In May 2020, the Division of Investment Management Staff of the U.S. Securities and Exchange Commission published a Statement withdrawing a November 2010 letter issued to Boulder Total Return Fund, relating to the Maryland Control Share Acquisition Act (MCSAA), which had long been an impediment to closed-end funds opting in to state statutes that permit corporations to restrict certain stockholders' ability to vote "control shares" (shares of a corporation which, when aggregated with all shares of such corporation owned by an acquiring person, exceed certain ownership thresholds). Following the May 2020 Staff Statement, a number of closed-end funds opted in to state control share statutes or adopted by-law provisions with similar impact. Further developments since then include:
February 2022: District Court in the Southern District of New York (SDNY) granted summary judgment in favor of an activist hedge fund and its adviser (Activist) that challenged control share provisions in certain funds' by-laws (SDNY Opinion) finding that such provisions violated Section 18(i) of the Investment Company Act of 1940 (Section 18(i)).
July 2022: Delaware enacted a control share statute that automatically applies to exchange-listed closed-end funds organized as Delaware statutory trusts (i.e., no "opt in" requirement).
January 2023: Massachusetts state court granted summary judgment in favor of a hedge fund advised by the Activist challenging control share provisions in certain funds' by-laws on Section 18(i) grounds.
May 2023: Maryland enacted legislation making the MCSAA applicable to new, and certain existing, closed-end funds organized as Maryland statutory trusts effective October 2023.
The Second Circuit Court of Appeals heard oral arguments in the appeal of the SDNY Opinion.
Yesterday, the Activist and a related hedge fund filed a lawsuit in the SDNY against 16 Maryland closed-end funds and certain of their board members arguing the same theme: that the MCSAA violates Section 18(i). The complaint seeks (1) rescission of control share provisions, (2) declaratory judgment that such control share provisions violate Section 18(i) and (3) to permanently enjoin the defendants from using control share provisions. Yesterday, the plaintiffs also filed a motion for summary judgment on claims (1) and (2).
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