MCC Medley Capital Corporation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWAR

VERIFIED COMPLAINT FOR INJUNCTIVE RELIEF

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

VERIFIED AMENDED COMPLAINT FOR INJUNCTIVE RELIEF

Plaintiffs FrontFour Capital Group LLC (“FFCG”) and FrontFour Master Fund, Ltd. (“FFMF,” and with FFCG, “FrontFour” or “Plaintiffs”), by and through their undersigned counsel, allege on personal knowledge as to their own conduct, and on information and belief as to all other matters, as follows:

NATURE OF THE ACTION

1.              Plaintiffs are stockholders of Medley Capital Corporation (“MCC” or the “Company”) who seek to block a highly conflicted, three-way transaction orchestrated by Brook and Seth Taube (the “Taube Brothers”) to monetize their controlling stake in Medley Management Inc. (“MDLY”), cement their control of the post-transaction entity and secure a future lucrative fee stream.

2.              The challenged transaction, which was announced on August 9, 2018 (the “Announcement Date”), would combine MDLY with two other entities the Taube Brothers control, MCC, a publicly-traded business development company (“BDC”), and Sierra Income Corporation (“SIC”), a privately-held BDC:¹

3.             If the transaction proceeds, SIC will first acquire MCC and then MDLY in two separate but cross-conditioned mergers (the “Proposed Mergers”). The transaction will leave SIC as the surviving company, which will then list on the New York Stock Exchange (“NYSE”).

4.              Incredibly, the Proposed Mergers contemplate the payment of $3.44 cash, plus $0.65 in cash dividends and the right to receive 0.3836 shares of SIC stock to holders of MDLY stock. The cash component alone represents an 18% premium to MDLY stockholders; adding the SIC stock component brings the premium to an outlandish 100%.²

5.              The Proposed Mergers will also reward the Taube Brothers and other members of MDLY management with lucrative employment contracts, despite their miserable track record managing MCC, overseeing MDLY’s two failed sales processes and furnishing projections of MDLY’s revenue growth that are manifestly overstated given its terrible historical performance and dim prospects.

6.            By contrast, MCC stockholders will only receive the right to 0.8050 shares of SIC stock, which provides no premium when compared to MCC’s net asset value (“NAV”). The definitive Proxy filed with the SEC on December 21, 2018 (the “Proxy”), states that the value to MCC stockholders is $5.68 per share, based on the NAV of the pro forma combined company ($7.06), and a $6.80 per share value to MDLY stockholders. But those values are totally unrealistic. While MDLY’s $3.44 per share cash component is fixed, SIC stock will trade well below NAV, given the Taube Brothers’ disastrous record managing MCC and the probability that SIC stockholders, who have had no opportunity to exit for five years, will dump their stock once SIC becomes publicly traded.

7.              In an attempt to convince the MCC stockholders to approve the transaction, the Taube Brothers and their allies continue to claim that (a) by merging with SIC, a much larger fund, MCC will gain access to capital and more favorable borrowing terms, which will in turn lift MCC’s chronically depressed stock price, (b) by merging with MDLY, MCC will benefit from management cost savings and better alignment with investor interests, and (c) MCC will realize the benefit of MDLY’s projected revenues from management of new assets that are projected to be brought into the proposed combined company.

8.              But there is at least one vastly better alternative for MCC and its stockholders. In January 2019, NexPoint Advisors, L.P. (“NexPoint”) has proposed an alternative involving the combination of MCC and SIC which would permit SIC to retain the $100 million it would otherwise distribute to MDLY stockholders under the Proposed Mergers. NexPoint also proposed to pay $25 million to the combined company for the benefit of stockholders, to provide a reduced fee structure and lowered costs, which would realize at least $9 million in annual savings, and to purchase at least $50 million of combined company shares over a five quarter period.

9.              On February 11, 2019, Origami Capital Partners, LLC (“Origami”) announced that it had issued an open letter to the MCC Board, proposing to buy 100% of the interests of MCC’s wholly owned subsidiary, Medley SBIC, L.P. (“Medley SBIC”) for $45 million cash. According to Origami, this represents 60% of MCC’s NAV as of September 30, 2018 and implies a 36.2% premium to MCC’s February 8, 2019 closing stock price. Origami also disclosed that it had reached out several times to MCC during the spring of 2018 and sent a formal letter on April 4, 2018 (“Origami IOI”) expressing interest in purchasing Medley SBIC. The Origami IOI is not referenced in the Proxy’s background section and was not produced under the stipulation entered into in the action styled FrontFour Capital Group LLC, et al. v. Medley Capital Corp., C.A. No. 2019-0021-KSJM (the “220 Action” and “220 Stipulation”) which governs MCC’s pre-vote production pursuant to 8 Del. C. § 220 (“220 Production”).

10.            The emergence of these alternatives after the announcement of the Proposed Mergers reflects the reality that no one attempted to shop MCC or seriously explore its strategic alternatives prior to signing up for the Taube Brothers’ preferred transaction. This failure is particularly galling because MCC’s NAV is far higher than its stock price, making MCC an attractive target.

11.            Consistent with the Taube Brothers’ objectives, the Proxy omits key details of two unsuccessful attempts to sell MDLY, suggests that the affiliated companies took adequate steps to protect against conflicts, and implies that MCC had no strategic alternatives. This picture was and remains misleading.

12.            For example, the Proxy heralds the formation by MCC’s Board of Directors (“MCC Board”) of a special committee of MCC’s independent directors (the “MCC Special Committee”) on January 28, 2018. But the MCC Special Committee never met, never retained a financial advisor, and never did anything else of substance (except get paid a monthly retainer) until June 19, 2018, after MDLY’s sale process failed and MDLY conceived of the Proposed Mergers. The Proxy could more accurately state that the MCC Special Committee’s primary purpose was to rubber-stamp the Proposed Mergers.

13.           Once negotiations regarding a merger began, the MCC Special Committee compounded the problems associated with its late start by irresponsibly agreeing to a no-shop clause that precludes the Company’s most logical alternatives, including the NexPoint proposal.

14.            The harm from the preclusive no-shop clause became manifest on February 1, 2019, when NexPoint revealed that it had proposed an alternative transaction to MCC and SIC on January 24, 2019, and made a definitive proposal on January 31, yet it had received no response.

15.           MDLY and SIC quickly responded with a press release, stating the respective company boards would adhere “to a rigorous review process.” But MDLY and SIC immediately cast doubt on the “rigorousness” of this process by accusing NexPoint of being “misleading.”

16.           On the morning of February 6, 2019, just four days later and without meeting with NexPoint’s representatives, MCC and SIC simultaneously announced the fait accompli: that they would not pursue NexPoint’s proposal because it was “in the best interests” of the companies’ stockholders to decline.

17.           On February 5, 2019, MCC, SIC and MDLY announced the postponement of their respective special meetings of stockholders to vote on the Proposed Mergers from February 8, 2019, to early March 2019. The special meeting has since been set for March 8, 2019.

18.            In this action, Plaintiffs seek injunctive relief blocking the Proposed Mergers and releasing MCC from the no-shop and termination fee provisions of the governing merger agreement, in order to permit the Company to engage with NexPoint, Origami and any other bidder that steps forward.

THE PARTIES

19.            Plaintiff FFCG is an SEC-registered investment advisor located at 35 Mason Street, Greenwich, Connecticut 06830. FrontFour and its affiliates (including FFMF) are the beneficial owners of 1,674,946 shares of MCC common stock, which constitutes 3.1% of the Company’s outstanding shares.

20.            Plaintiff FFMF is an investment fund managed by FFCG. FFMF is the beneficial owner of 1,633,232 shares of MCC common stock, including 1,031 shares held by FFMF in record name.

21.            Defendant MCC is a Delaware corporation with its principal place of business at 280 Park Ave, 6^th Floor East, New York, NY 10017. MCC is a non-diversified closed-end investment company that seeks to invest in small- and middle-market companies through privately negotiated debt and equity securities transactions. MCC is externally managed by MCC Advisors LLC (“MCC Advisors”), a majority owned subsidiary of Medley LLC, which is controlled by MDLY, which is in turn controlled by Medley Group LLC, pursuant to an investment management agreement executed on January 14, 2014 (the “MCC Management Agreement”). The Taube Brothers are the majority and controlling owners of Medley Group LLC. MCC is named as a defendant solely for the purpose of securing Plaintiffs’ requested relief.

22.            Defendant Brook Taube is the Chief Executive Officer (“CEO”) and Chief Investment Officer (“CIO”) of MCC and the Chairman of the MCC Board. He co-founded MDLY with Seth Taube in 2006. He is conflicted because he serves as Co-CEO of MDLY and as Co-Chairman of the MDLY board of directors (the “MDLY Board”), along with his brother Seth Taube. Brook Taube is also the Managing Partner of MCC Advisors and Senior Portfolio Manager of the private investment funds managed by MDLY since 2007. Brook Taube has served on the board of directors of SIC (the “SIC Board”) since its inception in 2012. He currently serves on the investment committee for SIC Advisors LLC (“SIC Advisors”), the investment adviser to SIC, as well as serves as a Trustee of the Sierra Total Return Fund (“STRF”) and on the investment committee of STRF Advisors LLC, the investment adviser to STRF. Brook Taube is interested in the Proposed Mergers because he controls, with Seth Taube, 14.6% of MCC common stock and 97.7% of the voting interests in MDLY common stock through ownership of MDLY Class B common stock.³ He will be Chairman and CEO of the combined company and stands to benefit from a lucrative employment package, with a base $600,000 annual salary and $3,200,000 bonus if performance objectives are met.

23.            Defendant Seth Taube has served on the MCC Board since its inception in January 2011. He is conflicted because he serves as co-CEO of MDLY and as co-Chairman of the MDLY Board, along with his brother Brook Taube. Seth Taube has also served as Chairman of the SIC Board and CEO of SIC since its inception in April 2012 and as a Trustee of STRF since January 2016. He is interested because he holds controls, with Brook Taube, 14.6% of MCC common stock and 97.7% of the voting interests in MDLY common stock. He will be Vice Chairman, Senior Executive Vice President and Senior Managing Director of the combined company and stands to benefit from a lucrative employment package, with a base $480,000 annual salary and $1,750,000 bonus if performance objectives are met.

24.            Defendant Jeff Tonkel has been a director of MCC 2014. He is conflicted because he is a Director and the President of MDLY and the President of SIC. He is interested in the Proposed Mergers because he holds 15,000 shares of MCC stock and 6% of the units in Medley LLC, which are exchangeable for shares of MDLY Class A stock. He will serve as President of the combined company and also stands to benefit from a lucrative employment package, with a base $480,000 annual salary and $1,750,000 bonus if performance objectives are met.

25.           Defendant Arthur S. Ainsberg has been a director of the Board since 2011 and is Chairman of the Nominating and Corporate Governance Committees. For his service as an MCC director, Ainsberg has been paid an aggregate of $1,034,923. He owns only 3,000 shares of MCC stock, which were purchased in 2012.

26.           Defendant Karin Hirtler-Garvey has been a director of the Board since 2011 and is Chairman of the Compensation Committee. For her service as an MCC director, Hirtler-Garvey has been paid an aggregate of $1,158,087. She owns only 3,000 shares of MCC stock, which were purchased shortly after the IPO. She is interested in the Proposed Mergers because she will be appointed a Director of the combined companies, where she will earn at least $200,000 annually.

27.             John E. Mack has been a director of the Board since 2011 and is Chairman of the Audit Committee. For his service as an MCC director, Mack has been paid an aggregate of $1,258,265. He owns only 7,000 shares of MCC stock, which were purchased in 2012. He is interested in the Proposed Mergers because he will be appointed a Director of the combined companies, where he will earn at least $200,000 annually.

28.            Defendant Mark Lerdal has been a director of the Board since 2017. For his two years of service as an MCC director, Lerdal has been paid $288,702. He does not own any shares of MCC stock.

29.            Defendant MDLY is a publicly traded asset management firm run by its co-CEOs, Defendants Brook and Seth Taube, and is the parent of several registered investment advisors (collectively, “Medley”). On September 24, 2014, MDLY completed its public offering and listed its shares on the NYSE. MDLY is controlled by Medley Group LLC, an entity wholly-owned by the senior professionals of Medley LLC. Ultimately, MDLY manages over $4.8 billion in assets, including those owned by MCC and SIC.

30.            Defendant SIC is a non-traded BDC. SIC was launched by MDLY in April 2012 as its first public non-traded permanent capital vehicle and is externally managed by SIC Advisors LLC, an affiliate of MDLY. SIC is an affiliate of MCC, as MDLY controls (either directly or indirectly) the investment managers of both SIC and MCC. SIC is named as a party to the Complaint to the extent necessary for the granting of injunctive relief.

31.            Defendant Medley Group LLC (“Medley Group”) is a Delaware limited liability corporation collectively owned by the Taube Brothers, Tonkel, Richard T. Allorto, Jr., John D. Fredericks, Samuel Anderson, and Christopher Taube. Medley Group holds more than 97% of the voting power of MDLY through its ownership of 100% of MDLY’s Class B common stock. Through its control of MDLY, Medley Group ultimately controls Medley LLC, MCC, SIC, MCC Advisors LLC, SIC Advisors LLC, and various other investment advisers and other entities under the MDLY umbrella.

32.            Defendant Medley LLC is a Delaware limited liability corporation. MDLY, which is controlled by Medley Group, is the sole managing member of Medley LLC and owns 100% of its voting units. The Taube Brothers are the Co-Chief Executive Officers of Medley LLC; Tonkel, Allorto and Fredricks serve, respectively, as the President, Chief Financial Officer and General Counsel of Medley LLC. Medley LLC owns and controls the investment advisers affiliated with MDLY, including MCC Advisors and SIC Advisors.

33.            Defendant MCC Advisors is a Delaware limited liability corporation. MCC Advisors is a wholly controlled and majority-owned subsidiary of MDLY. MCC Advisors serves as the investment manager to MCC. The Taube Brothers, Tonkel and Allorto, serve as Managing Partners of MCC Advisors; Brook Taube also serves as MCC’s Senior Portfolio Manager.

34.            MDLY’s most recent Form 10-K, which was filed with the SEC on March 29, 2018, presents the MDLY management structure, including MCC Advisors, as follows:

FACTUAL ALLEGATIONS

35.             Since its IPO on January 19, 2011, MCC has been under the constant stewardship of MCC Advisor, which in turn has been controlled by the Taube Brothers.

36.            Pursuant to the MCC Management Agreement, MCC Advisors controls all relevant aspects of MCC’s investment-based business. MCC pays MCC Advisors fees for its investment advisory and management services, consisting of a base management fee and a two-part incentive fee.

37.            According to the Form 10-K filed by MCC for the year ended September 30, 2018, which was filed December 14, 2018 (“2018 MCC Form 10-K”), MCC has paid $51.3 million to MCC Advisors for the past three fiscal years. Along with the MCC Management Agreement, MCC entered into a separate administration agreement with MCC Advisors (the “MCC Administration Agreement”) – itself worth significant fees to Medley – ensuring that MCC Advisors controls virtually every aspect of MCC’s operations. Both the MCC Management Agreement and MCC Administration Agreement must be approved annually and may be terminated by either party upon 60 days’ written notice without penalty.

38.            In addition to rewarding the Taube Brothers, the Form 10-K filed by MDLY for the year ended December 31, 2017 (the “2017 MDLY Form 10-K”) discloses that a third Taube brother, Christopher, serves as MDLY’s Senior Managing Director, Head of Institutional Fund Raising. Christopher Taube received total compensation valued at $1.2 million in 2017.

39.            The rich compensation paid to MCC Advisors and members of the Taube family has not resulted in strong market returns for MCC stockholders. Between its IPO and the Announcement Date, MCC’s stock Plummeted by approximately 72%, during a period of sustained stock market and sector share price increase. MCC’s cumulative return during that period was -34%, while the return of the S&P 500 Index was +161%. MCC’s performance was equally dismal compared to peers and cannot be blamed on any trouble within the BDC sector. As the following chart shows, the S&P BDC Index has had a positive 57% return since the date of MCC’s IPO:⁴

40.            This poor performance is not surprising, because by every industry measure the fund has been in a steady decline:⁵

41.            The deterioration in MCC’s net investment income (“NII”) and dividend are particularly dramatic. NII, a measure of the income received from investment assets (bonds, stocks, funds, loans and other investments), minus equivalent investment expenses, is a key metric in measuring BDC performance and serves as a proxy for a BDC’s earning power. Since 2014, NII has plunged by 85% (from $1.58 to $0.23 per share), and the dividend has fallen by 65% (from $1.48 to $0.52 per share). Moreover, because dividends have exceeded NII, MCC has operated with an unsustainable shortfall since 2016.

42.            As of the Announcement Date, MCC had the largest discount to NAV (53%) of any BDC, and the lowest annual return (-38.6%). Nothing has improved in the past few months, and as of year-end, MCC has continued to languish at a 55% discount to NAV—the single largest NAV discount among the 46 BDCs covered by Raymond James’ investment banking group in their “BDC Weekly Insight” report (published January 3, 2019) and nearly 3x the BDC average discount of 19%. Industry.

43.            Despite MCC Advisors’ abysmal performance and fact that the MCC Management and Administration Agreements could be terminated without penalty, the MCC Board has routinely extended both agreements for an additional year, most recently on November 29, 2018.

44.           The extensions alone raise questions concerning the independent directors of the MCC Board’s competence and engagement. Since 2011, none of the currently serving independent directors have ever elected to receive MCC stock in lieu of cash compensation, and none of the independent directors have acquired shares in the Company since 2012. This indicates a serious misalignment between the interests of MCC’s independent directors and its stockholders.

45.            The misalignments are also reflected in the independent directors’ pay. For the fiscal year ended September 30, 2017, MCC compensated its independent directors in amounts ranging from $148,000 to $165,000. MCC’s director compensation is unjustified in comparison to BDC peers, many of which pay in the same range – or less – despite having substantially more assets under management and positive returns:

46.            After years of destroying MCC’s share price and market reputation, MDLY began looking for a profitable escape route. In May 2017, certain senior members of MCC Advisors, including the Taube Brothers, Jeff Tonkel, and Christopher Taube (collectively, “Medley Management”), began shopping MDLY and MCC Advisors to potential bidders. Although they retained UBS and Credit Suisse to conduct outreach, the process ultimately failed. No bids progressed beyond the initial indication of interest stage.

47.             In October 2017, MDLY retained the services of Goldman Sachs & Co. LLC (“Goldman”) and Broadhaven Capital Partners (“Broadhaven”) to restart the process and reach out to potential bidders. At MDLY’s direction, Goldman and Broadhaven invited thirty-eight potential strategic partners or buyers to participate in the preliminary round of a two-round sale process.

48.            Although the process had started in May 2017, the MCC Board had no involvement in the process run by Goldman and Broadhaven. A strategic transaction was not an agenda item at MCC Board meetings held in May, August or December 2017, although the Taube Brothers and Tonkel sat on the MCC Board and had to know any strategic transaction would have a substantial impact on MCC stockholders.

49.            Despite the broad outreach by Goldman and Broadhaven, MDLY only received three “viable” first-round, nonbinding indications of interest. Only one bidder (“Party X”) made a second-round proposal. From January 12, 2018 through January 24, 2018, MDLY and Party X engaged in negotiations, which resulted in the exchange of numerous proposals and counter-proposals.

50.           Based upon these negotiations, on January 26, 2018, the MCC Board established the MCC Special Committee, consisting of Ainsberg, Hirtler-Garvey, Mack and Lerdal, with Ainsberg serving as chair, to consider and evaluate the impact on MCC of a sale of MDLY to a third party that would result in the assignment of the MCC Management Agreement.

51.            The MCC Board approved compensation for the MCC Special Committee, with each member to receive a $25,000 retainer upon the committee’s formation and a monthly stipend of $15,000 for the chair and $10,000 per month for all other members.

52.            Although the MCC Special Committee was formed on January 26, 2018, documents produced in the 220 Production indicate that it did not hold any meetings; did not retain any advisors in connection with the transaction proposed by Party X, and did not engage in substantive discussions via email with the Taube Brothers or other members of MDLY Management about a strategic transaction until after June 19, 2018.

53.            According to its February 11, 2019 press release, Origami reached out to MCC several times in the spring of 2018 and sent the Origami IOI on April 4, 2018, but it “received no response.”

54.            The terms of the IOI are not known, because it was not included in the 220 Production, although Section 1(c) of the 220 Stipulation required production of all IOIs sent “between and including May 1, 2017 and August 9, 2018, relating to the Proposed Mergers or any Alternative Transaction.”⁷ This raises the additional concern that MCC or MCC Advisors received other IOIs that were withheld from production.

55.           Section 1(a) of the 220 Stipulation also requires MCC to produce “All Board Materials created, sent or modified between and including May 1, 2017 and August 9, 2018 relating to…any Alternative Transaction.” The 220 Production contains no Board Materials, as defined in the 220 Stipulation, referencing the Origami IOI, although the MCC Special Committee should have considered those proposals and was receiving monthly pay to do so. There are only two possible explanations: either the Taube Brothers, Tonkel and other members of Medley Management breached their fiduciary duties by withholding the Origami IOI from the MCC Special Committee, or the MCC Special Committee breached its fiduciary duty by ignoring it.

56.            Despite the lack of any visible work, the MCC Special Committee was paid at least a total of $280,000 between January and June 2018.

57.            At that time the Taube Brothers were under immense financial pressure, as MCC’s poor performance had drastically reduced MCC Advisors’ and therefore MDLY’s revenues. Each quarter, base management fees paid to MCC Advisors had decreased due to the decline in MCC’s portfolio, falling from $19.5 million to $17.8 million from 2016 to 2017. The incentive fee had precipitously fallen from $8.0 million to $0.9 million in the same period, and MCC Advisors was not on target to receive any incentive fees from MCC in 2018. Faced with a growing deficit and the need to pay a dividend to MCC stockholders, on May 4, 2018, MCC Advisors voluntarily elected to waive $380,000 of the base management fee payable for the quarter ended March 31, 2018.

58.           The Taube Brothers were also under increasing pressure due to the terms of a joint venture agreement entered into on June 3, 2016, between Medley LLC and affiliates of Fortress Credit Advisors, LLC (“Fortress” and “Fortress Agreement”), by which Fortress had provided the majority of funding for Medley Seed’s purchase of MCC common stock. The terms of the Fortress Agreement require Medley LLC to pay to Fortress “an 8% preferred distribution, 15% of the Joint Venture’s profits, and up to 8% of the net advisory revenues from one of Medley LLC’s subsidiaries.” By May 2018, Medley LLC was at risk of default under the Fortress Agreement due to MCC’s weakening state and non-sustainable payment of dividends. The 220 Production suggests that the Fortress Agreement was a deterrent to potential acquirers. (MCC220_9554.)

59.          MDLY apparently recognized that bidders saw little value in MDLY itself, particularly with the Taube Brothers at the helm. On May 15, 2018, Brook Taube emailed two MDLY employees regarding                                                                                                                                                                                                                                 

(MCC220_011525.)

60.            Ultimately, Party X was interested only in an asset purchase – an unappealing structure for MDLY because it would cut off its lucrative management fees. In June 2018, MDLY broke off engagement with Party X and all other potential counterparties because it was unable to find any viable indication of interest “that was worth pursuing.”

61.         The MDLY sales process reflected that the real value existed at MCC and SIC. But, under the current structure, the Taube Brothers could not appropriate the value of those businesses for themselves.

