Commitment and Contingencies |
6 Months Ended |
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Jun. 30, 2020 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| Commitments and Contingencies | Commitments and Contingencies The following represent the material commitments and contingencies of the Company as of June 30, 2020:
Management agreement. The Company pays PRCM Advisers a management fee equal to 1.5% per annum, calculated and payable quarterly in arrears, of the Company’s stockholders’ equity. For purposes of calculating the management fee, the Company’s stockholders’ equity means the sum of the net proceeds from all issuances of the Company’s equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus the Company’s retained earnings at the end of the most recently completed calendar quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less the consolidated stockholders’ equity of Granite Point and its subsidiaries during the time Granite Point was consolidated on the Company’s balance sheet, the weighted average cost basis of Granite Point common stock purchased, the outstanding principal balance of the promissory note due from the sale of Granite Point preferred stock and any amount that the Company has paid for repurchases of its common stock since inception, and excluding any unrealized gains, losses or other items that do not affect realized net income (regardless of whether such items are included in other comprehensive income or loss, or in net income). In connection with the acquisition of CYS effective July 31, 2018, the Management Agreement was amended to reduce PRCM Advisers’ base management fee with respect to the additional equity under management resulting from the merger to 0.75% from the effective time through the first anniversary of the effective time. Effective July 31, 2019, the management fee reduction on the equity acquired in the CYS transaction expired. For purposes of calculating the management fee, stockholders’ equity will also be adjusted to exclude one-time events pursuant to changes in U.S. GAAP, and certain non-cash items after discussions between PRCM Advisers and the Company’s independent directors and approval by a majority of the Company’s independent directors. To the extent asset impairment reduces the Company’s retained earnings at the end of any completed calendar quarter; it will reduce the management fee for such quarter. The Company’s stockholders’ equity for the purposes of calculating the management fee could be greater than the amount of stockholders’ equity shown on the consolidated financial statements. The current term of the management agreement expires on October 28, 2020, and automatically renews for successive one-year terms annually until terminated in accordance with the terms of the agreement.
The Company reimburses PRCM Advisers for (i) the Company’s allocable share of the compensation paid by PRCM Advisers to its personnel serving as the Company’s principal financial officer and general counsel and personnel employed by PRCM Advisers as in-house legal, tax, accounting, consulting, auditing, administrative, information technology, valuation, computer programming and development and back-office resources to the Company, and (ii) any amounts for personnel of PRCM Adviser’s affiliates arising under a shared facilities and services agreement.
Upon termination of the management agreement by the Company without cause or by PRCM Advisers due to the Company’s material breach of the management agreement, the Company is required to pay a termination fee equal to three times the sum of the average annual base management fee earned by PRCM Advisers during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.
On April 13, 2020, the Company announced that it had elected to not renew the Management Agreement on the basis of unfair compensation payable to the manager pursuant to Section 13(a)(ii) of the Management Agreement. As a result, the Company had expected the Management Agreement to terminate on September 19, 2020, at which time the Company would have been required to pay a termination fee, calculated pursuant to the terms of the Management Agreement. In connection with the non-renewal of the Management Agreement, the Company recognized $145.1 million and $145.8 million in restructuring charges for the three and six months ended June 30, 2020, respectively. See Note 19 - Restructuring Charges for additional information.
Subsequent to quarter end, on July 15, 2020, the Company provided PRCM Advisers with a notice of termination of the Management Agreement for “cause” on the basis of certain material breaches of the Management Agreement by PRCM Advisers, its agents and/or its assignees that are incapable of being cured within the time period set forth therein and certain events of gross negligence on the part of PRCM Advisers in the performance of its duties under the Management Agreement. The notice of termination specifies that the Management Agreement will terminate on August 14, 2020. No termination fee will be payable to PRCM Advisers in connection with the termination pursuant to Section 15(a) of the Management Agreement.
Following the termination of the Management Agreement, the Company will become a self-managed company. The Company expects to continue to be managed by its current senior management team, along with the other personnel currently providing services to the Company.
Employment contracts. The Company does not directly employ any personnel and, therefore, does not have any employment contracts with its personnel or executive officers. Instead, the Company reimburses PRCM Advisers for all of its compensation expenses related to the personnel who provide services to the Company under the Management Agreement, other than the Chief Executive Officer and investment professionals whose cash compensation and benefits are the responsibility of PRCM Advisers. Under the Management contract, expense reimbursements to PRCM Advisers are required to be made in cash on a quarterly basis following the end of each quarter.
Legal and regulatory. From time to time, the Company may be subject to liability under laws and government regulations and various claims and legal actions arising in the ordinary course of business. Under ASC 450, Contingencies, or ASC 450, liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts established for those claims.
As previously disclosed, on April 13, 2020, the Company announced that it had elected not to renew the management agreement with PRCM Advisers. On June 17, 2020, PRCM Advisers filed a complaint, or the State Complaint, against the Company in the Supreme Court of the State of New York in which PRCM Advisers alleges, among other things, breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair competition and business practices in connection with the Company’s non-renewal of the management agreement. The State Complaint seeks, among other things, damages in an amount to be proven at trial, an order enjoining the Company from hiring certain employees of Pine River, an order enjoining the Company from making any use of Pine River’s intellectual property, and fees and costs incurred by PRCM Advisers in pursing the action. PRCM Advisers has subsequently filed a notice of voluntary discontinuance without prejudice with respect to the State Complaint.
On July 21, 2020, PRCM Advisers filed a separate complaint, or the Federal Complaint, against the Company in the United States District Court for the Southern District of New York. The Federal Complaint alleges, among other things, the misappropriation of trade secrets in violation of both the Defend Trade Secrets Act and New York common law, breach of contract, breach of the implied covenant of good faith and fair dealing, unfair competition and business practices, unjust enrichment, and conversion. The Federal Complaint seeks, among other things, an order enjoining the Company from hiring certain employees of Pine River, an order enjoining the Company from making any use of or disclosing Pine River’s trade secret, proprietary or confidential information, damages in an amount to be determined at a hearing and/or trial, disgorgement of the Company’s wrongfully obtained profits, and fees and costs incurred by PRCM Advisers in pursuing the action. The Company’s board of directors believes the State Complaint and the Federal Complaint are without merit and that the Company has fully complied with the terms of the management agreement.
As of June 30, 2020, the Company’s condensed consolidated financial statements do not recognize a contingency liability under ASC 450 because management does not believe that a loss or expense related to the State Complaint or the Federal Complaint is probable or reasonably estimable. The specific factors that limit the Company’s ability to reasonably estimate a loss or expense related to the State Complaint or the Federal Complaint include that the cases are in their early stages and neither the State Complaint nor the Federal Complaint specify an amount of damages. If and when management believes payments associated with the State Complaint or the Federal Complaint are a probable future event that may result in a loss or expense to the Company and the loss or expense is reasonably estimable, the Company may recognize in its condensed consolidated financial statements a contingency liability and resulting loss in such period.
Based on information currently available, management is not aware of any other legal or regulatory claims that would have a material effect on the Company’s condensed consolidated financial statements and therefore no accrual is required as of June 30, 2020.
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