Strougo v. Bassini
| Decision Date | 28 February 2002 |
| Docket Number | Docket No. 00-9303. |
| Citation | 282 F.3d 162 |
| Parties | Robert STROUGO, on behalf of the Brazilian Equity Fund, Inc., Plaintiff-Appellant, v. Emilio BASSINI, Richard Watt, Daniel Sigg, Dr. Enrique R. Arzac, James J. Cattano, George W. Landau, Martin M. Torino, Bea Associates, and The Brazilian Equity Fund, Inc., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
Jack C. Auspitz, Morrison & Foerster, New York, NY (on the brief), for Defendants-Appellees Enrique R. Arzac, James J. Cattano, George W. Landau, Martin M. Torino, and Brazilian Equity Fund, Inc.
Lawrence O. Kamin, Willkie Farr & Gallagher (Daniel B. Rosenthal, of counsel), New York, NY, for Defendants-Appellees BEA Associates, Emilio Bassini, Richard Watt, and Daniel Sigg.
Before: LEVAL, SACK, and SOTOMAYOR, Circuit Judges.
Plaintiff Robert Strougo appeals from a judgment of the United States District Court for the Southern District of New York (Robert W. Sweet, Judge) granting the defendants' Fed.R.Civ.P. 12(b)(6) motion to dismiss the complaint for failure to state an actionable claim. The complaint includes, inter alia, class action claims on behalf of shareholders of an investment fund against the fund's management. The district court dismissed these claims on the ground that redress for the injuries alleged could only be sought through derivative, and not direct, claims.1 Because we conclude that the plaintiff alleged injuries that support direct claims, we vacate the judgment of the district court in part and remand for further proceedings consistent with this opinion.
The plaintiff is a shareholder of the Brazilian Equity Fund, Inc. (the "Fund"), a non-diversified, publicly traded, closed-end investment company incorporated under the laws of Maryland and registered under the Investment Company Act of 1940, as amended, 15 U.S.C. § 80a-1 et seq. (the "ICA"). As its name implies, the Fund invests primarily in the securities of Brazilian companies. The term "closed-end" indicates that the Fund has a fixed number of outstanding shares, so that investors who wish to acquire shares in the Fund ordinarily must purchase them from a shareholder rather than, as in open-end funds, directly from the Fund itself. Shares in closed-end funds are thus traded in the same manner as are other shares of corporate stock. Indeed, shares in the Fund are listed and traded on the New York Stock Exchange. The number of outstanding shares in the Fund is described as "fixed" because it does not change on a daily basis as it would were the Fund open-end, in which case the number of outstanding shares would change each time an investor invested new money in the fund, causing issuance of new shares, and each time a shareholder divested and thereby redeemed shares.
Although closed-end funds do not sell their shares to the public in the ordinary course of business, there are methods available to them to raise new capital after their initial public offering. One such device is a "rights offering," by which a fund offers shareholders the opportunity to purchase newly issued shares. Rights so offered may be transferable, allowing the current shareholder to sell them in the open market, or non-transferable, requiring the current shareholder to use them him- or herself or lose their value when the rights expire. It was the Fund's employment of a non-transferable rights offering that generated the claims at issue on this appeal.
On June 6, 1996, the Fund announced that it would issue one "right" per outstanding share to every shareholder, and that every three rights would enable the shareholder to purchase one new share in the Fund. The subscription price per share was set at ninety percent of the lesser of (1) the average of the last reported sales price of a share of the Fund's common stock on the New York Stock Exchange on August 16, 1996, the date on which the rights expired, and the four business days preceding, and (2) the per-share net asset value at the close of business on August 16.
The plaintiff asserts that this sort of rights offering is coercive because it penalizes shareholders who do not participate. Under the Fund's pricing formula for its rights offering, the subscription price could not have been higher than ninety percent of the Fund's per-share net asset value. Thus, the introduction of new shares at a discount diluted the value of old shares. Because the rights could not be sold on the open market, a shareholder could avoid a consequent reduction in the value of his or her net equity position in the Fund only by purchasing new shares at the discounted price. This put pressure on every shareholder to "pony up" and purchase more shares, enabling the Fund to raise new capital and thereby increase its asset holdings. Such purchases would, in turn, have tended to increase the management fee paid to defendant BEA Associates, the Fund's investment advisor, because that fee is based on the Fund's total assets.
