Sculptor Capital Management, Inc. (“Sculptor” or the “Company”)
(NYSE: SCU) today responded to the Section 220 Demand for
Inspection (“Section 220”) letter sent by Daniel S. Och, Harold
Kelly, Richard Lyon, James O’Connor, and Zoltan Varga (the “Och
Group”) dated August 22, 2023.
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Mr. Och took home $3.3 billion since 2007
while the Company's stock price dropped by 96%. (Graphic: Business
Wire)
Below is a cover letter and a Section 220 response letter
delivered to the Och Group today.
Cover Letter August 29,
2023
via Email
Daniel S. Och Harold Kelly Richard Lyon James O’Connor Zoltan
Varga c/o Andrew J. Levander, Esq. Dechert LLP Three Bryant Park
1095 Avenue of the Americas New York, NY 10036
andrew.levander@dechert.com
Re: Letter Seeking Inspection of Books
and Records of Sculptor Capital
Management, Inc.
Dear Messrs. Och, Kelly, Lyon, O’Connor, and Varga:
We write to you (the “Och Group”) on behalf of Sculptor Capital
Management, Inc. (“Sculptor” or the “Company”) in response to your
letter dated August 22, 2023 to the Special Committee of the Board
of Directors (the “Letter”) and Section 220 Demand for Inspection
(the “Demand”). As set forth in the enclosed response to the
Demand, the Company believes that your requests are improper as
they continue to propagate and rely upon a false narrative as a
cover for your true motives: to disparage the Company, its Board of
Directors and management, and to make self-interested demands. This
is demonstrated by the following points which are further detailed
in our response:
- The Demand appears to be improperly motivated by Mr. Och’s
longstanding resentment from his having been exited from the
Company. While ostensibly requesting information about the
sales process described in the Company’s preliminary proxy
statement, your Demand for books and records is set against
historical context that makes clear that purpose is pretextual, and
that the true purpose is the continuation of what the company views
as Mr. Och’s well-publicized, years’ long smear campaign against
the Company’s management. The Company believes that campaign has
been fueled by Mr. Och’s longstanding animus arising from his
having been exited from the Company following the Africa bribery
scandal that almost put the Company out of business seven years ago
and for which Mr. Och personally paid $2.2 million to resolve a
related SEC enforcement action. The Company believes that the
Demand is just the latest salvo in Mr. Och’s efforts to seek
retribution, which in recent years alone has included him, by all
indications, engineering the noisy resignation of his Board
designee, J. Morgan Rutman, on the basis of a misleading diatribe
regarding management compensation, followed by a books-and-records
lawsuit publicizing yet more false and disparaging information
under the guise of seeking information that, in any event, Mr. Och
already possessed.
- The Och Group’s professed concern for public stockholders
cannot be reconciled with Mr. Och’s repeated efforts to undermine
the Special Committee’s sales process. Moreover, your stated
concerns about seeking to “protect the interests of all [Company]
stockholders” in respect of the Company’s sales efforts rings
particularly hollow considering all that you have done in recent
months that seemed to undermine those efforts. After pledging to
support the Special Committee’s sales process, you then dragged
your feet for months on signing a standard non-disclosure
agreement, depriving yourself of the facts. At the same time, you
publicized baseless attacks about the process on Schedule 13D,
seemingly ignoring contrary information provided to you in
correspondence from the Special Committee and its counsel. And even
worse, after signing the non-disclosure agreement, following what
the Company viewed as disruptive behavior by you, a potential
transaction for $12 per share with Bidder D.
- In negotiations with Rithm Capital Corp. (“Rithm”), the Och
Group’s focus seems to have been on self-interested demands.
Your professed concerns for the Company’s public stockholders is
also belied by your more recent interactions with Rithm in which
you appear to have focused on maximizing your own economic
interests. For example, you requested that, as part of any closing,
Rithm agree to accelerate tens of millions of dollars as a
prepayment at a favorable discount rate of the Tax Receivable
Agreement and pay you an additional $5.5 million in cash for your
legal expenses supposedly incurred in connection with the Company’s
sales process, including costs for counsel that were negotiating
for your own economic benefits. The transaction under discussion
between the Och Group and Rithm would have included the option for
a rollover in order to allow you to avoid recognizing significant
taxable gain received in the transaction. Notably missing from
those discussions were meaningful concessions by any of you for the
benefit of public stockholders.
- We believe that Mr. Och’s purported concern for public
stockholders is in stark contrast to his record when running the
Company. Mr. Och took home $3.3 billion since 2007 while the
Company’s stock price dropped by 96%. [Please see accompanying
chart]
- The Och Group’s attacks on the Special Committee process are
rebutted by the facts of the robust and independent process the
Special Committee ran. The Company believes that the criticisms
you seek to level against the Special Committee’s sales process do
not have even the slightest merit. The Special Committee ran a
robust sales process supported by world-class legal and financial
advisors. They reached out to seventy potential acquirors and
bidders, and management were appropriately instructed not to engage
in any negotiations regarding management’s go-forward employment
until principal terms had been agreed.
- The Och Group’s misguided criticisms of the Rithm
transaction are based upon distortions and misrepresentations.
Furthermore, the attacks on the Rithm transaction are equally
misplaced. The suggestion that there were other credible bids that
provided greater value and certainty of closing, with or without
current management, is distorted - no such bid exists. Nor does
Rithm’s bid crystallize supposed losses from the adoption of Mr.
Levin’s compensation package. Mr. Levin has also agreed to
substantial reductions in his compensation to support a Rithm
transaction.
