UNITED STATES DISTRICT COURT
DISTRICT OF MARYLAND
- ------------------------------------------
NEUBERGER BERMAN REAL ESTATE
INCOME FUND INC.,
PLAINTIFF, CIVIL ACTION NO. AMD-04-3056
-AGAINST-
LOLA BROWN TRUST NO. 1B,
ERNEST HOREJSI TRUST NO. 1B, AND
BADLANDS TRUST COMPANY, SUSAN
L. CICIORA AND LARRY L. DUNLAP, AS
TRUSTEES OF LOLA BROWN TRUST NO. 1B AND
ERNEST HOREJSI TRUST NO. 1B, AND
STEWART R. HOREJSI,
DEFENDANTS.
- ------------------------------------------
PLAINTIFF'S MEMORANDUM OF LAW IN OPPOSITION TO
COUNTERCLAIMANTS' MOTION FOR A SPEEDY DECLARATORY JUDGMENT
HEARING UNDER RULE 57 AND/OR MOTION FOR A PRELIMINARY INJUNCTION
TABLE OF CONTENTS
-----------------
PAGE
----
PRELIMINARY STATEMENT..........................................................1
SUMMARY OF FACTS...............................................................5
ARGUMENT.......................................................................9
I. THE SHAREHOLDER RIGHTS PLAN REFLECTS A VALID EXERCISE OF
BUSINESS JUDGMENT BY NRL'S DIRECTORS AND DOES NOT
CONFLICT WITH THE 1940 ACT.............................................9
A. The Rights Plan is a Judicially Approved Response to
a Coercive Tender Offer...........................................10
B. The Rights Plan Does Not Violate the 1940 Act.....................12
1. The Rights Plan Does Not Violate Section 18(d)............13
2. The Rights Plan Does Not Violate Section 23(b)............15
3. The Rights Plan Does Not Violate Section 18(i)............16
II. NRL HAS PROPERLY OPTED INTO THE MARYLAND CONTROL SHARE
ACQUISITION ACT, AND THE TRUST DEFENDANTS WILL BE SUBJECT
TO ITS STRICTURES IF THEIR SHAREHOLDINGS EXCEED THE 10%
TRIGGERING THRESHOLD..................................................17
A. The Sale of Shares in the Private Placement Was a
Valid Defensive Measure...........................................18
B. The MCSAA Cannot Be Read to Exempt the Trust Defendants
Because they Once Held More than 10% of NRL's Shares..............20
C. The 1940 Act Does Not Pre-empt the MCSA...........................22
III. THE TRUST DEFENDANTS ARE BARRED BY SECTION 12(d)(1) OF
THE 1940 ACT FROM COMPLETING THE TENDER OFFER.........................24
A. Section 12(d) Reflects a Policy Against Concentrated
Ownership.........................................................25
B. Each Trust Defendant and the Group Comprised of All
the Defendants Is an Investment Company Under the
1940 Act..........................................................26
C. The 1940 Act's Integral Rule of Construction Compels
the Conclusion that Each Trust Defendant and the Group
is an Investment Company..........................................28
-i-
IV. EVISCERATING THE DIRECTORS' ABILITY TO DEFEND AGAINST
AN UNDESIRABLE, COERCIVE TENDER OFFER WOULD DISSERVE THE
1940 ACT'S PURPOSE TO PROMOTE CAPITAL FORMATION.......................30
V. THE TRUSTS ARE NOT ENTITLED TO INJUNCTIVE RELIEF......................32
A. The Trusts Will Not be Irreparably Harmed if the
Court Denies Injunctive Relief....................................33
B. NRL Will be Harmed if the Court Grants Injunctive
Relief............................................................35
C. The Trust Defendants Fail to Establish a Likelihood
of Success on the Merits..........................................36
D. The Trust Defendants' Request for Injunctive Relief
Contradicts Public Policy.........................................36
CONCLUSION....................................................................38
PRELIMINARY STATEMENT
---------------------
The Defendants in this action - related Trust Defendants(1) engaged in the
business of investing in securities and their managers(2) - ask this Court to
hold that a registered investment company like plaintiff, Neuberger Berman Real
Estate Income Fund Inc. ("NRL"), confronted by a coercive tender offer(3)
threatening substantial harm to both the fund and its shareholders, cannot
defend itself and its shareholders by invoking traditional takeover defenses
whose validity and enforceability in precisely the circumstances presented here
are well-settled. Were this Court to accept Defendants' invitation to legislate
a new set of rules tying the hands of an investment company's independent
directors and forbidding their exercise of business judgment, it would radically
tilt a tender offer playing field that has been carefully leveled through
decades of legislation and tender offer jurisprudence, and throw an entire
industry into chaos in the bargain. It would, moreover, undercut the policy of
investor protection that lies at the heart of the Investment Company Act of 1940
(the "1940 Act"). That policy of investor protection is codified in provisions
of the 1940 Act that Defendants are violating, even as they ask this Court for
"equitable" relief that would permit them to enlarge their violation and the
resulting harm to NRL's shareholders.
The coercive quality of partial tender offers such as that undertaken by
Defendants here (they propose to acquire just over 50% of NRL's shares) is
uniformly acknowledged by commentators and recognized in the case law.
Shareholders who are uncomfortable with the business plans and management
- ----------
(1) The Trust Defendants are Lola Brown Trust No. 1B and Ernest Horejsi Trust
No. 1B.
(2) The managers of the Trust Defendants include Stewart R. Horejsi, Susan L.
Ciciora, Larry L. Dunlap and Badlands Trust Company.
(3) A partial tender offer is coercive where, as here, it is structured in a
front-loaded manner, such that an investor that decides not to tender his shares
is faced with a diminution in the value of his investment if the tender offer is
successful. SEE CITY CAPITAL ASSOC. LTD. V. INTERCO INC., 551 A.2d 787, 797
(Del. Ch. 1988) (REJECTED ON OTHER GROUNDS BY PARAMOUNT COMMUNICATIONS, INC. V.
TIME INC., 571 A.2d 1140, 1152-53).
personnel proposed by the offeror are driven to tender their shares because they
fear that, if they do not, they will find themselves trapped in an illiquid
minority position whose value will decline. The coercion in this case is
palpable: Defendants have indicated that, if successful, they will oust NRL's
directors in favor of their own nominees; will install their own affiliates as
advisors to NRL; will then dramatically increase the fees NRL pays for advisory
services; and will abandon NRL's stated investment guidelines, turning NRL into
a "blind pool" which they can invest in whatever manner they choose. This is an
unsettling scenario for investors who bought shares of NRL believing, as set
forth in NRL's offering prospectus, that NRL would invest in the securities of
real estate companies and would be managed by Neuberger Berman Management, Inc.,
one of the nation's oldest and most trusted investment advisors.(4) In the Wall
Street Journal advertisement announcing their tender offer, the Defendants
boldly attempted to capitalize on the fears created by the coercive nature of
their offer, with the statement that "For stockholders who do not wish to be a
part of NRL's new direction, our offer is an opportunity to sell shares before
any changes occur."(5)
NRL's independent directors(6) evaluated the tender offer. They
interviewed defendant Horejsi, requested materials from the Defendants and
reviewed the small amount of information sent by Defendants, and caused their
professional advisors to conduct additional research on the Defendants. The
independent directors concluded that the tender offer was not in the best
- ----------
(4) Defendants attempt to sugar-coat the bitter pill they are proposing for
NRL's shareholders by falsely suggesting that they are better managers and will
obtain better returns for the shareholders. These and other deceptive statements
in the tender offer are the subject of the complaint filed by NRL and are
discussed more fully below.
