Strougo On Behalf of Brazilian Equity v. Bassini
| Decision Date | 06 April 1998 |
| Docket Number | No. 97 Civ. 3579(RWS).,97 Civ. 3579(RWS). |
| Citation | 1 F.Supp.2d 268 |
| Parties | Robert STROUGO, on Behalf of THE BRAZILIAN EQUITY FUND, INC., Plaintiff, v. Emilio BASSINI, Richard Watt, Daniel Sigg, Dr. Enqieue R. Arzac, James J. Cattano, Peter A. Gordon, George W. Landau, Martin M. Torino and BEA Associates, Defendants, and The Brazilial Equity Fund, Inc., Nominal Defendant. Robert STROUGO, on behalf of himself and all others similarly situated, Plaintiff, v. Emilio BASSINI, Richard Watt, Daniel Sigg, Dr. Enrique R. Arzac, James J. Cattano, Peter A. Gordon, George W. Landau, Martin M. Torino and BEA Associates, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Wechsler Harwood Halebian & Feffer, New York City, Stuart D. Wechsleer, Richard B. Brualdi, of counsel, for Plaintiff.
Willkie Farr & Gallagher, New York City, Lawrence O. Kamin, of counsel, for Defendants BEA Associates, Emilio Bassini, Richard Watt and Daniel Sigg.
Morrison & Foerster, New York City, Jack C. Auspitz, David S. Berg, of counsel, for Defendants Dr. Enrique R. Arzac, James T. Cattano, Peter A. Gordon, George W. Landau and Martin M. Torino.
Defendants BEA Associates ("BEA"), the investment adviser to the Brazilian Equity Fund, Inc. (the "Fund") and Emilio Bassini, Richard Watt and Daniel Sigg, at all relevant times directors of the Fund and employees of BEA (together with BEA, the "BEA Defendants") have moved to dismiss the complaint of plaintiff Robert Strougo ("Strougo") pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim and Fed.R.Civ.P. 23.1 for failure to make a pre-litigation demand upon the Fund's board of directors prior to commencing this derivative action; or, in the alternative, to certify a question to the Maryland Court of Appeals pursuant to Maryland Courts and Judicial Proceedings § 12-603. Defendants Enrique R. Arzac, James J. Cattano, Peter A. Gordon, George W. Landau, and Martin M. Torino (the "Outside Director Defendants"), at all relevant times directors of the Fund who are not employees of BEA, have filed a similar motion. For the reasons set forth below, the motions to dismiss will be granted as to the class action claims and denied as to all other claims.
Strougo filed the complaint in this action on May 16, 1997, repeating similar allegations to those he set forth in an action involving a rights offering against a different fund that invested in Brazilian securities. See Strougo v. Scudder, Stevens & Clark, Inc., 96 Civ. 2136(RWS) (the "Scudder Action").
This action arises from a 1996 rights offering (the "Rights Offering") by the Fund, a closed-end investment company, under which the Fund's existing shareholders were given the opportunity to purchase additional shares of newly issued Fund stock at a discount from market value. Strougo, a shareholder of the Fund, alleges that the Rights Offering constituted a breach of duty by BEA (the Fund adviser) and the Fund's directors because the offering purportedly diluted the shareholders' investments, imposed transaction costs on the Fund (such as investment banking fees), and was allegedly motivated by a desire to increase BEA's investment advisory fee. Strougo does not allege making a demand on the Fund's board of directors prior to initiating this derivative action.
The complaint contains the same six causes of action alleged in the Scudder Action; (1) a claim under the section 36(b) of the Investment Company Act of 1940, as amended (the "ICA"), for excessive fees;1 (2) a "control person" claim under section 48(a) of the ICA; (3) two derivative claims alleging breach of fiduciary duty under section 36(a) of the ICA and under Maryland law; and (4) two direct class action claims alleging breach of duty under section 36(a) of the ICA and under Maryland law. The futility of demand upon the Board is alleged based upon the interest of the directors.
The instant motion by the Outside Director Defendants was filed on September 15, 1997, and the motion by the BEA Defendants was filed on September 16, 1997. The motions seek (1) dismissal of the derivative claims for failure to make a demand upon the board of directors of the Fund (the "Board"); (2) certification of the futility question to the Maryland Court of Appeals; and (3) dismissal of the class action claims. The motions were considered fully submitted after argument on December 17, 1997.