For all of these reasons and the others set forth in the
response to the Demand, it is clear that you lack the proper
purpose mandated by Delaware law to be entitled to books and
records from the Company. To the contrary, we believe that you are
abusing the process accorded to stockholders under Delaware law as
a means of presenting false narratives about the Company while
shielding your own undisclosed conflicts which put you at odds with
the public stockholders. While this would justify the Company
refusing your requests in full, in the interest of avoiding yet
more unnecessary litigation, as set forth in additional detail in
the Company’s response, we are prepared to meet and confer with you
regarding the production of the limited set of materials typically
subject to requests under Section 220. This letter is without
prejudice to the rights of the Company and the Board, all of which
are preserved.
Very truly yours, Jonathan Pickhardt
cc: Michael Carlinsky Blair Adams Brendan Carroll Brock E.
Czeschin
Full Response Letter August
29, 2023
via Email
Andrew J. Levander, Esq. Dechert LLP Three Bryant Park 1095
Avenue of the Americas New York, NY 10036
andrew.levander@dechert.com
Re: Letter Seeking Inspection of Books
and Records of Sculptor Capital
Management, Inc.
Dear Mr. Levander:
We write on behalf of Sculptor Capital Management, Inc.
(“Sculptor” or the “Company”) in response to the August 22, 2023
demand (the “Demand”) from your clients, Daniel S. Och, Harold
Kelly, Richard Lyon, James O’Connor, and Zoltan Varga (the “Och
Group”), to inspect Company books and records pursuant to 8 Del. C.
§ 220 (“Section 220”) in regard to the proposed acquisition of the
Company by Rithm (“Merger”) as detailed in the preliminary proxy
statement filed by the Company on August 21, 2023 (the “Preliminary
Proxy”).
The Och Group does not have any valid grounds under Section 220
to inspect Company books and records. While they profess to make
the Demand in order to “protect the interests of all [Company]
stockholders,” the Och Group’s well-documented history makes clear
that their actual motivations are otherwise and inappropriate. In
reality, the Demand is nothing more than a pretext for Mr. Och and
his colleagues to continue their years’ long campaign against the
Company’s current management while masking their own conflicts in
having repeatedly demanded economic benefits for themselves.
The Company believes this campaign was borne out of Mr. Och’s
resentment at being exited from the Company’s helm following a
highly-publicized Foreign Corrupt Practices Act (“FCPA”) bribery
scandal that nearly destroyed the Company seven years ago. Since
then, Mr. Och has orchestrated a series of public attacks against
the Company’s management, the Demand being but the latest chapter.
This included the January 2022 noisy resignation of Mr. Och’s
designee to the Company’s Board of Directors (“Board”), J. Morgan
Rutman, a long-time employee of Mr. Och’s, regarding the
compensation paid to the Company’s CEO, James Levin, who seems to
have been Mr. Och’s primary target ever since Mr. Levin supported
the independent directors’ effort to exit Mr. Och from the Company.
Later in 2022, notwithstanding Mr. Och’s already-extensive
knowledge of Mr. Levin’s compensation arrangements, the Och Group
initiated a Section 220 demand purportedly to obtain information
about those arrangements, as well as follow-on litigation that
served no apparent purpose other than to attack the Company, its
Board and management despite the obvious potential for injury to
the Company’s business and prospects.
Now the Och Group has returned to the same playbook, seeking
once again to use Section 220 as a rhetorical platform to attack
the Company and its sale process, while masking the economic
self-interest and personal vendettas that the Company believes
motivate Mr. Och’s behavior, and presenting a false narrative to
the Company’s stockholders. Once again, the Och Group has no real
need for the information demanded as they have been receiving
information about the sales process for months from the Special
Committee and its advisers pursuant to a non-disclosure agreement.
This access included meeting with each of the two bidders that the
Special Committee determined to have presented the best overall
offers for purchase of the Company.1 Had Mr. Och actually had
legitimate concerns about the process, including whether steps were
taken to favor management (when, to be clear, no such steps were
actually taken), he could have simply asked the bidders with whom
he met. Given the multiple weeks of negotiation afforded Mr. Och
with these bidders, he had multiple opportunities to raise his
concerns. However, the Section 220 demand does not even make
mention of an attempt by him to learn the facts. Instead, his
Demand relies only on unfounded allegations stemming from purported
conversations with third parties whose identities he has
consistently withheld.
To the extent Mr. Och’s focus has extended beyond his continuing
vendetta against the Company and Mr. Levin, it has been to
negotiate for Mr. Och’s own economic interests stemming from his
years running the Company. For example, Mr. Och proposed as a
condition of supporting any transaction that Rithm provide him with
acceleration of tens of millions of dollars as a prepayment at a
favorable discount rate of a lucrative Tax Receivable Agreement
(“TRA”) asset structured by members of the Och Group at the time of
the Company’s IPO. The Och Group also sought to structure any
transaction to permit them to delay hundreds of millions of dollars
of taxable income that they have already delayed for more than a
decade and a half. In addition, the Och Group demanded payment of
$5.5 million to cover legal fees incurred by them in connection
with actions taken against the Company. The Och Group also sought,
among other things, enhanced credit protection. It was only when
Rithm refused to accede to Mr. Och’s demands that he chose to
oppose the deal.