(5) Wall Street Journal, September 10, 2004, page C-5.
(6) As required by section 2(a)(19) of the 1940 Act, the thirteen independent
directors of NRL are independent of Neuberger Berman Management, Inc. and its
affiliates. NRL also has two directors affiliated with Neuberger Berman
Management, Inc.
-2-
interests of NRL's shareholders. The bona fides of that determination and its
validity as an exercise of the directors' business judgment are not challenged
by Defendants, nor could they be.
As required by federal law, NRL's directors informed the shareholders of
their determination and, as every board of directors confronted by an offer
inimical to the interests of its shareholders does, the NRL board implemented
defensive measures designed to prevent exploitation of its shareholders and to
allow NRL's management and shareholders time to explore and consider alternative
transactions. These defensive measures consisted, in the first instance, of the
adoption of a "poison pill" shareholder rights plan that is effective for 120
days, the sale of additional NRL shares at full net asset value (the "Private
Placement") to a friendly entity (in part to help fund a self-tender offer which
NRL subsequently initiated), and the election to "opt-in" to the control share
provision of Maryland state law - every one a lawful act, every one a
traditional measure adopted by target company directors in the valid exercise of
their business judgment.
In order to afford an alternative exit path for shareholders upset by
Defendants' designs on NRL and unwilling to risk the outcome of litigation, the
directors also authorized a self-tender by NRL for up to 20% of the outstanding
shares. The directors are certainly entitled to offer exiting shareholders an
alternative that is financially better for them ($20.00 per share, VS. $19.89
offered by Defendants) and that also protects the interests of those
shareholders who do not sell (by reducing the number of sellers who might accept
Defendants' tender offer). In addition, the directors indicated that they would
explore possible alternative transactions, such as a merger, which they may wish
to present to NRL's shareholders. There is nothing untoward about these actions;
they are consistent with the fiduciary obligations of corporate directors to
explore and provide alternatives they believe to be in the best interests of the
shareholders.
-3-
There is, moreover, a legal impediment to the completion of the Trust
Defendants' tender offer that the Defendants have not addressed. The Trust
Defendants individually and the larger group of which they are a part are
investment companies under the 1940 Act.(7) As such, they are prohibited by
federal law from owning more than 3% of the shares of any registered investment
company like NRL. Section 12(d)(1)(A)(i) of the 1940 Act provides that "[i]t
shall be unlawful . . . for any investment company . . . to purchase or
otherwise acquire any security of any registered investment company . . . if the
acquiring company and any company or companies controlled by it immediately
after such purchase or acquisition own in the aggregate . . . more than three
per centum of the total outstanding voting stock of the acquired company." The
Trust Defendants violated this provision of federal law when amassing their
present NRL shareholdings, and there is no doubt that completion of the tender
offer would effect an even greater violation.
Defendants' present application for a declaratory judgment or,
alternatively, a preliminary injunction, thus proposes an unwise "rush to
judgment." There are substantial and complex factual, legal and policy issues
that should be resolved on a full record before the Court should entertain an
application to nullify the actions of NRL's directors and render them and the
shareholders helpless before the onslaught of the coercive and misleading tender
offer. There is no urgency to Defendants' case and no threat of irreparable
injury; indeed, because Defendants propose to fund the tender offer through
borrowings from a securities margin account, there is not even monetary injury
attending a delay. In fact, the opposite is true: allowing the coercive offer to
proceed would cause irreparable harm to NRL and its shareholders. Defendants
- ----------
(7) The Court should not be diverted by Defendants' use of the trust form.
Section 2(a)(8) of the 1940 Act defines "company" to include, among other
things, "a trust" and "any organized group of persons whether incorporated or
not . . . "
-4-
extended the tender offer once, and they can do so again without any prejudice
to its ultimate success - other than that posed by careful judicial review.
SUMMARY OF FACTS
----------------
NRL is a closed-end management investment company incorporated in Maryland
which invests primarily in real estate securities and is subject to the
Investment Company Act of 1940. NRL's common stock is listed and trades on the
New York Stock Exchange.
On or about September 2, 2004, Stewart R. Horejsi and the Trust
Defendants, jointly filed a Schedule 13D with the SEC stating that the Trust
Defendants had accumulated approximately 10.05% of the outstanding shares of
NRL. The Schedule 13D stated that the Trust Defendants:
o intended to acquire up to just over 50%, i.e. a bare majority, of
the outstanding shares of NRL;
o would consider modifying or expanding the investment objective for
the Fund;
o intended to replace five of NRL's directors at the 2005 annual
meeting, and to replace all remaining directors at subsequent annual
meetings;
o intended to terminate and replace the current fund adviser with
entities controlled by Stewart R. Horejsi; and
o intended to replace the current fund administrator with a Horejsi
affiliate.
On September 10, 2004, the Trust Defendants commenced a hostile, 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 the outstanding shares of NRL.
The offer announced that the Trust Defendants would acquire shares on a pro-rata
basis in the event that NRL shareholders tendered more than the number of shares
the Trust Defendants were willing to acquire. The offer is coercive, because the
Trust Defendants do not propose a "back-end" transaction by which the shares of
-5-
all non-tendering NRL shareholders would be acquired for consideration
equivalent to that paid in the tender offer. Thus, the tender offer creates the
risk for the NRL shareholders that, if they do not tender their shares, they may
find themselves locked into an illiquid investment of reduced value. Adding to
its coercive character, the offer also contained the following statement: "For
stockholders who do not wish to be a part of NRL's new direction, our offer is
an opportunity to sell shares before any changes occur."
The offer indicated that the Trusts would use cash on hand and future
margin borrowings under an account maintained by Merrill Lynch, Pierce, Fenner &
Smith Inc. to fund the purchase of shares pursuant to the offer. The offer and
corresponding withdrawal rights were announced to expire at 12:00 midnight on
October 8, 2004.
On September 14, 2004, following the Trusts' tender offer, NRL's Board
formed a Special Committee of independent directors charged with evaluating and
assessing the terms of the offer in consultation with legal counsel.
On the same day, counsel for the independent fund directors requested
information from the Trust Defendants of the type that the Board annually
requests for its evaluation of the fund's adviser. The Trust Defendants
responded on September 16, 2004, in a letter providing only a small portion of
the requested information.
