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Majority-Of-The-Outstanding Voting Standard
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Updates are in reverse chronological order.
Control Share Defenses
The Maryland Funds Seek U.S. Supreme Court Review on Procedure, Not Merits (September 24, 2024): Having completely and repeatedly lost on the legality of control share defenses under §18(i) of the ICA, certain of the Maryland funds—apparently in consultation with the ICI—filed a petition with the U.S. Supreme Court on a completely separate issue: the private right of action that courts have recognized under §47(b), which creates a claim for rescission when a fund enters into a contract that violates the ICA. The ICI subsequently filed an amicus brief in support. Section 47(b) has been annoying the industry recently because it gives shareholders a clear and straightforward legal mechanism to challenge contracts with a fund that violate the ICA. Winning the appeal is unlikely to change the result in the control share litigation because the plaintiffs asserted other claims as well, but apparently ICI has perceived a potential silver lining if the Supreme Court were to take the appeal. The probability is very low.
Court of Appeals Affirms Judgment Against the Maryland Funds (June 26, 2024): The U.S. Court of Appeals for the Second Circuit upheld the lower court’s ruling that opting into the Maryland control share statute violates §18(i) for all of the same reasons it previously affirmed the ruling in Nuveen. The court issued a summary opinion and found little merit in the Maryland funds’ favorable parsing of the language of §18(i):
The Funds’ only argument to distinguish the present case from Nuveen is that here, the Control Share Provision does not violate the ICA because it is “otherwise required by law,” that is, Maryland law. The Funds argue that although opting into the Control Share Provision was a voluntary act, once they did so, the Control Share Provision became required by Maryland law. But the Funds cannot simply disregard the optional nature of that portion of the MCSAA because the MCSAA does not require a CEF to opt into the Control Share Provision. Rather, as stated expressly in the MCSAA, the Control Share Provision does not apply to a CEF unless its “board of directors adopts a resolution to be subject to” it. Thus, the Control Share Provision is not “required by law,” and consistent with Nuveen, violates Section 18(i) of the ICA. (Citations removed)
Court Enters Judgment Against the Maryland Funds (January 4, 2024): A New York federal judge ruled that the control share resolutions passed by the Maryland-domiciled funds “plainly violate Section 18(i) of the ICA” and granted judgment in Saba’s favor on its claim for rescission. The same rationale in the Eaton Vance and Nuveen applies to Maryland funds that opt into the control share statute rather than pass a bylaw:
The only argument defendants make here that the Second Circuit did not specifically consider and reject in Nuveen is that, because the control share resolutions at issue are permissible under Maryland law, they are ‘otherwise required by law’ and thus safe from Section 18(i)’s mandate of equal voting rights. The fatal flaw in that argument is rather easy to spot. The fact that Maryland law allows funds to adopt such control share resolutions does not in any way mean that Maryland law requires as much. (Citations removed)
Court Of Appeals Affirms Judgment Against Nuveen (November 30, 2023): The U.S. Court of Appeals for the Second Circuit upheld a lower court’s ruling that Maryland-domiciled funds managed by Nuveen violated §18(i) of the ICA by opting into the Maryland control share statute. The court held that §18(i) is “plain and unambiguous”:
In addition to requiring that all investment company stock be voting stock, the statute defines it with reference to its function—that it “presently entitles” the owner to vote it. Nuveen’s Amendment violates this provision because under it, if an owner of Nuveen stock cannot “presently” vote their stock, the stock loses its function and is not “voting” stock. The Amendment also violates Section 80a-18(i) because it deprives some shares of voting power but not others—contrary to the provision’s guarantee of “equal voting rights.” (Citations removed)
The court soundly rejected semantical arguments by Nuveen that the control share bylaws applied only to shareholders and not shares, which are protected by §18(i) (i.e., the shares may be entitled to vote but the shareholder isn’t). The court found this distinction to be “at the very least, overstated” and ultimately meritless. Nuveen did not further appeal.
Court Dismisses Some of the Maryland Funds on Jurisdictional Grounds (September 26, 2023): Of the sixteen Maryland-domiciled funds sued by Saba, the federal district court dismissed five because their bylaws contained forum selection clauses that required the litigation to be filed in Maryland. Certain individuals named in the action were also dismissed on jurisdictional grounds. The claims against the remaining defendants were permitted to proceed.
