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SEC Staff Withdraws Prior Guidance on Control Share Acquisition Statutes's picture
Commentary by Steven Lofchie

The SEC Division of Investment Management withdrew 2010 guidance which reviewed the permissibility of an SEC-registered, closed-end fund determining to opt in to a control share acquisition statute ("control share statutes") authorized under state law.

Such control share statutes generally remove voting rights from shares owned or controlled by a single person who holds more than a specified percentage of the shares of the company, thereby making it more difficult for a new shareholder to take control. In the withdrawn staff guidance (see "Boulder Letter"), SEC staff had taken the position that opting in to such statute was inconsistent with the voting requirements of ICA Section 18(i) ("Capital structure of investment companies").

In withdrawing the Boulder Letter, the Staff stated that it would not recommend enforcement action against any ICA Section 18(i) closed-end fund for opting in to and triggering a control share statute if the board of the fund made the decision with "reasonable care" and followed other applicable duties and laws.

The Staff requested feedback on this action to help inform future recommendations. Specifically, the Staff asked for comment on, among other things:

  • the practical and functional effects on closed-end funds, their management, and their shareholders when funds opt in to and trigger control share statutes;

  • what a fund's board would consider when debating whether to opt in to and trigger a control share statute;

  • how the ability to opt in to and trigger a control share statute would have a practical or functional effect on a fund's compliance with federal securities laws other than ICA Section 18(i); and

  • whether the SEC should address the ability of a closed-end fund to opt in to and trigger a control share statute under ICA Section 18(i).


ICA Section 18(i) states as follows:

"[Subject to certain exceptions] every share of stock hereafter issued by a registered management company . . . shall be a voting stock and have equal voting rights with every other outstanding voting stock."

Read literally, it is not obvious that the Boulder Letter reached a wrong conclusion as to the words of the ICA. However, according to a footnote in the statement by the Division of Investment Management.

"Inflexible adherence to any rigid interpretation [under section 18(i)] could produce grave distortions of the apparent intent of Congress to require a reasonably equitable distribution of voting power. . . ."

Of course, the SEC has the authority under ICA Section 6(c) to exempt investment companies, subject to such conditions as the SEC deems appropriate, if any, from ICA Section 18(i). It is interesting that the SEC chose to act by statutory interpretation, rather than by considering whether an exemption was warranted. The grant of an exemption is obviously a more formal and time-consuming process.

In its statement, the Division of Investment Management also raises the question of whether a registered investment company could question other takeover defense measures, such as the adoption of poison pills.

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