On September 20, 2004, the Special Committee held meetings with its legal
advisers, with Mr. Horejsi who represented the Trust Defendants, and with
representatives of Neuberger Berman Management, Inc., NRL's investment manager.
The Special Committee then carefully assessed the terms of the offer in light of
the information provided by Mr. Horejsi, NB Management and the legal advisers.
-6-
On September 21, 2004, the Special Committee reported their on their
meetings and recommendations to the independent fund directors, who then
carefully discussed and assessed the terms of the offer. They were later joined
by the remaining directors, who were informed of earlier discussions and
proposed actions.
On September 23, 2004, the Special Committee unanimously concluded that
the tender offer represented a substantial threat to the Fund and its
stockholders and that the unsolicited, partial and hostile nature of the tender
offer, and the plans announced for the Fund by the Trusts, were designed to
coerce stockholders of the Fund to tender shares into the tender offer on
disadvantageous terms. Therefore, the Special Committee determined that the
tender offer was not in the best interests of the stockholders and unanimously
recommended to the Board that the full Board recommend that the Fund's
stockholders reject the tender offer and not tender their shares to the Trust
Defendants for purchase. Following receipt of such recommendation, the full
Board concurred with the Special Committee and also made the same determination
as the Special Committee regarding the tender offer. In light of the foregoing,
the Board:
o approved a Common Stock Purchase Agreement (the "Stock Purchase
Agreement") with Neuberger Berman, LLC, pursuant to which 139,535
shares of Common Stock were issued to Neuberger Berman, LLC for $21.50
per share, a price equal to NRL's net asset value and higher than the
market price;
o adopted resolutions, effective immediately after the issuance of shares
pursuant to the Stock Purchase Agreement, electing the Fund to be
subject to both the Maryland Control Share Acquisition Act and the
Maryland Business Combination Act;
o authorized the Fund to promptly commence a self tender offer for
943,704 shares of Common Stock at a price of $20.00 per share, which
was designed to provide liquidity to the Fund's stockholders, if
-7-
required, without requiring them to tender into the coercive tender
offer;
o authorized the filing of a complaint in this Court against the
Defendants, alleging, among other things, that the tender offer
contains false and misleading statements in violation of the United
States tender offer rules; and
o adopted a stockholder rights agreement (the "Rights Plan").
Pursuant to the Rights Plan, the Board adopted a resolution declaring a
dividend of one right (a "Right") for each outstanding share of common stock.
The dividend was paid on October 7, 2004. Each Right entitles the registered
holder to purchase from the Fund three shares of Common Stock at a price equal
to the par value of such shares (the "Purchase Price"). The Rights Plan provides
that after the tenth day following the public announcement (the "Distribution
Date") that a person or group of affiliated persons have acquired beneficial
ownership of 11% or more of the outstanding shares of Common Stock (an
"Acquiring Person"), each shareholder of record on the Distribution Date will be
sent a Rights Certificate. Prior to the Distribution Date (or earlier redemption
or expiration of the Rights), the Rights are nontransferable, I.E. they are
transferred with and only with the shares of Common Stock. The Rights are not
exercisable until the Distribution Date. The Rights will expire 120 days after
their issuance, on January 21, 2005 (the "Final Expiration Date"), unless the
Rights are earlier redeemed or exchanged by the Fund.
In the event that the Rights become exercisable, the Rights Plan also
provides that in lieu of exercise for the purchase price, the Board may make
proper provision so that each holder of a Right, other than Rights beneficially
owned by the Acquiring Person in excess of the Rights associated with 11% of the
Common Stock held by the Acquiring Person receives three shares of Common Stock.
-8-
Until a Right is exercised, the holder thereof, as such, will have no rights as
a stockholder of the Fund, including, without limitation, the right to vote or
to receive dividends.
On October 4, 2004, the Trusts issued a supplement to their September 10,
2004 tender offer which failed to correct the misstatements and omissions in the
initial disclosure and contained other misstatements. The October 4 Supplement
extended the expiration date of the tender offer to October 15, 2004.
On October 6, 2004 at approximately 8:45 p.m., the Trusts and Badlands
Trust Company filed counterclaims and this motion for a declaratory judgment
and/or a preliminary injunction. Despite the passage of almost two weeks since
the filing of NRL's complaint and the taking of the other actions that the
Defendants seek to enjoin, the Defendants requested that an expedited hearing be
held on their motions. On October 8, 2004, the Court set a hearing for October
13, 2004.
ARGUMENT
--------
I. THE SHAREHOLDER RIGHTS PLAN REFLECTS A VALID EXERCISE OF BUSINESS JUDGMENT
BY NRL'S DIRECTORS AND DOES NOT CONFLICT WITH THE 1940 ACT
Defendants suggest that NRL's adoption of the Rights Plan is novel and
unprecedented, and therefore invalid. This suggestion bespeaks a fundamental
misapprehension of the regulations applicable to registered closed-end
investment companies and the effect that these regulations have on tender
offers. Because, as discussed more fully in Point III, below, concentrations of
ownership in such companies are strictly regulated by the 1940 Act, there have
been few instances in which these companies have been targets of hostile
takeover bids. Thus, there has been less need for these companies to implement
"poison pill" defenses. In addition, because the 1940 Act provisions governing
the issuance of rights and warrants operate to limit the duration of the rights
-9-
issued under a defensive rights plan to 120 days,(8) the poison pill technique
would be employed by a registered closed-end investment company only in response
to an actual takeover attempt. By contrast, rights plans in ordinary for-profit
corporations are typically of much longer duration - often as long as ten years
- - and are adopted without reference to a pending hostile offer, but as part of
the corporation's armament of takeover defenses. Thus, they occur more
frequently and have been the subject of litigation even where there is no
pending tender offer. But the fact that the 1940 Act's restrictions on
concentrated ownership have minimized the instances in which a registered
closed-end investment company might need to make recourse to a defensive rights
plan does not mean that, when and if the need arises, as it has here, such
recourse is invalid.
At bottom, the rights plan operates in the same manner for an ordinary
corporation as it does for an investment company. The legal principles to which
the courts, state legislatures, and the New York Stock Exchange (on which NRL's
shares are listed) have looked to uphold the enforceability of this defensive
technique in the "ordinary" corporation context are fully applicable to, and
fully validate, the Rights Plan adopted by NRL's directors.
A. THE RIGHTS PLAN IS A JUDICIALLY APPROVED RESPONSE TO A COERCIVE
TENDER OFFER
It is well settled that directors of registered closed-end investment
companies like NRL owe a fiduciary duty to their shareholders. SEE Investment
Company Act, ss. 36; SEE Md. Code Ann. 2-405.1, 2-405.2, 2-405.3, 5-417; SEE
BURKS V. LASKER, 441 U.S. 471, 484-85 ("Congress entrusted to the independent
directors of investment companies, exercising the authority granted to them by
state law, the primary responsibility for looking after the interests of the
funds' shareholders."). As part of their fiduciary responsibilities to
shareholders, directors are required to evaluate hostile tender offers and take
- ----------
(8) SEE 1940 Act ss. 18(d).
