MVC Capital filed suit in the Unites States District Court Southern District of New York against Millennium Partners, its largest shareholder; Millennium subsidiary Millenco and Karpus Management for what it alleges are violations of federal securities law. Millennium Partners contends the lawsuit is a desperate attempt by MVC management to obstruct shareholder voting in upcoming board elections. The case goes to court on Tuesday, Feb. 18. The proxy election is scheduled for Feb. 28.
The suit contends that the dissident shareholders have conspired to take control of MVC and liquidate its assets through pyramid stock ownership, misrepresentations and omissions in SEC filings, and fraudulent proxy solicitations. MVC claims that through its affiliates Millennium Partners controls 6.9% or more of MVC, and that federal law prohibits investment companies from controlling more than 3% of a fund it invests in.
“In our view it’s their intent to gradually liquidate the fund,” said a source close to MVC’s suit. “We believe that based on their track record and things that they’ve said to us. We think they need to come straight with what their intent is.” In 2000, Millennium Partners took over and liquidated the International Biotechnology Trust, a U.K.-based investment firm.
“We have never said we wanted to liquidate this fund. It’s just posturing by the other side, coming up with the most volatile and emotive language they can come up with,” says Robert Knapp, managing director of Millennium Partners and one of the board of directors candidates being advanced by the dissident shareholders. “Our view is that we want to see new mangers run this fund as a more traditional business development company.”
Millenco maintains that it wants to install new management and run MVC like a business development company akin to Allied Capital (NYSE: ALD) and Gladstone Capital (Nasdaq: GLAD). It says its plan calls for the appointment of an interim CEO, a sharp reduction in new investments and containment of expenses, and a portfolio review conducted by an outside auditor.
Millenco sued the fund and its directors in the Chancery Court of Delaware alleging breach of the directors’ fiduciary duty. In December’s ruling, the judge found that MVC failed to disclose information about the business relationships between CEO John Grillos and two board members and ordered the fund to hold new board elections.
With this election, the number of board members for the company will increase from five to seven. MVC Capital’s candidates for board of directors are Grillos; Frederick Hoar, a professor of marketing at Santa Clara University and co-founder of the Band of Angels investment group; James Sims, co-founder, chairman and CEO of GEN3 Partners and current fund directors Laurence Hootnick; Michael Jordan; Peter Locke and Vincent Tobkin.
The Millenco nominees to the board are Knapp, Emilio Dominianni, a retired partner of the law firm Doudert Brothers LLP; Robert Everett, a managing director with Everett & Solsvig; Millennium Partners vice chairman and COO Terry Feeney; Gerald Hellerman, principal of Hellerman Associates and a former branch chief of the Securities and Exchange Commission; Karpus Management president and CEO George Karpus and
Crossbow Venture Partners vice president Bruce Shewmaker.
MVC Capital, formerly meVC Draper Fisher Jurvetson, held a public offering in 2000 to raise $330 million. Soon afterward the company abandoned its business model of partnering with Draper Fisher Jurvetson on deals. By the end of Q3 2002, MVC had invested $134 in 26 portfolio companies which are now valued at approximately $70 million. MVC has about $120 million in cash.
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