Saba Sues Numerous Maryland-Organized Funds (June 29, 2023): Having obtained judgments in Eaton Vance and Nuveen regarding the use of control share bylaws by Massachusetts trusts, Saba filed litigation in New York federal court challenging the ability of closed end funds organized as Maryland corporations to opt into the Maryland control share statute and/or pass control share bylaws.
Court Grants Judgment Against Eaton Vance (January 21, 2023): The Massachusetts court ruled, as a matter of law, that Eaton Vance’s control share bylaws violate §18(i) of the ICA and entered judgment in favor of Saba on the rescission claim. The court dismissed claims, however, that the trustees violated their fiduciary duties because the evidence did not demonstrate that the trustees “were not independent or disinterested, or that they acted in bad faith or in self-interest to entrench themselves.” The ruling could not be immediately appealed by Eaton Vance because the case continued as to the claims arising from the heightened voting threshold (addressed in a different section below).
Court Grants Judgment Against Nuveen (February 17, 2022): The New York court held, as a matter of law, that the use of control share bylaws by the Nuveen closed-end funds violated §18(i) of the Investment Company Act of 1940, which requires that every share of stock issued by a registered investment company “be a voting stock and have equal voting rights with every other outstanding voting stock.” The court held that “Section 18(i)’s requirements that every stock be voting and have equal voting rights are clear and unambiguous.” The court entered judgment in favor of Saba on the claim for rescission of the control share bylaws.
See also Rulings Suggest Significant Risk In Implementing Control Share Measures Under The 1940 Act
Court Denies Eaton Vance’s Motion To Dismiss (March 3, 2021): The court declined to dismiss most of Saba’s counterclaims regarding the control share bylaws, including claims that implementing a control share mechanism breached the charters of the funds at issue, constituted a breach of fiduciary duty by the trustees, and violated §18(i) of the ICA, which requires that “that “every share of stock . . . shall be voting stock and have equal voting rights.”
See also Massachusetts Case Exemplifies The Perils Of Defensive Bylaws In Closed-End Funds
Saba Sues the Nuveen Funds (January 14, 2021): In October 2020, Nuveen jumped on the control share bandwagon and caused its closed end funds to adopt control share bylaws. Shortly thereafter, Saba sued multiple Nuveen closed end funds in New York federal court for a declaratory judgment finding that the control share bylaws violate §18(i) of the ICA and rescission. Like Eaton Vance, the Nuveen funds are organized as Massachusetts trusts.
Eaton Vance Sues Saba (July 15, 2019): The first challenge to the use of a control share bylaw has arisen in an odd procedural context: the Eaton Vance Senior Income Trust, in the midst of a so-called “activist campaign” led by Saba Capital Management, amended its bylaws to (1) dramatically increase the threshold required to elect a direction from a plurality to a majority of all outstanding shares; and (2) enact control share restrictions effectively preventing shareholders from voting more than 10% of the fund’s outstanding shares no matter how many shares the shareholder actually owns. Because many closed end fund shareholders don’t vote, and because the control share provision capped any individual shareholder from voting more than 10% of the outstanding shares, the amendments rendered it effectively impossible for an outsider to win a board seat. Apparently sensing a strategic opportunity, Eaton Vance then sued Saba in Massachusetts state court for a declaratory judgment that the impossible voting standard was valid and enforceable. The complaint copies and pastes liberally from various Investment Company Institute rambles on the “evils” of active shareholders. In response, Saba filed counterclaims against Eaton Vance, numerous Eaton Vance closed end funds, and the board of trustees seeking, among other things, a ruling that the bylaws violate the ICA and constitute a breach of fiduciary duty.
SEC Retracts Boulder Letter (May 27, 2020): A decade after issuing the sensible guidance in the Boulder letter, the SEC folded to industry pressure to stymie an increasingly active group of institutional investors focused on influencing and improving management in underperforming and discounted closed end funds. In a non-binding statement with “no legal force or effect,” the SEC withdrew the Boulder letter and stated that it would consider compliance with Section 18(i) on a case-by-case basis in light of “(1) the board’s fiduciary obligations to the fund, (2) applicable federal and state law provisions, and (3) the particular facts and circumstances surrounding the board’s action.” This set off a deluge of bylaw amendments by closed end funds to take advantage of control share defenses.