-10-
steps to oppose an offer they determine not to be in the shareholders' best
interests. Exercising their business judgment in response to a coercive tender
offer they concluded was not in the interests of shareholders, NRL's independent
directors adopted the Rights Plan. Defendants have not asserted that the
independent directors' actions were not a valid exercise of business judgment.
Indeed, the Rights Plan, informally known as a "poison pill," is a
well-established and legally permitted defensive measure in response to a
hostile takeover.
The poison pill was first judicially approved in Delaware in MORAN V.
HOUSEHOLD INT'L, INC., 500 A.2d 1346, 1348-49 (Del. 1985). In deciding whether
the adoption of a poison pill is reasonable in relation to the threat posed,
"courts will not substitute their business judgment for that of directors, but
will determine if the directors' decision was, on balance, within a range of
reasonableness." UNITRIN, INC. V. AMERICAN GENERAL CORP., 651 A.2d 1361, 1385-86
(Del. 1995). Since MORAN, the Delaware courts have consistently upheld the use
of poison pills as an appropriate exercise of business judgment in the face of a
hostile tender offer. SEE LEONARD LOVENTHAL ACCOUNT V. HILTON HOTELS CORP., No.
Civ. A. 17803, 2000 WL 1528909 at *1 (Del.Ch. Oct. 10, 2000) ("Today, rights
plans have not only become commonplace in Delaware, but there is not a single
state that does not permit their adoption.") (collecting cases and statutes).
The federal courts have similarly blessed the use of the poison pill. SEE WLR
FOODS, INC. V. TYSON FOODS, INC., 861 F. Supp. 1277, 1285-86 (W.D. Va. 1994)
(poison pills a valid and effective corporate response to an unsolicited
takeover bid), AFF'D, 65 F.3d. 1172 (4th Cir. 1995).
Like Delaware, Maryland law accords wide discretion to corporate directors
to adopt defensive tactics in the interest of the corporation.(9) SEE MOUNTAIN
MANOR REALTY, INC. V. BUCCHERI, 461 A.2d 45, 52-53 (Md. Ct. Spec. App. 1983);
- ----------
(9) Maryland law is more favorable to the target company's directors than is
Delaware law. The Delaware Supreme Court fashioned a two-pronged, "heightened
scrutiny" test for evaluating defensive tactics in UNOCAL CORP. V. MESA
-11-
CUMMINGS V. UNITED ARTISTS THEATRE CIRCUIT, INC., 204 A.2d 795, 805-06 (Md.
1964). This Court has explicitly approved of the use of the poison pill in
response to a partial tender offer, explicitly recognizing that the poison pill
provides protection from takeovers to all shareholders. SEE REALTY ACQUISITION
CORP. V. PROPERTY TRUST OF AMERICA, Civ. No. JH-89-2503, 1989 WL 214477, at *2
(D. Md. Oct. 27, 1989). Among other things, the offeror in that case challenged
the target company's directors' refusal to exempt the offeror from the operation
of the poison pill, but the Court refused to disturb the judgment of the
target's directors. SEE ID. at *3. Applying Maryland's business judgment rule,
the Court found that "it is well established that courts will not interfere with
the internal management of a corporation at the request of a minority
stockholder or member." ID.
Given this overwhelming weight of authority, it is not surprising that
Defendants do not challenge the Rights Plan under principles of state corporate
law, but instead seek to persuade the Court that it is barred by the 1940 Act.
There is no merit to this assertion.
B. THE RIGHTS PLAN DOES NOT VIOLATE THE 1940 ACT
Defendants' attempt to find some prohibition of the Rights Plan in the
1940 Act runs counter to the Act's underlying policy to protect shareholders.
SEE Section 1(b) ("the policy and purposes of this title . . . are . . . to
eliminate . . . the conditions . . . which adversely affect . . . the interest
- --------------------------------------------------------------------------------
PETROLEUM CO. 493 A.2d 946 (Del. 1985), and noted that the legitimacy of any
defensive tactic is "materially enhanced" where, as with NRL's Rights Plan, it
was "approv[ed] . . . [by] a board comprised of a majority of outside
independent directors." ID. at 955. Significantly, Maryland courts have not
followed Delaware's practice of preliminarily disregarding the business judgment
rule and imposing a heightened level of scrutiny when corporate control is at
issue. "[I]n Maryland, the business judgment rule applies even to directors'
change-in-control decisions." HUDSON V. PRIME RETAIL, INC., No. 24-C-03-5806,
2004 WL 1982383, at *11 n.13 (Md. Cir. Ct. April 1, 2004). Because Maryland
enjoys preeminence as the home to the largest number of registered investment
companies, SEE James J. Hanks, Jr., MARYLAND LEGISLATION OFFERS NEW BENEFITS FOR
CORPORATIONS, REITS AND INVESTMENT COMPANIES, IN Corporate Law, at 8 (Insights,
May 2000, Vol. 14, No. 5) (as of 2000); its jurisprudence is particularly
relevant here.
-12-
of investors").(10) Analysis of the statutory provisions on which Defendants
rely shows that they do not -- either explicitly or implicitly -- prohibit the
Rights Plan.
1. THE RIGHTS PLAN DOES NOT VIOLATE SECTION 18(d)
Defendants erroneously claim the Rights Plan violated Section 18(d) of the
1940 Act because the anti-takeover protection it provides could result in
shareholders being treated differently. (Def. Mem. at 22-23.) Section 18(d)
provides, in relevant part, that a registered management company may issue
"rights" to purchase stock, provided they are "issued exclusively and ratably to
a class or classes of such company's security holders." The Rights Plan
unambiguously met this requirement: the right to purchase attached to all NRL
shares without any discrimination whatsoever. Section 18(d) does not require
more.
We note, moreover, that the anti-discrimination provision of Section 18(d)
is not unique to the 1940 Act, but finds numerous parallels in state law. The
courts have consistently found that poison pills do not violate these statutes,
because they operate to discriminate between shareholders, rather than between
shares. SEE, E.G., DYNAMICS CORP. OF AM. V. CTS CORP., 805 F.2d 705, 718 (7th
Cir. 1986) ("The Delaware Code forbids discrimination, and the Delaware courts
have construed this to mean discrimination between shares, not shareholders.")
(applying Indiana law); GEORGIA-PACIFIC CORP . V. GREAT N. NEKOOSA CORP., 728 F.
Supp. 807, 810 (D. Me. 1990) ("Delaware courts have long distinguished between
discrimination among shareholders and discrimination among shares, finding the
former permissible . . .") (applying Maine law); HARVARD INDUS., INC, V. TYSON,
1986 WL 36295, at *1 (E.D. Mich. Nov. 25, 1986) ("the position of the
- ----------
(10) The 1940 Act specifically enumerates the risk of investor injury when
"investment companies are reorganized, become inactive, or change the character
of their business, or when the control or management thereof is transferred,
without the consent of their security holders." SEE Section 1(b)(6).
