Goldstein v. Lincoln Nat. Convertible Sec. Fund, Civil Action No. 00-2653.

• Decision Date: 27 April 2001
• Docket Number: Civil Action No. 00-2653.
• Citation: 140 F.Supp.2d 424
• Parties: Phillip GOLDSTEIN, Plaintiff, v. LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC., H. Thomas McMeekin, Adela Cepeda, Roger J. Deshaies, Richard Burridge, Thomas Mathers, Thomas L. Brindley, Daniel R. Toll, Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

140 F.Supp.2d 424

Phillip GOLDSTEIN, Plaintiff, v. LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC., H. Thomas McMeekin, Adela Cepeda, Roger J. Deshaies, Richard Burridge, Thomas Mathers, Thomas L. Brindley, Daniel R. Toll, Defendants.

Civil Action No. 00-2653.

United States District Court, E.D. Pennsylvania.

April 27, 2001.

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Gregory E. Keller, Harnes Keller, LLP, New York City, for plaintiff.

David Clarke, Jr., Piper, Marbury, Rudnick & Wolfe LLP, Washington, DC, for defendants.

MEMORANDUM

DuBOIS, District Judge.

I. INTRODUCTION

This action arises out of the reorganization of the Board of Directors of defendant, Lincoln National Convertible Securities Fund (the "Fund" or "LNV"), a subsequent proxy contest, and election of directors at the Fund's May 5, 2000 annual meeting. Plaintiff, Phillip Goldstein ("plaintiff" or "Goldstein"), asks the Court to set aside the election of directors at that meeting and for other related relief on the grounds that defendants breached their fiduciary duty to plaintiff and all other shareholders under federal and state law by enforcing an invalid advance notice deadline for submission of shareholder nominations and proposals and inequitably interfering with the shareholders' right to vote for directors. The Fund contends that the 2000 election was properly conducted and that Goldstein is not entitled to the requested equitable relief as he comes to this Court with unclean hands. After a three day non-jury trial beginning on April 16, 2001, the Court concludes that the Fund improperly precluded plaintiff from presenting his nominees at the annual meeting and distributed a proxy statement that omitted material information, as a result of which plaintiff is entitled to equitable relief.

Plaintiff filed this action on May 24, 2000. On September 15, 2000, defendants filed an Answer with affirmative defenses and a Counterclaim. Plaintiff filed a motion to dismiss the Counterclaim on October 5, 2000 and a motion for partial summary judgment on October 30, 2000. Both of plaintiff's motions were denied by Order dated January 3, 2001.

Based on the following Findings of Fact and Conclusions of Law, the Court finds in favor of plaintiff in part and in favor of defendants in part and will enter judgment accordingly. The Court's findings of fact are set forth in Section II, infra. The Court's conclusions of law are included in its discussion of the legal issues in Section III, infra.

II. FINDINGS OF FACT

1. Plaintiff is an individual who resides in Pleasantville, NY. He has been a stockholder of LNV¹ since March, 1999.

2. Plaintiff manages investments for various clients, including Opportunity Partners, LP ("Opportunity Partners"), a private investment partnership. He is the president of Opportunity Partners' general partner.

3. Defendant LNV is a closed-end mutual fund² organized under Maryland law;

its headquarters are located at One Commerce Square, 2005 Market Street, Philadelphia, PA 19103.

4. The individual defendants are or were members of the Fund's Board of Directors ("Board") at the time of the events that give rise to this litigation — they constituted the Fund's seven-member Board in 1999 and 2000.

5. Pursuant to an investment advisory agreement, the Fund is managed by Lincoln Investment Management, Inc. ("LIM"), an indirect, wholly owned subsidiary of Lincoln National Corporation.

6. The Fund has no employees. Its business and affairs are conducted primarily by its investment adviser, LIM, which, through its affiliates, manages the Fund's investment portfolio, maintains its accounts and records, and provides executive and administrative services to the Fund. See Ex. P-6 at 17 (LNV's Annual or Semi-Annual Report, filed Mar. 1, 2000). The Fund pays LIM a quarterly management fee of .21875% of the Fund's net assets on the last business day of each quarter. In 1999, the Fund paid LIM fees of approximately $1 million. See Ex. P-6 at 13.

7. The Fund is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940 (the "1940 Act").

8. Article Seven of the Fund's Articles of Incorporation sets forth the powers of the Board that may be exercised without the approval of the shareholders. The powers expressly vested in the Board include the power to (i) make, adopt, alter, amend and repeal bylaws of the Fund; (ii) declare and pay dividends; (iii) make distributions of income and capital gains to avoid or reduce the Fund's liability for income taxes; (iv) issue any of the authorized shares of common stock of the Fund; and (v) authorize the purchase of shares of the Fund's common stock in the open market or otherwise. See Ex. P-5 at 3-4.

