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Carlson v. Triangle Capital Corp.

United States District Court, E.D. North Carolina, Western Division

July 23, 2018

DAN CARLSON, Plaintiff,



         This memorandum opinion sets forth reasons for the court's decision entered July 16, 2018, denying plaintiff's motion for preliminary injunction.


         Plaintiff filed suit on July 6, 2018, against Triangle Capital Corporation (“Triangle” or “Company”) and its board members, alleging violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”), as amended by the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. §§78n(a) and 78t(a) respectively, and Rule 14a-9, 17 C.F.R. § 240.14a-9, in connection with the sale of all or substantially all of defendant Triangle's assets to Benefit Street Partners L.L.C. (“BSP”) for approximately $981.2 million in cash. Triangle stockholders are scheduled to vote on this proposed sale at a special meeting scheduled for July 24, 2018.

         Plaintiff's claims concern the Schedule 14A Definitive Proxy Statement (“Proxy”) filed by defendants with the Securities Exchange Commission (“SEC”) and disseminated to shareholders on June 1, 2018. (See Proxy (DE 12-2)). The Proxy spans more than 500 pages and includes, among other things, a detailed description of the transactions, as well as copies of the Asset Purchase Agreement, the Externalization Agreement, Triangle's 2017 Form 10-K, and Triangle's Q1 2018 Form 10-Q. (See id.). Plaintiff alleges the Proxy contains the following material omissions: 1) indication whether the valuation of defendant Triangle conducted by defendants' financial advisor, Houlihan Lokey Capital, Inc. (“Houlihan”), accounted for the full value of the company; 2) indication whether the terms of the bidding agreements entered into for the sale of the company included “don't-ask, don't-waive” (“DADW”) provisions and whether those provisions are still in effect; and 3) certain net asset value information.

         On July 11, 2018, 13 days before the July 24, 2018, shareholder vote, plaintiff filed motion for preliminary injunction, seeking to enjoin that vote until defendants disclose to shareholders material information allegedly omitted from the Proxy. The court allowed plaintiff's request for expedited briefing on motion, over defendants' objection, providing defendants until July 13, 2018, to respond, and plaintiff until July 14, 2018, to reply. Plaintiff's motion for hearing, however, was denied at telephonic hearing July 12, 2018, as unlikely to aid in the court's decision, and practically unavailable.


         Triangle is a specialty finance company that provides customized financing to lower middle market companies located primarily in the United States. (Compl. (DE 1) ¶ 12). Triangle has historically focused on “investments in subordinated debt (or mezzanine) securities, which generally produce higher yields but typically carry higher amounts of principal risk versus more senior-oriented securities.” (Proxy (DE 12-2) at 57).[1]

         On November 1, 2017, Triangle publicly announced that its Board of Directors (“Board”) “had elected to pursue the exploration of strategic alternatives, including the potential benefit of partnering with another organization to accelerate the Company's corporate initiatives, the potential sale of certain investments and other alternatives.” (Id. at 58). The Board authorized the engagement of Houlihan as financial advisor to assist in that endeavor. (Id.). During subsequent meetings later in November 2017, the Board instructed Houlihan to “contact as many potentially interested parties as practicable without restricting the solicitation process as to type of transaction or counterparty . . . .” (Id.). The Board “approved a form confidentiality agreement to be sent to interested parties, ” and that agreement “included customary ‘standstill' and related provisions designed to protect the strategic transaction review process, along with a provision that would allow bidders to confidentially request a waiver of the standstill provisions once a strategic transaction had been publicly announced, which would allow the Board to receive and consider competing proposals.” (Id.).

         On December 18, 2017, the Board held telephonic meeting with representatives of Houlihan and Eversheds Sutherland (US) LLP (“Eversheds Sutherland”), Triangle's outside counsel. (Id. at 59). The Board and Eversheds Sutherland “discussed certain provisions in the form confidentiality agreement being negotiated with interested parties, including the standstill provisions and overall term of the confidentiality agreement[.]” (Id.). The Proxy explains: “[T]he Board did not believe it was in the best interests of the Company or its stockholders to reduce the term of the standstill to less than one year for any single bidder. However, as previously discussed with the Board, under the standard form of confidentiality agreement, following public announcement of a strategic transaction, bidders would be allowed to approach the Board confidentially to seek a waiver of the standstill in order to submit a competing proposal.” (Id.).

         Eventually, Houlihan informed the Board that over 100 potential bidders were contacted, and 53 bidders executed confidentiality agreements. (Id. at 59-61). “The Company began to receive initial indications of interest on January 17, 2018, including from Barings and BSP on January 18, 2018[.]” (Id. at 60).[2] The initial indications of interest from Barings and BSP are discussed in the Proxy. (Id.). After consideration of the initial indications of interest, Triangle invited numerous parties to participate in the second round of the strategic review process. (Id. at 61-62). Triangle received various second round indications of interest, including from Barings and BSP. (Id. at 62-65). Eventually, after consideration of these additional second round indications of interest, the Board decided to pursue a dual transaction option involving BSP and Barings, and directed Houlihan and Eversheds Sutherland to proceed in negotiations with BSP and Barings accordingly. (Id. at 71).

