1 Migdal v. Rowe Price-Fleming, et al., Case No. AMD 98-2162 (January 20, 1999).
2 See Gartenberg v. Merrill Lynch Asset Management, 694 F.2d 923, 927-30 (2d Cir. 1982).
3 The plaintiffs’ complaint had alleged that the independent directors were “interested persons” because they were “affiliated
persons”. However, the definition of “affiliated person” under Section 2(a)(3) does not make any reference to service on
multiple boards or receipt of fees for doing so. In their motion to dismiss the complaint, the defendants presumed that
plaintiffs may be arguing that the directors were “affiliated persons” because they were “controlled persons” under Section
2(a)(3)(C). The definition of “control” in Section 2(a)(9) includes a rebuttable presumption that natural persons are not
controlled persons.
[10673]
January 26, 1999
TO: BOARD OF GOVERNORS No. 4-99
CLOSED-END INVESTMENT COMPANY MEMBERS No. 6-99
DIRECTOR SERVICES COMMITTEE No. 4-99
SEC RULES MEMBERS No. 12-99
RE: COURT DISMISSES COMPLAINT IN CASE CHALLENGING DIRECTOR
INDEPENDENCE
______________________________________________________________________________
The United States District Court for the District of Maryland has issued an order dismissing a
complaint against two funds, their advisers, underwriter and transfer agents, and the funds’ directors.1
The Amended Complaint alleged breach of fiduciary duty under Section 36(b) of the Investment
Company Act of 1940 (the “Act”) against the advisers and other corporate defendants and two
derivative claims of breach of fiduciary duty under state law against the directors of the funds. The
plaintiffs claimed that the independent directors were co-opted by the advisers, and as a result became
“interested persons,” through the payment of fees for service on multiple fund boards. By this action,
they sought to void all agreements between the funds and the corporate defendants, and recover all fees
and expenses paid under the agreements, on the basis that the agreements were not approved by a
majority of the independent directors to the funds as required by Section 15(c) of the Act.
In granting defendants’ motion to dismiss, the court found that an essential element of a Section
36(b) claim was missing; specifically, the Amended Complaint did not allege that the adviser’s fee paid by
each fund was so excessive that it “could not have been the product of arm’s length bargaining.”2 The
court was not convinced that the element of excessiveness under Section 36(b) could be satisfied by an
indirect attack on the presumed independence of directors. Moreover, even if the Section 36(b) claim
itself was adequate, the court found that the factual allegations in the Amended Complaint were
insufficient to rebut the presumption that a natural person is not a “controlled person” under Section
2(a)(9) of the Investment Company Act.3
By dismissing the Amended Complaint without prejudice, the court afforded the plaintiffs the
opportunity to file a Second Amended Complaint addressing these deficiencies; however, they must do
so prior to February 1, 1999. If they fail to do so, the court will enter a final order dismissing the Section
36(b) claim with prejudice and the derivative claims without prejudice.
A copy of the order is attached.
Marguerite C. Bateman
Associate Counsel
Attachment
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