Moreover, the criticisms that the Och Group levels at the
Special Committee’s process and the Rithm transaction itself are
flatly false. As described in detail in the Preliminary Proxy, the
Special Committee—comprised of two unassailably independent
directors—implemented and ran a robust sales process that was
supported and validated by world-class financial and legal
advisors. The suggestion of any interference in the process to
entrench management and protect their supposedly outsized
compensation has it exactly backwards. Nothing about the process
required or even encouraged the retention of management which was
entirely up to the bidders. Further, existing management—especially
Mr. Levin—made significant concessions in support of obtaining a
deal with Rithm that would maximize benefits to stockholders. This
included Mr. Levin agreeing to accept a cap on his annual
compensation that would leave him earning less than what Mr. Och
regularly paid him when Mr. Och was CEO of the Company—and a small
fraction of what Mr. Och routinely paid himself. Indeed, the only
current or former management stakeholders involved in the
discussions who failed to provide meaningful concessions to improve
the benefits of the Rithm transaction for stockholders are the Och
Group members, who have not only proposed their personal stakes
being paid in full but who have, in fact, sought preferential
treatment.
As explained in further detail below, these considerations
demonstrate that the Demand is pretextual, lacks a proper purpose
and otherwise fails to comply with the requirements of Section
220.
1. The Demand Is Improperly Motivated by Longstanding and
Well-Documented Animus.
Under Delaware law, a showing that a Section 220 demand is
motivated by animus establishes an improper purpose. Compare
Highland Select Equity Fund, L.P. v. Motient Corp., 906 A.2d 156,
167 (Del. Ch. 2006), aff’d sub nom. Highland Equity Fund, L.P. v.
Motient Corp., 922 A.2d 415 (Del. 2007) (denying Section 220 demand
where stockholder’s purported purpose in bringing the demand was a
“ruse” and instead motivated by a desire to “derive[] utility from
the demand itself as a rhetorical platform”), with Grimes vs. DSC
Communications Corp., 724 A.2d 561 (Del. Ch. 1998) (ordering
production of materials in response to Section 220 demand where
“there is nothing in the record to date suggesting that [the
demand] is motivated by some improper animus”).
Here, the Demand is just the latest installment in Mr. Och’s
historical effort to harm the Company, its Board and its
management. The genesis of Mr. Och’s animus has nothing to do with
the transaction at issue or its terms, but rather traces back to
the events leading up to his departure from the Company, when it
was known as Och-Ziff. Mr. Och, as Chairman, CEO and controlling
stockholder, built Och-Ziff into a hedge fund behemoth, but its
success was squandered when, in September 2016, Och-Ziff was
required to enter a Deferred Prosecution Agreement (“DPA”) with the
U.S. Department of Justice (a serious sanction effectively serving
as a form of probation for its multi-year duration) and its Africa
subsidiary was forced to plead guilty to a criminal charge for
conspiracy to violate the Foreign Corrupt Practices Act for a
bribery scandal that took place in the Democratic Republic of Congo
(the “DRC”) and Libya. The Securities and Exchange Commission
brought related charges. In total, the Company was ordered to pay
$412 million to resolve the matter. Mr. Och himself paid $2.2
million to resolve a related SEC enforcement action in which the
SEC found Mr. Och had “caused violations in two Och-Ziff
transactions in the [DRC]” and detailed how he had been “aware of
the risk of corruption in the transactions with [Och-Ziff’s] DRC
Partner” and “approved the use of Och-Ziff investor funds in those
transactions” even though proceeding with the transactions was
“contrary to the recommendation of his legal and compliance team.”
Faced with massive capital withdrawals in the wake of the scandal
and restrictive regulatory penalties that barred the Company from
key investor channels, the Company had no choice but to attempt to
distance itself from Mr. Och, including by ultimately rebranding as
Sculptor.
In December 2017, the independent directors of the Board
unanimously voted to recommend that Mr. Och be removed as CEO. Mr.
Och refused to recognize the idea that his continued presence at
the Company was detrimental to its future success. Instead, he
became enraged by the perceived disloyalty of Company executives
and Board members who made this decision. Chief among those whom
Mr. Och blamed for his exit from the Company is Mr. Levin, its
current chief executive and chief investment officer, whom Mr. Och
had previously anointed as his heir-apparent. Mr. Och
contemporaneously instructed a group of his allies, including
certain members of the Och Group and Mr. Rutman: “We have to make
clear that I/we will be the winning team” and that “Jimmy [Levin]
cannot be the winning team.”
Since that time, Mr. Och has repeatedly taken steps that have
disrupted Sculptor’s business. These actions have peaked over the
past eighteen months. Among other things, by all indications Mr.
Och caused Mr. Rutman—his hand-picked board representative and
longtime president of Mr. Och’s family office (that manages his
personal wealth) and to whom he has paid millions of dollars—to
noisily resign from the Board in stated protest of a compensation
package agreed with Mr. Levin at the end of 2021 (“2021
Compensation Package”). As part of his resignation, Mr. Rutman sent
the Board a seven-page, single-spaced letter containing a diatribe
against the Company’s corporate governance process and decisions,
including numerous disparaging remarks about the Company, its
Board, and its officers. Mr. Och and Mr. Rutman were both well
aware that Sculptor would be forced to disclose a letter of this
type. The public resurgence of a dispute with Mr. Och had its
obvious effect, negatively impacting Sculptor’s publicly traded
share price and causing meaningful disruption among Sculptor’s
clients and to its capital-raising efforts.
Mr. Och then used Mr. Rutman’s resignation letter as a basis to
demand books and records from the Company regarding the Board’s
process for approving Mr. Levin’s 2021 Compensation Package. The
books-and-records requests were themselves a charade, largely
targeting Board materials to which Mr. Och already had access
through Mr. Rutman. While the Company was in the midst of
diligently producing the requested documents, and without any
warning or notice to the Company, Mr. Och used the
books-and-records demand as an excuse to publicly file an
unnecessary lawsuit filled with additional disparaging statements
that were not even relevant to the demand for books and records.