62.            The MDLY Board decided to turn its attention to a more lucrative option than any asset purchase by a third party could be: rolling up SIC and MCC with MDLY. Through this structure, MDLY Management could “triple dip” by (i) cashing out their interests in MDLY at a higher price than any third party would pay, (ii) keeping their fee stream alive in the form of newly negotiated employment agreements, and (iii) receiving disproportionate consideration for their increased equity in any subsequent sale of the Combined Company.

63.           On June 19, 2018, the MCC Board expanded the MCC Special Committee’s mandate to evaluate the Proposed Mergers’ impact to the MCC stockholders. The MCC Special Committee had the authority to, among other things, evaluate the terms and conditions of the Proposed Mergers or any alternative thereto and determine whether the Proposed Mergers and any alternative thereto were “advisable and [fair] to, and in the best interests of [MCC] and its stockholders.”

64.            For multiple reasons, the Special Committee process came nowhere close to cleansing the conflict-plagued process.

65.            First, the Special Committee became involved far too late. During MDLY’s outreach to potential bidders in 2017 and early 2018, the MCC Special Committee did nothing except collect its monthly fee. The MCC Special Committee’s absence early in the process had a critical impact. For example, the confidentiality agreements that MDLY executed with twenty-four potential strategic acquirers during its sales process included standstill provisions preventing the signatories from making bids for MCC, absent MDLY’s consent. Thus, MDLY and its management team effectively blocked a wide range of potential bidders for MCC from making bids without first securing MDLY’s blessing.

66.            Second, once the MCC Special Committee’s mandate expanded, MDLY Management inserted itself in every stage of the deliberations. For example, “at the direction of MDLY,” representatives of Goldman, advisor to the MDLY Board and highly incentivized to monetize MDLY, were present in the July 11, 2018 meeting of the MCC Special Committee. During that meeting, the MCC Special Committee reviewed the Proposed Mergers and the challenges MCC would face as a standalone entity. Documents in the 220 Production indicate that Goldman prepared work product that MDLY Management apparently surreptitiously re-styled as its own (“we are converting the MCC and SIC presentations to your letterhead overnight”) and fed to the MCC Special Committee. (See MCC220_010427-42, MCC220_010449-51; MCC220_10457-59.)

67.           Brook Taube’s emails show that his only concern was closing the deal he wanted, without regard to the deal’s fairness, and that he had no hesitation about bullying the MCC Special Committee, or concern that they could not be bullied. For example, on July 27, 2018, he emailed Goldman, Seth Taube and Tonkel about price terms for MCC:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

                                                                                                                        (MCC220_011827, emphasis added.) On July 31, 2018, Brook Taube emailed Tonkel.                                                                                                                                                                                                                                  (MCC220_011831, emphasis added.)

68.            Third, the MCC Special Committee only retained its financial advisor, Sandler O’Neill & Partners, L.P. (“Sandler O’Neill”) on June 29, 2018, approximately forty days before the Announcement Date. This was far too late for the MCC Special Committee to have played an adequate role in managing the process or evaluating earlier proposals that may not have attracted the Taube Brothers, but may well have offered greater value to MCC.⁸

69.            Fourth, after MDLY suggested a three-way combination, the MCC Special Committee appears to have focused on that transaction exclusively. It did not seriously explore alternatives, including an asset sale to Party X, a combination with an unaffiliated BDC or any number of other options. The MCC Special Committee could have negotiated for a waiver of the NDA provisions prohibiting outreach to MCC that MDLY had required bidders to agree upon during its failed sales processes. The MCC Special Committee could have explored terminating MCC Advisors’ investment management agreement and engaging an unaffiliated fund manager. The MCC Special Committee could have engaged in direct negotiations with Origami and the two parties who submitted IOIs to MDLY on June 22, 2018 (“Party A”) and July 30, 2018 (“Party B”), or, at a minimum, reviewed those IOIs to gain an understanding of MDLY’s value proposition. Had they done so, the MCC Special Committee would have learned that Party A was prepared to offer MDLY a 47% premium and Party B a 39% premium, nothing near the 100% MDLY negotiated for itself in the Proposed Mergers.⁹ Nothing in the 220 Production indicates that the MCC Special Committee considered any of these options.

70.            Fifth, the Proxy indicates that MCC Special Committee and Sandler O’Neill took the forecasts of MDLY provided by MDLY Management (the “MDLY Projections”) at face value, even though they were prepared by a conflicted management team, do not appear to have been prepared in the regular course of business and are manifestly unreasonable.

71.            Though MDLY’s revenue and EBITDA decreased by 17% and 31%, respectively, between 2016 and 2018, the MDLY Projections forecast revenue and EBITDA increasing by 67% and 106%, respectively, over the next three years.¹⁰

72.            The notion that the Taube Brothers and MDLY’s management team could attract hundreds of millions of dollars of additional investments to support a projected increase of management fees to $40 million in four years, is laughable. They were terrible money managers. The data collected by Sandler O’Neill shows MCC – denominated as “Montauk” – at the bottom of its class of 42 BDCs, having both the poorest market cap to NAV ratio (0.53), and poorest total return for the past 3 month (-19.8%) and 1 year periods and (-38.6%).

73.            Nothing in the 220 Production suggests that the MCC Special Committee performed diligence on the MDLY projections. They clearly should have. The Taube Brothers’ emails demonstrate that                                                                                                                                                                                                                                                                                                                                                                              In their effort to persuade Party X that their rosy projections were sound, the Taube Brothers and MDLY Management prepared and emailed a “Management fee Review” to Party X. The presentation states,

(See MCC220_010365-MCC220_10370.)

74.            Based upon MDLY’s SEC filings, it appears that neither opportunity closed, and the Management Fee Review mentions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

75.            Party X appears to have kicked the tires and discounted the projections. The MCC Special Committee and its advisors accepted what the Taube Brothers fed them at face value.

76.            Sixth, the MCC Special Committee spent almost no time considering the impact of chaining MCC stockholders to MDLY Management, although that structure was supposedly a key part of the value proposition. Upon closing of the Proposed Mergers, the Taube Brothers and Tonkel are to receive lucrative contracts providing for $1,960,000 base salary and up to $6,700,000 in bonus compensation, with brother Christopher to receive a $360,000 base salary and up to $1,650,000 bonus compensation. This increased compensation will overwhelm the “synergies” of the Proposed Mergers and contributed to Barclays conclusion that “net synergies” arising from the Proposed Mergers would be negative. The MCC Special Committee apparently did not participate at all in the negotiation of the combined entity’s management or employment contracts. This was and is unacceptable. If the Proposed Mergers proceed, MCC stockholders will receive SIC shares and will effectively pay munificent compensation to the same people who destroyed MCC’s value in the first place.

77.            The MCC Special Committee apparently only reviewed management compensation at the combined entity on August 8, 2018, one day before approving the Proposed Mergers, and had no say on pay. The MCC Special Committee apparently never considered, or cared, that MDLY Managements’ continued employment and entrenchment, given their deplorable track record with MCC, would likely push down the trading price of the combined entity and further deprive MCC stockholders of substantial value.

78.             On August 9, 2018, Sandler O’Neill presented its opinion that the MCC Merger Consideration was fair to MCC stockholders from a financial point of view (the “Fairness Opinion”). The Fairness Opinion focused exclusively on the purported value of the MCC Merger Consideration (the right to receive $0.8050 of SIC stock per share) and said nothing about whether (i) the Proposed Mergers contemplated payment of an unjustified premium to MDLY, (ii) the cash component of the merger consideration earmarked for MDLY holders was fair given MCC holders’ anticipated receipt of SIC stock or (iii) the rich compensation to MDLY management would have a disproportionate impact on the pro forma company. Nor did the Fairness Opinion address whether termination of the various agreements with MDLY or some other option was superior. Sandler O’Neill also failed to evaluate the trading value of SIC common stock or the likely trading value of pro forma company stock.

79.             Although the Fairness Opinion is replete with the negative story of “Montauk”, it never questions the conflicted upside of the Proposed Mergers to “Huntington” aka MDLY, the party responsible for “Montauk’s” disastrous performance. (MCC220_000554-MCC220_000555.)

80.            After receiving the Fairness Opinion, the MCC Special Committee recommended that the MCC Board approve the Proposed Mergers, which it did.

81.            The deal documents, including the Agreement and Plan of Merger between MCC and SIC dated as of August 8, 2018 (“MCC Merger Agreement”), were attached to the Proxy.

82.            Section 7.10 of the MCC Merger Agreement controls whether and when the MCC Board may engage with parties submitting “Competing Proposals” and “Superior Proposals.”

83.            Section 1.1 of the MCC Merger Agreement defines “Competing Proposal” and “Superior Proposal” as:

“Competing Proposal” means any inquiry, proposal or offer made by any Third Party: (a) to purchase or otherwise acquire, directly or indirectly, in one transaction or a series of transactions (including any merger, consolidation, tender offer, exchange offer, stock acquisition, asset acquisition, binding share exchange, business combination, recapitalization, liquidation, dissolution, joint venture or similar transaction), (i) beneficial ownership (as defined under Section 13(d) of the Exchange Act) of twenty percent (20%) or more of any class of equity securities of MCC or SIC, as applicable, or (ii) any one or more assets or businesses of MCC or its Subsidiaries or SIC or its Subsidiaries that constitute twenty percent (20%) or more of the revenues or assets of MCC and its Subsidiaries, taken as a whole, or SIC and its Subsidiaries, taken as a whole, as applicable; or (b) any liquidation of MCC or SIC, in each case other than the Merger and the other transactions to occur at Closing in accordance with this Agreement.

“Superior Proposal” means any bona fide written Competing Proposal made by a Third Party that the MCC Board or the SIC Board, as applicable, determines in good faith, after consultation with its outside financial advisors and legal counsel, and taking into account the terms and conditions of such proposal, the party making such proposal, all financial, legal, regulatory and other aspects of such proposal, as well as the likelihood of consummation of the Competing Proposal relative to the Merger and such other factors as the MCC Board or SIC Board, as applicable, considers to be appropriate, is more favorable to MCC’s stockholders or SIC’s stockholders, as applicable, from a financial point of view than the Merger and the other transactions contemplated by this Agreement (including any revisions to the terms of this Agreement committed to by SIC to MCC in writing in response to such Competing Proposal made to MCC or by MCC to SIC in writing in response to such Competing Proposal made to SIC under the provisions of Section 7.10(f); provided however, for these purposes, to the extent relevant to the Competing Proposal in question, all percentages in subsections (a)(i) and (a)(ii) of the definition of Competing Proposal shall be increased to fifty percent (50%).

84.            Section 7.10(d) provides that the Board may contact the Third Party to “clarify any ambiguous terms” of a Completing Proposal or “engage in negotiations or substantive discussions with, or furnish any information and other access to, any Third Party making such Competing Proposal and its representatives and Affiliates,” but only “if the MCC Board or SIC Board, as applicable, determines in good faith (after consultation with its outside financial advisors and legal counsel) that (A) such Competing Proposal either constitutes a Superior Proposal or could reasonably be expected to lead to a Superior Proposal and (B) failure to consider such Competing Proposal could reasonably be expected to be inconsistent with the fiduciary duties of the directors of MCC or SIC, as applicable, under Applicable Law.” (emphasis added).

85.            Section 7.10(e) of the Merger Agreement provides that the MCC Board may not make an “Adverse Recommendation Change” or enter into any agreement (other than a confidentiality agreement) with a Third Party unless, having determined that a Competing Proposal is a Superior Proposal:

the board of directors effecting the Adverse Recommendation Change determines in good faith (after consultation with its outside financial advisor and legal counsel) that failure to make an Adverse Recommendation Change could reasonably be expected to be inconsistent with the fiduciary duties of the MCC Board.

86.            Section 9.4 of the MCC Merger Agreement provides for a $6 million “Termination Fee,” which MCC must pay if either party terminates the MCC Merger Agreement after the MCC Board effects an “Adverse Recommendation Change,” or if MCC terminates the MCC Merger Agreement to enter into a definitive agreement contemplated by a Superior Proposal.

87.            In an effort to avoid being deemed an unlawful penalty, Section 9.4(d) states that the Termination fee is “liquidated damages, in a reasonable amount that will compensate the other party, in the circumstances in which the Termination Fee is payable, for the efforts and resources expended and opportunities foregone while negotiating this Agreement and in reliance on this Agreement and on the expectation of the consummation of the transactions contemplated hereby, which amount would otherwise be impossible to calculate with precision.”

88.            Section 9.1(c) provides that the Merger Agreement will terminate on March 31, 2019, if the Proposed Merger with SIC has not been consummated by that date.

89.            The Proxy concedes that the No Solicitation and Termination Fee provisions are a “potentially negative” factor:

[T]he fact that the MCC Merger Agreement precludes MCC from actively soliciting competing proposals and MCC may not terminate the MCC Merger Agreement to accept a competing proposal from a third party unless the MCC Board (or the MCC Special Committee) has determined in good faith (after consultation with its outside financial advisor and legal counsel) that the competing proposal constitutes a superior proposal and after providing notice, as applicable, and entering into good faith negotiations with Sierra, in which case MCC would be required to pay the termination fee.

But the Proxy omits any reference to the reality that the MCC Special Committee failed to test the waters and therefore had no basis to conclude that the definitions of “Competing Proposal” and “Superior Proposal” were adequate. In fact, those definitions ruled out obvious alternatives the MCC Special Committee should have known about.

90.            The Proposed Mergers significantly undervalue the Company and will handsomely reward MDLY. The deal implies a transaction price (based on MCC’s pre-announcement stock price) to MCC’s September 30, 2018 NAV multiple of 0.55x. This valuation falls well below the valuation range for externally managed BDCs derived by Broadhaven. Using both precedent transactions and comparable public companies, Broadhaven derived an average valuation range of 0.76x and 0.92x, respectively: 38% – 69% above the MCC valuation implied by the merger consideration.

91.            Further underscoring this valuation discrepancy, using precedent transactions, Sandler O’Neill derived mean and median transaction price/NAV multiples of 0.79x and 0.86x, respectively.

92.            By accepting a below-market valuation of 0.55x for MCC shares, an excessive amount of deal consideration offered by SIC is earmarked for holders of MDLY, the entity controlled by MDLY Management. In addition, MDLY holders will receive approximately 64% of the deal consideration in cash, while MCC holders will receive only SIC stock. If the individuals controlling MDLY were truly aligned with stockholders of MCC, they would have pushed for SIC to pay closer to 0.8x to 1.0x NAV for MCC’s assets while making an offer with a considerable cash component. As currently structured, the proposed transaction leaves MCC stockholders with the prospect of holding only SIC stock, without the certainty of cash consideration that MDLY holders will receive.

93.            By contrast, MDLY holders will receive a 100% premium, despite the fact that no bidders were willing to pay anywhere close to that during a Goldman-run auction process. In fact, the Offers from Party A and Party B made close in time to the Announcement Date implied far lower premiums (47% and 39% respectively).

94.            Relying on multiples derived from precedent transactions, the Proxy indicates that Goldman Sachs valued MDLY at only $1.43 to $2.70 based on MDLY’s EV/LTM EBITDA as of June 30, 2018 – well below the $3.44 cash component of the MDLY Merger Consideration, and even further below the alleged aggregate $6.80 MDLY Merger Consideration.

95.            Between the Announcement Date and the public disclosure of the NexPoint proposal, MCC’s share price fell approximately 4%, while MDLY’s price surged 43%.

96.            FrontFour, one of MCC’s largest non-affiliated stockholders, repeatedly attempted to communicate its concerns privately, beginning with extensive efforts at outreach to Sam Anderson, Senior Managing Director and Head of Capital Markets at Medley. After realizing that Mr. Anderson would not provide any substantive information, FrontFour attempted to engage directly with the MCC Special Committee.

97.            MCC CEO Brook Taube and others in management intervened and prevented FrontFour from having a prompt and direct discussion with the MCC Special Committee by, among other things, refusing to schedule an in-person meeting, delaying for weeks before even scheduling a call, and insisting that management participate despite clear conflicts of interest. When the call finally occurred on November 13, 2018, MCC provided only inadequate, generic responses.

98.            On December 13, 2018, after numerous failed attempts to reach the MCC Board, FrontFour issued an open letter to MCC stockholders, urging them to vote against the Proposed Mergers.

99.            Unsurprisingly, other major stockholders have also signaled their opposition to the Proposed Mergers. On December 19, 2018, another stockholder holding approximately 3% of MCC’s shares, Moab Capital Partners LLC (“Moab”) issued its own open letter, in which it raised similar concerns and noted, among other things, that MDLY and the Taube Brothers had reaped over $100 million in fees from MCC stockholders over the years, while MCC stockholders were left with hundreds of millions of dollars in losses. Moab calculated that while the Proposed Mergers would dilute MCC stockholders by 8%, the Taube Brothers would sell their MDLY shares for an impressive 109% premium to MDLY’s closing price prior to the Announcement Date. Moab recommended terminating the Company’s investment management contracts and pursuing a sale of MCC without MDLY and the Taube Brothers.¹¹

100.          On December 21, 2018, MCC filed the Proxy (which exceeds 1,400 pages including exhibits) and announced that it had scheduled a special meeting of stockholders to approve the Proposed Mergers for February 8, 2019. The Proposed Mergers were originally expected to close in Q1 2019, upon the satisfaction of certain closing conditions.¹²

101.          The first page of the Proxy “sells” the MCC Merger Consideration as a value enhancement, by stating value based upon the NAV of the combined company:

The summary information does not disclose up front that the $5.68 merger consideration is entirely theoretical, as SIC’s future trading price is not knowable.

102.          The Proxy also makes misleading representations that the Proposed Mergers will be “accretive” to MCC stockholders, in “that the total implied value of the MCC Merger Consideration to be received by the unaffiliated MCC Stockholders in the MCC Merger is expected to result in an estimated 18.52% accretion of NII per share of MCC Common Stock for MCC Stockholders assuming flat MDLY earnings and an estimated 29.8% accretion assuming projected MDLY earnings.”

103.          The statement is misleading, as it relies upon MDLY’s unrealistic financial projections, derived from the “Other” revenue central to its July 2018 growth projections for the proposed combined company. To add to the confusion, the MDLY projections containing “Other” revenue are not contained in the Proxy, but in the Barclay’s Presentation, which was separately filed by MDLY on November 7, 2018, where MCC stockholders would be least likely to find them.

104.          The aggressive revenue projections drive a projected increase in NII of the combined company. But the projected growth in NII at SIC would only be possible if it issued shares, and the Barclays presentation incorrectly fails to account for those issuances.

105.          The misleading disclosures in the Proxy continue, including (1) claims that basic, readily obtainable metrics concerning previous IOIs submitted by third parties to MDLY were unquantifiable, (2) the omission of any mention of the obligations MDLY owes to Fortress Credit Advisors (“Fortress”), which created desperation on behalf of MDLY as well as a direct conflict of interest between MDLY and MCC with respect to any separate sale or liquidation of MCC, and (3) the omission of the Origami IOI and any other offers to acquire MCC’s assets.

106.          On December 28, 2018, Plaintiff FFCG served MCC with a sworn demand for books and records (the “Demand”) pursuant to 8 Del. C. § 220. The stated purposes of the demand were to investigate: (i) whether the members of the MCC Board or third parties, including MDLY, breached their fiduciary duties in connection with the Proposed Mergers; (ii) whether any person or entity, including MDLY, aided and abetted any fiduciary’s breach of fiduciary duty in connection with the Proposed Mergers; (iii) whether the members of the MCC Board were independent with respect to the Proposed Merger and any related matters; (iv) the valuation of FrontFour’s shares; (v) whether to solicit stockholders to vote against the Proposed Mergers and/or pursue a sale of MCC separately from MDLY involvement; (vi) whether to otherwise communicate with MCC stockholders in advance of the vote on the Proposed Mergers; (vii) whether to press the MCC Board to terminate any or all of its various management and administration agreements with MCC’s MDLY-related entities, or call a stockholder vote to effect the same; and (viii) whether to pursue a pre-closing injunction or post-closing money damages claim in relation to the Proposed Mergers. On the same day, Plaintiff FFMF served MCC with a sworn demand for books and records for MCC’s stockholder list and related materials (the “Stockholder Demand”).

107.          In view of the February 8, 2019 meeting date, FrontFour pressed MCC for the books and records, but MCC stalled and refused to negotiate production terms. On January 11, 2019, FFCG sued for books and records and moved for expedited proceedings. (Trans. ID 62843920). On January 14, 2019, an FFCG filed an Amended Complaint that added FFMF as a Plaintiff.

108.          On January 16, 2019, the Court granted Plaintiffs’ motion to expedite and scheduled a books and records trial for January 23, 2019.

109.          On January 22, the parties submitted a 220 Stipulation and proposed order governing MCC’s pre-vote production, which eliminated the need for a pre- vote books and records trial. The Court entered the 220 Stipulation on January 24, 2019. (Trans. ID 62893117). Although MCC purportedly completed its rolling production of documents in satisfaction of its obligations under the 220 Stipulation on January 28, 2019, it did not produce any indication of interest submitted by Origami.

110.          During this time period, MCC issued numerous press releases and other investor communications designed to encourage “for” votes.

111.          Although the market price of MCC stock had initially risen 12% after the Announcement Date, reaching a high of $4.03 per share on August 31, 2018, the stock steadily trended downward thereafter. By December 13, 2018, the date FrontFour issued its first public letter, the stock had closed at $3.25 per share. The downward trend continued into January 2019.

112.          On January 17, 2019, MCC filed an investor presentation with the SEC. In it, MCC sought to discredit concerned stockholders by misleadingly blaming the “campaign of activist stockholders for the price drop.” The statement was patently untrue. It not only ignored that the price been tumbling without any help from third parties since 2013, but also that the stock had dropped precipitously on December 4, 2018, after MCC released earnings and announced it had written NAV down from $6.43 to $5.90 a share, or 9%.

113.           On January 26, 2019, ISS, one of the leading proxy advisory firms, issued its initial report on the Proposed Mergers. The ISS report is not readily available to retail investors, who constitute the majority of MCC stockholders, so the Company issued a press release.

114.        The MCC press release announced only that ISS, had recommended a vote “For” the merger. The press release misleadingly omitted that ISS recommended the “For” vote due to the absence of any other alternative. ISS termed the Proposed Mergers “underwhelming”, because:

Shareholders have limited visibility regarding the value they are receiving, given that Sierra shares are not publicly traded. Moreover, the deal appears to disproportionately favor an external manager (Medley) that has demonstrated a poor track records of managing MCC assets… Shareholders could reasonably opt to reject the proposed terms on these bases.

ISS also flagged the process failures:

The board’s decision to forgo an auction process for MCC is a cause for concern, since investors lack market-based evidence that the deal presented in fact represents the best available alternative for MCC shareholders. . . . In addition, the potential acquirers that participated in the MDLY sales process may have had limited ability to engage directly with MCC. For example, the proxy states that Party X indicated it had preference for an asset purchase transaction rather than a merger. Considering that MDLY has no assets, it would be fair to assume that the interest related to MCC or Sierra assets; however, further details of Party X’s interest were not disclosed.”

(emphasis added.).

115.          Between January 18, 2019 and January 28, 2019, MCC produced approximately 900 documents in response to the Demand.

