Alert September 24, 2013

Massachusetts High Court Rules that Closed-End Funds’ Bylaws Allow No More than 395 Days Between Annual Shareholders’ Meetings

The Supreme Judicial Court of the Commonwealth of Massachusetts (the “SJC”) interpreted “on at least an annual basis” as used in the bylaws (the “Bylaws”) of two closed-end investment companies organized as Massachusetts business trusts (the “Funds”) to mean that each Fund must hold an annual shareholders’ meeting no later than one year and thirty days (395 days) after the Fund’s last annual shareholders’ meeting.

Background.  The defendant Funds are registered under the Investment Company Act of 1940 and listed on the New York Stock Exchange (the “NYSE”).  The Bylaws require each Fund to hold, on at least an annual basis, an election of trustees so long as the Funds’ are listed for trading on the NYSE.  The Bylaws provide that in the event that such a meeting is not held in any annual period, whether by oversight or otherwise, a subsequent special meeting may be held in lieu of such meeting.  To comply with the NYSE Listed Company Manual (the “NYSE Manual”), each Fund must " hold an annual shareholders' meeting during each fiscal year."  The Funds, whose fiscal years end July 31, routinely held a joint shareholders’ meeting in December.  Consistent with this practice, the Funds notified shareholders that the Funds planned to hold the annual meeting for the 2012 fiscal year in December 2011.  In September 2011, the plaintiffs, who were the second-largest beneficial owners of preferred shares of each of the Funds (the “Plaintiffs”), provided the Funds with written notice that the Plaintiffs intended to nominate one of their partners for election as a trustee of each Fund at the December 2011 meeting.  In October 2011, the Funds issued a press release stating that their December 2011 meeting was being rescheduled to July 31, 2012, the last day of the Funds’ 2012 fiscal years.

Superior Court Ruling.  In December 2011, the Plaintiffs filed a complaint in the Superior Court of the Commonwealth of Massachusetts (the “Superior Court”) alleging that the Funds intended to commit a breach of their Bylaws by postponing the annual meeting to a date that was nineteen months after the Funds' last annual meeting in December 2010.  The complaint sought, among other things, a declaration that the Funds' Bylaws require "that a meeting of shareholders for the election of trustees ... [be] held at least once within any [twelve] month period."  In relevant part, the Superior Court ruled that the Bylaws require the Funds "to schedule future annual shareholder meetings in or within twelve months of their last annual shareholder meetings."  The Funds filed an appeal which on its own motion, the SJC transferred to its docket.

SJC Ruling.  The SJC stated that as with a Massachusetts corporation’s articles of incorporation and bylaws, a Massachusetts business trust’s declaration of trust and bylaws are a contract between the trust’s trustees and shareholders that define the rights of shareholders, and must be interpreted according to traditional principles of contract law.  In the course of its analysis, the SJC invoked various principles of contract interpretation, including that to the extent that there is any ambiguity in a bylaw provision, the ambiguity must be construed against the drafters, in this case, the Funds.  The SJC ruled that the Bylaw requirement that the annual shareholders' meeting be held “on at least an annual basis" so long as the Funds are listed for trading on the NYSE clearly means that such meeting must be held at least “each fiscal year” as required by the NYSE Manual.

The SJC noted that the Bylaws’ notice provisions governing a shareholder trustee nomination are different if an “annual meeting” is not scheduled to be held within a period that commences thirty days before the first anniversary date of the annual meeting for the preceding year and ends thirty days after such anniversary date.  The Court further noted that such an annual meeting date outside such period was referred to in the Bylaws as an "Other Annual Meeting Date.”  The SJC also noted that the Bylaws provided that "the term 'annual meeting' refers to any annual meeting of [s]hareholders as well as any special meeting held in lieu of an annual meeting."  Based on these Bylaw provisions, the SJC concluded that the Bylaws suggest that a regular annual shareholder meeting must be scheduled within the “annual period,” which ends thirty days after the anniversary date of the last annual shareholders’ meeting.  The SJC found this interpretation to be more consistent with the usual meaning of "on at least an annual basis" than the Funds' interpretation, under which they potentially could have held annual shareholders' meetings twenty-three months apart.  The SJC observed that until the Plaintiffs declared their intent to nominate a new trustee, the Funds had not held a regular annual shareholder meeting more than thirty days after the anniversary date of the last annual meeting.  Based on the foregoing, the SJC interpreted the Funds’ Bylaws to require that each Fund schedule future annual shareholders’ meetings no later than thirty days after the anniversary of its last annual shareholders’ meeting.

Brigade Leveraged Capital Structures Fund v. Pimco Income Strategy Fund, 466 Mass. 368 (2013).