1 Roumell v. Templeton Asset Management, et al. and Wetta v. Templeton Asset Management, et al., 98-6059-Civ-Hurley (S.D. Fl. Dec. 9,
1999).
2 Marquit v. Dobson, et al., 98 Civ. 9089 (JSM) (S.D.N.Y. Dec. 29, 1999).
[11670]
February 23, 2000
TO: CLOSED-END INVESTMENT COMPANY COMMITTEE No. 7-00
DIRECTOR SERVICES COMMITTEE No. 6-00
SEC RULES COMMITTEE No. 24-00
RE: RECENT COURT OPINIONS CONSIDER DIRECTOR SERVICE ON MULTIPLE
FUND BOARDS
______________________________________________________________________________
Two recent court opinions have considered whether the receipt of compensation for service on
multiple fund boards alone deems a director “interested” under the Investment Company Act of 1940.
In the first order, the United States District Court for the Southern District of Florida granted in part
and denied in part motions to dismiss complaints alleging breach of fiduciary duty under Maryland law
in related cases brought by two investors in the same closed-end fund.1 In the second case, the United
States District Court for the Southern District of New York granted the motion to dismiss the plaintiff’s
class action complaints against three closed-end funds, two of which were managed by the same
investment adviser, alleging breach of fiduciary duty under the Investment Company Act and Maryland
law. 2
In the first case, in addition to the allegations in the complaints that the defendants had
breached various provisions of the Investment Company Act and the Investment Advisers Act of 1940,
one plaintiff alleged that the independent directors had breached their fiduciary duty, as defined by
Maryland law, to the fund and the plaintiffs. Specifically, the plaintiff alleged that the deviation from the
fund’s investment policy and failure to hold a shareholder vote in a timely manner constituted a breach
of fiduciary duty. Defendants argued that the claim should be dismissed, among other reasons, because
the plaintiff failed to make a demand on the board to pursue litigation or to allege with particularity that
demand was futile.
The court, citing Strougo v. Scudder, Stevens & Clark, Inc., 964 F. Supp. 783 (S.D.N.Y. 1997), stated
that Maryland law governs whether demand is required and the conditions that will excuse demand.
Noting that demand is futile when directors are interested persons under the Investment Company Act
(because Maryland law incorporates the definition of “interested person” in the Investment Company
Act), the court found that the plaintiff had alleged sufficient facts in his complaint to demonstrate that
the demand was futile. The facts alleged in the complaint included that the director defendants, by
virtue of their multiple directorships and the substantial payments they received for this service, were
dominated or otherwise controlled or beholden to the adviser. The motion to dismiss on this ground
was denied.
In the second case, brought in the jurisdiction of the original Strougo case, the court granted the
motion to dismiss on the ground that the claims asserted were derivative and, as required in derivative
actions, the plaintiff failed to first seek action from the board or show that such a request would be
futile. The court distinguished the Strougo case, finding that, on the face of the complaints, there were no
facts that would demonstrate that such a demand would be futile. The court noted that “[w]hile Judge
Sweet found in Strougo that allegations that the directors received substantial remuneration from their
service on the boards of other funds managed by the same adviser would constitute interest, there are no
such allegations here.” The court added that in the instant case,“[i]t is doubtful that the mere fact that a
director serves on the board of two funds would be sufficient to compel the conclusion that he was not
disinterested.”
Marguerite C. Bateman
Associate Counsel
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