116.          On January 30, 2019, Plaintiffs sent the MCC Board a letter identifying several disclosure flaws that required correction, including that the Proxy (1) incorrectly claimed that basic, readily obtainable metrics concerning previous IOIs submitted by third parties were unquantifiable, (2) failed to provide any explanation of the opaque “Other” revenue central to its July 2018 growth projections for the proposed combined company, and (3) omitted any mention of MDLY’s payment obligations to Fortress.

117.          On the afternoon of February 1, 2019, the Company represented to FrontFour that it intended to supplement its disclosures to MCC investors in some undefined way at an unidentified time the following week.

118.          On February 1, 2019, NexPoint issued a press release disclosing that it had submitted an unsolicited expression of interest to MCC on January 24, 2019. NexPoint also disclosed that it had made a specific proposal to MCC and SIC on January 31, 2019 that contemplated a simplified merger of MCC into SIC while terminating and replacing MDLY as their investment manager.

119.          NexPoint effectively proposes to merge MCC and SIC and then NexPoint would serve as the combined company’s investment manager. The NexPoint proposal would permit SIC to retain the $100 million it would otherwise distribute to MDLY stockholders in the Proposed Mergers. The NexPoint proposal also contemplates the payment of $25 million to the combined company for the benefit of stockholders, to provide a reduced fee structure and lowered costs (that would realize at least $9 million in annual savings), and to purchase at least $50 million of combined company shares over a five quarter period.

120.          At no point prior to NexPoint’s February 1 press release did MCC disclose to its stockholders or to Plaintiffs that NexPoint had expressed any interest in a deal, let alone that it had submitted a serious proposal offering value to MCC stockholders superior to the consideration in the Proposed Mergers. Apparently, the Company had no intention of disclosing this offer to investors and instead hoped that NexPoint would simply go away so that MCC could proceed with the Taube Brothers’ preferred deal (they would lose their roles at MCC under the NexPoint proposal).¹³

121.          Also on February 1, 2019, Glass Lewis, the other leading proxy solicitation firm, recommended that stockholders vote against the Proposed Mergers, writing:

We believe there is ample cause for concern with management’s track record at MCC, raising questions about its ability to meet internal financial projections that appear highly optimistic and to generate substantial returns for shareholders. . . . The MCC Board does not appear to have taken sufficient steps to review potential alternative transactions prior to the proposed merger agreement…. Market valuations and recent transactions in the BDC space suggest there could be interest in acquiring MCC at a significant premium to the current share price.

122.          The NexPoint Proposal offered the MCC Special Committee the opportunity to rectify their prior breaches of fiduciary duty. But they did not do so. Instead, on February 2, 2019, MCC and SIC issued a vague press release characterizing NexPoint’s February 1 description of its transaction proposal as “misleading.” The press release then professed that “[t]he MCC Special Committee and the Sierra Special Committee and the respective Boards of MCC and Sierra, adhering to a rigorous review process - consistent with their fiduciary duties and in consultation with their respective independent legal and financial advisors - will carefully review the letter and respond to NexPoint as appropriate.”

123.          On February 4, 2019, ISS issued a Proxy Alert to advise that, based upon NexPoint’s competing proposal, it was now recommending a vote “Against” the Proposed Mergers. Although MCC had issued a press release on January 26, 2019 to announce the ISS “For” recommendation, it provided no update when, on February 4, 2019, ISS reversed it.

124.          On February 4, 2019, FrontFour filed a letter with the Court requesting an emergency hearing on an application for a temporary restraining order enjoining MCC from proceeding with the scheduled February 8 vote on the Proposed Mergers until MCC’s stockholders had time to absorb the Company’s anticipated supplemental disclosures.

125.          On February 5, 2019, MCC finally issued a Form 8-K with the supplemental disclosures it had promised – just three days before the scheduled vote on the Proposed Mergers was to take place. The supplemental disclosures are inadequate. While they purport to include additional information on previous IOIs received by MDLY, they make no attempt to explain how the IOIs pertain to MCC, leaving MCC stockholders completely in the dark as to their potential value.

126.          The supplemental disclosures also purport to disclose additional detail regarding the “Other” revenue included in the proposed combined company’s projections, but these disclosures simply raise more questions by purporting to show rapid revenue growth from unnamed “New Advisory Clients” in products which, in some cases, do not even exist yet. The supplement disclosures also fail to describe the Origami IOI.

127.          The supplemental disclosures also fail to address the error in the Barclays presentation that understate the dilutive effect of share issuances.

128.          The supplemental disclosures superficially address MDLY’s relationship with Fortress, pointing to disclosures made outside the Proxy, but they fail to provide sufficient detail, leaving MCC stockholders to guess the meaning of “certain redemption rights” Fortress may have over a $50 million MCC joint venture. Given the complexity of the Proposed Mergers and sheer length of the Proxy, investors should not be forced on a scavenger hunt to understand the transaction.

129.          On February 5, 2019, MCC filed a letter with the Court, stating that its supplemental disclosures rendered FrontFour’s request for an emergency hearing and temporary restraining order moot.

130.          On February 5, 2019, MCC, SIC and MDLY announced the postponement of the special meeting from February 8, 2019, to early March 2019. claiming that during the U.S. government shutdown, “key branches of the U.S. Government were unable to process, review and/or approve documentation required to close the mergers.” This statement appears incomplete at best, given the issuance of the Proxy Supplement the same day, vocal stockholder dissatisfaction and the negative view expressed by ISS in changing its recommendation to “Against.”

131.          On February 6, 2019, MCC and SIC issued a joint press release declaring that their respective boards of directors “unanimously and independently determined to decline to pursue” NexPoint’s proposal. The joint press release failed to address the substance of any component of NexPoint’s offer, or how the proposal would specifically affect MCC stockholders. The entire discussion of the merits of NexPoint’s proposal in the joint press release is limited to the following:

NexPoint’s claim that its proposal provides $225 million of incremental value over the Announced Merger Plan is UNSUBSTANTIATED and MISLEADING;

NexPoint’s proposal DEPRIVES shareholders of the expected benefits of becoming an INTERNALLY-MANAGED BDC, which include the opportunity to potentially grow third-party AUM as well as the potential for an improved market valuation as an internally managed BDC;

NexPoint’s proposal presents SIGNIFICANT UNCERTAINTY to shareholders; and

NexPoint and its affiliate Highland Capital have a CONCERNING track record as fiduciaries.

Again, MCC stockholders are left entirely in the dark as to the process followed by MCC’s Board in reviewing the NexPoint offer, as well as the Board’s assessment of the merits of the offer itself.

132.          If the speed of the February 6, 2019 disclosure did not in itself reveal that the Special Committee had not given the proposal more than cursory thought, NexPoint’s February 7, 2019 press release confirmed that fact. NexPoint wrote that neither the Special Committee or that of SIC had “made any attempt to communicate with NexPoint regarding its proposals, save from a single email from counsel . . . acknowledging receipt.”

133.          On February 8, 2019, MCC announced that the special meeting had been rescheduled for March 8, 2019. In the meantime, MCC continues to solicit votes and seek support for the Proposed Mergers, despite the harm it will do to MCC stockholders.

134.          On February 11, 2019, Origami publicly disclosed that it had offered to acquire from MCC 100% of the interests in all of the assets of MCC SBIC for $45 million cash. According to Origami, its proposal “represents 60.0% of Medley SBIC’s regulatory capital (or NAV) at September 30, 2018 and implies a 36.2% premium to the February 8[th] closing share price of Medley Capital Corporation.”

135.          Plaintiffs bring this action pursuant to Rule 23 of the Rules of the Court of Chancery, individually and on behalf of all other owners of MCC common stock (except Defendants and any person, firm, trust, corporation or other entity related to or affiliated with them and their successors in interest) who were injured by Defendants’ wrongful actions, as more fully described herein (the “Class”).

136.          This action is properly maintainable as a class action.

137.          The Class is so numerous that joinder of all members is impracticable. As of December 4, 2018, the Company had approximately 54,474,211 shares of common stock outstanding, which are publicly traded and held by thousands of beneficial owners.

138.          A class action is superior to other available methods for the fair and efficient adjudication of this controversy. The expense and burden of individual litigation make it impracticable for Class members individually to seek redress for the wrongful conduct alleged herein.

139.          There are questions of law and fact common the Class and which predominate over questions affecting any individual class member. The common questions include, inter alia:

(a)           whether the MCC Directors have breached their fiduciary duties to Company stockholders;

(b)           whether the remaining defendants aided and abetted those breaches of fiduciary duty;

(c)           whether the Plaintiffs and the other members of the Class will be harmed by the wrongs complained of herein;

(d)           whether the Defendants should be required to provide supplemental and/or corrective disclosures; and

(e)           whether the Plaintiffs and the Class are entitled to other injunctive or related relief.

140.          Plaintiffs anticipate that there will be no difficulty in the management of this litigation as a class action.

141.          The Defendants have acted on grounds generally applicable to the Class with respect to the matters complained of herein, thereby making appropriate the relief sought herein with respect to the Class as a whole.

142.          Plaintiffs are committed to prosecuting this action and has retained competent counsel experienced in litigation of this nature. Plaintiffs’ claims are typical of the claims of the other members of the Class and Plaintiffs have the same interests as the other members of the Class. Accordingly, Plaintiffs are an adequate representative of the Class and will fairly and adequately protect the interests of the Class.

143.          The prosecution of separate actions by individual members of the Class would create the risk of inconsistent or varying adjudications with respect to individual members of the Class, which would establish incompatible standards of conduct for Defendants, or adjudications with respect to individual members of the Class which would, as a practical matter, be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests.

COUNT I: 

Breach of Fiduciary Duty Against the MCC Directors

144.          Plaintiffs repeat and incorporate by reference each of the allegations set forth above.

145.          At all relevant times, the MCC Directors owed fiduciary duties to Plaintiffs and the Class. The Taube Brothers independently owed fiduciary duties to Plaintiffs and the Class because they are controllers and officers of MCC. Tonkel also owed fiduciary duties to Plaintiffs and the Class because he is an officer of MCC.

146.          The Proposed Mergers are, with respect to at least the Taube Brothers, Tonkel, Hirtler-Garvey and Mack, self-interested transactions because each of them has a material interest in the Proposed Mergers.

147.          The MCC Directors failed to conduct a fair process in connection with the Proposed Mergers. Although the MCC Board formed the MCC Special Committee in January 2018, it did not participate in the failed MDLY process, and it never adequately explored MCC’s strategic alternatives.

148.          The MCC Directors compounded this failure by agreeing to a merger agreement with a no solicitation clause that prevents consideration of key strategic alternatives available to MCC that the MCC Special Committee should have investigated.

149.          The MCC Special Committee failed to negotiate a fair price, and they have agreed to a transaction that will transfer cash to MDLY, to the detriment of MCC.

150.          The Special Committee failed to give adequate consideration to the NexPoint Proposal or negotiate with NexPoint, although NexPoint has proposed a superior proposal.

151.          Plaintiffs and the members of the Class will be irreparably harmed as a direct and proximate result of the aforementioned acts.

152.          Plaintiffs and the members of the Class have no adequate remedy at law.

COUNT II:

Breach of Fiduciary Duty of Disclosure Against the MCC Directors

153.          Plaintiffs repeat and incorporate by reference each of the allegations set forth above.

154.          The Individual Defendants have violated their fiduciary duty of disclosure by failing to provide several categories of material information that the Company’s stockholders need to make an informed decision regarding the Proposed Mergers.

155.          While they purport to include additional information on previous IOIs received by MDLY, they make no attempt to explain how the IOIs pertain to MCC, leaving MCC stockholders completely in the dark as to their potential value.

156.          The supplemental disclosures also purport to disclose additional detail regarding the “Other” revenue included in the proposed combined company’s projections, but these disclosures do not identify or correct the error in the Barclays presentation that fails to account for the dilutive effect of projected share issuances.

157.          Finally, the supplemental disclosures continue to provide misleading information about the impact of the Fortress relationship on the Taube Brothers’ interests.

158.          The information listed above is highly material to the Company’s stockholders. Absent corrective disclosure, the Company’s stockholders will not be able to make an informed decision concerning the Proposed Mergers.

159.          Plaintiffs and the Class will be irreparably harmed as a direct and proximate result of the aforementioned acts.

160.          Plaintiffs and the members of the Class have no adequate remedy at law.

COUNT III: 

Aiding and Abetting Breach of Fiduciary Duty 

Against Defendants by MDLY, SIC, MCC Advisors, Medley Group and 

Medley LLC

161.          Plaintiffs repeat and incorporate by reference each of the allegations set forth above.

162.          The MCC Directors owed to Plaintiff and the members of the Class certain fiduciary duties as fully set out herein.

163.          By committing the acts alleged herein, the MCC Directors breached fiduciary duties they owed to Plaintiffs and the Class.

164.          Defendants MDLY, SIC, MCC Advisors, Medley Group and Medley LLC (collectively, the “Colluding Defendants”) aided and abetted the MCC Directors’ breaches of fiduciary duties, and were active and knowing participants in the MCC Directors’ breaches.

165.           As alleged herein, the Colluding Defendants were well aware that the MCC Directors have not sought to obtain the best available transaction for MCC’s public stockholders. The Colluding Defendants aided and abetted the MCC Directors by, among other things: dominating and controlling the MCC Board; causing the continued extension of the MCC Management Agreement in spite of MCC’s poor performance; failing to timely establish the MCC Special Committee and allow MCC to conduct an independent exploration of strategic alternatives; refusing to consider or pursue indications of interest from potential bidders interested in purchasing MCC’s assets; and facilitating the execution of a preclusive no-shop clause that effectively prevented MCC from exploring other strategic alternatives.

166.          Plaintiffs and the members of the Class will be irreparably harmed as a direct and proximate result of the aforementioned acts.

167.          Plaintiffs and the members of the Class have no adequate remedy at law.

PRAYER FOR RELIEF

WHEREFORE, FrontFour respectfully requests that the Court enter an Order:

ANSWER AND AFFIRMATIVE DEFENSES OF DEFENDANTS
MARK LERDAL, KARIN HIRTLER-GARVEY, JOHN E. MACK
AND ARTHUR S. AINSBERG TO PLAINTIFFS’ AMENDED
VERIFIED COMPLAINT FOR INJUNCTIVE RELIEF

Defendants Mark Lerdal, Karin Hirtler-Garvey, John E. Mack and Arthur S. Ainsberg (collectively, the “Special Committee Defendants”), by and through their undersigned counsel, answer the Amended Verified Complaint for Injunctive Relief (the “Amended Complaint”) filed by Plaintiffs FrontFour Capital Group LLC (“FFCG”) and FrontFour Master Fund, Ltd. (“FFMF,” and together with FFCG, “FrontFour” or “Plaintiffs”) as follows:

GENERAL DENIAL

Except as otherwise expressly admitted herein, the Special Committee Defendants deny each and every allegation contained in the Amended Complaint. The Special Committee Defendants state that the headings, sub-headings, footnotes, and graphic material throughout the Amended Complaint do not constitute well-pleaded allegations of fact and therefore require no response. To the extent that a response is required, those allegations are denied. The Special Committee Defendants expressly reserve their right to amend and/or supplement their answer to the Amended Complaint (the “Answer”) as may be necessary.¹

RESPONSE TO SPECIFIC ALLEGATIONS

NATURE OF THE ACTION

1.              Plaintiffs are stockholders of Medley Capital Corporation (“MCC” or the “Company”) who seek to block a highly conflicted, three-way transaction orchestrated by Brook and Seth Taube (the “Taube Brothers”) to monetize their controlling stake in Medley Management Inc. (“MDLY”), cement their control of the post-transaction entity and secure a future lucrative fee stream.

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 1 concerning Plaintiffs and otherwise deny the allegations in Paragraph 1.

2.              The challenged transaction, which was announced on August 9, 2018 (the “Announcement Date”), would combine MDLY with two other entities the Taube Brothers control, MCC, a publicly-traded business development company (“BDC”), and Sierra Income Corporation (“SIC”), a privately-held BDC:

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 2, except admit that on August 9, 2018, SIC, MCC, and MDLY issued a joint press release (the “August 9, 2018 Press Release”) concerning definitive agreements pursuant to which (i) MCC would, on the terms and subject to the conditions set forth in the Agreement and Plan of Merger, dated as of August 9, 2018, by and between MCC and SIC (the “MCC Merger Agreement”), merge with and into SIC, with SIC continuing as the surviving company in the merger, and (ii) MDLY would, on the terms and subject to the conditions set forth in the Agreement and Plan of Merger, dated as of August 9, 2018, by and between MDLY, SIC, and Sierra Management, Inc., a wholly owned subsidiary of SIC (“Merger Sub”) (the “MDLY Merger Agreement”), merge with and into Merger Sub, with Merger Sub continuing as the surviving company in the merger. The Special Committee Defendants respectfully refer the Court to the August 9, 2018 Press Release, the MCC Merger Agreement, and the MDLY Merger Agreement, which are publicly available, for their complete and accurate contents.

3.              If the transaction proceeds, SIC will first acquire MCC and then MDLY in two separate but cross-conditioned mergers (the “Proposed Mergers”). The transaction will leave SIC as the surviving company, which will then list on the New York Stock Exchange (“NYSE”).

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 3, except admit that they purport to characterize the terms of the MCC Merger Agreement and the MDLY Merger Agreement. The Special Committee Defendants respectfully refer the Court to the MCC Merger Agreement and the MDLY Merger Agreement, which are publicly available, for their complete and accurate contents.

4.              Incredibly, the Proposed Mergers contemplate the payment of $3.44 cash, plus $0.65 in cash dividends and the right to receive 0.3836 shares of SIC stock to holders of MDLY stock. The cash component alone represents an 18% premium to MDLY stockholders; adding the SIC stock component brings the premium to an outlandish 100%.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 4, except admit that they purport to characterize the terms of the MCC Merger Agreement and the MDLY Merger Agreement, and respectfully refer the Court to those documents, which are publicly available, for their complete and accurate contents.

5.              The Proposed Mergers will also reward the Taube Brothers and other members of MDLY management with lucrative employment contracts, despite their miserable track record managing MCC, overseeing MDLY’s two failed sales processes and furnishing projections of MDLY’s revenue growth that are manifestly overstated given its terrible historical performance and dim prospects.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 5.

6.              By contrast, MCC stockholders will only receive the right to 0.8050 shares of SIC stock, which provides no premium when compared to MCC’s net asset value (“NAV”). The definitive Proxy filed with the SEC on December 21, 2018 (the “Proxy”), states that the value to MCC stockholders is $5.68 per share, based on the NAV of the pro forma combined company ($7.06), and a $6.80 per share value to MDLY stockholders. But those values are totally unrealistic. While MDLY’s $3.44 per share cash component is fixed, SIC stock will trade well below NAV. given the Taube Brothers’ disastrous record managing MCC and the probability that SIC stockholders, who have had no opportunity to exit for five years, will dump their stock once SIC becomes publicly traded.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 6, except admit that portions of the allegations in Paragraph 6 purport to characterize the terms of the MCC Merger Agreement and the MDLY Merger Agreement, and the contents of the joint proxy statement of SIC, MCC, and MDLY filed with the Securities and Exchange Commission on December 21, 2018 (the “Joint Proxy”), and respectfully refer the Court to those documents, which are publicly available, for their complete and accurate contents.

7.              In an attempt to convince the MCC stockholders to approve the transaction, the Taube Brothers and their allies continue to claim that (a) by merging with SIC, a much larger fund, MCC will gain access to capital and more favorable borrowing terms, which will in turn lift MCC’s chronically depressed stock price, (b) by merging with MDLY, MCC will benefit from management cost savings and better alignment with investor interests, and (c) MCC will realize the benefit of MDLY’s projected revenues from management of new assets that are projected to be brought into the proposed combined company.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 7, except admit that they purport to characterize the contents of the Joint Proxy and SEC filings in support of the proposed transaction, and respectfully refer the Court to the Joint Proxy and those filings, which are publicly available, for their complete and accurate contents.

8.               But there is at least one vastly better alternative for MCC and its stockholders. In January 2019, NexPoint Advisors, L.P. (“NexPoint”) has proposed an alternative involving the combination of MCC and SIC which would permit SIC to retain the $100 million it would otherwise distribute to MDLY stockholders under the Proposed Mergers. NexPoint also proposed to pay $25 million to the combined company for the benefit of stockholders, to provide a reduced fee structure and lowered costs, which would realize at least $9 million in annual savings, and to purchase at least $50 million of combined company shares over a five quarter period.

ANSWER: The Special Committee Defendants deny the allegations in the first sentence of Paragraph 8. The Special Committee Defendants deny the remaining allegations in Paragraph 8, except admit that they purport to characterize the contents of press releases issued by NexPoint, and respectfully refer the Court to those press releases, which are attached as Exhibits A and D to Plaintiffs’ Motion to Expedite, for their complete and accurate contents.

9.              On February 11, 2019, Origami Capital Partners, LLC (“Origami”) announced that it had issued an open letter to the MCC Board, proposing to buy 100% of the interests of MCC’s wholly owned subsidiary, Medley SBIC, L.P. (“Medley SBIC”) for $45 million cash. According to Origami, this represents 60% of MCC’s NAV as of September 30, 2018 and implies a 36.2% premium to MCC’s February 8, 2019 closing stock price. Origami also disclosed that it had reached out several times to MCC during the spring of 2018 and sent a formal letter on April 4, 2018 (“Origami IOI”) expressing interest in purchasing Medley SBIC, The Origami IOI is not referenced in the Proxy’s background section and was not produced under the stipulation entered into in the action styled FrontFour Capital Group LLC et aL v. Medley Capital Corp,, C.A. No. 2019-0021-KSJM (the “220 Action” and “220 Stipulation”) which governs MCC’s pre-vote production pursuant to 8 Del. C. § 220 (“220 Production”).

ANSWER: The Special Committee Defendants deny the allegations in the first, second, and third sentences of Paragraph 9, except admit that they purport to characterize the contents of a press release issued by Origami. The Special Committee Defendants respectfully refer the Court to Origami’s press release, which is publicly available and incorporated by reference, for its complete and accurate contents. The Special Committee Defendants admit the allegations in the fourth sentence of Paragraph 9, except deny that the April 4, 2018 letter, purportedly from Origami, which was unsigned, was material or otherwise required to be disclosed in the Joint Proxy, and respectfully refer the Court to the referenced letter, and deny knowledge or information sufficient to form a belief as to the truth of the allegations concerning the contents of the document production in the 220 Action.

10.            The emergence of these alternatives after the announcement of the Proposed Mergers reflects the reality that no one attempted to shop MCC or seriously explore its strategic alternatives prior to signing up for the Taube Brothers’ preferred transaction. This failure is particularly galling because MCC’s NAV is far higher than its stock price, making MCC an attractive target.

ANSWER: The Special Committee Defendants deny the allegations in the first sentence of Paragraph 10. The Special Committee Defendants deny the allegations in the second sentence of Paragraph 10, and respectfully refer the Court to MCC’s NAV and stock price, which are matters of public record.

11.            Consistent with the Taube Brothers’ objectives, the Proxy omits key details of two unsuccessful attempts to sell MDLY, suggests that the affiliated companies took adequate steps to protect against conflicts, and implies that MCC had no strategic alternatives. This picture was and remains misleading.

ANSWER: The Special Committee Defendants deny the allegations in the first sentence of Paragraph 11, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents. The Special Committee Defendants deny the allegations in the second sentence of Paragraph 11.