SEC Issues Boulder Letter (November 15, 2010): In the 1980s, some states began passing corporate anti-takeover laws called “control share statutes,” which permitted companies to avoid a change in corporate control by altering or removing voting rights when a person acquires an amount of shares defined by the statute (usually 10%). Because the ICA generally prohibits the use of vote-stripping mechanisms, the statutes didn’t get much attention from the fund industry at first. In 2010, the Boulder Total Return Fund, Inc., a Maryland corporation, sought SEC guidance as to whether opting into the Maryland control share statute would be permissible under §18(i) of the ICA, which requires that “every share of stock hereafter issued by a registered management company . . . shall be a voting stock and have equal voting rights with every other outstanding voting stock.” Not surprisingly, in written guidance, the SEC concluded that the use of a control share restriction by an investment company to “restrict the ability of certain shareholders to vote ‘control shares’ . . . would be inconsistent with the fundamental requirements of Section 18(i).”
Poison Pills
ASA Extends The Poison Pill Again (August 22, 2024): While the parties await a ruling from the federal district court, ASA extended its poison pill again to keep Saba at bay. Notably, the extension was implemented by a subcommittee that excluded Saba’s nominees (not sure how that is permissible), and was accompanied by a press release with language plainly intended to bolster ASA’s legal positions. For example, ASA argues that the rights plan “is designed to enable ASA’s shareholders to realize the long-term value of their investment, provide an opportunity for shareholders to receive fair and equal treatment in the event of any proposed takeover of ASA and guard against tactics to gain control of ASA without paying shareholders what the Board or the Committee considers to be an appropriate premium for that control or recompense for the costs incurred by the Company in its efforts to protect shareholder interests.” This, of course, ignores that advisers routinely extract all available consideration from a fund acquisition without passing compensation through to shareholders. And no fund board will voluntarily agree to negotiate a change of control transaction without the adviser’s blessing. Based on ASA’s litigation positions and history of entrenching conduct, it does not appear likely to make an exception of that rule, and thus the rationales appear disingenuous.
Briefing Is Complete In ASA (July 12, 2024): ASA doubled down on its “issuance” versus “exercise” argument in defense of a shareholder rights plan that would unfairly dilute any shareholder who exceeds the maximum threshold of shares. ASA characterizes the dispute as arising solely from Saba’s frustration with the inability to purchase “an unlimited number of shares,” and cites “several funds” that have likewise violated the ICA by including ownership caps in their governing documents. ASA also cites unrelated ownership caps imposed by the ICA in an apparent attempt to show that caps are generally not a bad thing. ASA minimizes the relevance of Saba’s citations to the “policy and purposes of the ICA,” despite having dedicated its opening brief to policy arguments about “predatory hedge funds.” Saba’s reply brief is here. The case is ready for argument and a decision by the court on both pending motions.
Parties File Opposition Briefs in ASA (June 24, 2024): Saba opposes ASA’s “hyper-technical” reading of the ICA for purposes of allowing funds to discriminate among its shareholders, which has been repeatedly rejected in other contexts. If the right issued by the fund can’t be exercised by all shareholders then it isn’t “ratable” and doesn’t comply with §18(d) of the ICA. Saba also argues that the poison pill has been in place for over 236 days, despite the 120 day restriction in the ICA, and structuring the plan through successive adoptions cannot make it comply. Saba cites other federal statutes with time limitations that address the right to extensions whereas the ICA provides no rights of extension. ASA opposesSaba’s motion for judgment on the basis that Saba can exercise its rights under the plan “to the same extent as all other non-triggering shareholders”—that is, until it can’t. As to its successive plans, ASA argues that they were adopted “months apart” to different shareholder bases, and their perfect alignment for a more-than-120-day period is apparently a coincidence.
Saba Moves for Judgment and ASA Moves To Dismiss (May 24, 2024): ASA’s motion to dismiss depends largely on the supposed history of poisons pills in the corporate context to create a “bargaining tool” for the board to negotiate with a raider. This overlooks the universally known fact that fund trustees don’t “negotiate” anything but rather take instructions from the adviser. A typical fund board’s conception of value maximization hinges on the adviser’s revenue, not the financial interests of shareholders. As to the legal issues, ASA (advised by Skadden) argues that §18(d) of the ICA requires only that the issuance of the rights be “ratable,” not the exercise of those rights. ASA also defends its successive implementation of 120-day rights plans by arguing that the ICA only limits the length of a single plan to 120 days but does not limit the number of plans a fund may implement, thus permitting infinite and perpetual plans. Saba moves for judgment because the facts aren’t really disputed between the parties and the poison pill violates the ICA for the reasons summarized below.
