Massachusetts Closed-End Fund Articles of Agreement Amendments
On March 31, 2021, the Superior Court of Suffolk County in Massachusetts rendered a decision on a motion to dismiss various counterclaims in a lawsuit originally filed on July 15, 2020 by Eaton Vance Senior Income Trust, a registered closed-end fund organized as a Massachusetts business trust, against Saba Capital Master Fund, Ltd., a shareholder of the fund, seeking a declaratory judgment that a previously adopted amendment to the fund’s articles of association is valid. In its decision, the court dismissed some of the counterclaims invoked by Saba but allowed other counterclaims to proceed.
In question, certain amendments to the articles of association adopted by four closed-end funds sponsored by Eaton Vance and organized as commercial trusts of Massachusetts. The Trusts requested a declaratory judgment that an amendment to the bylaws providing that in a contested election, a nominee trustee must receive the affirmative vote of the majority of the outstanding shares of the fund, but in an uncontested election a nominee trustee must receive only the affirmative vote of a plurality of the votes cast. Prior to the amendment, the plurality standard applied to all elections of directors, contested and uncontested. The amendment also provided that if neither an incumbent nor a new director candidate obtains the required majority vote in a contested election, the incumbent director may continue to sit (the election rules). In response, Saba Capital Master Fund, Ltd., an investor in the funds, challenged the validity of this amendment as well as a second amendment to the Articles, the operation of which is similar to the “controlling share” provisions under the laws. on state-owned companies, providing that a shareholder who acquires ownership or control of more than 10 percent of the voting rights of a fund may not vote on its shares without special authorization to do so by a majority vote shareholders of the fund (the regulation on control shares). In addition, Saba has asserted certain other counterclaims against the funds, their trustees and their investment advisor and has requested a declaratory judgment that both bylaw amendments are invalid.
In its decision, the court dismissed Saba’s counterclaims against the funds and their trustees alleging a breach of the implied good faith and fair use commitment and two counterclaims against the funds’ investment adviser alleging tort interference. in contractual relations and complicity in a breach of fiduciary duty duty. However, the court dismissed the motion to dismiss Saba’s counterclaims alleging breach of contract and breach of fiduciary duty, as well as Saba’s counterclaims seeking to set aside the controlling share settlement under the Investment Companies Act 1940 and a declaratory judgment as to the validity of the bylaw changes allowing these claims to continue.
As the court stated in that case, in order to survive a motion to dismiss, a party must simply allege facts which, if they were true, “would plausibly suggest[ ] . . . a right to relief. Therefore, in considering the motion to dismiss Saba’s claims, the court assumed the correctness of Saba’s factual allegations and drew “all reasonable inferences” in Saba’s favor.
Regarding Saba’s breach of contract claims, Saba asserted that the Declarations of Trust governing the funds are contracts between the funds and their shareholders, and that the adoption of the bylaw amendments in question violate that contract. In particular, with respect to the electoral regulations, Saba alleged that requiring a trustee to be elected by majority vote in a contested election makes it “practically impossible” for a shareholder to challenge the re-election of a trustee in place because, as Saba stated in her memorandum of law, “a significant proportion of private fund shareholders” do not vote. Therefore, Saba argued that this bylaw amendment violated the provision on the Declaration of Trust giving shareholders the right to remove trustees. Regarding the regulation on controlling shares, Saba claimed that this amendment deprived shareholders holding more than 10 percent of the outstanding shares of a fund of their voting rights, in violation of a disclosure provision. trust stating that “shareholders will have the power to vote. . . with respect to the election of the Trustees ”and“ for the removal of the Trustees ”. Assuming the accuracy of Saba’s factual allegations, the court determined that those allegations could survive the dismissal motion.
Saba also claimed that the trustees of the funds breached applicable fiduciary duties by adopting the amendments to the statutes in question. Although the trustees asserted that they owed a fiduciary duty to the funds but not the shareholders of the funds, the court agreed with Saba’s contention that, except as otherwise provided in the Declaration of Trust, the trustees of a Massachusetts commercial trusts have fiduciary obligations to the beneficiaries. The Trustees asserted that their actions should be the subject of deference under the “business judgment rule,” which protects directors from liability who make decisions “in good faith. [and] with the care that a person in a similar position would reasonably consider appropriate in similar circumstances ”, which the director“ reasonably believes to be in the best interests of the company ”. Saba alleged that in enacting the changes to the articles of association, the trustees of the funds did not act in good faith and in the best interests of the funds, but rather acted to prevent Saba from revoking them and to protect their own interests and them. interest on funds. investment advisor. Assuming this allegation to be true, the court determined that the breach of fiduciary duty claim could survive the motion to dismiss.
Finally, Saba asserted that the controlling stock regulations violate section 18 of the 1940 law, which generally provides that “every share is a stock. . . issued by a registered management company. . . must be one voting share and have the same voting rights as all other outstanding voting shares. . . . “Saba further asserted that because the statutes of the funds are contracts between the funds and their shareholders, and because section 46 of the 1940 law provides that any contract which violates the 1940 law is unenforceable and subject to annulment, that the controlling share rule should be repealed Assuming the accuracy of Saba’s claim, the court determined that the claim alleging a violation of the 1940 law could survive the motion to dismiss.
The memorandum and court order are available under Eaton Vance Senior Income Trust v. Saba Capital Master Fund, Ltd., 2084CV01533-BLS2 (Mass. Super. Ct. March 31, 2021).