Neuberger Berman Real Estate v. Lola Brown Trust

• Decision Date: 08 May 2007
• Docket Number: No. AMD 04-3056.,AMD 04-3056.
• Citation: 485 F.Supp.2d 631
• Parties: NEUBERGER BERMAN REAL ESTATE INCOME FUND, INC., Plaintiff v. LOLA BROWN TRUST NO. 1B, et al., Defendants.
• Court: U.S. District Court — District of Maryland

485 F.Supp.2d 631

NEUBERGER BERMAN REAL ESTATE INCOME FUND, INC., Plaintiff v. LOLA BROWN TRUST NO. 1B, et al., Defendants.

No. AMD 04-3056.

United States District Court, D. Maryland.

May 8, 2007.

David Clarke, Jr., John R. Wellschlager, Dla Piper US. LLP, Washington, DC, Daniel M. Perry, Michael L. Hirschfeld, Stacey J. Rappaport, Milbank Tweed Hadley and McCloy LLP, New York, NY, for Plaintiff.

Joseph R. Price, Scott S. Ward, Donald B. Mitchell, Jr., James H. Hulme, Kate Bowen Briscoe, Arent Fox Kintner Plotkin and Kahn PLLC, Washington, DC, for Defendants.

MEMORANDUM OPINION

DAVIS, District Judge.

This action arises out of a hostile tender offer which sought to take control of a Maryland closed-end investment company; the lawsuit was one among several defensive actions taken in response to the tender offer by the investment company's board.¹ Three of the defendants filed a ten-count counterclaim, challenging, on myriad grounds, the propriety of the defensive measures invoked by plaintiff.² After discovery concluded, the parties filed cross-motions for summary judgment. A hearing was held and, by orders entered on March 30, 2007, and April 15, 2007, I granted in part and denied in part the cross-motions, and I filed an interlocutory declaratory judgment order announcing particular rulings and conclusions. This opinion spells out the reasons for those orders.

I.

A detailed account of the genesis and progress of this litigation may be found in the prior opinions issued in this case, familiarity with which is assumed. See 342 F.Supp.2d 371 (D.Md.2004)(denying motion for preliminary injunction); 225 F.R.D. 171 (D.Md.2004) (certifying declaratory judgment for immediate appeal); 230 F.R.D. 398 (D.Md.2005) (resolving discovery disputes and ordering sanctions against defendants under Fed.R.Civ.P. 37); 2006 WL 709846 (D.Md., March 20, 2006) (overruling exceptions to magistrate judge's determinations of discovery disputes and imposition of sanctions). See also Full Value Partners, L.P. v. Neuberger Berman Real Estate Income Fund, Inc., 2005 WL 885421 (D.Md., April 18, 2005)(parallel litigation instituted by a shareholder of plaintiff).

In summary, plaintiff Neuberger Berman Real Estate Income Fund, Inc. ("NRL"), is a closed-end investment company incorporated in Maryland, investing primarily in real estate securities. NRL is subject to the Investment Company Act of 1940, 15 U.S.C. §§ 80a1 et seq. (the "ICA" or "the 1940 Act"). NRL's common stock trades on the New York Stock Exchange. Neuberger Berman Management, Inc. (NBM) acts as the investment adviser to NRL; Neuberger Berman, LLC ("NBLLC") is the sub-adviser.

Six defendants are joined in the two-count amended complaint. Defendants Lola Brown Trust No. 1 B ("Lola Trust") and Ernest Horej si Trust No. 1 B ("Ernest Trust") are irrevocable grantor trusts domiciled and administered in South Dakota. Defendant Stewart R. Horejsi ("Horejsi") is a beneficiary (and one-time trustee) of the trusts, an active private investor and a portfolio manager for Boulder Investment Advisors ("BIA") and Stewart Investment Advisors ("SIA"), two non-party investment companies. The remaining defendants are sued in their capacity as trustees of the trusts: (1) Badlands Trust Company ("Badlands"); (2) Susan L. Ciciora (the daughter of defendant Horejsi, who is also a beneficiary of one or more related trusts); and (3) Larry L. Dunlap.

In September 2004, Horejsi, the Lola Trust, and the Ernest Trust jointly filed a Schedule 13D with the Securities and Exchange Commission ("SEC") disclosing that the trusts had acquired approximately 10.05% of the outstanding shares of NRL and that they intended to acquire just over 50% of the outstanding shares of NRL, with the intent to change or expand the investment objectives of the NRL, to replace NRL's directors, to replace the NRL's investment adviser with BIA and SIA, and to replace the administrator with an affiliate of defendants. Accordingly, on September 10, 2004, the trusts commenced a partial tender offer to purchase for cash up to 1,825,000 outstanding shares of common stock of NRL, so as to acquire up to 50.01% of NRL's outstanding shares. The Schedule TO filed with the SEC indicated that the trusts had acquired an additional 8,000 shares of NRL common stock beyond that disclosed on September 2, 2004, such that the trusts collectively owned approximately 10.22% of the outstanding shares. The offer and corresponding withdrawal rights were to expire at midnight on October 8, 2004. On October 4, 2004, the offerors extended the expiration date to midnight on October 15, 2004.

