The latest twist in the ongoing struggle for control of TICC Capital Corp., a business development company that invests in both the debt and the equity tranches of collateralized loan obligations, is a district court decision granting part of the plaintiff’s motion for reconsideration of the court’s October ruling. But not the part in which the plaintiff was presumably most interested.
The decision speaks not just to the sports-fan in me, the fellow who likes watching alt-investment industry heavyweights duke it out in court. It speaks as well to the aficionado of federal-state issues, because the reconsideration turns on the federal judge’s determination that the Securities and Exchange Commission has effectively invited the lawmakers of the states to have their own say on the sort of BDC transaction at issue.
For the sports fan, the plaintiff’s loss in the first round is still a loss. But for the federal/state aficionado, it is a loss for a different reason: it is a loss under Maryland’s law as well as under that of the United States. As a matter of the precedential consequence of this decision, that may well matter.
The plaintiff is NexPoint Advisors, a unit of Highland Capital Management, and a shareholder in TICC. NexPoint had offered to become TICC’s investment advisor, for a perpetual 1.25% management fee. Its offer came with a loyalty program, something like ‘frequent flyer miles” for investors. NexPoint would match 2% on each share for any shareholder that stays in for more than a year.
On October 9, NexPoint sweetened the deal, offering a share repurchase program of between $50 and $100 million.
But TICC resisted. Its management favored another direction. Specifically, the managers wanted to sell TICC to Benefit Street Partners. That required the successful outcome of a board election.
Thus, TICC wanted to hold a Special Meeting for the election of a slate of directors, and to exclude from the proceedings at that meeting a slate of directors nominated by NexPoint.
NexPoint brought a lawsuit asking the U.S. District Court in the District of Connecticut to require TICC to include the NexPoint slate and to let shareholders vote on the opposing slates of nominees as an item of business at the Special Meeting.
TICC won a victory in October, when the district court held that, though TICC would have to issue a supplemental and corrective proxy statement [I’ll leave the proxy-statement issue aside here — TICC has since filed the revised disclosure], once it had done so it would be allowed to proceed with the meeting without the slate of directors nominated by NexPoint.
A losing litigant’s motion for reconsideration is often a mere formality. It is a matter of crossing one’s “tees” before proceeding with an appeal to the next level. In this case, though, the court actually has reconsidered and has significantly changed its rulings due to arguments that the plaintiff made in such a motion.
Why? Its view of the federal-state relationship involved shifted. The court’s original view was that this case was to be settled under the Investment Company Act, and thus under the safe harbor that federal law creates for certain corporate transactions under its sect. 15. Since the laws of the United States are supreme in the event of conflicts with state law, the law of Maryland, where TICC is chartered, could be left to the side.
The judge now says that upon further consideration “the Court should take Maryland law into account in determining whether NexPoint has made a sufficient showing to obtain a preliminary mandatory injunction.”
And the Former Conclusion Again
Maryland law comes into the picture because the federal government, by way of the Securities Exchange Commission, has brought it in. The SEC did so in a release notice that, as the court says, announced “amendments to ICA exemptive rules arguably similar to those in the previously enacted” sect. 16(b), on which the court’s October opinion had itself been founded.
The release notice said, “These amendments are not intended to supplant or limit the ability of fund shareholders under state law to nominate independent directors.” The court quoted those words and gave italics to the phrase “under state law.”
But, under that state’s law, TICC still wins the day. “I am unable to conclude,” Judge Charles S. Haight said, “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 Court adheres to the October 23 Ruling, denying a preliminary injunction with respect to the election of TICC directors.”