Although Mr. Och did not provide Sculptor with any advance notice
of the Complaint, it seems he had his media relations team
aggressively push it to the press.
Faced with Mr. Och’s disruptive and injurious behavior, the
Company worked to find a solution. In mid-November, the Company was
able to finally reach an agreement with Mr. Och to dismiss the
books-and-records lawsuit in exchange for some additional documents
in conjunction with the Board also announcing publicly that a
Special Committee of the Board (which had been established months
earlier) had been created to explore potential transactions (which
could include a sale of the Company). Sculptor only agreed to
announce the Special Committee’s ongoing exploration of potential
transactions publicly because Mr. Och represented he would approach
the process in good faith and without conditioning his
consideration on any particular structure (such as the exclusion of
existing management). This commitment was reflected in the public
statement accompanying the agreement, where he stated: “we will be
supportive of a vigorous, independent, and thorough process that
puts shareholders first.”
Unfortunately, Mr. Och did not honor his commitments. Shortly
after settling the Section 220 litigation, the Company sent Mr. Och
a proposed non-disclosure agreement so that it could share
information with him regarding the sale process. Mr. Och did not
even provide comments on the draft for almost two months. Instead,
Mr. Och used the interim period to spread a false narrative that
the Special Committee was not running an open and transparent sales
process. For example, Mr. Och filed a Schedule 13D containing
materially incorrect statements such as that the Special Committee
was “implying to potential buyers that management’s approval is
effectively necessary for any deal” and that the Special Committee
was discouraging bidders from presenting certain types of offers
for the Company. (January 27, 2023 Schedule 13D.) Mr. Och finally
responded to the draft non-disclosure agreement—showing his first
interest in learning the actual facts—on January 28, 2023, the day
after he filed this Schedule 13D. That agreement was eventually
signed on February 15, 2023.
As disclosed in the Preliminary Proxy, the Company believes that
Mr. Och was also responsible for the collapse of a potential
transaction with Bidder D earlier this year. By March 2023, the
Special Committee was in advanced discussions with Bidder D, having
agreed on price, a draft merger agreement, and all material
conditions. As of March 27, 2023, the key gating item standing in
the way of a definitive merger agreement with Bidder D was Bidder
D’s desire to secure the Och Group’s support for the transaction.
Mr. Och sent two letters refusing to support the transaction
without even engaging with Bidder D. Once Mr. Och eventually
allowed his representative (Mr. Rutman) to meet with Bidder D,
Bidder D became concerned that Mr. Och did not intend to engage in
a constructive dialogue. Then, in the midst of the Company’s
discussions with Bidder D, Mr. Och wrote to the Special Committee
on April 5, 2023, contending that the Company should abandon the
sales process altogether—even though he had publicly pledged
support just a few month earlier. A few weeks later, with no change
in Mr. Och’s actions, Bidder D walked away, relaying to the Special
Committee’s advisors that they had no appetite to engage further
with the Och Group.
2. The Och Group’s Supposed Concern for Protecting Stockholder
Value Is Belied by Its Self-Interested Demands.
Given the experience with Bidder D, the Special Committee sought
to re-engage with potential acquirors willing to consider a
transaction that would not be conditioned on Mr. Och’s support. In
late May 2023, Rithm provided an updated proposal to the Special
Committee and confirmed that it did not intend to condition the
signing or closing of the potential transaction on the support of
Mr. Och. Through June 2023, the Special Committee negotiated with
Rithm to improve its proposal (while also engaging with other
potential bidders). In late June 2023, Rithm indicated that it
wanted to have discussions with Mr. Och about the potential
transaction before proceeding to execute a definitive merger
agreement.
On July 6, 2023, the Och Group entered into a confidentiality
agreement with Rithm so they could discuss a potential transaction.
Over the next two weeks, Rithm responded to extensive requests for
information from the Och Group and engaged with them on a number of
issues they raised as conditions for supporting any transaction.
The issues that Mr. Och raised in those discussions made clear to
the Company that Mr. Och’s focus was on continuing to inflict
additional pay cuts on Mr. Levin and on maximizing his own economic
interests not shared with public stockholders.
For example, the Och Group focused heavily on the TRA asset that
Mr. Och had bestowed on himself and the other Och Group members at
the time of the Company’s IPO in 2007. The TRA assets have allowed
the Och Group to reap over $150 million in payments from the
Company in connection with the use of certain tax assets that had
been created at the time of the IPO. The TRA by its terms expressly
contemplated change-of-control transactions such as the merger by
providing for assumptions favorable to the Och Group in calculating
TRA payments but did not provide for any required acceleration of
those TRA payments, which instead would continue to be paid over a
several years. Nevertheless, in his discussions with Rithm, Mr. Och
requested that, as part of closing any transaction, Rithm agree to
prepay a significant portion of the more than $170 million in
estimated remaining TRA payments, a substantial portion of which
would be paid to the Och Group. Moreover, the Och Group demanded a
highly favorable discount rate on the prepayment. Similarly, the
Och Group insisted as a condition of supporting any transaction
that Rithm agree to pay them an additional $5.5 million in cash for
legal expenses incurred in connection with the Company’s sales
process, including counsel costs related to negotiating for their
own economic benefits.
