Annals of Questionable Corporate Governance

The BDC Activist has some excellent coverage  of the in-progress management changes and controversy at Business Development Corporation of America(BDCA), a non-traded BDC managed by affiliates of AR Global.  The external manager plans on getting acquired by Benefit Street, pending the vote of shareholders at BDCA.   The BDC Activist points out similarities between this situation and recent events at Fifth Street, KCAP, Full Circle, and TICC Capital.  The actions of independent directors have a significant impact on shareholder’s returns.   Here are a few of the key points:

  • Prospect Capital and NexPoint both offered to acquire the manager, and offered BDCA shareholders arguably  lower fees and overall better deals, but BDCA turned them down.  BDCA was especially virulent in its opposition to Nexpoint
  • Nonetheless, the board of BDCA unanimously recommends that investors vote yes on the transaction.
  • Board members recently increased their compensation significantly.
  • The BDC Activist also points out that independent directors of BDCA have zero ownership of the stock in this $2.5 billion asset company!

It doesn’t appear that the management contract was shopped very well.  Is Benefit Street really the best option that’s available?Probably not.  There are a lot of asset managers out there with economies of scale that would love to have another $2.5 billion in AUM.

Here is the full piece on BDCA by BDC Activist

Here is the  preliminary proxy

AR Global and its affiliates have a reputation aggressive capital raising , but their stewardship of investor assets has been abysmal.  They have a history of questionable corporate governance.  The “independent” directors often serve on boards of multiple affiliated REITs and/or BDCs, and have been approving of abusive management all along.

Affiliates of BDCA management previously  committed proxy fraud and consequently paid a $3 million fine.

As part of an attempted rollup of several non-traded REITS, with the goal of locking in 20 year + management contract, investors were asked to vote on proposals that would have removed investor protections.

The proxy for ARC Hospitality in particular looked like the ballot in a banana republic democracy.  Like the others, it  asked investors to give up basic rights.  But it had a twist.  The explanation for proposal 3 contained this:

“If this amendment to the Charter is not approved, the Relief Period under the March Advisory Amendment would be terminated and could cause the Company to be unable to meet its capital requirements, including payments due on our outstanding indebtedness, which could have a material adverse effect on the Company.”

The external advisor, which had previously caused the company to lose deposits on properties due to sloppy planning and management, had temporarily been receiving its fee in shares, since the REIT was so overextended it couldn’t afford to pay in cash.  The Proxy stated that if the proposed changes were not approved, it would demand payment in cash, potentially bankrupting the company.  They backed down partially on this requirement, but ultimately shareholders ended up approving most of the proposals at ARC Hospitality and the other affiliated REITs.  With few exceptions the independent directors at these REITs approved of all of the changes.


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