9. The Bylaws of the Fund ("Bylaws"), which were last amended on October 20, 1995, contain the following provision relating to annual meetings in Article I, Section 1:

The annual meeting of the shareholders of the Corporation shall be held on the third Friday of April, or such other date within 31 days as may be set by the Board of Directors, in each year ... at 10:00 a.m., at the office of the Corporation in the City of Baltimore, Maryland, or at such other time and place within the United States as may be fixed by the Board of Directors, for the purpose of electing directors and for transacting such other business as may properly be brought before the meeting. Only such business, in addition to that prescribed by law, by the Articles of Incorporation or by these Bylaws, may be brought before such meeting as may be specified by resolution of the Board of Directors, or by writing filed with the Secretary of the Corporation signed by the Chairman of the Board or the President or by a majority of the directors or by shareholders holding at least one-half of the Common Stock of the Corporation outstanding and entitled to vote at the meeting.

Ex. P-10 at LNV 0059.

10. The Fund's Bylaws and Articles of Incorporation do not contain any provisions that restrict the right or ability of a shareholder of the Fund to make a proposal or nominate a candidate for election to the Board at an annual meeting or that require a shareholder to provide advance notice of such a proposal or nomination. See Exs. P-5 and P-10.

11. The Fund's 1999 proxy statement includes a provision that states:

Any stockholder proposals intended to be presented at the [2000] annual meeting and be included in the proxy statement and proxy of the Fund must be in proper form and must be received on or before November 17, 1999. Any stockholder proposals intended to be presented at the [2000] annual meeting, but not to be included in the proxy statement and proxy of the Fund, must be in proper form and must be received on or before January 31, 2000.... The inclusion and/or presentation of any such proposal is subject to the applicable requirements of the proxy rules under the Securities Exchange Act of 1934.

Ex. P-2A at LNV 0025.

12. The 1999 proxy statement was issued on March 16, 1999 for the April 23, 1999 annual meeting of the Fund. The 1999 proxy statement was sent to stockholders of record at the close of business on February 26, 1999 — the shareholders who were entitled to vote at the April 23, 1999 meeting. See Ex. P-2A at LNV 0019. Plaintiff was not a stockholder of LNV at the close of business on February 26, 1999.

13. As of April 14, 2000, plaintiff, a private investment partnership he manages (Opportunity Partners), three of plaintiff's clients, and certain of plaintiff's family and friends beneficially owned 205,-911, or approximately 3.2% of the Fund's outstanding shares. See Ex. P-7 at 6 (Definitive Goldstein Proxy Statement, filed April 14, 2000).

14. The Fund's common stock has traded at a discount to net asset value ("NAV") for at least two years. As of March 31, 2000, LNV's common stock was trading at a discount of 19.1% to NAV. See Ex. P-8 at 3 (Definitive LNV Proxy Statement, filed Apr. 26, 2000). On April 7, 2000, the stock traded at a discount of 24.4%. See Ex. P-7 at 2 (Definitive Goldstein Proxy Statement, filed April 14, 2000).

15. Plaintiff sent the nominating committee of the Board a letter dated January 22, 2000 in which he expressed his concern about the discount at which the Fund's stock was trading and asked the nominating committee to consider nominating him as a director of the Fund. Ex. P-3. In his letter, plaintiff stated that if he was elected to the Board, his "primary objective will be to work with the other directors to develop strategies designed to enhance shareholder value by narrowing the discount." Ex. P-3 at LNV 1072. The Fund received plaintiff's letter on January 27, 2000. See Ex. P-3 at LNV 1073.

16. After receipt of plaintiff's letter, the Board obtained research on plaintiff and learned that he was an advocate of measures to reduce the discount at which certain closed-ends funds had traded and that plaintiff had presented proposals at shareholder meetings of other closed-end funds. Tr. Transcript at 53 (testimony of Daniel R. Toll, Apr. 17, 2001); id. at 133 (testimony of H. Thomas McMeekin, Apr. 17, 2001). The Board also learned that he had conducted proxy contests, nominated himself and been elected to the boards of directors of other closed-end funds. Id. at 53 (testimony of Daniel R. Toll, Apr. 17, 2001); id. at 132 (testimony of H. Thomas McMeekin, Apr. 17, 2001).

17. For a number of years, plaintiff has been, and continues to be, an advocate of shareholders of closed-end funds for measures to reduce the discounts at which the shares of closed-end funds trade.

18. On January 28, 2000, at a previously scheduled Board meeting, the individual defendants nominated themselves for election at the May 5, 2000 annual meeting "to serve, if elected, until the next annual meeting of shareholders...." Ex. P-15 at 8.

19. As of the January 28, 2000 meeting, the Fund's Bylaws provided that the...