12.            For example, the Proxy heralds the formation by MCC’s Board of Directors (“MCC Board”) of a special committee of MCC’s independent directors (the “MCC Special Committee”) on January 28, 2018. But the MCC Special Committee never met, never retained a financial advisor, and never did anything else of substance (except get paid a monthly retainer) until June 19, 2018, after MDLY’s sale process failed and MDLY conceived of the Proposed Mergers. The Proxy could more accurately state that the MCC Special Committee’s primary purpose was to rubber-stamp the Proposed Mergers.

ANSWER: The Special Committee Defendants deny the allegations in the first sentence of Paragraph 12, except admit that, on January 26, 2018, the MCC Board established the MCC Special Committee comprised of independent directors of MCC. The Special Committee Defendants deny the allegations in the second sentence of Paragraph 12, except admit that the allegations purport to characterize the contents of the Joint Proxy. The Special Committee Defendants respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents. The Special Committee Defendants deny the allegations in the third sentence of Paragraph 12.

13.            Once negotiations regarding a merger began, the MCC Special Committee compounded the problems associated with its late start by irresponsibly agreeing to a no-shop clause that precludes the Company’s most logical alternatives, including the NexPoint proposal.

ANSWER: The Special Committee Defendants deny the allegations of Paragraph 13, and respectfully refer the Court to the MCC Merger Agreement and the MDLY Merger Agreement, which are publicly available, for their complete and accurate contents.

14.            The harm from the preclusive no-shop clause became manifest on February 1, 2019, when NexPoint revealed that it had proposed an alternative transaction to MCC and SIC on January 24, 2019, and made a definitive proposal on January 31, yet it had received no response.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 14, except admit that they purport to characterize the contents of NexPoint’s February 1, 2019 press release, and respectfully refer the Court to the press release, which is attached as Exhibit A to Plaintiffs’ Motion to Expedite, for its complete and accurate contents.

15.            MDLY and SIC quickly responded with a press release, stating the respective company boards would adhere “to a rigorous review process.” But MDLY and SIC immediately cast doubt on the “rigorousness” of this process by accusing NexPoint of being “misleading.”

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations of Paragraph 15. except admit that they purport to characterize the MCC and SIC Joint Press Release, dated February 2, 2019 (the “February 2, 2019 Joint Press Release”), and the Special Committee Defendants respectfully refer the Court to the February 2, 2019 Joint Press Release, which is attached as Exhibit B to Plaintiffs’ Motion to Expedite, for its complete and accurate contents.

16.            On the morning of February 6, 2019. just four days later and without meeting with NexPoint’s representatives, MCC and SIC simultaneously announced the fait accompli: that they would not pursue NexPoint’s proposal because it was “in the best interests” of the companies’ stockholders to decline.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 16, except admit that they purport to characterize the MCC and SIC Joint Press Release, dated February 6, 2019 (the ‘February 6, 2019 Joint Press Release”), and the Special Committee Defendants respectfully refer the Court to the February 6, 2019 Joint Press Release, which is attached as Exhibit C to Plaintiffs’ Motion to Expedite, for its complete and accurate contents.

17.            On February 5, 2019, MCC, SIC and MDLY announced the postponement of their respective special meetings of stockholders to vote on the Proposed Mergers from February 8, 2019, to early March 2019. The special meeting has since been set for March 8, 2019.

ANSWER: The Special Committee Defendants admit the allegations of Paragraph 17.

18.            In this action, Plaintiffs seek injunctive relief blocking the Proposed Mergers and releasing MCC from the no-shop and termination fee provisions of the governing merger agreement, in order to permit the Company to engage with NexPoint, Origami and any other bidder that steps forward.

ANSWER: The allegations in Paragraph 18 contain legal conclusions and/or Plaintiffs’ characterization of the nature of the allegations and purported claims in the Amended Complaint to which no response is required. To the extent that a response is required, the Special Committee Defendants deny that Plaintiffs are entitled to the relief they seek.

THE PARTIES

19.            Plaintiff FFCG is an SEC-registered investment advisor located at 35 Mason Street, Greenwich, Connecticut 06830. FrontFour and its affiliates (including FFMF) are the beneficial owners of 1,674,946 shares of MCC common stock, which constitutes 3.1% of the Company’s outstanding shares.

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 19.

20.            Plaintiff FFMF is an investment fund managed by FFCG. FFMF is the beneficial owner of 1,633,232 shares of MCC common stock, including 1,031 shares held by FFMF in record name.

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 20.

21.            Defendant MCC is a Delaware corporation with its principal place of business at 280 Park Ave, 6th Floor East, New York, NY 10017. MCC is a nondiversified closed-end investment company that seeks to invest in small- and middle-market companies through privately negotiated debt and equity securities transactions. MCC is externally managed by MCC Advisors LLC (“MCC Advisors”), a majority owned subsidiary of Medley LLC, which is controlled by MDLY, which is in turn controlled by Medley Group LLC, pursuant to an investment management agreement executed on January 14, 2014 (the “MCC Management Agreement”). The Taube Brothers are the majority and controlling owners of Medley Group LLC. MCC is named as a Defendant solely for the purpose of securing Plaintiffs’ requested relief.

ANSWER: The Special Committee Defendants admit the allegations in the first two sentences of Paragraph 21. The third and fourth sentences of Paragraph 21 state legal conclusions to which no responses are required. To the extent that responses are required, the Special Committee Defendants admit that the Joint Proxy states that MCC is externally managed by MCC Advisors, a majority owned subsidiary of Medley LLC, pursuant to the MCC Management Agreement, that “certain members of Management...control Medley Group LLC” and that Medley Group LLC is “an entity wholly owned by Management.” The Special Committee Defendants respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents. The fifth sentence of Paragraph 21 contains legal conclusions and allegations concerning Plaintiffs characterization of its action to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations of the fifth sentence of Paragraph 21.

22.            Defendant Brook Taube is the Chief Executive Officer (“CEO”) and Chief Investment Officer (“CIO”) of MCC and the Chairman of the MCC Board. He co-founded MDLY with Seth Taube in 2006. He is conflicted because he serves as Co-CEO of MDLY and as Co-Chairman of the MDLY board of directors (the “MDLY Board”), along with his brother Seth Taube. Brook Taube is also the Managing Partner of MCC Advisors and Senior Portfolio Manager of the private investment funds managed by MDLY since 2007. Brook Taube has served on the board of directors of SIC (the “SIC Board”) since its inception in 2012. He currently serves on the investment committee for SIC Advisors LLC (“SIC Advisors”), the investment adviser to SIC, as well as serves as a Trustee of the Sierra Total Return Fund (“STRF”) and on the investment committee of STRF Advisors LLC, the investment adviser to STRF. Brook Taube is interested in the Proposed Mergers because he controls, with Seth Taube, 14.6% of MCC common stock and 97.7% of the voting interests in MDLY common stock through ownership of MDLY Class B common stock. He will be Chairman and CEO of the combined company and stands to benefit from a lucrative employment package, with a base $600,000 annual salary and $3,200,000 bonus if performance objectives are met.

ANSWER: The Special Committee Defendants admit the allegations in the first two sentences of Paragraph 22. The Special Committee Defendants deny the allegations in the third sentence of Paragraph 22, except admit that Brook Taube is Co-CEO of MDLY and Co-Chairman of the MDLY board of directors. The Special Committee Defendants admit the allegations in the fourth, fifth, and sixth sentences of Paragraph 22. The Special Committee Defendants deny the allegations in the seventh and eighth sentences of Paragraph 22, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents. The Special Committee Defendants further state that Brook Taube’s positions with the referenced entities are a matter of public record.

23.            Defendant Seth Taube has served on the MCC Board since its inception in January 2011. He is conflicted because he serves as co-CEO of MDLY and as co-Chairman of the MDLY Board, along with his brother Brook Taube. Seth Taube has also served as Chairman of the SIC Board and CEO of SIC since its inception in April 2012 and as a Trustee of STRF since January 2016. He is interested because he holds controls, with Brook Taube, 14.6% of MCC common stock and 97.7% of the voting interests in MDLY common stock. He will be Vice Chairman, Senior Executive Vice President and Senior Managing Director of the combined company and stands to benefit from a lucrative employment package, with a base $480,000 annual salary and $1,750,000 bonus if performance objectives are met.

ANSWER: The Special Committee Defendants admit the allegations in the first sentence of Paragraph 23. The Special Committee Defendants deny the allegations in the second sentence of Paragraph 23, except admit that Seth Taube is Co-CEO of MDLY and Co-Chairman of the MDLY board of directors. The Special Committee Defendants deny the remaining allegations in Paragraph 23, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents. The Special Committee Defendants further state that Seth Taube’s positions with the referenced entities are a matter of public record.

24.            Defendant Jeff Tonkel has been a director of MCC 2014. He is conflicted because he is a Director and the President of MDLY and the President of SIC. He is interested in the Proposed Mergers because he holds 15,000 shares of MCC stock and 6% of the units in Medley LLC, which are exchangeable for shares of MDLY Class A stock. He will serve as President of the combined company and also stands to benefit from a lucrative employment package, with a base $480,000 annual salary and $1,750,000 bonus if performance objectives are met.

ANSWER: The Special Committee Defendants admit the allegations in the first sentence of Paragraph 24. The Special Committee Defendants deny the allegations in the second sentence of Paragraph 24, except admit that Jeff Tonkel is a Director of MDLY and President of SIC. The Special Committee Defendants deny the remaining allegations in Paragraph 24, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents. The Special Committee Defendants further state that Jeff Tonkel’s positions with the referenced entities are a matter of public record.

25.            Defendant Arthur S. Ainsberg has been a director of the Board since 2011 and is Chairman of the Nominating and Corporate Governance Committees. For his service as an MCC director, Ainsberg has been paid an aggregate of $1,034,923. He owns only 3,000 shares of MCC stock, which were purchased in 2012.

ANSWER: The Special Committee Defendants admit the allegations in the first and third sentences of Paragraph 25. The Special Committee Defendants deny the allegations in the second sentence of Paragraph 25, except admit that the amount of compensation that Mr. Ainsberg has received for his service as a MCC director is a matter of public record, and respectfully refer the Court to filings made with the SEC.

26.            Defendant Karin Hirtler-Garvey has been a director of the Board since 2011 and is Chairman of the Compensation Committee. For her service as an MCC director, Hirtler-Garvey has been paid an aggregate of $1,158,087. She owns only 3,000 shares of MCC stock, which were purchased shortly after the IPO. She is interested in the Proposed Mergers because she will be appointed a Director of the combined companies, where she will earn at least $200,000 annually.

ANSWER: The Special Committee Defendants admit the allegations in the first and third sentences of Paragraph 26. The Special Committee Defendants deny the allegations in the second sentence of Paragraph 26, except admit that the amount of compensation that Ms. Hirtler-Garvey has received for her service as a MCC director is a matter of public record, and respectfully refer the Court to filings made with the SEC. The Special Committee Defendants deny the allegations in fourth sentence of Paragraph 26, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy for its complete and accurate contents.

27.            John E. Mack has been a director of the Board since 2011 and is Chairman of the Audit Committee. For his service as an MCC director, Mack has been paid an aggregate of $1,258,265. He owns only 7,000 shares of MCC stock, which were purchased in 2012. He is interested in the Proposed Mergers because he will be appointed a Director of the combined companies, where he will earn at least $200,000 annually,

ANSWER: The Special Committee Defendants admit the allegations in the first sentence of Paragraph 27, The Special Committee Defendants deny the allegations in the second sentence of Paragraph 27, except admit that the amount of compensation that Mr. Mack has received for his service as a MCC director is a matter of public record, and respectfully refer the Court to filings made with the SEC. The Special Committee Defendants deny the allegations in the third sentence of Paragraph 27. The Special Committee Defendants deny the allegations in fourth sentence of Paragraph 27, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy for its complete and accurate contents.

28.            Defendants Mark Lerdal has been a director of the Board since 2017. For his two years of service as an MCC director, Lerdal has been paid $288,702. He does not own any shares of MCC stock.

ANSWER: The Special Committee Defendants admit the allegations in the first and third sentences of Paragraph 28. The Special Committee Defendants deny the allegations in the second sentence of Paragraph 25, except admit that the amount of compensation that Mr. Lerdal has received for his service as a MCC director is a matter of public record, and respectfully refer the Court to filings made with the SEC.

29.            Defendant MDLY is a publicly traded asset management firm run by its co-CEOs, Defendants Brook and Seth Taube, and is the parent of several registered investment advisors (collectively, “Medley”). On September 24, 2014, MDLY completed its public offering and listed its shares on the NYSE. MDLY is controlled by Medley Group LLC, an entity wholly-owned by the senior professionals of Medley LLC. Ultimately, MDLY manages over $4.8 billion in assets, including those owned by MCC and SIC.

ANSWER: The Special Committee Defendants deny the allegations in the first sentence of Paragraph 29, except admit that MDLY is a publicly traded asset management firm and Brook and Seth Taube are its co-CEOs. The Special Committee Defendants deny the allegations in the second sentence of Paragraph 29. except admit that MDLY completed its public offering of shares on September 29, 2014. The third sentence of Paragraph 29 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants admit that the Joint Proxy states that MDLY is “a publicly traded asset management firm, which is controlled by Medley Group LLC. an entity wholly owned by Management,” and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents. The Special Committee Defendants otherwise admit the allegations in Paragraph 29.

30.            Defendant SIC is a non-traded BDC. SIC was launched by MDLY in April 2012 as its first public non-traded permanent capital vehicle and is externally managed by SIC Advisors LLC, an affiliate of MDLY. SIC is an affiliate of MCC, as MDLY controls (either directly or indirectly) the investment managers of both SIC and MCC. SIC is named as a party to the Complaint to the extent necessary for the granting of injunctive relief.

ANSWER: The Special Committee Defendants admit the allegations in the first two sentences of Paragraph 30. The third sentence of Paragraph 30 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants admit that the Joint Proxy states that: (i) “SIC Advisors is a majority owned subsidiary of Medley LLC, which is controlled by Medley Management Inc.”; and (ii) “MCC Advisors is a majority owned subsidiary of Medley LLC, which is controlled by Medley Management Inc.,” and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents. The fourth sentence of Paragraph 30 contains legal conclusions and allegations concerning Plaintiffs’ characterization of its action to which no response is required. To the extent a response is required, the Special Committee Defendants deny the allegations in the fourth sentence of Paragraph 30.

31.            Defendant Medley Group LLC (“Medley Group”) is a Delaware limited liability corporation collectively owned by the Taube Brothers, Tonkel, Richard T. Allorto, Jr., John D. Fredericks, Samuel Anderson, and Christopher Taube. Medley Group holds more than 97% of the voting power of MDLY through its ownership of 100% of MDLY’s Class B common stock. Through its control of MDLY, Medley Group ultimately controls Medley LLC, MCC, SIC, MCC Advisors LLC, SIC Advisors LLC, and various other investment advisers and other entities under the MDLY umbrella.

ANSWER: Paragraph 31 states legal conclusions to which no response is required. To the extent that a response is required, the Special Committee Defendants admit that the Joint Proxy states that Medley Group LLC is “an entity wholly owned by Management that “holds all 100 issued and outstanding shares of MDLY Class B Common Stock.” and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents. The Special Committee Defendants otherwise deny the allegations in Paragraph 31.

32.            Defendant Medley LLC is a Delaware limited liability corporation. MDLY, which is controlled by Medley Group, is the sole managing member of Medley LLC and owns 100% of its voting units. The Taube Brothers are the CoChief Executive Officers of Medley LLC; Tonkel, Allorto and Fredricks serve, respectively, as the President, Chief Financial Officer and General Counsel of Medley LLC. Medley LLC owns and controls the investment advisers affiliated with MDLY, including MCC Advisors and SIC Advisors.

ANSWER: The Special Committee Defendants admit the allegations in the first and third sentences of Paragraph 32. The second and fourth sentences of Paragraph 32 state legal conclusions to which no response is required. To the extent that a response is required, the Special Committee Defendants admit that the Joint Proxy states that MDLY is “a publicly traded asset management firm, which is controlled by Medley Group LLC, an entity wholly owned by Management,” and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents. The Special Committee Defendants otherwise deny the allegations in Paragraph 32.

33.            Defendant MCC Advisors is a Delaware limited liability corporation. MCC Advisors is a wholly controlled and majority-owned subsidiary of MDLY. MCC Advisors serves as the investment manager to MCC. The Taube Brothers, Tonkel and Allorto, serve as Managing Partners of MCC Advisors; Brook Taube also serves as MCC’s Senior Portfolio Manager.

ANSWER: The Special Committee Defendants admit tire allegations of the first, third, and fourth sentences of Paragraph 33. The second sentence of Paragraph 33 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants admit that the Joint Proxy states that “MCC is externally managed and advised by its investment adviser, MCC Advisors, pursuant to the MCC Investment Management Agreement” and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

34.            MDLY’s most recent Form 10-K, which was filed with the SEC on March 29, 2018, presents the MDLY management structure, including MCC Advisors, as follows:

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations of Paragraph 34, except admit that they purport to characterize the contents of MDLY’s Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2018, and respectfully refer the Court to MDLY’s Form 10- K. which is publicly available, for its complete and accurate contents.

FACTUAL ALLEGATIONS

35.            Since its IPO on January 19, 2011, MCC has been under the constant stewardship of MCC Advisors, which in turn has been controlled by the Taube Brothers.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 35, except admit that the MCC Management Agreement with MCC Advisors was first executed on January 11, 2011 and the allegations otherwise purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

36.            Pursuant to the MCC Management Agreement, MCC Advisors controls all relevant aspects of MCC’s investment-based business. MCC pays MCC Advisors fees for its investment advisory and management services, consisting of a base management fee and a two-part incentive fee.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 36, except admit that they purport to characterize the MCC Management Agreement and the MCC Administration Agreement, and respectfully refer the Court to those documents, which are publicly available, for their complete and accurate contents.

37.            According to the Form 10-K filed by MCC for the year ended September 30, 2018, which was filed December 14, 2018 (“2018 MCC Form 10- K”), MCC has paid $51.3 million to MCC Advisors for the past three fiscal years. Along with the MCC Management Agreement, MCC entered into a separate administration agreement with MCC Advisors (the “MCC Administration Agreement”) – itself worth significant fees to Medley - ensuring that MCC Advisors controls virtually every aspect of MCC’s operations. Both the MCC Management Agreement and MCC Administration Agreement must be approved annually and may be terminated by either party upon 60 days’ written notice without penalty.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 37, except admit that they purport to characterize the 2018 MCC Form 10-K, the MCC Management Agreement, and the MCC Administration Agreement, and respectfully refer the Court to those documents, which are publicly available, for their complete and accurate contents.

38.            In addition to rewarding the Taube Brothers, the Form 10-K filed by MDLY for the year ended December 31, 2017 (the “2017 MDLY Form 10-K”) discloses that a third Taube brother, Christopher, serves as MDLY’s Senior Managing Director, Head of Institutional Fund Raising. Christopher Taube received total compensation valued at $1.2 million in 2017.

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 38. except admit that they purport to characterize the 2017 MDLY Form 10-K and respectfully refer the Court the 2017 MDLY Form 10-K, which is publicly available, for its complete and accurate contents.

39.            The rich compensation paid to MCC Advisors and members of the Taube family has not resulted in strong market returns for MCC stockholders. Between its IPO and the Announcement Date, MCC’s stock plummeted by approximately 72%, during a period of sustained stock market and sector share price increases. MCC’s cumulative return during that period was -34%, while the return of the S&P 500 Index was +161%. MCC’s performance was equally dismal compared to peers and cannot be blamed on any trouble within the BDC sector. As the following chart shows, the S&P BDC Index has had a positive 57% return since the date of MCC’s IPO:

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 39, except admit that MCC’s historical stock price, and price movements, including its stock price and/or stock price movements between its IPO and the Announcement Date, are matters of public record.

40.            This poor performance is not surprising, because by every industry measure the fund has been in a steady decline:

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 40, except admit that MCC’s historical stock price, price movements, and financial data, are matters of public record.

41.            The deterioration in MCC’s net investment income (“NII”) and dividend are particularly dramatic. NII, a measure of the income received from investment assets (bonds, stocks, funds, loans and other investments), minus equivalent investment expenses, is a key metric in measuring BDC performance and serves as a proxy for a BDC’s earning power. Since 2014, NII has plunged by 85% (from $1.58 to $0.23 per share), and the dividend has fallen by 65% (from $1.48 to $0.52 per share). Moreover, because dividends have exceeded NII, MCC has operated with an unsustainable shortfall since 2016.

ANSWER: The Special Committee Defendants deny the allegations in the first sentence of Paragraph 41. The Special Committee Defendants deny the remaining allegations in Paragraph 41, except admit that MCC’s historical stock price, NII, and dividends are matters of public record.

42.            As of the Announcement Date, MCC had the largest discount to NAV (53%) of any BDC, and the lowest annual return (-38.6%). Nothing has improved in the past few months, and as of year-end, MCC has continued to languish at a 55% discount to NAV—the single largest NAV discount among the 46 BDCs covered by Raymond James’ investment banking group in their “BDC Weekly Insight’” report (published January 3. 2019) and nearly 3x the BDC average discount of 19%. Industry.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 42, except admit that MCC’s historical stock price and NAV are matters of public record.

43.            Despite MCC Advisors’ abysmal performance and fact that the MCC Management and Administration Agreements could be terminated without penalty, the MCC Board has routinely extended both agreements for an additional year, most recently on November 29, 2018.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 43, except admit that on November 29, 2018, the MCC Board approved the renewal of each of the MCC Management Agreement and the MCC Administration Agreement for one-year terms.

44.            The extensions alone raise questions concerning the independent directors of the MCC Board’s competence and engagement. Since 2011, none of the currently serving independent directors have ever elected to receive MCC stock in lieu of cash compensation, and none of the independent directors have acquired shares in the Company since 2012. This indicates a serious misalignment between the interests of MCC’s independent directors and its stockholders.

ANSWER: The Special Committee Defendants deny the allegations in the first sentence of Paragraph 44. The Special Committee Defendants deny the remaining allegations in Paragraph 44, except admit that none of the independent directors has elected to receive MCC stock in lieu of cash and none has acquired shares in MCC since 2012.

45.            The misalignments are also reflected in the independent directors’ pay. For the fiscal year ended September 30, 2017, MCC compensated its independent directors in amounts ranging from $148,000 to $165,000, MCC’s director compensation is unjustified in comparison to BDC peers, many of which pay in the same range - or less - despite having substantially more assets under management and positive returns:

ANSWER: The Special Committee Defendants deny the allegations in the first sentence of Paragraph 45. The Special Committee Defendants deny the remaining allegations in Paragraph 45, except admit that they purport to characterize data contained in SEC filings, and Defendants respectfully refer the Court to those documents, which are incorporated by reference to the Amended Complaint, for their complete and accurate contents.

46.            After years of destroying MCC’s share price and market reputation, MDLY began looking for a profitable escape route. In May 2017, certain senior members of MCC Advisors, including the Taube Brothers, Jeff Tonkel, and Christopher Taube (collectively, “Medley Management”), began shopping MDLY and MCC Advisors to potential bidders. Although they retained UBS and Credit Suisse to conduct outreach, the process ultimately failed. No bids progressed beyond the initial indication of interest stage.

