IM Seeks Industry Input on Closed-End Funds Control Shares Provision
A recent statement from the SEC’s Investment Management division may be welcome news for closed-end funds that have long battled takeover attempts from activist shareholders. The statement withdraws a 2010 staff letter that discouraged closed-end funds from opting into state statutes that permit companies to restrict the ability of certain shareholders to vote their control shares. IM wrote its staff will not recommend enforcement action against a closed-end fund for opting in to and triggering a control share statute if the decision to do so by the board of the fund was taken with reasonable care on a basis consistent with other applicable duties and laws and the duty to the fund and its shareholders generally. The staff clarified that any actions taken by a board of a fund, including with regard to control share statutes, should be examined 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. Generally, “control shares” are shares that are equal to or exceed a specific percentage of a company or fund’s total voting power. Various states have control share statutes, which prohibit shareholders from voting their control shares unless or until that share purchaser’s voting rights are reinstated by a vote of the disinterested shareholders. The staff’s 2010 letter concluded that such state statutes were “inconsistent with the fundamental requirements of Section 18(i) of the Investment Company Act that every share of stock issued by [a fund] be voting stock and have equal voting rights with every other outstanding voting stock.” That position appeared to benefit activist shareholders of closed-end funds, according to industry participants. The staff is requesting industry input to determine whether additional Commission action is warranted in this area to provide greater certainty to funds and other stakeholders, among several other related questions. Lawyers from K&L Gates and Ropes & Gray have written alerts on the topic, which provider a fuller discussion of the staff’s statement, the 2010 letter, and the implications for closed-end funds and their boards.