The transaction under discussion between the Och Group and Rithm
would have included the option for a rollover of the Class A Unit
interests that they hold, in a fully tax-deferred transaction,
which would allow them to avoid recognizing significant taxable
gain in excess of proceeds to be received in the transaction (as a
result of taxable gain attributable in large part to tax-deferred
distributions previously received by the Och Group).
Finally, the Och Group even demanded that they be given personal
consent rights over any press statements announcing the
transaction, presumably to ensure they can continue their false
narrative of being on the side of stockholders.
In contrast to the actions taken by the Och Group, Mr. Levin
agreed to make significant modifications to his employment
agreement that would materially reduce his overall compensation,
including imposing an annual cap. Even with these concessions, Mr.
Och still sought to insist that Mr. Levin’s compensation be reduced
further as a condition of the Och Group’s support for the Rithm
transaction. Aside from ignoring the importance of Mr. Levin to
investors, it is also inexplicable why Mr. Och feels the need to
overturn the independent decision of a third party, i.e., Rithm, as
to what is appropriate compensation for Mr. Levin going forward.
Notably, when Mr. Och was CEO, he regularly approved compensation
for Mr. Levin in excess of the cap agreed to by Mr. Levin.
Mr. Och’s behavior in his negotiations with Rithm is nothing
new. Mr. Och has regularly focused on his personal economic
benefits. For example, at the time of the Company’s IPO, Mr. Och
caused the Company to take on $750 million in debt with the
majority of the proceeds going to fund a personal distribution to
himself and members of his group. Thereafter, Mr. Och continued to
distribute substantially all of the Company’s earnings, with
himself as the largest recipient, leaving the business with little
retained earnings and saddled with debt. When this left the Company
insufficiently capitalized to pay the $412 million penalty imposed
as a result of the Africa bribery scandal, he conditioned providing
any personal financing to the Company on receiving “preferred”
interests in exchange that would ensure he got repaid ahead of
public stockholders. Because no asset management company had ever
had a DPA, there was a question about the Company’s survival.
However, when it came time to pay the penalty and there were no
retained earnings to do so, Mr. Och insisted on receiving preferred
interests that would pay him back completely before public
shareholders would receive a penny in the event of a bankruptcy.
Mr. Och also insisted as a condition of providing financing that he
receive a broad-based release.
Mr. Och’s ability to bestow these benefits upon himself was
enabled by his complete control over the Company—at the time of the
IPO, Mr. Och awarded himself a voting proxy and certain other
powers, giving him control over stockholder votes and Board
decisions on material matters. These powers were removed and
governance was democratized as part of Mr. Och’s exit from the
Company. And current management has since diligently paid down the
debt with which Mr. Och had saddled the Company.
3. The Och Group’s Criticisms of the Special Committee Process
and Proposed Transaction Are Based Upon Distortions and
Misrepresentations.
Setting aside the Och Group’s animus, the Demand does not
identify a “proper purpose” for the books-and-records demand, as it
must. Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026,
1028 (Del. 1996) (“[A] stockholder has the burden of showing . . .
a proper purpose entitling the stockholder to an inspection of
every item sought.”). A stockholder’s obligation to identify a
proper purpose is more than “a mere speed bump” that she must
clear. Hoeller v. Tempur Sealy Int’l, Inc., 2019 WL 551318, at *1
(Del. Ch. Feb. 12, 2018). According to the Demand, the Och Group’s
purpose for demanding books and records are to investigate
potential breaches of fiduciary duty related to: (i) the sales
process, including approval of the merger; (ii) the negotiation,
execution, and approval of management compensation; (iii) the
negotiation, execution, and approval of voting agreements; to
“investigate the possible aiding and abetting” of those breaches by
Rithm; to evaluate the fairness of the merger; to assess the
veracity and completeness of the Company’s public disclosures; and
to communicate with other stockholders. Demand at 5. But all of
these so-called “purposes” are underpinned by the baseless
allegations of wrongdoing leveled by the Och Group in the Demand
letter itself. Such allegations do not establish a proper purpose
for inspection of books and records under Delaware law.
In the context of similar demands, the Delaware Supreme Court
has held that “stockholders seeking inspection under Section 220
must present ‘some evidence’ to suggest a ‘credible basis’ from
which a court can infer that mismanagement, waste or wrongdoing may
have occurred.” Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117,
118 (Del. 2006). A stockholder “must do more than state, in a
conclusory manner” that a desire to investigate mismanagement or
wrongdoing is a proper purpose. See W. Coast Mgmt. & Capital,
LLC v. Carrier Access Corp., 914 A.2d 636, 646 (Del. Ch. 2006); see
also AmerisourceBergen Corp. v. Lebanon Cty. Emps. Ret. Fund, 243
A.3d 417, 428 (Del. 2020) (stockholders cannot use Section 220
demands to engage in an “indiscriminate fishing expedition”). The
Och Group has adduced no such evidence, and no credible basis to
infer that mismanagement, waste or wrongdoing occurred in the sale
process or anywhere else at the Company.
The Och Group’s complaints about the Special Committee sales
process are simply false. As disclosed in the Preliminary Proxy,
the Board appointed a Special Committee composed of directors whose
independence is unassailable. The Special Committee retained
experienced world-class advisors, including Latham & Watkins as
its independent legal advisor and PJT Partners as its financial
advisor.2 The Special Committee reached out to seventy potential
acquirors, twenty-five of which signed confidentiality agreements
and commenced due diligence, and eleven of which submitted
non-binding preliminary indications of interest. The Special
Committee ran the process from start to finish, and instructed
bidders and management, including in the bid process letters sent
to interested parties, not to engage in any negotiations regarding
management’s go-forward employment until after the principal terms
of any transaction had been agreed between the Company and the
bidder.
