transaction, which responded to several assertions made by TSLX and NexPoint and disagreed with the assertion that "TICC didn't engage with TSLX or NexPoint." As noted by the Court, notwithstanding the statements in this presentation, the Special Committee did not engage with NexPoint.
On October 5, 2015, the Company filed a presentation outlining the alternatives facing the Company and its stockholders. As noted by the Court, notwithstanding the statements in this presentation, the Special Committee was not advised by Wachtell Lipton or Morgan Stanley during its initial review of the NexPoint proposal nor did the Special Committee engage with NexPoint regarding its proposal, other than the written and telephonic communications, through counsel, and requests for information noted above in this supplemental disclosure.
Subsequently, on October 7, 2015, BSP announced its intention to support a tender offer or share repurchase program of between $50 million and $100 million, with the tender offer to be funded by BSP, if the New Advisory Agreement is approved by the Company's stockholders.
On October 8, 2015, the Company published a letter to stockholders with the statement that "[t]he proposals from [TPG Specialty Lending, Inc.] and NexPoint were carefully reviewed by the Special Committee who is advised by Morgan Stanley." As noted by the Court, notwithstanding the statements in this press release, the Special Committee was not advised by Wachtell Lipton or Morgan Stanley during its initial review of the NexPoint proposal.
On October 8, 2015, NexPoint commenced litigation in the United States District Court for the District of Connecticut against the Company, the Board, and the President of the Company. NexPoint subsequently revised its proposal to include support for a tender offer or share repurchase program of between $50 million and $100 million in the event that the Board of Directors and the Company's stockholders approve a new advisory agreement with NexPoint. As the revision did not address the concerns of the Special Committee regarding NexPoint's suitability to be the Company's investment adviser, the Special Committee determined, with the aid of Wachtell Lipton and Morgan Stanley, to continue to support the New Advisory Agreement and not to engage in negotiations with NexPoint.
On October 9, 2015, the Company filed an Investor Presentation detailing the review conducted by the Special Committee and the Board of Directors on the possible alternatives. As noted by the Court, notwithstanding the statements in this presentation, the Special Committee was not advised by Wachtell Lipton or Morgan Stanley during its initial review of the NexPoint proposal nor did the Special Committee engage with NexPoint regarding its proposal, other than the written and telephonic communications, through counsel, and requests for information noted above in this supplemental disclosure.
These materials are being sent to you by the undersigned pursuant to Court order in connection with the upcoming Special Meeting of Stockholders (the "Special Meeting") of TICC Capital Corp. ("TICC" or the "Company").
On October 8, 2015, NexPoint Advisors, L.P. ("NexPoint") filed suit in the United States District Court for the District of Connecticut against TICC, the members of the Company's Board of Directors, and the Company's President. Among other things, NexPoint alleged that we violated Section 14(a) of the Securities Exchange Act of 1934 by making materially false and misleading misstatements and omissions in proxy materials soliciting votes for our proposals at the Special Meeting, which was then scheduled for October 27, 2015.
On October 23, 2015, the Court issued a preliminary injunction indefinitely postponing the Special Meeting until we corrected certain false and misleading misstatements and omissions in our proxy materials. The Court ordered us to submit proposed corrective disclosures, which NexPoint would review and comment on, and which the Court would approve, before we filed them with the SEC and published them to stockholders. We filed with the SEC and published to stockholders, without prior review by either NexPoint or the Court, what we claimed to be the corrective disclosures required by the preliminary injunction on October 27, 2015. The Court disagreed and found that the October 27, 2015 proxy materials were insufficient to satisfy the requirements of the preliminary injunction.
On November 26, 2015, the Court ordered us to disclose that the October 27, 2015 proxy materials were insufficient to correct our prior misstatements and omissions, and also to make the following corrective disclosures.
In the September 3, 2015 proxy statement, we disclosed only that Jonathan Cohen, the Company's CEO and member of the Company's Board of Directors; Charles Royce, the Chairman of the Company's Board of Directors; and Saul Rosenthal, the Company's President, stand to "receive substantial payments" if the BSP Transaction is completed. The Court found that our failure to disclose the actual amounts Messrs. Cohen, Royce, and Rosenthal will receive if the BSP Transaction closes violated SEC regulations. The Court further held that this failure to disclose made the proxy statement materially false and misleading even in the absence of SEC regulations on point:
In October 27, 2015 proxy materials, we purported to comply with the preliminary injunction by disclosing that if the Transaction closes, Messrs. Cohen, Royce, and Rosenthal will earn "(i) a 24.9% economic interest in the BSP Affiliate," which they can sell to BSP two years after the Transaction closes, and "(ii) the potential for a cash distribution of up to $10 million." The Court has determined, and ordered us to disclose, that this was not the corrective disclosure of "Cohen, Royce, and Rosenthal's multi-million dollar interests" that the preliminary injunction requires. Instead, Cohen, Royce and Rosenthal will personally gain $___ million if the BSP Transaction were to close.
In October 2, 2015 proxy materials, we asserted that it was
The Court found that we gave stockholders the "[mis]impression that TICC had engaged in some semblance of a negotiation with NexPoint." The Court found this misrepresentation to be material, because "it is apparent that a reasonable shareholder would place importance on the level of interaction the Board had with a third-party competing against a proposal being presented to them, specifically where the proposal favored by the Board is one that would provide tens of millions of dollars to certain of the board's members."
In October 5, 2015 proxy materials, we stated on a slide entitled, "The Review Undertaken to Protect Your Interests": "The Special Committee thoroughly considered the NexPoint and TPG BDC proposals, engaging with both entities and soliciting more information and is assisted by independent legal counsel at Wachtell, Lipton, Rosen & Katz and financial advisors at Morgan Stanley & Co. LLC." The Court found that this statement "can be reasonably regarded as an effort to mislead stockholders" into believing that Wachtell, Lipton, Rosen & Katz and Morgan Stanley & Co. LLC advised us when we rejected NexPoint's proposal to become our next investment advisor. We were not so advised.
