Donoghue v. Oaktree Specialty Lending Corp.
| Decision Date | 25 April 2022 |
| Docket Number | 21 Civ. 4770 (PAE) |
| Citation | 600 F.Supp.3d 463 |
| Parties | Deborah DONOGHUE and Mark Rubenstein, Plaintiffs, v. OAKTREE SPECIALTY LENDING CORP., Nominal Defendant, and Leonard M. Tannenbaum, Defendant. |
| Court | U.S. District Court — Southern District of New York |
David Lopez, Law Office of David Lopez, Southampton, NY, Miriam Deborah Tauber, Miriam Tauber Law, New York, NY, James Austen Hunter, Pipersville, PA, for Plaintiffs.
Jeffrey Adam Udell, Walden Macht & Haran LLP, New York, NY, Derek Borchardt, New York State Office of the Attorney General, New York, NY, George William Kroup, The Law Offices of John F. Baughman, PLLC, New York, NY, for Defendant.
Bradley Randall Bobroff, Proskauer Rose LLP, New York, NY, for Nominal Defendant.
In this derivative action, shareholders of Oaktree Specialty Lending Corporation ("OCSL") bring suit to recover alleged short-swing profits obtained by a company insider, Leonard Tannenbaum, pursuant to Section 16(b) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78p(b) ("§ 16(b)").
Plaintiffs Deborah Donoghue and Mark Rubenstein, who own stock in OCSL, allege that Tannenbaum, a statutory insider of both OCSL and Oaktree Strategic Income Corporation ("OCSI"), unlawfully realized short-swing profits when he (1) voted in favor of OCSI's merger into OCSL (the "Merger"), causing his OCSI shares to be exchanged for OCSL shares at a ratio of which he had advance inside knowledge, and then, (2) within six months of the Merger, sold OCSL shares on the open market, at a profit. Tannenbaum counters that his acquisition of OCSL shares pursuant to the Merger was exempt from § 16(b) under the "unorthodox transaction" doctrine, because he did not have volition over how to vote on the Merger and did not have access to exploitable inside information. Crucially, he asserts, he had been instructed by non-party Oaktree Capital Management, L.P. ("Oaktree") to vote his shares in favor of the Merger pursuant to a valid voting agreement, thereby leaving him no discretion over how to vote.
After the Court determined that it could not resolve this dispute on the pleadings, the parties conducted discovery on the limited issue whether the elements for exemption under the "unorthodox transaction" doctrine are established, as Tannenbaum claims. With discovery now complete, the parties have cross-moved for summary judgment. For the reasons that follow, the Court grants Tannenbaum's motion and denies plaintiffs’ mirror-image motion.
Nominal defendant OCSL, a management investment company, is a Delaware corporation whose common stock is registered under § 12(b) of the Act and traded on the NASDAQ Stock Market LLC. Pl. 56.1 ¶ 3; Dkt. 46-20 ("OCSL Form 8-K") at 1.
Non-party OCSI is a Delaware corporation whose stock was registered under § 12(b) of the Act and traded on the NASDAQ Stock Market LLC. Dkt. 46-19 ("OCSI Form 8-K") at 1.
Non-party Oaktree, which arranged the Merger, is an investment company which beneficially owned 13.2% of OCSL's shares and 22.9% of OCSI's shares immediately prior the Merger. Pl. 56.1 ¶¶ 6, 8.
Defendant Tannenbaum is an individual who beneficially owned 13% of OCSL's shares and 21.6% of OCSI's shares immediately before the March 2021 Merger, and 14.9% of OCSL's shares immediately after the Merger. Id. ¶¶ 5, 7.
Plaintiffs Donoghue and Rubenstein are individuals who, at all relevant times, owned securities in OCSL. Id. ¶ 39.
