The staff of the SEC’s Division of Investment Management provided guidance on whether a registered closed-end fund organized as a Maryland corporation could opt into the Maryland Control Share Acquisition Act (the “MSCAA”) without violating Section 18(i) of the Investment Company Act of 1940 (the “1940 Act”). The MSCAA provides that:
Holders of control shares of the corporation acquired in a control share acquisition have no voting rights with respect to control shares except to the extent approved by the stockholders at a meeting . . . by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
Control shares are generally shares that cause the holder’s total ownership of an issuer’s voting securities to fall within certain ranges of voting power (e.g., from 10% to less than one-third). The statute was designed to compel prospective acquirers to deal directly with a company’s management rather than attempt to effect change by obtaining significant voting power through market purchases of a company’s shares. Section 18(i) of the 1940 Act provides, in relevant part, that “[e]xcept as . . . otherwise required by law, 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 . . .”
The SEC staff concluded that the MSCAA was inconsistent with the wording of, and purposes underlying, Section 18(i) specifically and of the 1940 Act generally, since the MSCAA would discriminate against certain shareholders by denying their voting rights and would contribute to the entrenchment of management. The SEC staff noted that for similar reasons it would take the same view of a business development company organized under Maryland law that failed to opt out of the MSCAA. (Under the MSCAA, closed-end funds are excluded by default; however, business development companies are subject to the MSCAA by default and must affirmatively opt out of its provisions.)