DALLAS, Aug. 13, 2020 /PRNewswire/ -- NexPoint Advisors, L.P. (together with its affiliates "NexPoint") issued an update today on its investment in United Development Funding IV (OTC PINK: UDFI) ("UDFI" or the "Trust"). The following provides background and other relevant information on NexPoint's involvement in UDFI to (1) address several inaccurate claims made by the Trust and (2) describe NexPoint's ongoing efforts to establish accountability for shareholders, including a books and records demand that NexPoint recently submitted to the Trust's Board of Trustees (the "UDFI Board").
Background on NexPoint's Involvement in UDFI:
As a significant, long-term shareholder, NexPoint has had growing concerns regarding the UDFI Board's management of the Trust. After several unsuccessful efforts to engage with the Trust privately, NexPoint sent a letter to the UDFI Board on July 8, 2020 (the "NexPoint Letter"). In it, NexPoint expressed concerns about the management and oversight of the Trust, urging the UDFI Board to consider a strategic proposal from NexPoint.
The UDFI Board provided a public response to NexPoint on July 22, 2020 (the "Response Letter"). The Response Letter included false accusations about NexPoint, questioning the firm's motives and making erroneous claims about NexPoint's current and past involvement with the Trust.
NexPoint is not looking to engage in a public "tit for tat" with the Trust, especially since the Trust believes "engaging with [NexPoint] would be a significant distraction that would divert resources from the Trust's much more pressing concerns." However, as a regular market participant, NexPoint feels obligated to correct the misleading account of events in the Response Letter. As NexPoint made perfectly clear in the NexPoint Letter, NexPoint's intent in proposing changes at UDFI is, and has always been, to drive shareholder value, which begins with restoring accountability.
It goes without saying that NexPoint sees value in UDFI's assets; and with a range of relevant expertise, NexPoint believes it could help UDFI maximize that value. Representatives from NexPoint met with the Trust's Chairman and CEO last year to share this view.
It has been over a year since that meeting, and management has yet to provide any clear business plan or direction. In addition to the lack of strategic direction, the Trust has not filed a Form 10-K (along with other required periodic Exchange Act reports) in five years. While the Trust has been involved in a number of legal matters over that period, its failure to provide such reports is a clear violation of SEC reporting requirements. It seems that this failure will continue to persist, as just this week they filed yet another notification of inability to timely file Form 10-Q. Equally concerning is the fact that, during the entire time that the Trust has shirked its reporting obligations, it has also failed to hold an annual meeting of shareholders, which violates UDFI's bylaws and declaration of trust.
As a result of the lack of accountability at UDFI—evident in both management's inaction over the last year and the ongoing governance and reporting deficiencies—NexPoint determined that it was time to take a proactive approach, and thus submitted the NexPoint Letter. In it, NexPoint requested engagement from the UDFI Board on a potential transaction to maximize shareholder value. It also sought to ensure that the UDFI Board is acting in a manner consistent with its obligations to shareholders.
Since receiving the letter, the only visible steps the UDFI Board has taken related to these requests are:
To publicly state that it intends to conduct a "vigorous defense" against shareholders seeking to exercise their right to elect directors; and
To implement a staggered board election policy, even though this would allow some trustees to ultimately keep their seats—without standing for election—for more than eight years.
Neither of these steps reflects a commitment to protecting shareholders' rights.
While the UDFI Board provided additional feedback to NexPoint in the Response Letter, the letter focused on raising concerns about NexPoint that are unrelated to the requests to protect shareholders' rights. The concerns not only distract from these requests, but also include several accusations that are untrue and thus require correction.
Correcting Misleading Statements and False Claims Made in the Response Letter:
The "serious concerns" raised about NexPoint's purported connection to Kyle Bass and Hayman Capital's trading and commentary around UDFI have no merit. NexPoint and its affiliates were in no way involved in the alleged "short and distort scheme." NexPoint has never shorted UDFI shares in any fund or account, and sought at no point to become a short seller.
The "serious concerns" about the timing of NexPoint's purchases of UDFI shares are likewise without merit. Even more problematic is the false claim of NexPoint's intent "to manipulate the Trust share price." Of note, the first purchases of UDFI shares in accounts advised by either NexPoint or its affiliates did not occur until April 2017, well over a year after any major decline in share price related to short selling.
Finally, the Response Letter wrongly suggests NexPoint's intentions include "protecting the participants in a scheme to defraud the Trust and its shareholders." For one, NexPoint has explicitly stated its intentions are to create shareholder value. Further, as one of the largest shareholders, NexPoint's interests are clearly aligned with the Trust's shareholder base; that alone makes this suggestion unreasonable. It its initial letter, NexPoint also expressly stated that it is open to any proposals regarding the preservation of UDFI's claims against those participants.
NexPoint's Request for Books and Records:
The response from the UDFI Board fails to offer any of the transparency owed to shareholders. To help address this lack of accountability, NexPoint (through Cede & Co., the record holder of its shares) submitted a books and records demand (the "Demand") to the UDFI Board to determine the financial condition of UDFI and the value of its shares.
With the Demand, NexPoint also seeks information on various actions from the UDFI Board and officers related to key matters. These include the Trust's failure to deliver required financial statements for the last five years and the Trust's correspondence with the U.S. Securities and Exchange Commission.
The UDFI Board's recent actions suggest the trustees' focus is on protecting their seats, not on the needs of shareholders. As noted above, the UDFI Board's direct response to receiving the NexPoint Letter was to further entrench the trustees by instituting a classified board. It did this in spite of the fact that this will allow some trustees to ultimately hold office for longer than eight years before they will stand for reelection. This action—along with the UDFI Board's stated intent to "vigorously defend" the further disenfranchisement of shareholders—is solely in the interest of the trustees, not of the shareholders to whom they owe a fiduciary duty.
NexPoint continues to welcome the opportunity to engage in meaningful discussions about the management of the Trust with the UDFI Board; however, its priority is ensuring that the UDFI Board is acting in a manner that safeguards the long-term health of the Trust, while also maximizing shareholder value and upholding its duties to shareholders.
About NexPoint Advisors, L.P.
NexPoint Advisors, L.P. is an SEC-registered adviser on the NexPoint alternative investment platform. It serves as the adviser to a suite of funds and investment vehicles, including a closed-end fund, interval fund, business development company, and various real estate vehicles.