-13-
better-reasoned cases [is] that such a rights plan does not discriminate among
shares but, rather, among shareholders, which is not forbidden").
This Court's decision in REALTY ACQUISITION is illustrative. In REALTY
ACQUISITION, the plaintiffs argued that the poison pill violated the defendant's
declaration of trust, which required that every share "be equal in all
respects." REALTY ACQUISITION at *2. The court upheld the poison pill, reasoning
that the terms of rights offering at issue applied to all shareholders without
discrimination. ID. The Court recognized that a shareholder who undertook a
triggering event was precluded from exercising the rights, but that prohibition
applied to all shareholders that decided to cause a triggering event. ID.
Moreover, the rights offering provided every shareholder equal protection from
takeovers. Id.
Here, too, the Rights were apportioned ratably. Everyone who owns a share
possesses the Right attached to the share. Every shareholder is entitled to
exercise the Rights if the 11% threshold is crossed. Every shareholder who
decides to buy more than 11% is precluded from exercising their Rights for each
share above the 11% threshold. Like the poison pill in REALTY ACQUISITION, the
Plan provides every shareholder, including Defendants, with equal protection
from coercive hostile takeovers that are not in the best interests of NRL.
Plaintiffs' argument also runs afoul of the plain language of Section
18(d), which requires only that rights are ISSUED in a ratable manner. At the
time of the issuance of the Rights, Defendants held 9.92% of the shares, well
under the triggering threshold for Rights Plan's anti-takeover mechanism.
Therefore, the Rights, when and as issued, had no dilutive effect whatsoever on
any of the shares held by Defendants.
Defendants seem to suggest that the Rights Plan is barred because it
could, at some point in the future, result in voiding the ability of a
shareholder who decides to acquire more than 11% of the stock to exercise his
-14-
Rights on shareholdings above the 11% threshold. (Def. Mem. at 23.) Defendants'
argument fails to elucidate why such a future contingency, entirely dependent
upon the voluntary act of a shareholder to place himself within the zone of
operation of the anti-takeover mechanism, and affecting any shareholder who so
elects in identical fashion, would violate Section 18(d)'s requirement that the
Rights be issued ratably. And even if a shareholder were to decide to increase
his holdings above the 11% threshold, the Rights he received on the day the
Rights were issued would all be exercisable by him.
2. THE RIGHTS PLAN DOES NOT VIOLATE SECTION 23(b)
The Rights Plan does not violate Section 23(b)'s prohibition on selling
common stock at a price below the net asset value of the company. Section 23(b)
provides a number of exceptions, two of which are applicable here. First, as
Defendants concede, Section 23(b)(4) explicitly permits a closed-end investment
company like NRL to sell common stock at a price below the net asset value
provided such stock is "issued in accordance with the provisions of section
18(d)." (Def. Mem. at 23-24.) As demonstrated above, the Rights were issued in
accordance with Section 18(d). NRL's compliance with this explicit safe harbor
set forth in Section 23(b)(4) effectively ends the inquiry and renders
Defendants' discussion of section 23(b)(1) completely irrelevant.
But even section 23(b)(1) permits the offering of stock at issue here.
Section 23(b)(1) permits a closed-end fund to sell common stock at a price below
the net asset value where such stock is issued "in connection with an offering
to the holders of one or more classes of its capital stock." Under the Rights
Plan, Rights were issued in respect of all the shares, and each holder received
upon issuance the same ability to exercise the Right to purchase additional
shares following a triggering event.
-15-
Defendants endeavor to find support for their position in a number of SEC
no-action letters, citing PILGRIM REGIONAL BANK SHARES INC., SEC No-Action
Letter, 1991 WL 290536 (pub. avail. Dec. 11, 1991), ASSOCIATION OF PUBLICLY
TRADED INVESTMENT FUNDS, SEC No-Action Letter, 1985 WL 54277 (pub. avail. Aug.
2, 1985) and ANONYMOUS, SEC No-Action Letter, 1993 WL 45914 (pub. avail. Feb.
11, 1993). Although we are hard pressed to discern support in the text of
Section 23 for the positions articulated in these no-action letters, it is clear
that these rulings applied in circumstances involving TRANSFERABLE rights
offerings to raise capital, which are quite different from the circumstances
here, involving NON-TRANSFERABLE Rights(11) issued for defensive purposes, and
exercisable at par - a tiny fraction of a cent per share. Whatever their merit,
these rulings are inapplicable here.
3. THE RIGHTS PLAN DOES NOT VIOLATE SECTION 18(i)
Section 18(i) of the 1940 Act provides that "every share of stock . . .
shall be a voting stock and have equal voting rights with every other
outstanding voting stock." Defendants assert that the triggering of the Rights
upon the Distribution Date affects the voting rights of the Acquiring Person,
and thereby violates Section 18(i). (Def. Mem. at 25.) Defendants are mistaken;
the triggering of the Rights Plan does not revoke voting rights from any shares.
- ----------
(11) Defendants incorrectly claim, without any support whatsoever (SEE Def. Mem.
at 24), that the Rights in question are "transferable." According to the 1977
SEC Release relied upon by Defendants, a rights offering "entitles existing
shareholders of a company to purchase additional shares of that company during a
specified period of time at a specified price," and a "transferable rights
offering would be structured so that shares not purchased pursuant to the
exercise of rights by existing shareholders could be sold to the general
public." SEE SEC Release No. IC-9932 (Sept. 15, 1977). The SEC found
TRANSFERABLE rights offerings problematic because the general public could
subscribe, "thereby increasing any dilutive effects of the offering on existing
shareholders." The Rights are non-transferable, and no danger of dilution from
purchases by the general public exists. The Rights were issued only to the
shareholders of record on October 7, 2004, not to the general public. SEE Rights
Agreement (Miller Decl. Ex. I) section 3. Moreover, unless a shareholder becomes
an Acquiring Person, the Rights are attached to the NRL shares, and are not
transferable to the general public. SEE ID. section 16.
-16-
Indeed, Defendants fail to point to any provision in the Rights Plan or the
associated documents that restricts voting rights in any manner.
Rather, Defendants merely make the obvious point that if they were to
decide to exceed the 11% threshold (something they have publicly stated they
will not do), the attendant dilution would result in a corresponding reduction
in their ownership interest and, accordingly, in their voting power. The "issue"
thus raised is one of dilution, and has nothing at all to do with the voting
rights of NRL shares. Section 18(i) does not address dilution.(12) Section 18(i)
merely requires that all stock be granted equal voting rights, something the
Rights Plan does not change.