On a motion to dismiss under rule 12(b)(6), the facts alleged I the complaint are presumed to be true, and all factual inferences are drawn in the plaintiff's favor. Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir.1993). Accordingly, the facts p-resented here are primarily from the allegations of the Complaint and do not constitute findings of fact by the Court.
Strougo has alleged that he purchased 1,000 shares of the Fund on January 11, 1993 and has held shares ever since.
The Fund is a non-diversified, publicly traded, closed-end investment company registered under the ICA and incorporated under the laws of Maryland that invests primarily in the securities of Brazilian companies. The Fund's shares are traded on the New York Stock Exchange.
BEA is the investment adviser of the Fund and manages the Fund's operations and investments subject to the governance of an eight member board of directors, made up of Emilio Bassini, Richard Watt and Daniel Sigg who, at all relevant times, were also BEA employees and Dr. Enrique R. Arzac, James J. Cattano, Peter A. Gordon, George W. Landau and Martin M. Torino, who are not employed by BEA but serve on the boards of BEA advised funds as follows:
Compensation From
Director Number of BEA Funds All BEA Funds
Dr. Enrique Arzac 9 No figure in complaint
James J. Cattano 6 $49,000
Peter A. Gordon 5 $39,000
George W. Landau 6 $49,000
Martin M. Torino 5 $42,000
The distinctions between an open-end and closed-end investment company, and the different ways in which they can raise additional capital has been described as follows:
Unlike a traditional mutual fund in which investors purchase and redeem shares directly from and with the mutual fund, a closed-end fund has a fixed number of shares and (after the initial public offering) investors may only purchase shares from an existing shareholder through a stock exchange on which such shares are listed. Thus, shares in a closed-end fund are traded exactly like the shares of any other publicly-owned corporation. By contrast with an "open-end" mutual fund, in which the number of shares is not fixed and investors can purchase or redeem shares at current net asset value ("NAV") (calculated by dividing the fund's total assets by the number of shares outstanding), a closed-end fund has a fixed number of shares that originally were sold in a public offering. Per-share trading prices may be at either a premium or a discount to NAV, but more often are at a discount.
Because closed-end funds operate with a fixed number of shares, they have limited options for obtaining capital to make new investments. Once a fund's initial capital has been fully invested, new investments generally can be made only if the fund sells existing portfolio holdings. Other options for raising capital include secondary public offerings at net asset value, or rights offerings to current investors at or below NAV.
Strougo v. Scudder, Stevens & Clark, Inc., 964 F.Supp. 783, 788 (S.D.N.Y.1997) (hereinafter Scudder I). Here, the Fund determined that it would raise additional capital by means of a non-transferable rights offering to current investors.
After the close of trading on June 6, 1996, the Fund announced that it would issue nontransferable rights to its shareholders, and that it expected to raise approximately $20 million thereby. The Rights Offering would provide one right per share to each shareholder and the rights were to expire on August 16, 1996. A holder of three rights could subscribe to one new share, at the subscription price, during a subscription period that would begin on July 17 and end on August 16.
The subscription price per share for the Rights Offering was set as follows: "90% of the lower of (I) the average of the last reported sales price of a share of the Fund's Common Stock on the New York Stock Exchange on the Pricing Date and on the four preceding business days thereof and (ii) the net asset value per share as of the close of business on the Pricing Date."
The prospectus for the Rights Offering stated that the Fund's board of directors had determined that the Rights Offering:
would be in the best interests of the Fund and its shareholders to increase the assets of the Fund available for investment, thereby enabling the Fund to more fully take advantage of available investment opportunities consistent with the Fund's investment objective of long-term capital appreciation. In reaching its decision, the Board of Directors was advised by BEA Associates that the availability of new funds would provide the Fund with additional investment flexibility as well as increase the Fund's ability to take advantage of what BEA Associates believes to be timely opportunities in the Brazilian market as a result of recent economic and political events and stock market developments. In evaluating such investment opportunities, the Board considered, among other things, the impact that Brazil's reform process would have on the country's stock prices, the future prospects for Brazil's growth and the likelihood of future privatizations.
The Board of Directors also considered that a well-subscribed rights offering may reduce the fund's expense ratio, which may be of a long-term benefit to shareholders....
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