         The parties negotiated a transaction under which Triangle would sell its December 31, 2017 investment portfolio to BSP for $981.2 million, and simultaneously enter into a stock purchase and transaction agreement with Barings, including a payment to Triangle shareholders of $1.78 per share, through which Barings would become investment adviser to the Company. (Id. at 69-76). Following negotiations, the Board “unanimously determined that the Asset Purchase Agreement, the Externalization Agreement and the transactions contemplated thereby were advisable to and in the best interests of the Company and its stockholders and unanimously voted to approve the Asset Purchase Agreement, the Externalization Agreement and the transactions contemplated thereby[.]” (Id. at 76). The Board also recommended “that the Company's stockholders approve the Asset Purchase Agreement, the Stock Issuance and the transactions contemplated thereby, and directed that the relevant matters be submitted to the stockholders for approval and adoption at a meeting of stockholders together with the Board's recommendation that the stockholders approve such matters.” (Id.). The total cash consideration in the proposed transaction represents a 26% premium to the April 3, 2018, closing market price of the Company's common stock. (Id. at 77).

         On April 4, 2018, Triangle issued a press release announcing the transactions. (Id.). Thereafter, on April 18, 2018, and again on May 17, 2018, Triangle filed preliminary proxy statements with the SEC. On June 1, 2018, Triangle filed the Proxy currently at issue. (Id. at 5). The Proxy invited stockholders to attend a special meeting on July 24, 2018, at which the stockholders would be asked to approve the transactions. (Id.).

         Plaintiff owns 200 shares of Triangle stock, (see DE 1-1), which represents 0.0000042% of Triangle's outstanding shares, (DE 40 at 6).


         A. Standard of Review

         Rule 65 of the Federal Rules of Civil Procedure allows a court to enter preliminary injunctive relief prior to adjudication on the merits of the action. Fed.R.Civ.P. 65(a). A preliminary injunction is “an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief.” Winter v. Natural Res. Def. Council, Inc, 555 U.S. 7, 22 (2008). To obtain a preliminary injunction, plaintiff must establish four requirements: (1) likelihood of success on the merits; (2) likelihood of irreparable harm in the absence of preliminary relief; (3) that the balance of equities tips in plaintiff's favor; and (4) that an injunction is in the public interest. Id. at 20; see also Real Truth About Obama, Inc. v. Federal Election Comm'n, 575 F.3d 342, 346 (4th Cir. 2009), vacated on other grounds, 130 S.Ct. 2371 (2010), reinstated in relevant part on remand, 607 F.3d 355 (4th Cir. 2010) (per curiam). B. Analysis 1. Likelihood of Success on the Merits The statutory basis for plaintiff's complaint is Section 14(a) of the Exchange Act, which “makes unlawful the solicitation of a proxy regarding any security, by way of interstate commerce, in contravention of the rules and regulations prescribed” by the SEC. Hayes v. Crown Cent. Petroleum Corp., 78 Fed.Appx. 857, 861 (4th Cir. 2003) (citing 15 U.S.C. § 78n(a)). “SEC Rule 14a-9 prohibits false or misleading statements with respect to material facts as well as the omission of material facts necessary to make the statements therein not false or misleading.” Id. (citing 17 C.F.R. § 240.14a-9).

         To prevail on a Section 14(a) claim, “a plaintiff must show that (1) the proxy statement contained a material misrepresentation or omission (2) that caused the plaintiff injury and that (3) the proxy solicitation was an essential link in the accomplishment of the transaction.” Id. With respect to materiality, “a misrepresentation or omission is material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by a reasonable investor as having significantly altered the total mix of information made available.” Id. (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).[3]

         Moreover, to state a claim for a Section 14(a) violation, the complaint must satisfy the strictures of the PSLRA. The PSLRA requires that the complaint “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). Failure to meet these “heightened pleading requirements” results in dismissal of the case. Hayes, 78 Fed.Appx. at 861.

         The court addresses each of plaintiff's three allegations of material omissions in turn below. a. Houlihan Valuation - DCF Analysis Inputs Houlihan performed a discounted cash flow (“DCF”) analysis based on company projections, which indicated a value of the company of “$946.4 million to $1, 030.4 million.” (Proxy (DE 12-2) at 88). The Proxy states the discount rates and terminal value multiples used. (Id. (“Houlihan Lokey applied a range of terminal value multiples of 0.90x to 1.00x, taking into account the results of the selected companies analysis and its experience and professional judgment, to the Company's net asset value and discount rates ranging from 9.0% to 11.0%, taking into account the results of the selected companies analysis and the Company's estimated ...

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