II. NRL HAS PROPERLY OPTED INTO THE MARYLAND CONTROL
SHARE ACQUISITION ACT, AND THE TRUST DEFENDANTS WILL
BE SUBJECT TO ITS STRICTURES IF THEIR SHAREHOLDINGS
EXCEED THE 10% TRIGGERING THRESHOLD
NRL concluded the Private Placement on September 23, 2004 ,issuing 139,535
shares to Neuberger Berman, LLC. The shares were issued at the above-market
price of $21.50 per share, which was equal to net asset value. The terms of the
sale were wholly in compliance with the 1940 Act, and Defendants do not suggest
otherwise.
As a consequence of the Private Placement, the percentage ownership
interest of the Trust Defendants in NRL fell from 10.22% to 9.92% - meaning
that, when NRL resolved to "opt into" the Maryland Control Share Acquisition Act
("MCSAA"),(13) at the 10% threshold the Trust Defendants were not
"grandfathered" as owners of control shares, and will be subject to the
disabilities imposed by the MCSAA should they voluntarily increase their
holdings above the 10% threshold.
- ----------
(12) Even if Section 18(i) were somehow impliedly triggered by a dilutive event,
Defendants arguments fail for the reasons articulated above. SEE SUPRA, point
I.B.1.
(13) NRL's research has disclosed at least four other instances within the last
two years of registered closed-end investment companies opting into the MCSAA.
SEE Perry Decl. paragraph 4.
-17-
Defendants contend, however, that the sale of NRL shares to Neuberger
Berman, LLC should be ignored for purposes of computing the Trust Defendants'
percentage ownership of NRL shares. They suggest that the purpose of the Private
Placement was to make NRL's subsequent opt-in to the MCSAA effective as to the
Trust Defendants, and that such a purpose is impermissible. Alternatively, they
argue that, even if the sale was effective to reduce the Trust Defendants'
ownership percentage below 10% at the time of the opt-in, the MCSAA should be
read to provide that a person who had been a 10% shareholder at any time before
the opt-in is "grandfathered" and never subject to the disabilities imposed by
the statute. There is no merit to either position.
A. THE SALE OF SHARES IN THE PRIVATE PLACEMENT WAS A VALID DEFENSIVE
MEASURE
NRL's independent directors authorized the Private Placement as a response
to the Trust Defendants' coercive tender offer. It is well settled that such an
action is within the business judgment of the directors of a target corporation
where, as here, they have determined that the tender offer is not in the best
interests of the shareholders. SEE, E.G, TREADWAY COS. V. CARE CORP., 638 F.2d
357, 381 (2d Cir. 1980) (issuance and sale of large block of stock was proper
exercise of target board's business judgment to oppose hostile takeover); HEIT
V. BAIRD, 567 F.2d 1157, 1160 (1st Cir. 1977) (upholding issue of stock in light
of hostile takeover); MOUNTAIN MANOR REALTY, INC. V. BUCCHERI, 46 A.2d 45, 53
(Md. Ct. Spec. App. 1983) ("in Maryland stock issuances which have the effect of
consolidating or perpetuating management control are not necessarily invalid ...
[T]he court must look to see if there was any legitimate business purpose");
SEE ALSO Lipton and Steinberger, 1 TAKEOVERS AND FREEZEOUTS section 6.06[4][d]
(2004) (issuance of shares to friendly entity is established anti-takeover
technique referred to in takeover parlance as "White Squire"). Such sales to
defeat a tender offer have been approved even where they were made at a bargain
-18-
price. SEE TREADWAY, 638 F.2d 357. A FORTIORI, the Private Placement, made at
full net asset value, which exceeded the market price, passes scrutiny.
In each of the foregoing cases, the offeror was disadvantaged by the
issuance of target stock as a defensive measure, and in each instance the court
allowed the disadvantage to stand:(14) that was the natural and specifically
intended consequence of the sale. Accordingly, the fact that Defendants here
likewise claim to have been purposely disadvantaged is of no moment. In
addition, Defendants' factual premise - that the Private Placement's sole
purpose was to allow application of the MCSAA to them, is false. (If NRL merely
wished to dilute the Trust Defendants' holdings below the 10% threshold, they
could have done so by selling far fewer shares in the Private Placement.) The
funds obtained by NRL will be used to partially fund the self-tender for up to
20% of the common stock that NRL has legitimately offered its shareholders as a
more attractive alternative, for those shareholders who wish to exit their
investments, to Defendants' coercive tender offer. 9/23/04 Form 14D-9 (Miller
Decl. Ex. E) at 11 (NRL's self-tender offer "is designed to provide liquidity to
[NRL's] stockholders, if required, without requiring them to tender into the
[Trusts'] coercive offer).(15)
- ----------
(14) In MOUNTAIN MANOR REALTY, the Court remanded to the court below for further
factual findings consistent with the opinion.
(15) NRL did not violate SEC Rule 14e-3 in making the Private Placement, as
erroneously alleged in the Counterclaim and referenced in passing in Def. Mem.
at 16. Rule 14e-3 prohibits insider trading in connection with tender offers -
I.E., the situation in which an insider or tippee possessing non-public
information knowing that a tender offer is imminent, acts on that non-public
information to buy in the market so that he can reap the premium when the tender
offer is announced. Without delving further into the elements of a Rule 14e-3
violation, it is clear here that Neuberger Berman, LLC would be economically
disadvantaged if it chose to tender its shares in the self-tender. NRL is
offering $20.00 per share in the self-tender, while Neuberger Berman, LLC paid
$21.50 per share in the Private Placement. Therefore, Defendants' suggestion
that Neuberger Berman, LLC intended to use information it purportedly had about
the self-tender to its advantage when it engaged in the Private Placement makes
no sense. This is simply not an action that the rule addresses.
-19-
Nor is there any merit to the Trust Defendants' attempt to portray the
Private Placement as a device to entrench incumbent management and advisors.(16)
In their tender offer disclosure, the Trust Defendants acknowledge that they may
not be able to make their changes in management or advisors immediately. Rather,
they indicated that, because of NRL's staggered board, such changes would take
two director election cycles. If they are displeased by NRL's response to the
tender offer, the shareholders can act, on their own initiative, at either of
these meetings, on the same timetable proposed by Defendants, to elect new
directors and replace NRL's advisors. Under Maryland law, the directors of a
corporation are presumed to have acted in good faith and in the best interests
of the corporation. SEE, E.G., HUDSON, 2004 WL 1982383, at *11. Defendants have
shown nothing to suggest that NRL's directors did not act in good faith and in
what they reasonably concluded was the best interest of the shareholders.
B. THE MCSAA CANNOT BE READ TO EXEMPT THE TRUST DEFENDANTS
BECAUSE THEY ONCE HELD MORE THAN 10% OF NRL'S SHARES
Notwithstanding their ownership of only 9.92% of NRL's shares at the time
NRL opted into the MCSAA, the Trust Defendants contend that they are forever
exempt from the application of the MCSAA because their shareholding percentage
at one time was greater than 10%. Unable to show any infirmity in the Private
Placement to support this result, they fall back on the contention that anyone
who AT ANY TIME prior to the "opt-in" to the statute held 10% of the issuer's
stock can claim exemption from the operation of the MCSAA.