As detailed in my prior opinion, NRL's board ultimately adopted the recommendation of its special committee of independent directors to recommend to shareholders that they not tender and that the board oppose the tender offer by taking a series of defensive measures to thwart it. The board took the following actions: (1) it signed a "Common Stock Purchase Agreement," pursuant to which plaintiff issued 139,535 unregistered shares of NRL common stock to NBLLC for $21.50 per share, a price equal to NRL's net asset value and higher than the market price, thereby diluting the offerors'"interest to 9.92% of NRL's voting shares; (2) it adopted a resolution, effective immediately after the issuance of the shares to NBLLC, electing NRL to be subject to the Maryland Control Share Acquisition Act ("MCSAA"), thereby limiting the voting rights of any shareholder who acquires "control shares" (greater than 10%), i.e., requires such a shareholder to obtain the approval of two-thirds of the other, disinterested shareholders, to vote the "control shares;" (3) it adopted a "Rights Agreement" or "poison pill," pursuant to which a tender offeror's purchase of more than 11% of outstanding shares would effect a fatal dilution of the tender offeror's shares; (4) it authorized the commencement of a self tender offer for 943,704 shares of common stock at a price of $20.00 per share, a price below the net asset value per share but higher than the price ($19.89) of the hostile offerors; and (5) it commenced this lawsuit.

Defendants filed counterclaims and, after a hearing on defendants' motion for preliminary injunction, I issued an opinion and order denying the motion for preliminary injunction, concluding that the poison pill was validly adopted. See 342 F.Supp.2d 371 (D.Md.2004). Although defendants did not note an appeal from the denial of the motion for preliminary injunction as they could have, they moved for an order certifying my declaratory judgment order as immediately appealable. Accepting defendants' representation at the hearing that the tender offer would be abandoned if the court's ruling on the validity of the poison pill were upheld, I certified the order as immediately appealable under Fed.R.Civ.P. 54. The Fourth Circuit promptly granted plaintiff/appellee's motion to dismiss the appeal, however, and the case returned to this court for a period of highly contentious discovery. In the meantime, during the pendency of this case, the Ernest Trust withdrew as a tender offeror (leaving only the Lola Trust as the offeror) and NRL has adopted a series of poison pills, such that NRL has had a poison pill in effect every day since September 23, 2004.

The Lola Trust's tender offer has been extended to, and the most recent poison pill has likewise been extended to, Summer 2007. (A proposal has been put forward to liquidate the fund, which is scheduled for consideration at a special meeting of stockholders in July 2007.)

II.

The parties sought summary judgment on plaintiffs affirmative defense, asserted under § 12(d) of the ICA, 15 U.S.C. § 80a-12(d)(1)(A)(i), to all of the counterclaims. I agree that, as a matter of law defendants are entitled to judgment on the § 12(d) affirmative defense.

Section 12(d) of the ICA prohibits an investment company from acquiring more than three percent of the outstanding voting stock of any registered investment company. 15 U.S.C. § 80a-12(d)(1)(A)(i).³ Describing defendants and their related entities, most prominently the numerous family trusts, as a "Family Investment Company" under the rubric of the "Horejsi Group," and drawing heavily on the history of the so-called Horejsi Group's successful efforts to gain control of three closed-end investment companies in the 1990s through tender offers, NRL asserted that both the Horejsi Group, and, separately, the Lola Trust, is an "investment company" and that their ownership of more than three percent of the voting stock of NRL is prohibited by § 12(d). Defendants contend that there is no such thing in fact or in law as "the Horejsi Group" and that the Lola Trust is not an investment company for any one or more of a host of reasons⁴

An investment company is defined in § 3(a)(1) of the IC as "any issuer which ... is or holds itself out to being engaged primarily ... in the business of investing, reinvesting, or trading in securities." 15 U.S.C. § 80a-3. In § 2(a)(28) a "company" is defined to include "any organized group of person whether incorporated or not." 15 U.S.C. § 80a-2(a)(28). Section 2(a)(22) of the IAC defines an issuer to include "every person who issues or proposes to issue any security." 15 U.S.C. § 80a-2(a)(22). A security is defined to include "any ... investment contract." 15 U.S.C. § 77(b)(a)(1).

The term "investment contract" has been interpreted by the Supreme Court to' include those instruments that, although not specifically named in the securities statutes, function as securities and thus require regulation. Specifically, the Supreme Court held, in SEC v. W.J. Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), that the term "investment contract" (under federal securities laws) "means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led, to expect profits solely from the efforts of the promoter or a third p...