Court Enters Schedule for ASA Case (May 13, 2024): The court entered the following schedule for briefing Saba’s motion for summary judgment and ASA’s motion to dismiss: opening briefs to be filed by May 24, 2024; opposition briefs to be filed by June 24, 2024; reply briefs to be filed by July 12, 2024.
Saba Wins Two Board Seats at ASA (April 26, 2024): At ASA’s 2024 shareholder meeting, candidates nominated by Saba won two of the four board seats, suggesting shareholder support for Saba’s positions despite the incumbent trustees’ defensive measures. Saba’s comments following the vote reflect the same: “ASA shareholders have clearly recognized the desperate need for a Board refresh to address the Fund’s poor performance and the Board’s track record of governance failures, which has only escalated with its recent adoption of multiple discriminatory poison pills.”
Saba Sues ASA Gold for Violating the ICA (January 31, 2024): Saba filed suit in New York federal court claiming that ASA’s poison pill violates the ICA’s requirement that any instrument issued below the market price must be issued equally (“ratably”) to all shareholders. Saba alleges that §23 provides that “no registered closed-end company shall sell any common stock of which it is the issuer at a price below the current net asset value of such stock,” except, as relevant, “upon the exercise of any warrant . . . issued in accordance with the provisions of section 18(d) of this title,” which requires that any such rights be “issued exclusively and ratably to a class or classes of such company’s security holders.” Further, ASA violated §18(d), which limits such “warrants or rights” to “one hundred and twenty days after their issuance.”
ASA Gold and Precious Metals Fund Adopts Poison Pill (December 31, 2023): Based on the “rapid and significant accumulation of ASA shares by Saba Capital Management,” ASA announced that it had implemented a poison pill (the first by a closed end fund in recent history). ASA issued to each outstanding ASA common share the right to purchase one additional share for $1 in the event that the plan is triggered. The rights become exercisable only if a person acquires 15% or more of ASA’s outstanding common shares (or if a current 15% or greater holder acquires another 0.25%). The person triggering the plan is excluded from receiving new shares and would be substantially diluted.
Skadden Endorses Poison Pills by Closed End Funds (December 7, 2023): Following a string of decisive losses for the industry in which courts struck down the use of control share restrictions as violative of §18(i) of the ICA (see above), a least some lawyers began suggesting a new page in the playbook to interfere with the ability of shareholders to vote at elections. A poison pill, or shareholder rights plan, makes it more difficult for shareholders to acquire meaningful percentages of a fund’s outstanding shares without the risk of significant dilution. If the shareholder acquires more than the threshold amount under the plan (typically 10-20% of outstanding shares), all holders except for the triggering party may buy additional shares at a substantial discount to the then-current market price, thereby diluting the triggering party. As recent as 2021, law firms were advising funds and boards of the “uncertainty as to whether a poison pill, as typically structured, complies with various provisions of the 1940 Act,” which explains the “rarity of poison pills adopted by closed-end funds.” The month after the Court of Appeals affirmed the ruling in Nuveen, Skadden published an articlesuggesting that poison pills are legal under the ICA. Skadden advised “closed-end fund boards and their managers [to] take note of shareholder rights plans as an option to protect the value of all shareholders’ positions and enhance the board’s bargaining power, flexibility and time to address third-party acquirers or those who want to use concentrated shareholdings to exert undue influence on the management or operations of the fund.”