ANSWER: The Special Committee Defendants deny that MDLY destroyed MCC’s share price and market reputation, and otherwise deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 46, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

47.            In October 2017, MDLY retained the services of Goldman Sachs & Co. LLC (“Goldman”) and Broadhaven Capital Partners (“Broadhaven”) to restart the process and reach out to potential bidders. At MDLY’s direction, Goldman and Broadhaven invited thirty-eight potential strategic partners or buyers to participate in the preliminary round of a two-round sale process.

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 47, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

48.            Although the process had started in May 2017, the MCC Board had no involvement in the process run by Goldman and Broadhaven. A strategic transaction was not an agenda item at MCC Board meetings held in May, August or December 2017, although the Taube Brothers and Tonkel sat on the MCC Board and had to know any strategic transaction would have a substantial impact on MCC stockholders.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 48, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

49.            Despite the broad outreach by Goldman and Broadhaven, MDLY only received three “viable” first-round, nonbinding indications of interest. Only one bidder (“Party X”) made a second-round proposal. From January 12, 2018 through January 24, 2018, MDLY and Party X engaged in negotiations, which resulted in the exchange of numerous proposals and counter-proposals.

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 49, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

50.            Based upon these negotiations, on January 26, 2018, the MCC Board established the MCC Special Committee, consisting of Ainsberg, Hirtler-Garvey, Mack and Lerdal, with Ainsberg serving as chair, to consider and evaluate the impact on MCC of a sale of MDLY to a third party that would result in the assignment of the MCC Management Agreement.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 50, except admit that the MCC Board established the MCC Special Committee, which consists of Mr. Ainsberg (who serves as chair), Ms. Hirtler- Garvey, Mr. Mack and Mr. Lerdal, on January 26, 2018 and that the remaining allegations purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

51.            The MCC Board approved compensation for the MCC Special Committee, with each member to receive a $25,000 retainer upon the committee’s formation and a monthly stipend of $15,000 for the chair and $10,000 per month for all other members.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 51, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

52.            Although the MCC Special Committee was formed on January 26, 2018, documents produced in the 220 Production indicate that it did not hold any meetings; did not retain any advisors in connection with the transaction proposed by Party X. and did not engage in substantive discussions via email with the Taube Brothers or other members of MDLY Management about a strategic transaction until after June 19, 2018.

ANSWER: The Special Committee Defendants deny the allegations of Paragraph 52, except admit that the MCC Special Committee was formed on January 26, 2018, and otherwise deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 52 concerning the contents of the 220 Production.

53.            According to its February 11, 2019 press release. Origami reached out to MCC several times in the spring of 2018 and sent the Origami IOI on April 4, 2018, but it “received no response.”

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 53, except admit that they purport to characterize the contents of Origami’s February 11, 2019 press release, and respectfully refer the Court to the press release, which is publicly available, for its complete and accurate contents.

54.            The terms of the IOI are not known, because it was not included in the 220 Production, although Section 1(c) of the 220 Stipulation required production of all IOIs sent “between and including May 1, 2017 and August 9, 2018, relating to the Proposed Mergers or any Alternative Transaction.” This raises the additional concern that MCC or MCC Advisors received other IOIs that were withheld from production.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 54, except deny knowledge or information sufficient to form a belief as to the truth of the allegations concerning the 220 Production and the 220 Stipulation.

55.            Section 1(a) of the 220 Stipulation also requires MCC to produce “All Board Materials created, sent or modified between and including May 1, 2017 and August 9, 2018 relating to . . . any Alternative Transaction.” The 220 Production contains no Board Materials, as defined in the 220 Stipulation, referencing the Origami IOI, although the MCC Special Committee should have considered those proposals and was receiving monthly pay to do so. There are only two possible explanations: either the Taube Brothers, Tonkel and other members of Medley Management breached their fiduciary duties by withholding the Origami IOI from the MCC Special Committee, or the MCC Special Committee breached its fiduciary duty by ignoring it.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 55, except deny knowledge or information sufficient to form a belief as to the truth of the allegations concerning the 220 Production and the 220 Stipulation.

56.            Despite the lack of any visible work, the MCC Special Committee was paid at least a total of $280,000 between January and June 2018.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 56, except admit that they purport to characterize the compensation of the MCC Special Committee as set forth in the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

57.            At that time the Taube Brothers were under immense financial pressure, as MCC’s poor performance had drastically reduced MCC Advisors’ and therefore MDLY’s revenues. Each quarter, base management fees paid to MCC Advisors had decreased due to the decline in MCC’s portfolio, falling from $19.5 million to $17.8 million from 2016 to 2017. The incentive fee had precipitously fallen from $8.0 million to $0.9 million in the same period, and MCC Advisors was not on target to receive any incentive fees from MCC in 2018. Faced with a growing deficit and the need to pay a dividend to MCC stockholders, on May 4, 2018, MCC Advisors voluntarily elected to waive $380,000 of the base management fee payable for the quarter ended March 31, 2018.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 57, except admit that they purport to characterize data and other contents set forth in the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents, and deny knowledge or information sufficient to form a belief as to the truth of the allegations concerning the Taube Brothers.

58.            The Taube Brothers were also under increasing pressure due to the terms of a joint venture agreement entered into on June 3, 2016, between Medley LLC and affiliates of Fortress Credit Advisors, LLC (“Fortress” and “Fortress Agreement”), by which Fortress had provided the majority of funding for Medley Seed’s purchase of MCC common stock. The terms of the Fortress Agreement require Medley LLC to pay to Fortress “an 8% preferred distribution, 15% of the Joint Venture’s profits, and up to 8% of the net advisory revenues from one of Medley LLC’s subsidiaries.” By May 2018, Medley LLC was at risk of default under the Fortress Agreement due to MCC’s weakening state and non-sustainable payment of dividends. The 220 Production suggests that the Fortress Agreement was a deterrent to potential acquirers. (MCC220_9554.)

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 58, except admit that they purport to characterize the contents of the Joint Proxy and respectfully refer the Court to the Joint Proxy, which is publicly available. The Special Committee Defendants further refer the Court to the Schedule 14A filed with the SEC by MCC on February 5, 2019, which contains additional disclosures concerning Fortress,

59.            MDLY apparently recognized that bidders saw little value in MDLY itself, particularly with the Taube Brothers at the helm. On May 15, 2018, Brook Taube emailed two MDLY employees regarding                                                                                                                                                                                                                                 

(MCC220_011525.)

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 59, except respectfully refer the Court to the referenced document for its complete and accurate contents.

60.            Ultimately, Party X was interested only in an asset purchase - an unappealing structure for MDLY because it would cut off its lucrative management fees. In June 2018, MDLY broke off engagement with Party X and all other potential counterparties because it was unable to find any viable indication of interest “that was worth pursuing.”

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 60, except respectfully refer the Court to the referenced document for its complete and accurate contents.

61.            The MDLY sales process reflected that the real value existed at MCC and SIC. But, under the current structure, the Taube Brothers could not appropriate the value of those businesses for themselves.

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 61.

62.            The MDLY Board decided to turn its attention to a more lucrative option than any asset purchase by a third party could be: rolling up SIC and MCC with MDLY. Through this structure, MDLY Management could “triple dip” by (i) cashing out their interests in MDLY at a higher price than any third party would pay, (ii) keeping their fee stream alive in the form of newly negotiated employment agreements, and (iii) receiving disproportionate consideration for their increased equity in any subsequent sale of the Combined Company.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 62, except deny knowledge or information sufficient to form a belief as to the truth of the allegations concerning the MDLY Board’s decisions or actions.

63.            On June 19, 2018, the MCC Board expanded the MCC Special Committee’s mandate to evaluate the Proposed Mergers’ impact to the MCC stockholders. The MCC Special Committee had the authority to, among other things, evaluate the terms and conditions of the Proposed Mergers or any alternative thereto and determine whether the Proposed Mergers and any alternative thereto were “advisable and [fair] to, and in the best interests of [MCC] and its stockholders.”

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 63, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

64.            For multiple reasons, the Special Committee process came nowhere close to cleansing the conflict-plagued process.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 64.

65.            First, the Special Committee became involved far too late. During MDLY’s outreach to potential bidders in 2017 and early 2018, the MCC Special Committee did nothing except collect its monthly fee. The MCC Special Committee’s absence early in the process had a critical impact. For example, the confidentiality agreements that MDLY executed with twenty-four potential strategic acquirers during its sales process included standstill provisions preventing the signatories from making bids for MCC, absent MDLY’s consent. Thus, MDLY and its management team effectively blocked a wide range of potential bidders for MCC from making bids without first securing MDLY’s blessing.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 65.

65.            Second, once the MCC Special Committee’s mandate expanded, MDLY Management inserted itself in every stage of the deliberations. For example, “at the direction of MDLY,” representatives of Goldman, advisor to the MDLY Board and highly incentivized to monetize MDLY, were present in the July 1L 2018 meeting of the MCC Special Committee. During that meeting, the MCC Special Committee reviewed the Proposed Mergers and the challenges MCC would face as a standalone entity. Documents in the 220 Production indicate that Goldman prepared work product that MDLY Management apparently surreptitiously re-styled as its own (“we are converting the MCC and SIC presentations to your letterhead overnight”) and fed to the MCC Special Committee. (See MCC220_010427-42, MCC220_010449-51; MCC220_10457-59.)

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 66, except respectfully refer the Court to the referenced documents for their complete and accurate contents and deny knowledge or information sufficient to form a belief as to the truth of the allegations concerning the contents of the 220 Production.

67.            Brook Taube’s emails show that his only concern was closing the deal he wanted, without regard to the deals’s fairness, and that he had no hesitation about bullying the MCC Special Committee, or concern that they could not be bullied. For example, on July 27, 2018, he emailed Goldman, Seth Taube and Tonkel about price terms for MCC:                                                                                                                                                                                                                                               

                                                                                                                                                                                                                                                                                                                 (MCC220_011827, emphasis added.) On July 31, 2018, Brook Taube emailed Tonkel,                                                                                                                                                                                                                                 (MCC220_011831, emphasis added.)

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 67, except deny knowledge or information sufficient to form a belief as to the truth of the allegations concerning the contents of Brook Taube’s emails, and respectfully refer the Court to the referenced documents for their complete and accurate contents.

68.            Third, the MCC Special Committee only retained its financial advisor, Sandler O’Neill & Partners, L.P. (“Sandler O’Neill”) on June 29, 2018, approximately forty days before the Announcement Date. This was far too late for the MCC Special Committee to have played an adequate role in managing the process or evaluating earlier proposals that may not have attracted the Taube Brothers, but may well have offered greater value to MCC.

ANSWER: The Special Committee Defendants deny the allegations hi the first sentence of Paragraph 68, except admit that the MCC Special Committee entered into an engagement letter with Sandler O’Neill on June 29, 2018. The Special Committee Defendants deny the allegations in the second sentence of Paragraph 68.

69.            Fourth, after MDLY suggested a three-way combination, the MCC Special Committee appears to have focused on that transaction exclusively. It did not seriously explore alternatives, including an asset sale to Party X, a combination with an unaffiliated BDC or any number of other options. The MCC Special Committee could have negotiated for a waiver of the NDA provisions prohibiting outreach to MCC that MDLY had required bidders to agree upon during its failed sales processes. The MCC Special Committee could have explored terminating MCC Advisors’ investment management agreement and engaging an unaffiliated fund manager. The MCC Special Committee could have engaged in direct negotiations with Origami and the two parties who submitted IOIs to MDLY on June 22, 2018 (“Party A”) and July 30, 2018 (“Party B”), or, at a minimum, reviewed those IOIs to gain an understanding of MDLY’s value proposition. Had they done so, the MCC Special Committee would have learned that Party A was prepared to offer MDLY a 47% premium and Party B a 39% premium, nothing near die 100% MDLY negotiated for itself in the Proposed Mergers. Nothing in the 220 Production indicates that the MCC Special Committee considered any of diese options.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 69, except deny knowledge or information sufficient to form a belief as to the truth of the allegations concerning the contents of the 220 Production.

70.            Fifth, the Proxy indicates that MCC Special Committee and Sandler O’Neill took the forecasts of MDLY provided by MDLY Management (the “MDLY Projections”) at face value, even though they were prepared by a conflicted management team, do not appear to have been prepared in the regular course of business and are manifestly unreasonable.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 70, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

71.            Though MDLY’s revenue and EBITDA decreased by 17% and 31%, respectively, between 2016 and 2018, the MDLY Projections forecast revenue and EBITDA increasing by 67% and 106%, respectively, over the next three years.

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 71, except admit that they purport to characterize the contents of Schedule 13E-3 filed by MDLY, dated November 7, 2018, and the Barclays’ Presentation, dated August 9, 2018. The Special Committee Defendants respectfully refer the Court to Schedule 13E-3, which is publicly available, and the Barclays’ Presentation, which is incorporated by reference, for their complete and accurate contents.

72.            The notion that the Taube Brothers and MDLY’s management team could attract hundreds of millions of dollars of additional investments to support a projected increase of management fees to $40 million in four years, is laughable. They were terrible money managers. The data collected by Sandler O’Neill shows MCC - denominated as “Montauk” - at the bottom of its class of 42 BDCs, having both the poorest market cap to NAV ratio (0.53), and poorest total return for the past 3 month (-19.8%) and 1 year periods and (-38.6%).

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 72, except respectfully refer the Court to the referenced documents for their complete and accurate contents.

73.            Nothing in the 220 Production suggests that the MCC Special Committee performed diligence on the MDLY projections. They clearly should have. The Taube Brothers’ emails demonstrate that                                                                                                                                                                                                                                                                              

                                                                                                                                                                                                   In their effort to persuade Party X that their rosy projections were sound, the Taube Brothers and MDLY Management prepared and emailed a “Management Fee Review” to Party X. The presentation states,

(See MCC220_010365-MCC220_10370.)

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 73, except deny knowledge or information sufficient to form a belief as to the truth of the allegations concerning the Taube Brothers’ emails and the contents of the 220 Production, and respectfully refer the Court to the referenced documents for their complete and accurate contents.

74.            Based upon MDLY’s SEC filings, it appears that neither opportunity closed, and the Management Fee Review mentions                                                                                                                                                                                                                                  

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 74, except admit that they purport to characterize MDLY’s SEC filings and other documents. The Special Committee Defendants respectfully refer the Court to the referenced filings and other documents for their complete and accurate contents.

75.            Party X appears to have kicked the tires and discounted the projections. The MCC Special Committee and its advisors accepted what the Taube Brothers fed them at face value.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 75, except deny knowledge or information sufficient to form a belief as to the truth of the allegations concerning Party X’s actions.

76.            Sixth, the MCC Special Committee spent almost no time considering the impact of chaining MCC stockholders to MDLY Management, although that structure was supposedly a key part of the value proposition. Upon closing of the Proposed Mergers, the Taube Brothers and Tonkel are to receive lucrative contracts providing for $1,960,000 base salary and up to $6,700,000 in bonus compensation, with brother Christopher to receive a $360,000 base salary and up to $1,650,000 bonus compensation. This increased compensation will overwhelm the “synergies” of the Proposed Mergers and contributed to Barclays conclusion that “net synergies” arising from the Proposed Mergers would be negative. The MCC Special Committee apparently did not participate at all in the negotiation of the combined entity’s management or employment contracts. This was and is unacceptable. If the Proposed Mergers proceed, MCC stockholders will receive SIC shares and will effectively pay munificent compensation to the same people who destroyed MCC’s value in the first place.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 76, except admit that portions of the allegations purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

77.            The MCC Special Committee apparently only reviewed management compensation at the combined entity on August 8, 2018, one day before approving the Proposed Mergers, and had no say on pay. The MCC Special Committee apparently never considered, or cared, that MDLY Managements’ continued employment and entrenchment, given their deplorable track record with MCC, would likely push down the trading price of the combined entity and further deprive MCC stockholders of substantial value.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 77.

78.            On August 9, 2018, Sandler O’Neill presented its opinion that the MCC Merger Consideration was fair to MCC stockholders from a financial point of view (the ‘Fairness Opinion”). The Fairness Opinion focused exclusively on the purported value of the MCC Merger Consideration (the right to receive $0.8050 of SIC stock per share) and said nothing about whether (i) the Proposed Mergers contemplated payment of an unjustified premium to MDLY, (ii) the cash component of the merger consideration earmarked for MDLY holders was fair given MCC holders’ anticipated receipt of SIC stock or (iii) the rich compensation to MDLY management would have a disproportionate impact on the pro forma company. Nor did the Fairness Opinion address whether termination of the various agreements with MDLY or some other option was superior. Sandler O’Neill also failed to evaluate the trading value of SIC common stock or the likely trading value of pro forma company stock.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 78, except admit that they purport to characterize the contents of Sandler O’Neill’s Fairness Opinion, and respectfully refer the Court to the Fairness Opinion, which is publicly available and set forth in the Joint Proxy, for its complete and accurate contents.

79.            Although the Fairness Opinion is replete with the negative story of “Montauk”, it never questions the conflicted upside of the Proposed Mergers to “Huntington” aka MDLY, the party responsible for “Montauk’s” disastrous performance. (MCC220_000554-MCC220_000555.)

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 79, except admit that they purport to characterize the Fairness Opinion and other documents. The Special Committee Defendants respectfully refer the Court to those documents for their complete and accurate contents.

80.            After receiving the Fairness Opinion, the MCC Special Committee recommended that the MCC Board approve the Proposed Mergers, which it did.

ANSWER: The Special Committee Defendants admit that the MCC Special Committee received the Fairness Opinion prior to the time that the MCC Special Committee recommended to the MCC Board that the Board approve the Proposed Mergers.

81.            The deal documents, including the Agreement and Plan of Merger between MCC and SIC dated as of August 8, 2018 (“MCC Merger Agreement”), were attached to the Proxy.

ANSWER: The Special Committee Defendants admit the allegations in Paragraph 81.

82.            Section 7.10 of the MCC Merger Agreement controls whether and when the MCC Board may engage with parties submitting “Competing Proposals” and “Superior Proposals.”

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 82, except admit that they purport to characterize the terms of the MCC Merger Agreement, and respectfully refer the Court to the MCC Merger Agreement, which is publicly available, for its complete and accurate contents.

83.            Section 1.1 of the MCC Merger Agreement defines “Competing Proposal” and “Superior Proposal” as:

“Competing Proposal” means any inquiry, proposal or offer made by any Third Party: (a) to purchase or otherwise acquire, directly or indirectly, in one transaction or a series of transactions (including any merger, consolidation, tender offer, exchange offer, stock acquisition, asset acquisition, binding share exchange, business combination, recapitalization, liquidation, dissolution, joint venture or similar transaction), (i) beneficial ownership (as defined under Section 13(d) of the Exchange Act) of twenty percent (20%) or more of any class of equity securities of MCC or SIC, as applicable, or (ii) any one or more assets or businesses of MCC or its Subsidiaries or SIC or its Subsidiaries that constitute twenty percent (20%) or more of the revenues or assets of MCC and its Subsidiaries, taken as a whole, or SIC and its Subsidiaries, taken as a whole, as applicable; or (b) any liquidation of MCC or SIC, in each case other than the Merger and the other transactions to occur at Closing in accordance with this Agreement.

“Superior Proposal” means any bona fide written Competing Proposal made by a Third Party that the MCC Board or the SIC Board, as applicable, determines in good faith, after consultation with its outside financial advisors and legal counsel, and taking into account the terms and conditions of such proposal, the party making such proposal, all financial, legal, regulatory and other aspects of such proposal, as well as the likelihood of consummation of the Competing Proposal relative to the Merger and such other factors as the MCC Board or SIC Board, as applicable, considers to be appropriate, is more favorable to MCC’s stockholders or SIC’s stockholders, as applicable, from a financial point of view than the Merger and the other transactions contemplated by this Agreement (including any revisions to the terms of this Agreement committed to by SIC to MCC in writing in response to such Competing Proposal made to MCC or by MCC to SIC in writing in response to such Competing Proposal made to SIC under the provisions of Section 7.10(f); provided however, for these purposes, to the extent relevant to the Competing Proposal in question, all percentages in subsections (a)(i) and (a)(ii) of the definition of Competing Proposal shall be increased to fifty percent (50%).

ANSWER: The Special Committee Defendants admit that Paragraph 83 accurately quotes portions of the MCC Merger Agreement, and respectfully refer the Court to the MCC Merger Agreement, which is publicly available, for its complete and accurate contents.

84.            Section 7.10(d) provides that the Board may contact the Third Party to “clarify any ambiguous terms” of a Completing Proposal or “engage in negotiations or substantive discussions with, or furnish any information and other access to, any Third Party making such Competing Proposal and its representatives and Affiliates,” but only “if the MCC Board or SIC Board, as applicable, determines in good faith (after consultation with its outside financial advisors and legal counsel) that (A) such Competing Proposal either constitutes a Superior Proposal or could reasonably be expected to lead to a Superior Proposal and (B) failure to consider such Competing Proposal could reasonably be expected to be inconsistent with the fiduciary duties of the directors of MCC or SIC, as applicable, under Applicable Law.” (emphasis added).

ANSWER: The Special Committee Defendants admit that Paragraph 84 accurately quotes portions of the MCC Merger Agreement, and respectfully refer the Court to the MCC Merger Agreement, which is publicly available, for its complete and accurate contents.

85.            Section 7.10(e) of the Merger Agreement provides that the MCC Board may not make an “Adverse Recommendation Change” or enter into any agreement (other than a confidentiality agreement) with a Third Party unless, having determined that a Competing Proposal is a Superior Proposal:

the board of directors effecting the Adverse Recommendation Change determines in good faith (after consultation with its outside financial advisor and legal counsel) that failure to make an Adverse Recommendation Change could reasonably be expected to be inconsistent with the fiduciary duties of the MCC Board.

ANSWER: The Special Committee Defendants admit that Paragraph 85 accurately quotes portions of the MCC Merger Agreement, and respectfully refer the Court to the MCC Merger Agreement, which is publicly available, for its complete and accurate contents.

86.            Section 9.4 of the MCC Merger Agreement provides for a $6 million “Termination Fee,” which MCC must pay if either party terminates the MCC Merger Agreement after the MCC Board effects an “Adverse Recommendation Change,” or if MCC terminates the MCC Merger Agreement to enter into a definitive agreement contemplated by a Superior Proposal.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 86, except admit that they purport to characterize the terms of the MCC Merger Agreement, and respectfully refer the Court to the MCC Merger Agreement, which is publicly available, for its complete and accurate contents.

87.            In an effort to avoid being deemed an unlawful penalty. Section 9.4(d) states that the Termination fee is “liquidated damages, in a reasonable amount that will compensate the other party, in the circumstances in which the Termination Fee is payable, for the efforts and resources expended and opportunities foregone while negotiating this Agreement and in reliance on this Agreement and on the expectation of the consummation of the transactions contemplated hereby, which amount would otherwise be impossible to calculate with precision.”

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 87, except admit that they purport to characterize the terms of the MCC Merger Agreement, and respectfully refer the Court to the MCC Merger Agreement, which is publicly available, for its complete and accurate contents.

88.            Section 9.1(c) provides that the Merger Agreement will terminate on March 31, 2019, if the Proposed Merger with SIC has not been consummated by that date.

ANSWER: The Special Committee Defendants deny the allegation in Paragraph 88, except admit that they purport to characterize the terms of the MCC Merger Agreement, and respectfully refer the Court to the MCC Merger Agreement, which is publicly available, for its complete and accurate contents.