Tannenbaum founded, and held a controlling interest in, the investment companies Fifth Street Senior Floating Rate Corp. ("Fifth Street Senior") and Fifth Street Finance Corp. ("Fifth Street Finance"). Pl. Counter 56.1 ¶¶ 3–4. On July 13, 2017, pursuant to an Asset Purchase Agreement (the "APA"), the two companies agreed to sell, to Oaktree, their management right in the funds under their management and certain other interests. Id. ¶ 4; Pl. 56.1 ¶ 12. The sale closed in October 2017. Pl. 56.1 ¶ 12. To reflect their new brand, Fifth Street Senior changed its name to Oaktree Strategic Income Corporation ("OCSI"), and Fifth Street Finance changed its name to Oaktree Specialty Lending Corporation ("OCSL"). Def. 56.1 ¶¶ 3–4. Tannenbaum continued to be a shareholder in OCSI and OCSL, but, under the APA, ceded certain rights and authorities with respect to his shares to Oaktree. Id. ¶ 6; Pl. Counter 56.1 ¶ 5. These restrictions, designed to ensure that Tannenbaum would not exercise unwanted influence over OCSI and OCSL, were set out in two identical voting agreements (the "Voting Agreements"). Def. 56.1 ¶¶ 6–7, 12.
The terms of the Voting Agreements were as follows. As to voting his shares:
As to his ability to exercise potential control over OCSL's or OCSI's management, the Voting Agreements prohibited Tannenbaum from:
The Voting Agreements further restricted Tannenbaum's ability to sell his OCSL/OCSI shares in the open market. Specifically, Tannenbaum:
The Voting Agreements are filed with the SEC and publicly available. See OCSI VA (displaying URL at bottom of each page linking to SEC archive); OCSL VA (same); see also Dkt. 42 at 4–5, 7 (parties so agreeing).
On October 28, 2020, OCSI and OCSL entered into an agreement to merge, with OCSL to be the surviving entity (the "Merger"). Def. 56.1 ¶¶ 18–19; see Dkt. 63-1 Annex A ("Merger Agreement"). In the Merger Agreement, OCSI's and OCSL's boards of directors recommended that their respective shareholders approve the proposed Merger. Merger Agreement at A-1.
On October 29, 2020, OCSI and OCSL publicly announced the proposed Merger through, inter alia , a joint press release, an investor presentation, and public SEC filings by OCSI and OCSL. Def. 56.1 ¶ 24. As consideration for the proposed Merger, OCSI shareholders were offered OCSL shares in exchange for their OCSI shares. Id. ¶¶ 21–22. In their joint press release, OCSI and OCSL explained that the exchange ratio of OCSI shares to OCSL shares would be derived from the ratio between the two funds’ net asset values ("NAVs") at the time of the Merger's closing. Dkt. 46-17 ("Press Release") at 12 ; see also Dkt. 46-16 item 1.01 (OCSL Form 8-K, filed with the SEC on October 29, 2020, setting forth same calculation method and specifying that the final NAVs would be calculated no sooner than 48 hours before the Merger's closing). As an illustrative example to clarify the exchange ratio's prospective calculation, the Press Release stated that, based on the companies’ NAVs as of June 30, 2020, each OCSI share would be converted into approximately 1.39 OCSL shares. Press Release at 1. In the Press Release, Mathew Pendo ("Pendo"), President and Chief Operating Officer of OCSL3 and OCSI, announced that "[w]e are thrilled to announce this merger," and touted its financial advantages to both sets of shareholders. Id. The Press Release announced that an investor conference call would take place that same day, provided the dial-in information, and announced that a joint proxy statement would be filed with the SEC and mailed to all OCSI and OCSL stockholders. Id. at 2–3.
Tannenbaum declares—and plaintiffs do not dispute—that he first learned of the proposed Merger through those public announcements. Pl. Counter 56.1 ¶¶ 24–25.
At his deposition, Tannenbaum testified that, upon learning that the proposed Merger had been publicly announced, he called Pendo at some point between October 30 and November 1, 2020. Dkt. 46-8 ("Tannenbaum Dep. Tr.") at 48–49; see also Pl. 56.1 ¶ 33. As a large shareholder in both OCSI and OCSL, Tannenbaum was "concerned and curious," Tannenbaum Dep. Tr. at 50, and wished to understand how both companies’ NAVs would be calculated to "ascertain if [he] was being hurt [or] benefitted" by the stock conversion pursuant to the Merger, id. at 47. In response, "Pendo pointed towards different parts of the public release documents to walk [Tannenbaum] through" the method of calculation. Id. at 48. Tannenbaum testified that he understood that any present calculations would not be final, as they depended on the companies’ NAVs at the time of the Merger's closing. Id. at...
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