Majority-Of-The-Outstanding Voting Standard
Court Rules In Favor Of Eaton Vance On Voting Standard (October 21, 2024): In a trial decision that is heavier on facts than legal analysis, a Massachusetts superior court judge ruled in favor of Eaton Vance on all claims relating to the majority-of-the-outstanding voting standard. The court received a lot of evidence—twelve witnesses and 810 exhibits—but much of it pertained to ancillary issues about Saba’s saga with the Eaton Vance funds, the pros and cons (mainly the cons) of activism, what a hypothetical caricature of a retail shareholder created by Eaton Vance’s lawyers might like or not like, and the stated rationales for the board’s decision to manipulate the voting threshold immediately following Saba’s successful proxy contest. At bottom, the court considered whether the trustees had implemented an “impossible” voting standard, and held from the outset that “as every court which has considered the issue has concluded, I too conclude that, if the Trustees were to adopt a voting standard that eliminated or deprived shareholders of a meaningful right to elect trustees such a standard would violate the ICA and the Declarations.” The devil, however, is in the court’s interpretation of “eliminate” or “deprive,” which was astonishingly limited given trial evidence that no fixed income proxy contest between 2010 and 2023 resulted in an election of a director by a majority of the outstanding shares. Instead, zooming out to include all closed end funds, the court credited two instances in which it had happened: the Korea Equity Fund, where two institutions held nearly 50% on their own, and the Gabelli Global Multimedia Trust, where two institutional holders owned 27%. The court also credited two other instances where it had almost happened but didn’t: the China Fund, where two institutional holders owned 42%, and Saba’s contest with ASA Gold & Precious metals, where one nominee almost received 47% of the outstanding. Based on these outliers and the apparent view that Saba could have tried harder to court retail holders, the judge found that the majority-of-the-outstanding standing was not “impossible or impractical.” As to the requirement in the funds’ governing documents that directors be “elected at an annual meeting,” the court found that holding an election was enough, even if no director was validly elected. The logic is difficult to discern:
The ordinary meaning of the term “elected” is that one is chosen through a formal, organized opportunity to vote by those enfranchised to do so. There are many situations in which the voting standard applicable to an election affects the results. Such an impact, however, does not mean an election was not held, or that the successful candidate, under that voting standard, was not elected. (citations omitted)
So, as long as some people vote on some things then a person is elected? The court likewise found that the voting standard did not violate §18(i) of the ICA because it is not a “limitation on Saba’s voting rights.” Rather, in the court’s view, Saba is free to nominate, solicit and vote, regardless of the futility of such actions. Saba will undoubtedly appeal.
Court Orders Summary Judgment Briefing in Blackrock Without Discovery (October 11, 2024): Following the motion to dismiss ruling, Saba moved for summary judgment seeking rescission of the majority-of-the-outstanding voting standard and a new shareholder meeting within 60 days. BlackRock sought discovery prior to briefing that motion, largely on whether or not the majority-of-the-outstanding standard is actually “impossible to meet. Saba argued that no discovery was necessary given that the facts are generally undisputed and the court need only apply the ICA as a matter of law. The court agreed with Saba and held that it “has a colorable claim that the grounds on which its motion for summary judgment rests can be resolved without further discovery,” and that the defendants had failed to “satisfy the standard” to obtain discovery. BlackRock’s opposition brief is due on November 27, 2024.
Court Declines To Dismiss Saba’s Voting Claims Against the BlackRock Funds (June 25, 2024): The court made quick work of BlackRock’s dismissal arguments under the ICA. At the outset, the court noted that the “text of the ICA, its history and purpose, and wide swaths of corporate law center on the voting rights of shareholders.” With that backdrop, the court held that Saba had stated claims under the ICA arising from BlackRock’s use of the majority-of-the-outstanding voting threshold:
Saba has sufficiently alleged that there is a point where the voting bylaws of ECAT operate to deprive shareholders of their right to select the trustees of the fund, and to circumvent the ICA’s requirement that trustees be “elected” at shareholder “meetings” and that a certain number of directors be resubmitted for shareholder approval each year. Defendants have said there is no such point, so long as the rules are facially valid, using the most pinched and parched approach to statutory construction. Saba may well not succeed in showing that this point has been reached in this case, but the allegations in the Complaint are sufficient to allow them to try. The alternative proposed by Defendants is simply not plausible: that even where a fund fails to have successful elections for years and where a fund’s board is composed primarily or entirely of holdovers selected by the sole initial shareholder who is affiliated with the investment advisor, even in perpetuity, there is no circumstance where such a fund could be found to be in violation of the ICA’s requirements for shareholder elections and board composition, so long as the rules are facially compliant on a word-by-word basis.
BlackRock undoubtedly will now bring in a parade of industry insiders to testify about (i) how evil closed end fund activists are; (ii) how totally normal it is to have an investment adviser unilaterally “elect” a board before any public shareholders exist; (iii) how annual meetings are painful and unnecessary; and (iv) how all of this somehow benefits the unidentified and indiscernible “long-term shareholder” regardless of the fund’s performance, its trading discount, or the actual view of actual shareholders.