- ----------
(16) Thirteen of the 15 directors of NRL are unaffiliated with management. For
serving as directors and trustees of all Neuberger Berman funds, these
unaffiliated directors receive an aggregate fee which is allocated across the
funds. This fee has not increased over the past two years as the eight
closed-end funds were added, so there is no reason to believe that it will
decline if NRL disappears from the Neuberger Berman complex. In addition, the
compensation of the independent directors is a matter handled by the independent
directors themselves. In short, the 13 directors unaffiliated with management
have NO economic interest in perpetuating current management or their current
positions on the NRL Board. Furthermore, as required by SEC regulations under
the 1940 Act, the selection and nomination of candidates to serve as independent
director are committed entirely to the discretion of the independent directors.
-20-
Defendants purport to find authority for this position in the MCSAA's
provision that, with respect to closed-end investment companies, it "shall not
be effective with respect to any person who has become a holder of control
shares before the time that the resolution is adopted." SEE MCSAA section
3-702(c)(4). Defendants' reading makes no sense because, until a corporation
"opts-in" to the MCSAA, it has no "control shares" and there can be no "holder
of control shares." Thus, the natural meaning of the statutory text on which
Defendants rely is that it refers to persons who own the requisite percentage
interest AT THE TIME OF the "opt-in" and are rendered control shareholders as a
result. No part of the MCSAA is rendered moot or superfluous by this reading.
Defendants' reading would produce preposterous results clearly not
intended by the Maryland legislature. Assume, for example, that a company with a
10% shareholder acquires another company in a stock-for-stock merger, thereby
diluting its 10% holder to a 3% position and subsequently "opts-in" to the
MCSAA. Under Defendants' theory, the company would be unable to invoke the MCSAA
against that holder. But denying the protection of the MCSAA to the shareholders
of the acquired company who are now shareholders of the acquirer would be
grossly unfair. The same unfair result would befall new purchasers in a
secondary offering if the company thereafter "opts-in" to the MCSAA. Under
Defendants' interpretation, these shareholders could find themselves confronted
by a tender offer from a hostile bidder who, years before the secondary
offering, held a 10% position, and who is now exempt from the disabilities
imposed by the MCSAA. For that matter, even without a dilutive transaction,
shareholders of a company that "opts-in" to the MCSAA could find themselves
confronted with hostile activities by unknown numbers of shareholders from the
distant past who claim exemption from the statute, thus severely compromising
the MCSAA's effectiveness as the anti-takeover device the legislature intended.
-21-
The Trust Defendants' interpretation that any person who held 10% of the
stock at any time prior to the "opt-in" resolution could claim the statutory
exemption takes a perfectly lucid and comprehensible statute and turns it into
an unworkable nightmare, fraught with unexpected surprises for unsuspecting
investors. There is no reason to create such dissonance, when the plain reading
offered by NRL not only makes it easy to know with certainty who is and who is
not a control shareholder, but is entirely consistent with the statute's
anti-takeover purpose.. H.D. 179, 1989 Gen. Assem. (Md. 1989) ("[T]he bill is
necessary to protect Maryland corporations and their stockholders in view of the
growth in hostile takeover activity").
C. THE 1940 ACT DOES NOT PRE-EMPT THE MCSA
There is a strong presumption against federal preemption of state law. WLR
FOODS, INC. V. TYSON FOODS, INC., 65 F. 3d 1172, 1179 (4th Cir. 1995) (Williams
Act does not preempt Virginia Control Shares Acquisition Act). "A state statute
is pre-empted only where compliance with both federal and state regulations is a
physical impossibility or where the state law stands as an obstacle to the
accomplishment and execution of the full purposes and objectives of Congress."
CTS CORP. V. DYNAMICS CORP. OF AM., 481 U.S. 69, 78-79 (1987) (Williams Act does
not pre-empt Indiana Control Shares Acquisitions Act); ACCORD REALTY ACQUISITION
CORP. V. PROP. TRUST OF AM., Civ. No. JH-89-2503, 1989 WL 214477, at *4-*5 (D.
Md. Oct. 27, 1989) (Williams Act does not pre-empt MCSAA). Because entities can
comply with both the 1940 Act and the MCSAA, and the legislative purposes of the
statutes are consistent, the 1940 Act does not pre-empt the MCSAA. CF. BURKS,
441 U.S. at 478-480.
Section 18(i) of the 1940 Act provides that:
-22-
Except as provided in subsection (a) of this section, or as
otherwise required by law, every share of stock hereafter
ISSUED by a registered management company (except a
common-law trust of the character described in section
16(c)) shall be voting stock and have equal voting rights
with every other outstanding voting stock ...
Section 18(i) thus provides that a registered investment company(17) may
issue only voting shares with equal voting rights. It prevents the creation of
an inferior class of nonvoting stock whose holders, although constituting the
majority of the equity, are effectively disenfranchised AB INITIO in matters
relating to the business of the company in favor of a minority that holds stock
with superior voting rights. The provision is clearly designed to eliminate the
potential for abuse inherent in these situations. Consistent with the mandate of
Section 18(i), each share of capital stock issued by NRL is entitled to one
vote. SEE NRL Arts. of Incorp. (Miller Decl. Ex. H) at 3.(18)
Properly understood, the MCSAA does nothing to alter the voting
characteristics of the NRL shares. Rather, it imposes a temporary PERSONAL
disability on one who purchases shares and thus willingly assumes the position
of controlling shareholder. Section 3-702(a)(1) of the MCSAA provides:
Control shares of the corporation acquired in a control
share acquisition have no voting rights except to the
extent approved by the stockholders at a meeting held under
3-704 of this subtitle by the affirmative vote of
two-thirds of all the votes entitled to be cast on the
matter, excluding all interested shares.
"Control shares" are defined in Section 3-701(d) of the
MCSAA as follows:
"Control shares" means shares of stock that, except for
this subtitle, would, if aggregated with all other shares
of stock of the corporation . . . owned by a PERSON or in
respect of which that PERSON is entitled to exercise or
- ----------
(17) A "management company" is "any investment company other than a face-amount
certificate company or a unit investment trust." 1940 Act ss. 4(3). NRL is a
management company within the contemplation of Section 18(i).
(18) Section 18(i), moreover, does not absolutely require that all shares be
allowed to vote in all circumstances. The statute allows exceptions to be made
where "otherwise required by law." Congress recognized that the presumption in
favor of voting rights expressed in Section 18(i) could give way.
-23-
direct the exercise of voting power ... entitle that
PERSON, directly or indirectly, to exercise or direct the
exercise of the voting power of shares of stock of the
corporation in the election of directors within any of the
following ranges of voting power:
(i) One-tenth or more, but less than one-third of all
voting power ....