At the close of business on August 16, 1996, the last day of the rights offering, the closing market price for the Fund's shares was $12.38, and the Fund's per-share net asset value was $17.24. The Fund's shareholders purchased 70.3 percent of the new shares available at a subscription price set at $11.09 per share, ninety percent of the average closing price for the Fund on that and the preceding four days. Through the rights offering, the Fund raised $20.6 million in new capital, net of underwriting fees and other transaction costs.
On May 16, 1997, the plaintiff brought this action against the Fund's directors, senior officers, and investment advisor. The plaintiff's complaint includes three direct class-action claims on behalf of all shareholders.2 It alleges that the defendants, by approving the rights offering, breached their duties of loyalty and care at common law and in violation of §§ 36(a) and 36(b) of the Investment Company Act, 15 U.S.C. §§ 80a-35(a), 80a-35(b). Compl. ¶ 32-37. The complaint further alleges that certain defendants violated § 48 of the ICA (15 U.S.C. §§ 80a-47) because of their positions of authority and control at the Fund. Id. ¶ 93-100. It asserts that these breaches of duty resulted in four kinds of injury to shareholders: (1) loss of share value resulting from the underwriting and other transaction costs associated with the rights offering; (2) downward pressure on share prices resulting from the supply of new shares; (3) downward pressure on share prices resulting from the offering of shares at a discount; and (4) injury resulting from coercion, in that "shareholders were forced to either invest additional monies in the Fund or suffer a substantial dilution." Id. ¶ 13.
On April 6, 1998, the district court dismissed the direct claims on the ground that the injuries alleged "applied to the shareholders as a whole." Strougo v. Bassini, 1 F.Supp.2d 268, 274 (S.D.N.Y.1998) ("Bassini"). Although the impact of the rights offering on any given shareholder depended on whether and to what extent that shareholder purchased new shares pursuant to the rights offering, the district court held that "so long as the defendants' action toward all shareholders was the same, and any disproportionate effect was the result of the various shareholders' responses to the action, the shareholders have no direct action." Id. at 275 (quoting Strougo v. Scudder, Stevens & Clark, Inc., 964 F.Supp. 783, 792 (S.D.N.Y.1997) (internal punctuation omitted) ("Scudder")).3
The district court entered judgment for the defendants on September 15, 2000. The plaintiff now appeals.
We review de novo the district court's grant of the defendant's motion to dismiss under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted. Levy v. Southbrook Int'l Invs., Ltd., 263 F.3d 10, 14 (2d Cir.2001). In ruling on a motion to dismiss, a court must construe in the plaintiff's favor all well-pleaded factual allegations in the complaint. Hack v. President & Fellows of Yale College, 237 F.3d 81, 88 (2d Cir.2000), cert. denied, ___ U.S. ___, 122 S.Ct. 201, 151 L.Ed.2d 142 (2001). Dismissal of the complaint is proper only where "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Harris v. City of New York, 186 F.3d 243, 250 (2d Cir.1999) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)).
We meet at the threshold the question of which law, state or federal, should be the source of the rules we apply to decide the issue of "shareholder standing" — whether the plaintiff may bring direct claims against the defendants — presented by this appeal.4 The parties do not dispute that Maryland law governs the plaintiff's common law claims: Maryland is the Fund's state of incorporation. But the defendants encourage us also to apply Maryland law to decide the shareholder-standing issue raised by the plaintiff's claims under the ICA. The plaintiff asks us instead to fashion a uniform federal law applicable to these claims.
Because the plaintiff's claims under the ICA involve federal causes of action, a legal rule that "impact[s] significantly upon the effectuation" of the plaintiff's suit must "be treated as raising federal questions." Burks v. Lasker, 441 U.S. 471, 477, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979). Hence, our points of departure in the selection of rules of shareholder standing under the ICA are "the statute and the federal policy which it has adopted." Id. at 476, 99 S.Ct. 1831 (citation and internal quotation marks omitted). The ICA itself is silent on issues of shareholder standing. However, the Supreme Court has held that, as a general matter, courts...
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