BlackRock Moves to Dismiss Because It “Elected” the Board (April 3, 2024): In papers seeking dismissal, BlackRock argues that the board was elected by “standard procedure”: BlackRock formed the fund then “purchased ECAT common shares” and “in its capacity as the sole initial shareholder, elected a slate of directors.” Based on this fact, BlackRock argues that all directors have already been “elected” by shareholders (err, one shareholder). In any event, §16 of the ICA doesn’t require a particular voting threshold, so a majority-of-the-outstanding is as good as any. BlackRock also argues that it hasn’t violated the §16 requirement that directors be elected annually because a class of directors does stand for election annually, even if they aren’t validly elected. And the fund also hasn’t violated the requirements that two-thirds of the board be elected by shareholders because holdovers aren’t “unusual,” are permitted by Maryland law, and don’t create vacancies. Finally, BlackRock argues that §18(i)’s equal voting requirement is not implicated because all shares have equally meaningless voting rights under a majority-of-the-outstanding threshold.
Saba counters, in its opposition papers, that BlackRock has admitted that the standard is impossible to meet, and while the ICA does not specify a voting threshold, it does not endorse gamesmanship intended to eliminate the §16 requirement that directors be “elected . . . by the holders of the outstanding voting securities.” Saba argues that the “ICA does not permit directors to be installed by insiders at origination, never to be elected again.” Rather, as to a classified board, §16(a) provides that “the term of office of at least one class shall expire each year,” and an annual meeting must be required or else that provision would be rendered meaningless. The dispute boils down to whether an adviser can unilaterally “elect” a board and then implement a voting standard that will keep them in power for perpetuity.
Saba Sues a BlackRock Fund Over Voting Standard (March 6, 2024): The BlackRock ESG Capital Allocation Trust imposes a double standard for electing trustees: in uncontested elections, the incumbents (blessed by the investment advisor) may be reelected by a plurality of votes. In a contested election, however, where shareholders have nominated new directors not endorsed by the investment adviser, the fund’s governing document requires that directors be elected by a majority of all outstanding shares. In most closed end funds, this is effectively an impossible standard and guarantees that any challenger will fail to be elected and the incumbents will retain their seats as holdovers (until the challenger eventually goes away and the incumbents can be reelected again by a plurality). The intent of the provision is obvious. The fund is relatively new, and thus the investment adviser anointed the board at inception, but public shareholders have not yet fully elected directors. The board is staggered into three classes. In 2022, the first class was confirmed by a plurality of shareholder votes. In 2023, Saba nominated four new candidates and ran a proxy contest for their election, but the fund failed to achieve quorum after three adjournments. Rather than try again, the second class of incumbent directors simply kept their positions as unelected holdovers. In advance of the 2024 annual meeting—at which the three remaining directors stood for election—Saba filed suit challenging the majority-of-the-outstanding voting threshold on multiple grounds:
- The impossible voting standard violates §16 of the ICA, which requires that directors be “elected . . . by the holders of the outstanding voting securities of such company,” as well as §18(i), which requires every share to “have equal voting rights with every other outstanding voting stock”;
- The failed elections caused by the impossible voting standard violate §16’s requirement that shareholders have a meaningful opportunity to elect trustees annually; and
- The failed elections have caused the fund to violate §16’s mandate that at least two-thirds of the directors be “elected to such office by the holders of the outstanding voting securities of the company.”
The case seeks a declaratory judgment that the majority-of-the-outstanding voting requirement violates the ICA. Saba also seeks a preliminary injunction, in advance of the 2024 stockholder meeting, barring the fund from applying the majority-of-the-outstanding voting threshold.
Court Dismisses Fiduciary Claims in Eaton Vance Based On Voting Threshold (January 21, 2023): On cross-motions for summary judgment, the court dismissed claims by Saba that the fund’s trustees breached their fiduciary duties during a proxy contest by implementing a heightened voting standard requiring that directors be elected by a vote of the majority of all outstanding shares rather than the previous plurality standard. Saba introduced evidence that the trustees raised “the threshold to an unattainable level and did not consider whether there was a reasonable prospect that any candidate would reach the 50%-of-outstanding threshold before adopting the Majority Rule Amendment.” Nevertheless, the court held that the record “does not show that the Trustees were acting primarily to preserve their own roles . . . . [n]or does it otherwise show a triable case on some other form of bad faith.” The case will proceed on the merits of Saba’s counterclaims for declaratory judgment, breach of contract and rescission on the voting issue as well as Eaton Vance’s declaratory judgment claim as to the validity of the amendment under the ICA.