89.            The Proxy concedes that the No Solicitation and Termination Fee provisions are a “potentially negative” factor:

[T]he fact that the MCC Merger Agreement precludes MCC from actively soliciting competing proposals and MCC may not terminate the MCC Merger Agreement to accept a competing proposal from a third party unless the MCC Board (or the MCC Special Committee) has determined in good faith (after consultation with its outside financial advisor and legal counsel) that the competing proposal constitutes a superior proposal and after providing notice, as applicable, and entering into good faith negotiations with Sierra, in which case MCC would be required to pay the termination fee.

But the Proxy omits any reference to the reality that the MCC Special Committee failed to test the waters and therefore had no basis to conclude that the definitions of “Competing Proposal” and “Superior Proposal” were adequate. In fact, those definitions ruled out obvious alternatives the MCC Special Committee should have known about.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 89, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

90.            The Proposed Mergers significantly undervalue the Company and will handsomely reward MDLY. The deal implies a transaction price (based on MCC’s pre-amiouncement stock price) to MCC’s September 30, 2018 NAV multiple of 0.55x. This valuation falls well below the valuation range for externally managed BDCs derived by Broadhaven. Using both precedent transactions and comparable public companies, Broadhaven derived an average valuation range of 0.76x and 0.92x. respectively: 38% - 69% above the MCC valuation implied by the merger consideration.

ANSWER: The Special Committee Defendants deny the allegations in the first and third sentence of Paragraph 90. The Special Committee Defendants deny the remaining allegations in Paragraph 90, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

91.            Further underscoring this valuation discrepancy, using precedent transactions, Sandler O’Neill derived mean and median transaction price/NAV multiples of 0.79x and 0.86x, respectively.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 91, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

92.            By accepting a below-market valuation of 0,55x for MCC shares, an excessive amount of deal consideration offered by SIC is earmarked for holders of MDLY, the entity controlled by MDLY Management. In addition, MDLY holders will receive approximately 64% of the deal consideration in cash, while MCC holders will receive only SIC stock. If the individuals controlling MDLY were truly aligned with stockholders of MCC, they would have pushed for SIC to pay closer to 0.8x to l.0x NAV for MCC’s assets while making an offer with a considerable cash component. As currently structured, the proposed transaction leaves MCC stockholders with the prospect of holding only SIC stock, without the certainty of cash consideration that MDLY holders will receive.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 92, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

93.            By contrast, MDLY holders will receive a 100% premium, despite the fact that no bidders were willing to pay anywhere close to that during a Goldman-run auction process. In fact, the Offers from Party A and Party B made close in time to the Announcement Date implied far lower premiums (47% and 39% respectively).

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 93, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

94.            Relying on multiples derived from precedent transactions, the Proxy indicates that Goldman Sachs valued MDLY at only $1.43 to $2.70 based on MDLY’s EV/LTM EBITDA as of June 30, 2018 - well below the $3.44 cash component of the MDLY Merger Consideration, and even further below the alleged aggregate $6,80 MDLY Merger Consideration.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 94, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

95.            Between the Announcement Date and the public disclosure of the NexPoint proposal, MCC’s share price fell approximately 4%, while MDLY’s price surged 43%.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 95, except admit that MCC’s and MDLY’s historical stock prices, and price movements, including their stock prices and/or stock price movements since the Announcement Date, are matters of public record.

96.            FrontFour, one of MCC’s largest non-affiliated stockholders, repeatedly attempted to communicate its concerns privately, beginning with extensive efforts at outreach to Sam Anderson, Senior Managing Director and Head of Capital Markets at Medley. After realizing that Mr. Anderson would not provide any substantive information, FrontFour attempted to engage directly with the MCC Special Committee.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 96, except admit that representatives of FrontFour have requested an in-person meeting with the MCC Special Committee.

97.            MCC CEO Brook Taube and others in management intervened and prevented FrontFour from having a prompt and direct discussion with the MCC Special Committee by, among other things, refusing to schedule an in-person meeting, delaying for weeks before even scheduling a call, and insisting that management participate despite clear conflicts of interest. When the call finally occurred on November 13, 2018. MCC provided only inadequate, generic responses.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 97, except admit that representatives of FrontFour and MCC held a phone call on or about November 13, 2018.

98.            On December 13, 2018, after numerous failed attempts to reach the MCC Board, FrontFour issued an open letter to MCC stockholders, urging them to vote against the Proposed Mergers.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 98, except admit that, on December 13, 2018, FrontFour issued an open letter to MCC stockholders. The Special Committee Defendants respectfully refer the Court to that letter, which is publicly available, for its complete and accurate contents.

99.            Unsurprisingly, other major stockholders have also signaled their opposition to the Proposed Mergers. On December 19, 2018, another stockholder holding approximately 3% of MCC’s shares, Moab Capital Partners LLC (“Moab”) issued its own open letter, in which it raised similar concerns and noted, among other things, that MDLY and the Taube Brothers had reaped over $100 million in fees from MCC stockholders over the years, while MCC stockholders were left with hundreds of millions of dollars in losses. Moab calculated that while the Proposed Mergers would dilute MCC stockholders by 8%, the Taube Brothers would sell their MDLY shares for an impressive 109% premium to MDLY’s closing price prior to the Announcement Date. Moab recommended terminating the Company’s investment management contracts and pursuing a sale of MCC without MDLY and the Taube Brothers.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 99, except admit that, on December 19, 2018, Moab Capital Partners, LLC issued an open letter to MCC shareholders. The Special Committee Defendants respectfully refer the Court to that letter, which is publicly available, for its complete and accurate contents.

100.          On December 21, 2018, MCC filed the Proxy (which exceeds 1,400 pages including exhibits) and announced that it had scheduled a special meeting of stockholders to approve the Proposed Mergers for February 8, 2019. The Proposed Mergers were originally expected to close in Q1 2019, upon the satisfaction of certain closing conditions.

ANSWER: The Special Committee Defendants admit the allegations in Paragraph 100, and respectfully refer the Court to the Joint Proxy and Form 425 filed by MDLY, which are publicly available, for their complete and accurate contents.

101.          The first page of the Proxy “sells” the MCC Merger Consideration as a value enhancement, by stating value based upon the NAV of the combined company:

The summary information does not disclose up front that the $5.68 merger consideration is entirely theoretical, as SIC/s future trading price is not knowable.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 101, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

102.          The Proxy also makes misleading representations that the Proposed Mergers will be “accretive” to MCC stockholders, in “that the total implied value of the MCC Merger Consideration to be received by the unaffiliated MCC Stockholders in the MCC Merger is expected to result in an estimated 18.52% accretion of NII per share of MCC Common Stock for MCC Stockholders assuming flat MDLY earnings and an estimated 29.8% accretion assuming projected MDLY earnings.”

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 102, except admit that they purport to characterize the contents of the Joint Proxy, and respectfully refer the Court to the Joint Proxy, which is publicly available, for its complete and accurate contents.

103.          The statement is misleading, as it relies upon MDLY’s unrealistic financial projections, derived from the “Other” revenue central to its July 2018 growth projections for the proposed combined company. To add to the confusion, the MDLY projections containing “Other” revenue are not contained in the Proxy, but in the Barclay’s Presentation, which was separately filed by MDLY on November 7, 2018, where MCC stockholders would be least likely to find them.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 103, except admit that portions of the allegations purport to characterize the contents of the Joint Proxy and a Schedule 13E-3 filed with the SEC; by MDLY on November 7, 2018 and respectfully refer the Court to those documents, which are publicly available, for their complete and accurate contents.

104.          The aggressive revenue projections drive a projected increase in NII of the combined company. But the projected growth in NII at SIC would only be possible if it issued shares, and the Barclays presentation incorrectly fails to account for those issuances.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 104.

105.          The misleading disclosures in the Proxy continue, including (1) claims that basic, readily obtainable metrics concerning previous IOIs submitted by third parties to MDLY were unquantifiable, (2) the omission of any mention of the obligations MDLY owes to Fortress Credit Advisors (“Fortress”), which created desperation on behalf of MDLY as well as a direct conflict of interest between MDLY and MCC with respect to any separate sale or liquidation of MCC, and (3) the omission of the Origami IOI and any other offers to acquire MCC’s assets.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 105.

106.          On December 28, 2018, Plaintiff FFCG served MCC with a sworn demand for books and records (the “Demand”) pursuant to 8 Del. C. § 220. The stated purposes of the demand were to investigate: (i) whether the members of the MCC Board or third parties, including MDLY, breached their fiduciary duties in connection with the Proposed Mergers; (ii) whether any person or entity, including MDLY, aided and abetted any fiduciary’s breach of fiduciary duty in connection with the Proposed Mergers; (iii) whether the members of the MCC Board were independent with respect to the Proposed Merger and any related matters; (iv) the valuation of FrontFour’s shares; (v) whether to solicit stockholders to vote against the Proposed Mergers and/or pursue a sale of MCC separately from MDLY involvement; (vi) whether to otherwise communicate with MCC stockholders in advance of the vote on the Proposed Mergers; (vii) whether to press the MCC Board to terminate any or all of its various management and administration agreements with MCC’s MDLY-related entities, or call a stockholder vote to effect the same; and (viii) whether to pursue a pre-closing injunction or post-closing money damages claim in relation to the Proposed Mergers. On the same day, Plaintiff FFMF served MCC with a sworn demand for books and records for MCC’s stockholder list and related materials (the “Stockholder Demand”).

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 106, except admit that MCC was served with Plaintiff FFCG’s Demand and Plaintiff FFMF’s Stockholder Demand on or about December 28, 2018, and that these allegations purport to characterize the stated purposes of the FFCG’s Demand. The Special Committee Defendants respectfully refer the Court to the Demand and Stockholder Demand for their complete and accurate contents.

107.          In view of the February 8, 2019 meeting date, FrontFour pressed MCC for the books and records, but MCC stalled and refused to negotiate production terms. On January 11, 2019, FFCG sued for books and records and moved for expedited proceedings. (Trans. ID 62843920). On January 14, 2019, an FFCG filed an Complaint that added FFMF as a Plaintiff.

ANSWER: The Special Committee Defendants deny the allegations in the first sentence of Paragraph 107. The Special Committee Defendants admit that FFCG filed the Verified Complaint for Inspection of Books and Records on January 11, 2019, as amended on February 14. 2019. in the action captioned FrontFour Capital Group LLC, et al v. Medley Capital Corporation, C.A. No 2019-0021-KSJM (the “Books and Records Action”).

108.          On January 16, 2019, the Court granted Plaintiffs’ motion to expedite and scheduled a books and records trial for January 23, 2019.

ANSWER: The Special Committee Defendants deny the allegations of Paragraph 108, except admit that they purport to characterize the proceedings in the Books and Records Action, and respectfully refer the Court to the transcript of Oral Argument on Plaintiffs’ Motion to Expedite and the Court’s Ruling in the Books and Records Action, dated January 16, 2019, for its complete and accurate contents.

109.          On January 22, the parties submitted a 220 Stipulation and proposed order governing MCC’s pre-vote production, which eliminated the need for a prevote books and records trial. The Court entered the 220 Stipulation on January 24, 2019. (Trans. ID 62893117). Although MCC purportedly completed its rolling production of documents in satisfaction of its obligations under the 220 Stipulation on January 28, 2019, it did not produce any indication of interest submitted by Origami.

ANSWER: The Special Committee Defendants admit the allegations in Paragraph 109, except deny that MCC in any manner failed to comply with the requirements of the 220 Stipulation.

110.          During this time period, MCC issued numerous press releases and other investor communications designed to encourage “for” votes.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 110, except admit that MCC issued press releases on February 4, 2019. February 5, 2019, and February 15, 2019 and filed materials with the SEC relating to die proposed mergers including a Schedule 14A, dated January 28. 2019, and respectfully refer the Court to those documents, which are publicly available, for their complete and accurate contents.

111.          Although the market price of MCC stock had initially risen 12% after the Announcement Date, reaching a high of $4.03 per share on August 31, 2018, the stock steadily trended downward thereafter. By December 13, 2018, the date FrontFour issued its first public letter, the stock had closed at $3.25 per share. The downward trend continued into January 2019.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 111, except admit that MCC’s historical stock prices, and price movements, including their stock prices and/or stock price movements since the Announcement Date, are matters of public record.

112.          On January 17, 2019, MCC filed an investor presentation with the SEC. In it, MCC sought to discredit concerned stockholders by misleadingly blaming the “campaign of activist stockholders for the price drop.” The statement was patently untrue. It not only ignored that the price been tumbling without any help from third parties since 2013, but also that the stock had dropped precipitously on December 4, 2018, after MCC released earnings and announced it had written NAV down from $6.43 to $5.90 a share, or 9%.

ANSWER: The Special Committee Defendants admit the allegations in the first sentence of Paragraph 112. The Special Committee Defendants deny the remaining allegations in Paragraph 112, except admit that they purport to characterize the contents of MCC’s investor presentation, dated January 17, 2019, and respectfully refer the Court to the presentation, which is publicly available, for its complete and accurate contents.

113.          On January 26, 2019, ISS, one of the leading proxy advisory firms, issued its initial report on the Proposed Mergers. The ISS report is not readily available to retail investors, who constitute the majority of MCC stockholders, so the Company issued a press release.

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 113, except admit that ISS issued a publication concerning the Proposed Mergers on January 25, 2019 and that MCC issued a press release.

114.          The MCC press release announced only that ISS, had recommended a vote “For” the merger. The press release misleadingly omitted that ISS recommended the “For” vote due to the absence of any other alternative. ISS termed the Proposed Mergers “underwhelming”, because:

Shareholders have limited visibility regarding tire value they are receiving, given that Sierra shares are not publicly traded. Moreover, the deal appears to disproportionately favor an external manager (Medley) that has demonstrated a poor track records of managing MCC assets... Shareholders could reasonably opt to reject the proposed terms on these bases.

ISS also flagged the process failures:

The board’s decision to forgo an auction process for MCC is a cause for concern, since investors lack market-based evidence that the deal presented in fact represents the best available alternative for MCC shareholders. . . . In addition, the potential acquirers that participated in the MDLY sales process may have had limited ability to engage directly with MCC. For example, the proxy states that Party X indicated it had preference for an asset purchase transaction rather than a merger. Considering that MDLY has no assets, it would be fair to assume that the interest related to MCC or Sierra assets; however, further details of Party X’s interest were not disclosed.”

(emphasis added.).

ANSWER: The Special Committee Defendants admit the allegations in the first sentence of Paragraph 114. The Special Committee Defendants deny the allegations in the second sentence of Paragraph 114. The Special Committee Defendants admit that the remaining allegations in Paragraph 114 purport to characterize the contents of the ISS report and the MCC press release, and respectfully refer the Court to those documents, which are incorporated by reference into the Complaint, for their complete and accurate contents.

115.          Between January 18, 2019 and January 28, 2019, MCC produced approximately 900 documents in response to the Demand.

ANSWER: The Special Committee Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations in Paragraph 115.

116.          On January 30, 2019, Plaintiffs sent the MCC Board a letter identifying several disclosure flaws that required correction, including that the Proxy (1) incorrectly claimed that basic, readily obtainable metrics concerning previous IOIs submitted by third parties were unquantifiable, (2) failed to provide any explanation of the opaque “Other” revenue central to its July 2018 growth projections for the proposed combined company, and (3) omitted any mention of MDLY’s payment obligations to Fortress.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 116, except admit that Plaintiffs’ counsel sent the MCC board a letter on January 30, 2019 and that the remaining allegations purport to characterize the contents of the January 30, 2019 letter from Plaintiffs’ counsel, and respectfully refer the Court to the letter, which is incorporated by reference into the Complaint, for its complete and accurate contents.

117.          On the afternoon of February 1, 2019, the Company represented to FrontFour that it intended to supplement its disclosures to MCC investors in some undefined way at an unidentified time the following week.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 117, except admit that they purport to characterize the contents of a February 1, 2019 letter from MCC’s counsel, and respectfully refer the Court to the letter, which is incorporated by reference into the Amended Complaint, for its complete and accurate contents.

118.          On February 1, 2019, NexPoint issued a press release disclosing that it had submitted an unsolicited expression of interest to MCC on January 24, 2019. NexPoint also disclosed that it had made a specific proposal to MCC and SIC on January 31, 2019 that contemplated a simplified merger of MCC into SIC while terminating and replacing MDLY as their investment manager.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 118, except admit that they purport to characterize the contents of NexPoint’s February 1, 2019 press release, and respectfully refer the Court to the press release, which is publicly available, for its complete and accurate contents.

119.          NexPoint effectively proposes to merge MCC and SIC and then NexPoint would serve as the combined company’s investment manager. The NexPoint proposal would permit SIC to retain the $100 million it would otherwise distribute to MDLY stockholders in the Proposed Mergers. The NexPoint proposal also contemplates the payment of $25 million to the combined company for the benefit of stockholders, to provide a reduced fee structure and lowered costs (that would realize at least $9 million in annual savings), and to purchase at least $50 million of combined company shares over a five quarter period.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 119, except admit that they purport to characterize the contents of NexPoint’s February 1, 2019 press release, and respectfully refer the Court to the press release, which is publicly available, for its complete and accurate contents.

120.          At no point prior to NexPoint’s February 1 press release did MCC disclose to its stockholders or to Plaintiffs that NexPoint had expressed any interest in a deal, let alone that it had submitted a serious proposal offering value to MCC stockholders superior to the consideration in the Proposed Mergers. Apparently, the Company had no intention of disclosing this offer to investors and instead hoped that NexPoint would simply go away so that MCC could proceed with the Taube Brothers’ preferred deal (they would lose their roles at MCC under the NexPoint proposal).

ANSWER: The Special Committee Defendants deny the allegations in the first sentence of Paragraph 120, except admit that MCC and SIC issued a press release responding to NexPoint’s press release on February 2, 2019. The Special Committee Defendants otherwise deny the allegations in Paragraph 120.

121.          Also on February 1, 2019, Glass Lewis, the other leading proxy solicitation firm, recommended that stockholders vote against the Proposed Mergers, writing:

We believe there is ample cause for concern with management’s track record at MCC, raising questions about its ability to meet internal financial projections that appear highly optimistic and to generate substantial returns for shareholders. . . . The MCC Board does not appear to have taken sufficient steps to review potential alternative transactions prior to the proposed merger agreement.... Market valuations and recent transactions in the BDC space suggest there could be interest in acquiring MCC at a significant premium to the current share price.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 122, except admit that they purport to characterize a Glass Lewis report, and respectfully refer the Court to the report, which is incorporated by reference, for its complete and accurate contents.

122.          The NexPoint Proposal offered the MCC Special Committee the opportunity to rectify their prior breaches of fiduciary duty. But they did not do so. Instead, on February 2, 2019, MCC and SIC issued a vague press release characterizing NexPoint’s February 1 description of its transaction proposal as “misleading.” The press .release then professed that “[t]he MCC Special Committee and the Sierra Special Committee and the respective Boards of MCC and Sierra, adhering to a rigorous review process - consistent with their fiduciary duties and in consultation with their respective independent legal and financial advisors - will carefully review the letter and respond to NexPoint as appropriate.”

ANSWER: The Special Committee Defendants deny the allegations in the first and second sentences of Paragraph 122. The Special Committee Defendants deny the allegations in the third sentence of Paragraph 122, except admit that they purport to characterize the contents of the February 2, 2019 press release, and respectfully refer the Court to the press release, which is publicly available, for its complete and accurate contents.

123.          On February 4, 2019, ISS issued a Proxy Alert to advise that, based upon NexPoint’s competing proposal, it was now recommending a vote “Against” the Proposed Mergers. Although MCC had issued a press release on January 26, 2019 to announce the ISS “For” recommendation, it provided no update when, on February 4, 2019, ISS reversed it.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 123, except admit that they purport to characterize the contents of a February 4, 2019 ISS report and MCC’s press releases. The Special Committee Defendants respectfully refer the Court to the referenced documents, which are publicly available, for their complete and accurate contents..

124.          On February 4, 2019, FrontFour filed a letter with the Court requesting an emergency hearing on an application for a temporary restraining order enjoining MCC from proceeding with the scheduled February 8 vote on the Proposed Mergers until MCC’s stockholders had time to absorb the Company’s anticipated supplemental disclosures.

ANSWER: The Special Committee Defendants admit that FrontFour filed a letter with the Court in the Books and Records Action on February 4, 2019. and respectfully refer the Court to the letter for its complete and accurate contents.

125.          On February 5, 2019, MCC finally issued a Form 8-K with the supplemental disclosures it had promised - just three days before the scheduled vote on the Proposed Mergers was to take place. The supplemental disclosures are inadequate. While they purport to include additional information on previous IOIs received by MDLY, they make no attempt to explain how the IOIs pertain to MCC, leaving MCC stockholders completely in the dark as to their potential value.

ANSWER: The Special Committee Defendants deny the allegations of Paragraph 125, except admit that MCC filed a Schedule 14A with the SEC on February 5, 2019, which contains supplement disclosures (the “Supplemental Disclosures”). The Special Committee Defendants respectfully refer the Court to the Supplemental Disclosures, which are publicly available, for their complete and accurate contents.

126.          The supplemental disclosures also purport to disclose additional detail regarding the “Other” revenue included in the proposed combined company’s projections, but these disclosures simply raise more questions by purporting to show rapid revenue growth from unnamed “New Advisory Clients” in products which, in some cases, do not even exist yet. The supplement disclosures also fail to describe the Origami IOI.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 126, except admit that they purport to characterize the contents of the Supplemental Disclosures, and respectfully refer the Court to the Supplemental Disclosures, which are publicly available, for their complete and accurate contents.

127.          The supplemental disclosures also fail to address the error in the Barclays presentation that understate the dilutive effect of share issuances.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 127 and respectfully refer the Court to the Barclays Presentation and Supplemental Disclosures, which are publicly available, for their complete and accurate contents.

128.          The supplemental disclosures superficially address MDLY’s relationship with Fortress, pointing to disclosures made outside the Proxy, but they fail to provide sufficient detail, leaving MCC stockholders to guess the meaning of “certain redemption rights” Fortress may have over a $50 million MCC joint venture. Given the complexity of the Proposed Mergers and sheer length of the Proxy, investors should not be forced on a scavenger hunt to understand the transaction.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 128, and respectfully refer the Court to the Supplemental Disclosures, which are publicly available, for their complete and accurate contents.

129.          On February 5, 2019, MCC filed a letter with the Court, stating that its supplemental disclosures rendered FrontFour’s request for an emergency hearing and temporary restraining order moot.

ANSWER: The Special Committee Defendants admit the allegations in Paragraph 129.

130.          On February 5, 2019, MCC, SIC and MDLY announced the postponement of the special meeting from February 8, 2019, to early March 2019 claiming that during the U.S. government shutdown, “key branches of the U.S. Government were unable to process, review and/or approve documentation required to close the mergers.” This statement appears incomplete at best, given the issuance of the Proxy Supplement the same day, vocal stockholder dissatisfaction and the negative view expressed by ISS in changing its recommendation to “Against.”

ANSWER: The Special Committee Defendants admit the allegations in the first sentence of Paragraph 130. The Special Committee Defendants deny the allegations in the second sentence of Paragraph 130, and respectfully refer the Court to the February 5, 2019 joint press release, which is publicly available, for its complete and accurate contents.