The Demand asserts two arguments regarding the Special
Committee’s independence, both of which are entirely without
merit.
First, Mr. Och falsely accuses Marcy Engel, Chair of the Board,
of being conflicted because her compensation for Board service
increased during her tenure on the Board. That is false and
outrageous. Ms. Engel’s compensation was increased when she assumed
the Chair role, to the exact same amount that her predecessor as
Chair received—an amount that was proposed by one of Mr. Och’s
designees. Notably, Mr. Och’s designee Mr. Rutman voted in favor of
Ms. Engel becoming Chair, and approved her compensation. Other
increases to Ms. Engel’s compensation were similarly based on her
assuming additional duties, including as chair of certain
committees, for which she also has been paid at levels consistent
with her predecessors. The Och Group’s suggestion that Ms. Engel is
somehow beholden to Mr. Levin is even more absurd. It was Mr. Och
himself who invited Ms. Engel to join the Board; she had no
preexisting relationship with Mr. Levin, and did not even meet him
until after she joined the Board. Mr. Och and his designee also
supported Ms. Engel’s role as lead independent director while he
was Chairman, and also voted to reaffirm Ms. Engel’s independence
each year.
Mr. Och next argues that both Ms. Engel and Charmel Maynard were
conflicted because they were “subject to a potential lawsuit” for
approving the 2021 Compensation Package. That reasoning is equally
specious. As described in the filings responding to the Och Group’s
prior Section 220 action, the Board followed a robust process in
approving the 2021 Compensation Package; it was advised by leading
compensation consultants, originally chosen by Mr. Och, who
concluded it was reasonable for the Board to support that package.
The Board exercised its business judgment to award a “pay for
performance” package that also took into account management’s
continued efforts in addressing the ramifications of the Africa
bribery matter, the DPA and the disputes and disagreements with Mr.
Och and related publicity. Any possible claim based on that
decision would also be subject to exculpation under Section
102(b)(7) of the Delaware General Corporation Law. Notably, in the
20 months since the 2021 Compensation Package was announced, and 18
months since Mr. Rutman’s noisy resignation, no lawsuit has sought
to question the Board’s decisions regarding Mr. Levin’s
compensation. Indeed, the only lawsuit filed relating to the 2021
Compensation Package was the Section 220 action that the Company
believes Mr. Och filed in furtherance of his retribution campaign.
There is no credible threat of liability for the 2021 Compensation
Package vote, and accordingly there is no basis for alleging that
the Special Committee members were conflicted in voting to approve
the Merger.
The Demand’s other complaints about the Special Committee’s
process or the Rithm transaction itself are equally unfounded.
First, the claim that there were other third-party bidders
prepared to acquire the Company for greater value without current
management is distorted. The Special Committee stood ready to
entertain a transaction in any form—with or without current
management—that would maximize stockholder value. The Special
Committee and its advisers are unaware of any such credible bid.
Indeed, after Mr. Och made public comments suggesting that such
bidders existed, the Special Committee repeatedly asked Mr. Och
either to refer them to the Special Committee or identify them so
that the Special Committee could deal with them directly. Despite
stating in multiple SEC filings that he is in communication with
bidders, Mr. Och has never identified a single interested party to
the Special Committee.
Second, the price of $11.15 per share proposed for the Rithm
transaction does not crystallize any losses attributable to
supposed off-market terms in the 2021 Compensation Package. To the
contrary, the market and the main analyst following the Company
reacted positively to the Package when it was first adopted,
undoubtedly recognizing that its performance-based metrics aligned
Mr. Levin’s pay with the interests of Sculptor’s stockholders and
clients. It was not until Mr. Och reignited his attacks on the
Company at the end of January 2022 that the Company’s stock price
dropped, reflecting what the Company believes was the weight of
concerns that the return of internecine squabbles with Mr. Och
would impact the Company’s ability to retain and grow its client
base. The Company believes that Mr. Och’s decision to pursue his
unnecessary Section 220 action last year, followed by repeated
misleading public filings, only served to exacerbate the impact.
The Company disclosed these impacts in a series of periodic filings
with the SEC, detailing the elevated redemption requests and
difficulty in raising new capital that the Company believes Mr.
Och’s attacks had occasioned.
Third, the suggestion that Rithm’s bid was negatively impacted
by the cost of Mr. Levin’s compensation package is false. As
explained in the Preliminary Proxy, while Rithm did decrease its
bid from $12 per share to $11.15 per share, that decrease had
little to do with Mr. Levin seeking additional compensation. To the
contrary, in his discussions with Rithm, Mr. Levin agreed to accept
major cuts in his compensation as well as in the value of his
equity interests. As described in the Preliminary Proxy, Rithm
revised its offer price to $11.00 per share due to Rithm’s belief
that it would need to spend more money than anticipated in the form
of a long-term incentive plan and retention plan for the Company’s
senior leadership (excluding Mr. Levin, with whom Rithm intended to
enter into revised employment agreement terms which substantially
reduce his compensation). Rithm had concluded, following additional
diligence and focus on the proceeds allocation among the key
employees, that it would be required to spend more than was
provided for in its original model in order to retain and
incentivize key members of senior leadership of the Company
(excluding Mr. Levin), particularly in light of the significant
amount of equity incentives which would not receive any
consideration in connection with the potential transaction. As a
result, Rithm had agreed to establish (a) a long-term incentive
plan and (b) a $30 million retention pool (in which Mr. Levin would
not participate), also for incentive purposes. Rithm subsequently
agreed to increase the retention incentive program from $30 million
to $35 million and allocate $5 million of its retention incentive
program to Mr. Levin, and the offer price was not reduced in
connection with such revision to the retention incentive program;
instead, Rithm subsequently increased its offer price to $11.15 per
share.