Eaton Vance Sues Over Majority-Of-The-Outstanding Voting Standard (July 15, 2019): During a proxy contest led by Saba Capital Management, certain Eaton Vance funds amended their bylaws to (1) increase the threshold required to elect a direction from a plurality to a majority of all outstanding shares; and (2) enact control share restrictions (discussed in the section above). After Saba sent a demand letter stating that the amendment of the voting threshold was invalid, Eaton Vance sued Saba in Massachusetts state court for a declaratory judgment that the impossible voting standard was valid and enforceable. In response, Saba filed counterclaims against Eaton Vance alleging, among other things, that the implementation of the majority-of-the-outstanding threshold under the circumstances constituted a breach of fiduciary duty.
NYSE Proposal to Eliminate Annual Meetings
SEC Institutes Proceedings to Consider Disadvantages of Annual Meeting Rule Change (October 4, 2024): The SEC instituted further proceedings to consider the policy issues raised by the proposed rule change to eliminate annual meeting for closed end funds, and gave “notice of the grounds for disapproval under consideration,” which arose largely from comments received. The SEC acknowledged that “annual shareholder meetings allow the shareholders of a company the opportunity to elect directors and meet with, and engage, management to discuss company affairs,” and expressed “concerns with the sufficiency of the Exchange’s analysis and whether the Exchange has met its burden.” Notably, the proposal did “not discuss whether the fact that CEF shares may trade at a large discount to NAV would raise any investor protection concerns with eliminating the annual shareholder meeting requirement.” And, while the proposal cites “certain requirements set forth in the 1940 Act [that] are designed to protect CEF investors and the public interest,” it failed to address “how its specific proposal to exempt CEFs from the Exchange’s longstanding annual shareholder meeting requirement—and any resulting loss of benefits to CEF investors of annual shareholder meetings—would be designed to protect CEF investors and the public interest.” These direct observations by the SEC cast significant doubt on its willingness to approve a transparent effort to insulate management from shareholders without any real investor-protection interest. The SEC requests further written comments within 35 days following the publication of the notice in the federal register.
SEC Opens Comment Period For Proposed NYSE Rule Change Eliminating Annual Meeting Requirement (July 3, 2024). The SEC published a notice of the NYSE’s proposal to amend Section 302.00 of the NYSE Listed Company Manual to exempt closed-end funds registered under the ICA from the requirement to hold annual shareholder meetings. The proposal argues that there are significant differences between closed end funds and listed operating companies that justify exempting closed end funds from annual meetings—namely, that the ICA includes certain requirements already with respect to the election of directors by shareholders, requires certain matters be approved directly by shareholders, and provides for funds to be overseen by non-interested directors. The proposal, which was driven by the ICI after nursing its losses on the control share front (discussed above), has been overwhelming opposed by individuals and institutions submitting comments letters. For additional analysis, see the MoKa article below.
See also MoKa Partner Submits Opposition To Eliminating NYSE Annual Meeting Requirement For Closed-End Funds
Pending Legislation
House Quietly Passes ICA Amendment To Cap Activists at 10% (March 8, 2024): The U.S. House of Representatives passed H.R. 2799, the “Expanding Access to Capital Act of 2023,” which included a discrete amendment to the ICA barring private funds and their affiliates from collectively acquiring more than 10% of the outstanding shares of a closed end fund. The restriction would apply “if immediately after such purchase or acquisition the acquiring company, other investment companies having the same investment adviser, and companies controlled by such investment companies, own more than 10 per centum of the total outstanding voting stock of such closed-end company.” The bill is yet another attempt by the industry to limit the influence that a single shareholder may exert on fund management after the courts soundly rejected the use of control share bylaws, which previously discouraged activists from acquiring more than 10% of a fund’s shares. The bill was referred to the Senate Banking Committee on March 9, 2024 with no subsequent action. The bill will expire with the swearing in of a new U.S. Congress in January 2025.