131.          On February 6, 2019, MCC and SIC issued a joint press release declaring that their respective boards of directors “unanimously and independently determined to decline to pursue” NexPoint’s proposal. The joint press release failed to address the substance of any component of NexPoint’s offer, or how the proposal .would specifically affect MCC stockholders. The entire discussion of the merits of NexPoint’s proposal in the joint press release is limited to the following:

NexPoint’s claim that its proposal provides $225 million of incremental value over the Announced Merger Plan is UNSUBSTANTIATED and MISLEADING;

NexPoint’s proposal DEPRIVES shareholders of the expected benefits of becoming an INTERNALLY-MANAGED BDC, which include the opportunity to potentially grow third-party AUM as well as the potential for an improved market valuation as an internally managed BDC;

NexPoint’s proposal presents SIGNIFICANT UNCERTAINTY to shareholders; and

NexPoint and its affiliate Highland Capital have a CONCERNING track record as fiduciaries.

Again, MCC stockholders are left entirely in the dark as to the process followed by MCC’s Board in reviewing the NexPoint offer, as well as the Board’s assessment of the merits of the offer itself.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 131, except admit that they purport to characterize the February 6, 2019 joint press release of MCC and SIC, and respectfully refer the Court to the press release, which is publicly available, for its complete and accurate contents.

132.          If the speed of the February 6, 2019 disclosure did not in itself reveal that the Special Committee had not given the proposal more than cursory thought, NexPoint’s February 7, 2019 press release confirmed that fact. NexPoint wrote that neither the Special Committee or that of SIC had “made any attempt to communicate with NexPoint regarding its proposals, save from a single email from counsel... acknowledging receipt.”

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 132, except admit that they purport to characterize the contents of NexPoint’s February 7, 2019 press release, and respectfully refer the Court to the press release, which is publicly available, for its complete and accurate contents.

133.          On February 8, 2019, MCC announced that the special meeting had been rescheduled for March 8, 2019. In the meantime, MCC continues to solicit votes and seek support for the Proposed Mergers, despite the harm it will do to MCC stockholders.

ANSWER: The Special Committee Defendants admit the allegations in the first sentence of Paragraph 133. The Special Committee Defendants deny the allegations in the second sentence of Paragraph 133, except admit that MCC has continued to engage in solicitation activities with respect to the Proposed Merger.

134.          On February 11, 2019, Origami publicly disclosed that it had offered to acquire from MCC 100% of the interests in all of the assets of MCC SBIC for $45 million cash. According to Origami, its proposal “represents 60.0% of Medley SBIC’s regulatory capital (or NAV) at September 30, 2018 and implies a 36.2% premium to the February 8[th] closing share price of Medley Capital Corporation.”

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 134. except admit that they purport to characterize the contents of Origami’s February 11, 2019 open letter, and respectfully refer the Court to the open letter, which is publicly available, for its complete and accurate contents.

135.          Plaintiffs bring this action pursuant to Rule 23 of the Rules of the Court of Chancery, individually and on behalf of all other owners of MCC common stock (except Defendants and any person, firm, trust, corporation or other entity related to or affiliated with them and their successors in interest) who were injured by Defendants’ wrongful actions, as more fully described herein (the “Class”).

ANSWER: Paragraph 135 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 135.

136.          This action is properly maintainable as a class action.

ANSWER: Paragraph 136 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 136.

137.          The Class is so numerous that joinder of all members is impracticable. As of December 4, 2018, the Company had approximately 54,474,211 shares of common stock outstanding, which are publicly traded and held by thousands of beneficial owners.

ANSWER: The first sentence of Paragraph 137 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in the first sentence of Paragraph 137. The Special Committee Defendants admit the allegations in second sentence of Paragraph 137.

138.          A class action is superior to other available methods for the fair and efficient adjudication of this controversy. The expense and burden of individual litigation make it impracticable for Class members individually to seek redress for the wrongful conduct alleged herein.

ANSWER: Paragraph 138 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 138.

139.          There are questions of law and fact common the Class and which predominate over questions affecting any individual class member. The common questions include, inter alia:

(a)          whether the MCC Directors have breached their fiduciary duties to Company stockholders;

(b)          whether the remaining Defendants aided and abetted those breaches of fiduciary duty;

(c)          whether the Plaintiffs and the other members of the Class will be harmed by the wrongs complained of herein;

(d)          whether the Defendants should be required to provide supplemental and/or corrective disclosures; and

(e)          whether the Plaintiffs and the Class are entitled to other injunctive or related relief.

ANSWER: Paragraph 139 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 139.

140.          Plaintiffs anticipate that there will be no difficulty in the management of this litigation as a class action.

ANSWER: Paragraph 140 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 140.

141.          The Defendants have acted on grounds generally applicable to the Class with respect to the matters complained of herein, thereby making appropriate the relief sought herein with respect to the Class as a whole.

ANSWER: Paragraph 141 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 141.

142.          Plaintiffs are committed to prosecuting this action and has retained competent counsel experienced in litigation of this nature. Plaintiffs’ claims are typical of the claims of the other members of the Class and Plaintiffs have the same interests as the other members of the Class. Accordingly, Plaintiffs are an adequate representative of the Class and will fairly and adequately protect the interests of the Class.

ANSWER: Paragraph 142 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 142.

143.          The prosecution of separate actions by individual members of the Class would create the risk of inconsistent or varying adjudications with respect to individual members of the Class, which would establish incompatible standards of conduct for Defendants, or adjudications with respect to individual members of the Class which would, as a practical matter, be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests.

ANSWER: Paragraph 143 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 143.

COUNT I:

Breach of Fiduciary Duty Against the MCC Directors

144.          Plaintiffs repeat and incorporate by reference each of the allegations set forth above.

ANSWER: In response to Paragraph 144, the Special Committee Defendants repeat and incorporate by reference each of their answers to the preceding allegations set forth above.

145.          At all relevant times, the MCC Directors owed fiduciary duties to Plaintiffs and the Class. The Taube Brothers independently owed fiduciary duties to Plaintiffs and the Class because they are controllers and officers of MCC. Tonkel also owed fiduciary duties to Plaintiffs and the Class because he is an officer of MCC.

ANSWER: Paragraph 145 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants admit that MCC’s directors owe fiduciary duties to MCC’s stockholders.

146.          The Proposed Mergers are, with respect to at least the Taube Brothers, Tonkel, Hirtler-Garvey and Mack, self-interested transactions because each of them has a material interest in the Proposed Mergers.

ANSWER: Paragraph 146 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 146.

147.          The MCC Directors failed to conduct a fair process in connection with the Proposed Mergers. Although the MCC Board formed the MCC Special Committee in January 2018, it did not participate in the failed MDLY process, and it never adequately explored MCC’s strategic alternatives.

ANSWER: The Special Committee Defendants deny the allegations hi Paragraph 147.

148.          The MCC Directors compounded this failure by agreeing to a merger agreement with a no solicitation clause that prevents consideration of key strategic alternatives available to MCC that the MCC Special Committee should have investigated.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 148.

149.          The MCC Special Committee failed to negotiate a fair price, and they have agreed to a transaction that will transfer cash to MDLY, to the detriment of MCC.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 149.

150.          The Special Committee failed to give adequate consideration to the NexPoint Proposal or negotiate with NexPoint, although NexPoint has proposed a superior proposal.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 150.

151.          Plaintiffs and the members of the Class will be irreparably harmed as a direct and proximate result of the aforementioned acts.

ANSWER: Paragraph 151 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 151.

152.          Plaintiffs and the members of the Class have no adequate remedy at law.

ANSWER: Paragraph 152 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 152.

COUNT II:

Breach of Fiduciary Duty of Disclosure Against the MCC Directors

153.          Plaintiffs repeat and incorporate by reference each of the allegations set forth above.

ANSWER: In response to Paragraph 153, the Special Committee Defendants repeat and incorporate by reference each of their answers to the preceding allegations set forth above.

154.          The Individual Defendants have violated their fiduciary duty of disclosure by failing to provide several categories of material information that the Company’s stockholders need to make an informed decision regarding the Proposed Mergers.

ANSWER: Paragraph 154 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 154.

155.          While they purport to include additional information on previous IOIs received by MDLY, they make no attempt to explain how the IOIs pertain to MCC, leaving MCC stockholders completely in the dark as to their potential value.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 155.

156.          The supplemental disclosures also purport to disclose additional detail regarding the “Other” revenue included in the proposed combined company’s projections, but these disclosures do not identify or correct the error in the Barclays presentation that fails to account for the dilutive effect of projected share issuances.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 156.

157.          Finally, the supplemental disclosures continue to provide misleading information about the impact of the Fortress relationship on the Taube Brothers’ interests.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 157.

158.          The information listed above is highly material to the Company’s stockholders. Absent corrective disclosure, the Company’s stockholders will not be able to make an informed decision concerning the Proposed Mergers.

ANSWER: Paragraph 158 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 158.

159.          Plaintiffs and the Class will be irreparably harmed as a direct and proximate result of the aforementioned acts.

ANSWER: Paragraph 159 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 159.

160.          Plaintiffs and the members of the Class have no adequate remedy at law.

ANSWER: Paragraph 160 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 160.

COUNT III:

Aiding and Abetting Breach of Fiduciary Duty Against Defendants by MDLY, SIC, MCC Advisors, Medley Group and Medley LLC

161.          Plaintiffs repeat and incorporate by reference each of the allegations set forth above.

ANSWER: In response to Paragraph 161, the Special Committee Defendants repeat and incorporate by reference each of their answers to the preceding allegations set forth above.

162.          The MCC Directors owed to Plaintiff and the members of the Class certain fiduciary duties as fully set out herein.

ANSWER: Paragraph 162 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants admit that MCC’s directors owe fiduciary duties to MCC’s stockholders.

163.          By committing the acts alleged herein, the MCC Directors breached fiduciary duties they owed to Plaintiffs and the Class.

ANSWER: Paragraph 163 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 163.

164.          Defendants MDLY, SIC, MCC Advisors, Medley Group and Medley LLC (collectively, the “Colluding Defendants”) aided and abetted the MCC Directors’ breaches of fiduciary duties, and were active and knowing participants in the MCC Directors’ breaches.

ANSWER: Paragraph 164 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 164.

165.          As alleged herein, the Colluding Defendants were well aware that the MCC Directors have not sought to obtain the best available transaction for MCC’s public stockholders. The Colluding Defendants aided and abetted the MCC Directors by, among other things: dominating and controlling the MCC Board; causing the continued extension of the MCC Management Agreement in spite of MCC’s poor performance: failing to timely establish the MCC Special Committee and allow MCC to conduct an independent exploration of strategic alternatives: refusing to consider or pursue indications of interest from potential bidders interested in purchasing MCC’s assets; and facilitating the execution of a preclusive no-shop clause that effectively prevented MCC from exploring other strategic alternatives.

ANSWER: The Special Committee Defendants deny the allegations in Paragraph 165.

166.          Plaintiffs and the members of the Class will be irreparably harmed as a direct and proximate result of the aforementioned acts.

ANSWER: Paragraph 166 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 166.

167.          Plaintiff has no adequate remedy at law.

ANSWER: Paragraph 167 states a legal conclusion to which no response is required. To the extent that a response is required, the Special Committee Defendants deny the allegations in Paragraph 167.

DEFENSES AND AFFIRMATIVE DEFENSES

Without assuming any burden of proof that is not otherwise established by law, the Special Committee Defendants assert the following defenses. The Special Committee Defendants reserve the right to amend this Answer to assert any defenses or affirmative defenses as discovery may warrant.

FIRST DEFENSE

The Amended Complaint fails to state a claim, in whole or in part, upon which relief can be granted.

SECOND DEFENSE

Plaintiffs cannot show irreparable injury, and therefore are not entitled to any injunctive relief.

THIRD DEFENSE

Plaintiffs’ claims are barred, in whole or in part, because Plaintiffs cannot satisfy their burden of proof as to the Special Committee Defendants.

FOURTH DEFENSE

Plaintiffs’ claims are barred, in whole or in part, because the conduct alleged is protected by application of the business judgment rule.

FIFTH DEFENSE

Plaintiffs’ claims are barred because the Special Committee Defendants did not breach any duties, if any, that were owed to Plaintiffs, The Special Committee Defendants acted at all times in good faith and in accordance with any such duties.

SIXTH DEFENSE

Without conceding any argument that the correct standard of review is entire fairness, Plaintiffs’ claims are barred, in whole or in part, because the transaction at issue is entirety fair to MCC and its stockholders.

SEVENTH DEFENSE

Plaintiffs’ claims are barred because an independent Special Committee of the MCC board of directors approved the transaction at issue.

EIGHTH DEFENSE

The Claims alleged and the relief sought in this action are barred, in whole or in part, by the equitable doctrine of laches, unclean hands, waiver, estoppel, acquiescence, consent and/or ratification.

NINTH DEFENSE

The Special Committee Defendants are not liable for any injuries or damages allegedly suffered by Plaintiffs, the fact and extent of which are expressly denied by the Special Committee Defendants, because such injuries or damages were not legally or proximately caused by any acts or omissions of the Special Committee Defendants.

TENTH DEFENSE

Plaintiffs are not entitled to maintain this action as a class action.

PRAYER FOR RELIEF

WHEREFORE, the Special Committee Defendants respectfully requests that the Court enter an Order:

CERTIFICATE OF SERVICE

I, Eric D. Selden, hereby certify that on March 4, 2019, I caused a true and correct copy of the foregoing PUBLIC VERSION Answer and Affirmative Defenses of Defendants Mark Lerdal, Karin Hirtler-Garvey, John E. Mack and Arthur S. Ainsburg to Plaintiffs’ Amended Verified Complaint for Injunctive Relief to be served through File & ServeXpress upon the following counsel of record:

Dated: February 25, 2019

DEFENDANT SIERRA INCOME CORPORATION’S

ANSWER TO PLAINTIFFS’ AMENDED COMPLAINT

FOR INJUNCTIVE RELIEF

Defendant Sierra Income Corporation (“SIC”), by and through its undersigned counsel, responds to the Verified Amended Complaint for Injunctive Relief (the “Amended Complaint”) of Plaintiffs FrontFour Capital Group LLC and FrontFour Master Fund, Ltd. (together, “Plaintiffs”), as follows. Unless expressly admitted, all allegations in the Amended Complaint are denied.

1.             Plaintiffs are stockholders of Medley Capital Corporation (“MCC” or the “Company”) who seek to block a highly conflicted, three-way transaction orchestrated by Brook and Seth Taube (the “Taube Brothers”) to monetize their controlling stake in Medley Management Inc. (“MDLY”), cement their control of the post-transaction entity and secure a future lucrative fee stream.

ANSWER: To the extent the allegations in paragraph 1 consist of legal conclusions, no response is required. To the extent a response is required, SIC denies the allegations in paragraph 1, except denies having knowledge or information sufficient to form a belief as to the truth of whether Plaintiffs are stockholders of MCC.

2.             The challenged transaction, which was announced on August 9, 2018 (the “Announcement Date”), would combine MDLY with two other entities the Taube Brothers control, MCC, a publicly-traded business development company (“BDC”), and Sierra Income Corporation (“SIC”), a privately-held BDC:¹ 

ANSWER: SIC denies the allegations in paragraph 2, except that SIC admits that SIC and MCC are BDCs, further admits that on August 9, 2018, SIC, MCC, and MDLY issued a joint press release (the “August 9, 2018 Press Release”) concerning definitive agreements pursuant to which (i) MCC would, on the terms and subject to the conditions set forth in the MCC Merger Agreement, merge with and into SIC, with SIC continuing as the surviving company, and (ii) MDLY would, on the terms and subject to the conditions set forth in the MDLY Merger Agreement, merge with and into a wholly owned subsidiary of SIC (“Merger Sub”), with Merger Sub continuing as the surviving company. SIC further states that the allegations in footnote 1 consist of legal conclusions to which no response is required, and notes that the August 9, 2018 Press Release, the MCC Merger Agreement, and the MDLY Merger Agreement, all of which are publicly available, speak for themselves.

3.             If the transaction proceeds, SIC will first acquire MCC and then MDLY in two separate but cross-conditioned mergers (the “Proposed Mergers”). The transaction will leave SIC as the surviving company, which will then list on the New York Stock Exchange (“NYSE”).

ANSWER: SIC denies the allegations in paragraph 3, except admits that the August 9, 2018 Press Release, the Joint Proxy statement of SIC, MCC, and MDLY filed with the Securities and Exchange Commission on December 21, 2018 (the “Joint Proxy”), the MCC Merger Agreement, and the MDLY Merger Agreement, all of which are publicly available, speak for themselves.

4.             Incredibly, the Proposed Mergers contemplate the payment of $3.44 cash, plus $0.65 in cash dividends and the right to receive 0.3836 shares of SIC stock to holders of MDLY stock. The cash component alone represents an 18% premium to MDLY stockholders; adding the SIC stock component brings the premium to an outlandish 100%.²

ANSWER: SIC denies the allegations in paragraph 4, except admits that paragraph 4 purports to characterize certain terms of the MDLY Merger Agreement, which is publicly available and speaks for itself. To the extent that footnote 2 requires a response, SIC notes that MDLY’s historical stock prices are publicly available.

5.             The Proposed Mergers will also reward the Taube Brothers and other members of MDLY management with lucrative employment contracts, despite their miserable track record managing MCC, overseeing MDLY’s two failed sales processes and furnishing projections of MDLY’s revenue growth that are manifestly overstated given its terrible historical performance and dim prospects.

ANSWER: SIC denies the allegations in paragraph 5, except admits that paragraph 5 purports to characterize certain terms of the MDLY Merger Agreement, which is publicly available and speaks for itself.

6.             By contrast, MCC stockholders will only receive the right to 0.8050 shares of SIC stock, which provides no premium when compared to MCC’s net asset value (“NAV”). The definitive Proxy filed with the SEC on December 21, 2018 (the “Proxy”), states that the value to MCC stockholders is $5.68 per share, based on the NAV of the pro forma combined company ($7.06), and a $6.80 per share value to MDLY stockholders. But those values are totally unrealistic. While MDLY’s $3.44 per share cash component is fixed, SIC stock will trade well below NAV, given the Taube Brothers’ disastrous record managing MCC and the probability that SIC stockholders, who have had no opportunity to exit for five years, will dump their stock once SIC becomes publicly traded.

ANSWER: SIC denies the allegations in paragraph 6, except admits that paragraph 6 purports to characterize the terms of the MCC Merger Agreement, the MDLY Merger Agreement, and the Joint Proxy, all of which are publicly available and speak for themselves. SIC further states that it denies having knowledge or information sufficient to form a belief as to the truth of the allegations concerning the future value of SIC stock and the future actions of SIC stockholders.

7.             In an attempt to convince the MCC stockholders to approve the transaction, the Taube Brothers and their allies continue to claim that (a) by merging with SIC, a much larger fund, MCC will gain access to capital and more favorable borrowing terms, which will in turn lift MCC’s chronically depressed stock price, (b) by merging with MDLY, MCC will benefit from management cost savings and better alignment with investor interests, and (c) MCC will realize the benefit of MDLY’s projected revenues from management of new assets that are projected to be brought into the proposed combined company.

ANSWER: SIC denies the allegations in paragraph 7, except admits that certain of the defendants have publicly stated their support for the proposed transactions described in the Joint Proxy (the “Proposed Mergers”). SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations purporting to characterize any individual’s reasons for supporting the Proposed Mergers.

8.             But there is at least one vastly better alternative for MCC and its stockholders. In January 2019, NexPoint Advisors, L.P. (“NexPoint”) has proposed an alternative involving the combination of MCC and SIC which would permit SIC to retain the $100 million it would otherwise distribute to MDLY stockholders under the Proposed Mergers. NexPoint also proposed to pay $25 million to the combined company for the benefit of stockholders, to provide a reduced fee structure and lowered costs, which would realize at least $9 million in annual savings, and to purchase at least $50 million of combined company shares over a five quarter period.

ANSWER: SIC denies the allegations in paragraph 8, except admits that, in January 2019, NexPoint Advisors, L.P. (“NexPoint”) submitted a management proposal relating to the merger of MCC and SIC, which proposal is publicly available and speaks for itself.

9.             On February 11, 2019, Origami Capital Partners, LLC (“Origami”) announced that it had issued an open letter to the MCC Board, proposing to buy 100% of the interests of MCC’s wholly owned subsidiary, Medley SBIC, L.P. (“Medley SBIC”) for $45 million cash. According to Origami, this represents 60% of MCC’s NAV as of September 30, 2018 and implies a 36.2% premium to MCC’s February 8, 2019 closing stock price. Origami also disclosed that it had reached out several times to MCC during the spring of 2018 and sent a formal letter on April 4, 2018 (“Origami IOI”) expressing interest in purchasing Medley SBIC. The Origami IOI is not referenced in the Proxy’s background section and was not produced under the stipulation entered into in the action styled FrontFour Capital Group LLC, et al. v. Medley Capital Corp., C.A. No. 2019-0021-KSJM (the “220 Action” and “220 Stipulation”) which governs MCC’s pre-vote production pursuant to 8 Del. C. § 220 (“220 Production”).

ANSWER: SIC denies the allegations in paragraph 9, except admits that, on or about February 11, 2019, Origami issued an open letter to the stockholders of MCC, further admits that the 220 Stipulation was entered in the 220 Action, and notes that the Origami letter and the 220 Stipulation are publicly available and speak for themselves. SIC denies having knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 9.

10.           The emergence of these alternatives after the announcement of the Proposed Mergers reflects the reality that no one attempted to shop MCC or seriously explore its strategic alternatives prior to signing up for the Taube Brothers’ preferred transaction. This failure is particularly galling because MCC’s NAV is far higher than its stock price, making MCC an attractive target.

ANSWER: SIC denies the allegations in paragraph 10, except admits that MCC’s Net Asset Value exceeds its stock price.

11.           Consistent with the Taube Brothers’ objectives, the Proxy omits key details of two unsuccessful attempts to sell MDLY, suggests that the affiliated companies took adequate steps to protect against conflicts, and implies that MCC had no strategic alternatives. This picture was and remains misleading.

ANSWER: To the extent the allegations in paragraph 11 consist of legal conclusions, no response is required. To the extent a response is required, SIC denies the allegations in paragraph 11.

12.           For example, the Proxy heralds the formation by MCC’s Board of Directors (“MCC Board”) of a special committee of MCC’s independent directors (the “MCC Special Committee”) on January 28, 2018. But the MCC Special Committee never met, never retained a financial advisor, and never did anything else of substance (except get paid a monthly retainer) until June 19, 2018, after MDLY’s sale process failed and MDLY conceived of the Proposed Mergers. The Proxy could more accurately state that the MCC Special Committee’s primary purpose was to rubber-stamp the Proposed Mergers.

ANSWER: To the extent the allegations in paragraph 12 consist of legal conclusions, no response is required. To the extent a response is required, SIC denies the allegations in paragraph 12, except admits that the MCC Board of Directors (the “MCC Board”) formed a special committee of MCC’s independent directors (the “MCC Special Committee”). To the extent that the allegations of paragraph 12 purport to characterize the contents of the Joint Proxy, that document is publicly available and speaks for itself.

13.           Once negotiations regarding a merger began, the MCC Special Committee compounded the problems associated with its late start by irresponsibly agreeing to a no-shop clause that precludes the Company’s most logical alternatives, including the NexPoint proposal.

ANSWER: To the extent the allegations in paragraph 13 consist of legal conclusions, no response is required. To the extent a response is required, SIC denies the allegations in paragraph 13 and notes that the MCC Merger Agreement is publicly available and speaks for itself.