Finally, the Demand falsely contends that the required
stockholder vote has been skewed in favor of the Board’s desired
outcome of supporting the Rithm transaction. In support, the Demand
cites to the fact that the Class A Unit Holders will be excluded
from the majority-of-the-minority approval as supposed evidence
that the Och Group is being disadvantaged. This is not accurate.
Rithm and the Company provided for the required corporate
approvals—a majority vote of all shareholders, including the Class
A Unit Holders, in accordance with the Company’s governing
documents. But then in addition to, and not in lieu of, that vote,
given the potential conflicts of interests attributable to both
management and the Och Group, the parties opted to go a step
further – which was not required – to provide even greater
protection and provide that the deal must be approved by the truly
disinterested stockholders in an additional majority of the
minority vote. The reason the Class A Unit Holders are excluded
from the majority-of-the-minority vote is because they are to
receive interests different from public stockholders under the
proposed Merger, namely the opportunity to rollover their Class A
Units into Rithm stock, which gives them a right they demanded.
Indeed, the need for a tax-free rollover opportunity has been a
longstanding demand of the Och Group, as it will permit them to
defer significant tax obligations. That the Och Group seeks to
portray the unique benefits they have sought and are being accorded
into an effort by the Company to disenfranchise them reveals the
lengths to which they are prepared to go to distort the record.
4. The Och Group’s Document Demands Are
Impermissibly Overbroad
The Demand as drafted is also vastly overbroad, and improper for
that reason as well. A Section 220 demand is not the equivalent of
discovery in litigation—which is precisely how the requests read.
Indeed, the Demand seeks “all documents and communications” related
to a litany of far-reaching, broad topics—including (but far from
limited to) “negotiation of the Voting Agreements,” “the treatment
of the Compensation Package and compensation arrangements,” and all
communications with Rithm regarding “the Merger.”
Delaware courts have been clear: the scope of documents produced
in response to a Section 220 request should be narrowly tailored to
the documents that are truly necessary for the stockholder’s proper
purpose. Helsman Mgmt. Servs., Inc., v. A & S Consultants,
Inc., 525 A.2d 160, 167 (Del. Ch. 1987) (allowing inspection of
only records that are “essential and sufficient” to the
stockholder’s purpose); see also Se. Pennsylvania Transportation
Auth. v. Facebook, Inc., No. CV 2019-0228-JRS, 2019 WL 5579488, at
*6 (Del. Ch. Oct. 29, 2019), judgment entered sub nom. Se.
Pennsylvania Transp Auth. v. Facebook, Inc. (Del. Ch. 2019)
(“[M]ere curiosity or a desire for a fishing expedition will not
suffice.”) (citation omitted). Indeed, the Och Group bears the
burden of making “specific and discrete identification, with rifled
precision, . . . [to] establish that each category of books and
records is essential to the accomplishment of their articulated
purpose.” Brehm v. Eisner, 746 A.2d 244, 266-67 (Del. 2000); accord
Espinoza v. Hewlett-Packard Co., 32 A.3d 365, 31-772 (Del. 2011).
Thus, even assuming the Och Group could state a proper purpose, the
scope of its requests falls well short of the “rifled precision”
standard that Delaware requires.
* * *
In sum, the Och Group’s Demand lacks a proper basis under
Section 220 because it is motivated by animus, lacks a proper
purpose, and is impermissibly overbroad in its requests. It is
evident that the Och Group seeks to abuse the process accorded to
stockholders under Delaware law as a means of amplifying their
unfounded accusations and to distract from their own conflicts,
which put them at odds with public stockholders. The Company thus
has no legal obligation to produce any books or records in
response.
Nonetheless, in the interest of avoiding yet more unnecessary
litigation, the Company is willing to meet and confer to discuss
providing the Och Group with an appropriate production of materials
typically subject to requests under Section 220, including the
non-privileged portions of the relevant minutes of the Board and
Special Committee’s meetings and the related presentations,
following the execution of a satisfactory non-disclosure
agreement.
I look forward to hearing from you regarding your availability
to meet and confer, including to finalize the non-disclosure
agreement related to production of materials. The Company reserves
the right to supplement this response and it is without prejudice
to the rights of the Company and the Board, all of which are
preserved.
Very truly yours, Jonathan Pickhardt
cc: Michael Carlinsky Blair Adams Brendan Carroll Brock E.
Czeschin
About Sculptor
Sculptor is a leading global alternative asset manager and a
specialist in opportunistic investing. For over 25 years, Sculptor
has pursued consistent outperformance by building an operating
model and culture which balance the ability to act swiftly on
market opportunity with rigorous diligence that minimizes risk.
Sculptor’s model is driven by a global team that is predominantly
home-grown, long tenured and incentivized to put client outcomes
first. With offices in New York, London and Hong Kong, Sculptor
invests across credit, real estate and multi-strategy platforms in
all major geographies. As of August 1, 2023, Sculptor had
approximately $34.0 billion in assets under management. For more
information, please visit our website (www.sculptor.com).
Additional Information About the Transaction and Where to
Find It
This communication relates to a proposed transaction between
Rithm Capital Corp. and Sculptor Capital Management, Inc.
(“Sculptor”). In connection with the proposed transaction, Sculptor
filed a preliminary proxy statement on Schedule 14A on August 21,
2023 with the Securities and Exchange Commission (“SEC”). Promptly
after filing its definitive proxy statement on Schedule 14A (the
“Proxy Statement”) with the SEC, Sculptor intends to mail or
otherwise provide to its stockholders such Proxy Statement.
Sculptor may also file other documents with the SEC regarding the
proposed transaction. BEFORE MAKING ANY VOTING DECISION, SCULPTOR'S
STOCKHOLDERS ARE URGED TO CAREFULLY READ THE PROXY STATEMENT
(INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO) AND ANY OTHER
DOCUMENTS THAT HAVE BEEN OR MAY BE FILED WITH THE SEC IN CONNECTION
WITH THE PROPOSED TRANSACTION OR INCORPORATED BY REFERENCE THEREIN
BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED
TRANSACTION AND THE PARTIES TO THE PROPOSED TRANSACTION. Investors
and security holders may obtain a free copy of the Proxy Statement
and other documents containing information about Sculptor and the
proposed transaction filed with the SEC (when available) from the
SEC's website at www.sec.gov and Sculptor's website at
www.sculptor.com. In addition, the Proxy Statement and other
documents filed by Sculptor with, or furnished to, the SEC (when
available) may be obtained from Sculptor free of charge by
directing a request to Sculptor's Investor Relations at
investorrelations@sculptor.com.
Participants in the Solicitation
Sculptor and certain of its directors, executive officers and
employees may be considered to be participants in the solicitation
of proxies from Sculptor's stockholders in connection with the
proposed transaction. Information regarding the persons who may,
under the rules of the SEC, be deemed participants in the
solicitation of the stockholders of Sculptor in connection with the
proposed transaction, including a description of their respective
direct or indirect interests, by security holdings or otherwise are
included in the preliminary proxy statement and will be included in
the Proxy Statement when it is filed with the SEC. You may also
find additional information about Sculptor's directors and
executive officers in Sculptor's proxy statement for its 2023
Annual Meeting of Stockholders, which was filed with the SEC on
April 28, 2023. You can obtain a free copy of this document from
Sculptor using the contact information above.
No Offer or Solicitation
This communication is for information purposes only and is not
intended to and does not constitute, or form part of, an offer,
invitation or the solicitation of an offer or invitation to
purchase, otherwise acquire, subscribe for, sell or otherwise
dispose of any securities, or the solicitation of any vote or
approval in any jurisdiction, pursuant to the proposed transaction
or otherwise, nor shall there be any sale, issuance or transfer of
securities in any jurisdiction in contravention of applicable law.
The proposed transaction will be implemented solely pursuant to the
terms and conditions of the merger agreement, which contain the
full terms and conditions of the proposed transaction.
Cautionary Note Regarding Forward-Looking Statements
The communication contains statements which may constitute
“forward-looking statements” made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995,
including, but not limited to, statements regarding the proposed
transaction. All statements, other than statements of current or
historical fact, contained in this communication may be
forward-looking statements. Without limiting the foregoing, the
words “believes,” “anticipates,” “plans,” “expects,” “may,”
“should,” “could,” “estimate,” “intend” (or the negative of these
terms) and other similar expressions are intended to identify
forward-looking statements. These statements represent Sculptor’s
current expectations regarding future events and are subject to a
number of assumptions, trends, risks and uncertainties, many of
which are beyond Sculptor’s control, which could cause actual
results to differ materially from those described in the
forward-looking statements. Accordingly, you should not place undue
reliance on any forward-looking statements contained herein. For a
discussion of some of the risks and important factors that could
affect such forward-looking statements, see the sections entitled
“Forward Looking Statements,” “Risk Factors” and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” in Sculptor’s most recent annual and quarterly reports
and other filings filed with the SEC, which are available on
Sculptor’s website (www.sculptor.com).
Factors that could cause actual results and outcomes to differ
materially from any future results or outcomes expressed or implied
include, but are not limited to, the following risks relating to
the proposed transaction: the occurrence of any event, change, or
other circumstances that could give rise to the termination of the
merger agreement; the satisfaction of closing conditions to the
transaction on a timely basis or at all, including the ability to
obtain required regulatory and stockholder approvals; uncertainties
as to the timing of the transaction; litigation relating to the
transaction; the impact of the transaction on Sculptor’s business
operations (including the threatened or actual loss of employees,
clients or suppliers); incurrence of unexpected costs and expenses
in connection with the transaction; and financial or other setbacks
if the transaction encounters unanticipated problems. Other
important factors that could cause actual results to differ
materially from those expressed or implied include, but are not
limited to, risks related to changes in the financial, equity and
debt markets, risks related to political, economic and market
conditions and other risks discussed and identified in public
filings made by Sculptor with the SEC.
New risks and uncertainties emerge from time to time, and it is
not possible for Sculptor to predict or assess the impact of every
factor that may cause its actual results to differ from those
contained in any forward-looking statements. Forward-looking
statements contained herein speak only as of the date of this
communication, and Sculptor expressly disclaims any obligation to
release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in Sculptor’s
expectations with regard thereto or change in events, conditions or
circumstances on which any statement is based.
_____________________________ 1 The first bidder proposed a
higher price per share but withdrew when faced with the Och Group’s
refusal to support the deal and their extensive demands for
information. 2 JP Morgan was also involved in the process as the
Company’s financial advisor.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20230829781225/en/
Sculptor - Shareholder Services Ellen Conti Sculptor
212-719-7381 investorrelations@sculptor.com
Sculptor - Media Relations Jonathan Gasthalter Gasthalter &
Co. 212-257-4170 sculptor@gasthalter.com
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