14.           The harm from the preclusive no-shop clause became manifest on February 1, 2019, when NexPoint revealed that it had proposed an alternative transaction to MCC and SIC on January 24, 2019, and made a definitive proposal on January 31, yet it had received no response.

ANSWER: SIC denies the allegations in paragraph 14, except admits that, on February 1, 2019, NexPoint issued a press release (the “February 1, 2019 NexPoint Press Release”), which is publicly available and speaks for itself.

15.           MDLY and SIC quickly responded with a press release, stating the respective company boards would adhere “to a rigorous review process.” But MDLY and SIC immediately cast doubt on the “rigorousness” of this process by accusing NexPoint of being “misleading.”

ANSWER: SIC denies the allegations in paragraph 15, except admits that, on February 2, 2019, MCC and SIC issued a press release (the “February 2, 2019 Press Release”), which is publicly available and speaks for itself.

16.           On the morning of February 6, 2019, just four days later and without meeting with NexPoint’s representatives, MCC and SIC simultaneously announced the fait accompli: that they would not pursue NexPoint’s proposal because it was “in the best interests” of the companies’ stockholders to decline.

ANSWER: SIC denies the allegations in paragraph 16, except admits that, on February 6, 2019, MCC and SIC issued a press release (the “February 6, 2019 Press Release”), which is publicly available and speaks for itself.

17.           On February 5, 2019, MCC, SIC and MDLY announced the postponement of their respective special meetings of stockholders to vote on the Proposed Mergers from February 8, 2019, to early March 2019. The special meeting has since been set for March 8, 2019.

ANSWER: SIC denies the allegations in paragraph 17, except admits that, on February 5, 2019, MCC, SIC, and MDLY issued a press release (the “February 5, 2019 Press Release”), which is publicly available and speaks for itself, and further admits that the special meeting is now set for March 8, 2019.

18.           In this action, Plaintiffs seek injunctive relief blocking the Proposed Mergers and releasing MCC from the no-shop and termination fee provisions of the governing merger agreement, in order to permit the Company to engage with NexPoint, Origami and any other bidder that steps forward.

ANSWER: To the extent the allegations in paragraph 18 purport to characterize Plaintiffs’ claims, no response is required. To the extent a response is required, SIC denies the allegations in paragraph 18.

19.           Plaintiff FFCG is an SEC-registered investment advisor located at 35 Mason Street, Greenwich, Connecticut 06830. FrontFour and its affiliates (including FFMF) are the beneficial owners of 1,674,946 shares of MCC common stock, which constitutes 3.1% of the Company’s outstanding shares.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 19 and on that basis denies them.

20.           Plaintiff FFMF is an investment fund managed by FFCG. FFMF is the beneficial owner of 1,633,232 shares of MCC common stock, including 1,031 shares held by FFMF in record name.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 20 and on that basis denies them.

21.           Defendant MCC is a Delaware corporation with its principal place of business at 280 Park Ave, 6^th Floor East, New York, NY 10017. MCC is a non-diversified closed-end investment company that seeks to invest in small-and middle-market companies through privately negotiated debt and equity securities transactions. MCC is externally managed by MCC Advisors LLC (“MCC Advisors”), a majority owned subsidiary of Medley LLC, which is controlled by MDLY, which is in turn controlled by Medley Group LLC, pursuant to an investment management agreement executed on January 14, 2014 (the “MCC Management Agreement”). The Taube Brothers are the majority and controlling owners of Medley Group LLC. MCC is named as a defendant solely for the purpose of securing Plaintiffs’ requested relief.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 21 and on that basis denies them.

22. Defendant Brook Taube is the Chief Executive Officer (“CEO”) and Chief Investment Officer (“CIO”) of MCC and the Chairman of the MCC Board. He co-founded MDLY with Seth Taube in 2006. He is conflicted because he serves as Co-CEO of MDLY and as Co-Chairman of the MDLY board of directors (the “MDLY Board”), along with his brother Seth Taube. Brook Taube is also the Managing Partner of MCC Advisors and Senior Portfolio Manager of the private investment funds managed by MDLY since 2007. Brook Taube has served on the board of directors of SIC (the “SIC Board”) since its inception in 2012. He currently serves on the investment committee for SIC Advisors LLC (“SIC Advisors”), the investment adviser to SIC, as well as serves as a Trustee of the Sierra Total Return Fund (“STRF”) and on the investment committee of STRF Advisors LLC, the investment adviser to STRF. Brook Taube is interested in the Proposed Mergers because he controls, with Seth Taube, 14.6% of MCC common stock and 97.7% of the voting interests in MDLY common stock through ownership of MDLY Class B common stock. ³ He will be Chairman and CEO of the combined company and stands to benefit from a lucrative employment package, with a base $600,000 annual salary and $3,200,000 bonus if performance objectives are met.

ANSWER: SIC admits that Brook Taube serves on the board of directors of SIC and the investment committee for SIC Advisors LLC and that Brook Taube has been designated to be the Chairman and CEO of the combined company. SIC denies having knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 22 (including, but not limited, to those in footnote 3) and on that basis denies them.

23. Defendant Seth Taube has served on the MCC Board since its inception in January 2011. He is conflicted because he serves as co-CEO of MDLY and as co-Chairman of the MDLY Board, along with his brother Brook Taube. Seth Taube has also served as Chairman of the SIC Board and CEO of SIC since its inception in April 2012 and as a Trustee of STRF since January 2016. He is interested because he holds controls, with Brook Taube, 14.6% of MCC common stock and 97.7% of the voting interests in MDLY common stock. He will be Vice Chairman, Senior Executive Vice President and Senior Managing Director of the combined company and stands to benefit from a lucrative employment package, with a base $480,000 annual salary and $1,750,000 bonus if performance objectives are met.

ANSWER: SIC admits that Seth Taube served as Chairman of the SIC Board and CEO of SIC and that Seth Taube has been designated to be Vice Chairman, Senior Executive Vice President and Senior Managing Director of the combined company. SIC denies having knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 23 and on that basis denies them.

24.           Defendant Jeff Tonkel has been a director of MCC 2014. He is conflicted because he is a Director and the President of MDLY and the President of SIC. He is interested in the Proposed Mergers because he holds 15,000 shares of MCC stock and 6% of the units in Medley LLC, which are exchangeable for shares of MDLY Class A stock. He will serve as President of the combined company and also stands to benefit from a lucrative employment package, with a base $480,000 annual salary and $1,750,000 bonus if performance objectives are met.

ANSWER: SIC admits that Jeff Tonkel is the President of SIC and has been designated to serve as President of the combined company. SIC denies having knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 24 and on that basis denies them.

25.           Defendant Arthur S. Ainsberg has been a director of the Board since 2011 and is Chairman of the Nominating and Corporate Governance Committees. For his service as an MCC director, Ainsberg has been paid an aggregate of $1,034,923. He owns only 3,000 shares of MCC stock, which were purchased in 2012.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 25 and on that basis denies them.

26.           Defendant Karin Hirtler-Garvey has been a director of the Board since 2011 and is Chairman of the Compensation Committee. For her service as an MCC director, Hirtler-Garvey has been paid an aggregate of $1,158,087. She owns only 3,000 shares of MCC stock, which were purchased shortly after the IPO. She is interested in the Proposed Mergers because she will be appointed a Director of the combined companies, where she will earn at least $200,000 annually.

ANSWER: SIC admits that Karin Hirtler-Garvey has been designated to be a Director of the combined companies. SIC denies having knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 26 and on that basis denies them.

27.           John E. Mack has been a director of the Board since 2011 and is Chairman of the Audit Committee. For his service as an MCC director, Mack has been paid an aggregate of $1,258,265. He owns only 7,000 shares of MCC stock, which were purchased in 2012. He is interested in the Proposed Mergers because he will be appointed a Director of the combined companies, where he will earn at least $200,000 annually.

ANSWER: SIC admits that John E. Mack has been designated to be a Director of the combined companies. SIC denies having knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 27 and on that basis denies them.

28.           Defendant Mark Lerdal has been a director of the Board since 2017. For his two years of service as an MCC director, Lerdal has been paid $288,702. He does not own any shares of MCC stock.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 28 and on that basis denies them.

29.           Defendant MDLY is a publicly traded asset management firm run by its co-CEOs, Defendants Brook and Seth Taube, and is the parent of several registered investment advisors (collectively, “Medley”). On September 24, 2014, MDLY completed its public offering and listed its shares on the NYSE. MDLY is controlled by Medley Group LLC, an entity wholly-owned by the senior professionals of Medley LLC. Ultimately, MDLY manages over $4.8 billion in assets, including those owned by MCC and SIC.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 29 and on that basis denies them.

30.           Defendant SIC is a non-traded BDC. SIC was launched by MDLY in April 2012 as its first public non-traded permanent capital vehicle and is externally managed by SIC Advisors LLC, an affiliate of MDLY. SIC is an affiliate of MCC, as MDLY controls (either directly or indirectly) the investment managers of both SIC and MCC. SIC is named as a party to the Complaint to the extent necessary for the granting of injunctive relief.

ANSWER: SIC admits the allegations in the first and second sentences of paragraph 30. The third sentence of paragraph 30 states a legal conclusion to which no response is required. The fourth sentence of paragraph 30 is a characterization of Plaintiffs’ claims to which no response is required. To the extent a response is required, SIC denies the allegations in the third and fourth sentences of paragraph 30.

31.           Defendant Medley Group LLC (“Medley Group”) is a Delaware limited liability corporation collectively owned by the Taube Brothers, Tonkel, Richard T. Allorto, Jr., John D. Fredericks, Samuel Anderson, and Christopher Taube. Medley Group holds more than 97% of the voting power of MDLY through its ownership of 100% of MDLY’s Class B common stock. Through its control of MDLY, Medley Group ultimately controls Medley LLC, MCC, SIC, MCC Advisors LLC, SIC Advisors LLC, and various other investment advisers and other entities under the MDLY umbrella.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 31 and on that basis denies them, except states that the third sentence of paragraph 31 sets forth a legal conclusion to which no response is required. To the extent that a response is required, SIC denies the allegations in paragraph 31.

32.           Defendant Medley LLC is a Delaware limited liability corporation. MDLY, which is controlled by Medley Group, is the sole managing member of Medley LLC and owns 100% of its voting units. The Taube Brothers are the Co-Chief Executive Officers of Medley LLC; Tonkel, Allorto and Fredericks serve, respectively, as the President, Chief Financial Officer and General Counsel of Medley LLC. Medley LLC owns and controls the investment advisers affiliated with MDLY, including MCC Advisors and SIC Advisors.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 32 and on that basis denies them.

33.           Defendant MCC Advisors is a Delaware limited liability corporation. MCC Advisors is a wholly controlled and majority-owned subsidiary of MDLY. MCC Advisors serves as the investment manager to MCC. The Taube Brothers, Tonkel and Allorto, serve as Managing Partners of MCC Advisors; Brook Taube also serves as MCC’s Senior Portfolio Manager.

ANSWER: SIC admits that Defendant MCC Advisors is a wholly controlled and majority-owned subsidiary of MDLY. SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 33 and on that basis denies them.

34.           MDLY’s most recent Form 10-K, which was filed with the SEC on March 29, 2018, presents the MDLY management structure, including MCC Advisors, as follows:

ANSWER: SIC admits that, on March 29, 2018, MDLY filed a Form 10-K with the SEC (the “2018 MDLY Form 10-K”). Insofar as the allegations of paragraph 34 purport to characterize the contents of the 2018 MDLY Form 10-K, that document is publicly available and speaks for itself. SIC denies having knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 34.

35.           Since its IPO on January 19, 2011, MCC has been under the constant stewardship of MCC Advisors, which in turn has been controlled by the Taube Brothers.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 35 and on that basis denies them.

36.           Pursuant to the MCC Management Agreement, MCC Advisors controls all relevant aspects of MCC’s investment-based business. MCC pays MCC Advisors fees for its investment advisory and management services, consisting of a base management fee and a two-part incentive fee.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 36 and on that basis denies them.

37.           According to the Form 10-K filed by MCC for the year ended September 30, 2018, which was filed December 14, 2018 (“2018 MCC Form 10-K”), MCC has paid $51.3 million to MCC Advisors for the past three fiscal years. Along with the MCC Management Agreement, MCC entered into a separate administration agreement with MCC Advisors (the “MCC Administration Agreement”) – itself worth significant fees to Medley – ensuring that MCC Advisors controls virtually every aspect of MCC’s operations. Both the MCC Management Agreement and MCC Administration Agreement must be approved annually and may be terminated by either party upon 60 days’ written notice without penalty.

ANSWER: SIC admits that, on December 14, 2018, MCC filed a Form 10-K with the SEC (the “2018 MCC Form 10-K”). SIC denies having knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 37, except that, to the extent that the allegations of paragraph 37 purport to characterize the contents of the 2018 MCC Form 10-K, that document is publicly available and speaks for itself.

38.           In addition to rewarding the Taube Brothers, the Form 10-K filed by MDLY for the year ended December 31, 2017 (the “2017 MDLY Form 10-K”) discloses that a third Taube brother, Christopher, serves as MDLY’s Senior Managing Director, Head of Institutional Fund Raising. Christopher Taube received total compensation valued at $1.2 million in 2017.

ANSWER: SIC admits that MDLY filed a Form 10-K with the SEC for the year ended December 31, 2017 (the “2017 MDLY Form 10-K”). SIC denies having knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 38, except that, to the extent that the allegations of paragraph 38 purport to characterize the contents of the 2017 MDLY Form 10-K, that document is publicly available and speaks for itself.

39.           The rich compensation paid to MCC Advisors and members of the Taube family has not resulted in strong market returns for MCC stockholders. Between its IPO and the Announcement Date, MCC’s stock plummeted by approximately 72%, during a period of sustained stock market and sector share price increases. MCC’s cumulative return during that period was -34%, while the return of the S&P 500 Index was +161%. MCC’s performance was equally dismal compared to peers and cannot be blamed on any trouble within the BDC sector. As the following chart shows, the S&P BDC Index has had a positive 57% return since the date of MCC’s IPO:⁴

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 39 and on that basis denies them (including but not limited to the allegations in footnote 4), except to the extent that the chart in paragraph 39 purports to characterize the data as to the performances of MCC’s stock and the S&P BDC Index, those data are publicly available and speak for themselves.

40.           This poor performance is not surprising, because by every industry measure the fund has been in a steady decline:⁵

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 40 and on that basis denies them (including but not limited to the allegations in footnote 5), except to the extent that the chart in paragraph 40 purports to characterize the data as to the performance of MCC’s stock, those data are publicly available and speak for themselves.

41.           The deterioration in MCC’s net investment income (“NII”) and dividend are particularly dramatic. NII, a measure of the income received from investment assets (bonds, stocks, funds, loans and other investments), minus equivalent investment expenses, is a key metric in measuring BDC performance and serves as a proxy for a BDC’s earning power. Since 2014, NII has plunged by 85% (from $1.58 to $0.23 per share), and the dividend has fallen by 65% (from $1.48 to $0.52 per share). Moreover, because dividends have exceeded NII, MCC has operated with an unsustainable shortfall since 2016.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 41 and on that basis denies them.

42.           As of the Announcement Date, MCC had the largest discount to NAV (53%) of any BDC, and the lowest annual return (- 38.6%). Nothing has improved in the past few months, and as of year- end, MCC has continued to languish at a 55% discount to NAV—the single largest NAV discount among the 46 BDCs covered by Raymond James’ investment banking group in their “BDC Weekly Insight” report (published January 3, 2019) and nearly 3x the BDC average discount of 19%. Industry.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 42 and on that basis denies them, except to the extent that the allegations in paragraph 42 purport to characterize one or more publicly available research reports as to the performance of MCC’s stock, those research reports speak for themselves.

43.           Despite MCC Advisors’ abysmal performance and fact that the MCC Management and Administration Agreements could be terminated without penalty, the MCC Board has routinely extended both agreements for an additional year, most recently on November 29, 2018.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 43 and on that basis denies them.

44.           The extensions alone raise questions concerning the independent directors of the MCC Board’s competence and engagement. Since 2011, none of the currently serving independent directors have ever elected to receive MCC stock in lieu of cash compensation, and none of the independent directors have acquired shares in the Company since 2012. This indicates a serious misalignment between the interests of MCC’s independent directors and its stockholders.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 44 and on that basis denies them.

45.           The misalignments are also reflected in the independent directors’ pay. For the fiscal year ended September 30, 2017, MCC compensated its independent directors in amounts ranging from $148,000 to $165,000. MCC’s director compensation is unjustified in comparison to BDC peers, many of which pay in the same range – or less – despite having substantially more assets under management and positive returns:

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 45 (including but not limited to the allegations in footnote 6) and on that basis denies them.

46.           After years of destroying MCC’s share price and market reputation, MDLY began looking for a profitable escape route. In May 2017, certain senior members of MCC Advisors, including the Taube Brothers, Jeff Tonkel, and Christopher Taube (collectively, “Medley Management”), began shopping MDLY and MCC Advisors to potential bidders. Although they retained UBS and Credit Suisse to conduct outreach, the process ultimately failed. No bids progressed beyond the initial indication of interest stage.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 46 and on that basis denies them.

47.           In October 2017, MDLY retained the services of Goldman Sachs & Co. LLC (“Goldman”) and Broadhaven Capital Partners (“Broadhaven”) to restart the process and reach out to potential bidders. At MDLY’s direction, Goldman and Broadhaven invited thirty-eight potential strategic partners or buyers to participate in the preliminary round of a two-round sale process.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 47 and on that basis denies them.

48.           Although the process had started in May 2017, the MCC Board had no involvement in the process run by Goldman and Broadhaven. A strategic transaction was not an agenda item at MCC Board meetings held in May, August or December 2017, although the Taube Brothers and Tonkel sat on the MCC Board and had to know any strategic transaction would have a substantial impact on MCC stockholders.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 48 and on that basis denies them.

49.           Despite the broad outreach by Goldman and Broadhaven, MDLY only received three “viable” first-round, nonbinding indications of interest. Only one bidder (“Party X”) made a second-round proposal. From January 12, 2018 through January 24, 2018, MDLY and Party X engaged in negotiations, which resulted in the exchange of numerous proposals and counter-proposals.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 49 and on that basis denies them.

50.           Based upon these negotiations, on January 26, 2018, the MCC Board established the MCC Special Committee, consisting of Ainsberg, Hirtler-Garvey, Mack and Lerdal, with Ainsberg serving as chair, to consider and evaluate the impact on MCC of a sale of MDLY to a third party that would result in the assignment of the MCC Management Agreement.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 50 and on that basis denies them.

51.           The MCC Board approved compensation for the MCC Special Committee, with each member to receive a $25,000 retainer upon the committee’s formation and a monthly stipend of $15,000 for the chair and $10,000 per month for all other members.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 51 and on that basis denies them.

52.           Although the MCC Special Committee was formed on January 26, 2018, documents produced in the 220 Production indicate that it did not hold any meetings; did not retain any advisors in connection with the transaction proposed by Party X, and did not engage in substantive discussions via email with the Taube Brothers or other members of MDLY Management about a strategic transaction until after June 19, 2018.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 52 and on that basis denies them.

53.           According to its February 11, 2019 press release, Origami reached out to MCC several times in the spring of 2018 and sent the Origami IOI on April 4, 2018, but it “received no response.”

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 53 and on that basis denies them.

54.           The terms of the IOI are not known, because it was not included in the 220 Production, although Section 1(c) of the 220 Stipulation required production of all IOIs sent “between and including May 1, 2017 and August 9, 2018, relating to the Proposed Mergers or any Alternative Transaction.”⁷ This raises the additional concern that MCC or MCC Advisors received other IOIs that were withheld from production.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 54 and on that basis denies them, except that to the extent that paragraph 54 and footnote 7 purport to characterize the contents of publicly available documents, including the 220 Stipulation, SIC states that those documents speak for themselves.

55.           Section 1(a) of the 220 Stipulation also requires MCC to produce “All Board Materials created, sent or modified between and including May 1, 2017 and August 9, 2018 relating to . . . any Alternative Transaction.” The 220 Production contains no Board Materials, as defined in the 220 Stipulation, referencing the Origami IOI, although the MCC Special Committee should have considered those proposals and was receiving monthly pay to do so. There are only two possible explanations: either the Taube Brothers, Tonkel and other members of Medley Management breached their fiduciary duties by withholding the Origami IOI from the MCC Special Committee, or the MCC Special Committee breached its fiduciary duty by ignoring it.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 55 and on that basis denies them, except that to the extent that paragraph 55 purports to characterize the contents of the 220 Stipulation, that document is publicly available and speaks for itself.

56.           Despite the lack of any visible work, the MCC Special Committee was paid at least a total of $280,000 between January and June 2018.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 56 and on that basis denies them.

57.           At that time the Taube Brothers were under immense financial pressure, as MCC’s poor performance had drastically reduced MCC Advisors’ and therefore MDLY’s revenues. Each quarter, base management fees paid to MCC Advisors had decreased due to the decline in MCC’s portfolio, falling from $19.5 million to $17.8 million from 2016 to 2017. The incentive fee had precipitously fallen from $8.0 million to $0.9 million in the same period, and MCC Advisors was not on target to receive any incentive fees from MCC in 2018. Faced with a growing deficit and the need to pay a dividend to MCC stockholders, on May 4, 2018, MCC Advisors voluntarily elected to waive $380,000 of the base management fee payable for the quarter ended March 31, 2018.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 57 and on that basis denies them.

58.           The Taube Brothers were also under increasing pressure due to the terms of a joint venture agreement entered into on June 3, 2016, between Medley LLC and affiliates of Fortress Credit Advisors, LLC (“Fortress” and “Fortress Agreement”), by which Fortress had provided the majority of funding for Medley Seed’s purchase of MCC common stock. The terms of the Fortress Agreement require Medley LLC to pay to Fortress “an 8% preferred distribution, 15% of the Joint Venture’s profits, and up to 8% of the net advisory revenues from one of Medley LLC’s subsidiaries.” By May 2018, Medley LLC was at risk of default under the Fortress Agreement due to MCC’s weakening state and non-sustainable payment of dividends. The 220 Production suggests that the Fortress Agreement was a deterrent to potential acquirers. (MCC220_9554.)

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 58 and on that basis denies them.

59.             MDLY apparently recognized that bidders saw little value in MDLY itself, particularly with the Taube Brother at the helm. On May 15, 2018, Brook Taube emailed two MDLY employees regarding                                                                                                                                                                                                                                

(MCC220_011525.) 

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 59 and on that basis denies them.

60.           Ultimately, Party X was interested only in an asset purchase – an unappealing structure for MDLY because it would cut off its lucrative management fees. In June 2018, MDLY broke off engagement with Party X and all other potential counterparties because it was unable to find any viable indication of interest “that was worth pursuing.”

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 60 and on that basis denies them.

61.           The MDLY sales process reflected that the real value existed at MCC and SIC. But, under the current structure, the Taube Brothers could not appropriate the value of those businesses for themselves.

ANSWER: SIC denies having knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 61 and on that basis denies them.

62.           The MDLY Board decided to turn its attention to a more lucrative option than any asset purchase by a third party could be: rolling up SIC and MCC with MDLY. Through this structure, MDLY Management could “triple dip” by (i) cashing out their interests in MDLY at a higher price than any third party would pay, (ii) keeping their fee stream alive in the form of newly negotiated employment agreements, and (iii) receiving disproportionate consideration for their increased equity in any subsequent sale of the Combined Company.