Under the MCSAA, therefore, the person holding the control shares has no
right to vote them absent approval from the other holders, but the shares
themselves are unchanged. The statutory disability does not attach to the
shares, which retain their voting characteristics, but to a holder who chooses
to cross an ownership threshold. The very same shares that cannot be voted in
the hands of a controlling shareholder can be freely voted in the hands of
another, non-controlling shareholder. There is no "physical impossibility" of
compliance with both statutes.
So, too, the policy to protect investment company shareholders against
unwanted changes in control, often accompanied, as Defendants have vowed they
will here, by changes in the character of NRL's business, are present in both
the MCSAA, with its control share scheme, and the 1940 Act, SEE, E.G., 1940 Act
ss. 1(b)(6). It cannot be said that the MCSAA stands as an obstacle to the
accomplishment and execution of the purposes and objectives of the 1940 Act.
III. THE TRUST DEFENDANTS ARE BARRED BY SECTION 12(D)(1) OF
THE 1940 ACT FROM COMPLETING THE TENDER OFFER
As noted in the introductory portion of this memorandum, Section
12(d)(1)(A)(i) of the 1940 Act prohibits an investment company from owning more
than 3% of the shares of a registered investment company. Defendants thus face a
statutory impediment to the consummation of their tender offer; the 1940 Act
prohibits their acquisition of the controlling interest they seek. Although NRL,
which has yet to conduct discovery, is not positioned now to move for summary
judgment on this issue, the applicability of the 1940 Act prohibition appears so
clearly from the Defendants' public disclosures that, at a minimum, this issue
requires denial of their request for declaratory judgment and injunctive relief.
-24-
A. SECTION 12(d) REFLECTS A POLICY AGAINST CONCENTRATED OWNERSHIP
Intended specifically to protect the "target company and its
shareholders,"(19) Section 12(d)(1)(A)(i) is part of a broad amalgam of
restrictions on ownership contained in Section 12(d)(1) that reflect Congress'
policy concern that a large investment pool not acquire so large a position in
the securities of a registered investment company that it "could exercise undue
influence over that fund or disrupt its orderly management."(20) This concern is
plainly implicated here: following the tender offer, the Trust Defendants intend
to use their majority shareholdings to replace the board of directors, replace
the investment adviser, charge shareholders an advisory fee that may be more
than 6 times the current advisory fee, and dramatically change the investment
objectives of NRL.
The restriction in Section 12(d)(1)(A)(i) reflects Congress' determination
that, in the circumstances there addressed, the risks that concentrated
ownership would present to a registered investment company's stockholders are so
great that concentrated ownership is barred. Congress could have addressed this
risk by permitting the concentrated ownership, but providing remedies for actual
overreaching by a concentrated holder. It chose not to do so, and its
determination must be enforced.
- ----------
(19) CLEMENTE GLOBAL GROWTH FUND, INC. V. T BOONE PICKENS, III, 705 F. Supp.
958, 963 (S.D.N.Y. 1989). The provision specifically addresses concerns
elucidated in the declaration of the 1940 Act that the interests of investors
are adversely affected when, among other things, "investment companies are ...
managed ... in the interest of other investment companies ... rather than in the
interests of all [shareholders]" and "when the control of investment companies
is unduly concentrated through ... inequitable methods of control." ID., citing
15 U.S.C. section 80a-1(b)(2) and (4).
(20) Protecting Investors: A Half Century of Investment Company Regulation,
Division of Investment Management, United States Securities and Exchange
Commission, May 1992, p. 107.
-25-
B. EACH TRUST DEFENDANT AND THE GROUP COMPRISED OF ALL THE
DEFENDANTS IS AN INVESTMENT COMPANY UNDER THE 1940 ACT
Section 3(a)(1)(A) of the 1940 Act defines "investment company" as "any
issuer which ... is or holds itself out as being engaged primarily . . . in the
business of investing, reinvesting, or trading in securities." From Defendants'
disclosures relating to the tender offer, it is clear that the business of each
Trust Defendant meets this definition. The tender offer states: "The Trusts'
principal business is investing in securities," Offer (Miller Decl. Ex. B), and
this description is parroted in Defendants' memorandum of law (at 4-5).(21)
These same materials also describe how a group (the "Group") including the
Trust Defendants and "other trusts associated with the Horejsi family have
invested in three other `closed end investment companies.'" Def. Mem. at 5; see
also Offer at 2 ("The Lola Trust, the Ernest Trust and several other Horejsi
family trusts acted together to acquire control of [First Financial Fund, Inc.]
in 2003"). It is well settled that two or more persons or entities acting in
concert to make securities investments over time are a distinct entity for
purposes of the 1940 Act, and that such a distinct entity is an investment
company if it satisfies one or more of the definitional tests under Section 3(a)
of the 1940 Act. SEE, E.G., PRUDENTIAL INS. CO. OF AMERICA V. SEC, 326 F.2d 383
(3d Cir.), CERT. DENIED 377 U.S. 953 (1964) (upholding SEC's determination that
a group of persons acting through a common manager to invest in a pool of
securities that served as the funding vehicle for a variable insurance product
were an organized group of persons, and an investment company, under the 1940
Act).
- ----------
(21) Section 3(a)(1)(C) defines "investment company" as "any issuer which ... is
engaged ... in the business of investing, reinvesting, owning, holding, or
trading in securities, and owns or proposes to acquire investment securities
having a value exceeding 40 per centum of the value of such issuer's total
assets . . ." NRL believes this test of business activity is met here as well,
based upon Defendants' descriptions of some of the transactions in which the
Trust Defendants have engaged, but cannot establish this point conclusively
without discovery.
-26-
Each of the Trust Defendants and the Group also is an "issuer" as that
term is used in Section 3(a)(1)(A) and defined in the 1940 Act. Section 2(a)(22)
of the 1940 Act defines "issuer" as "every person who issues or proposes to
issue any security, or has outstanding any security which it has issued." This
simple definition relies upon two other terms defined in the 1940 Act, "person"
and "security." Each of the Trust Defendants and the Group is a "person,"
defined in the 1940 Act as "a natural person or a company." Section 2(a)(28). As
previously noted, "company," as defined in Section 2(a)(8), includes "a trust" -
thus, each Trust Defendant qualifies. "Company" also includes "any organized
group of persons whether incorporated or not." The Group thus qualifies as well.
The Trust Defendants, the other Defendants and other Horejsi family trusts are
participants in a common enterprise, managed by their trustees, to invest in NRL
and other funds. The cross-lending arrangements among the Trusts,(22) their
common trustees, their common investment advisor, the participation of several
other Horejsi family trusts, their participation in prior coordinated hostile
takeover attempts, all demonstrate a history of concerted investment activity by
an organized group of persons.
"Security" is very broadly defined in the 1940 Act (as it is in the
Securities Act of 1933, among other federal securities enactments), and includes
"any ... investment contract ... or ... any interest ... commonly known as a
`security' ..." 1940 Act ss. 2(a)(36). Under the test articulated by the Supreme
Court in SEC V. W.J. HOWEY CO., 328 U.S. 293 (1946), and still applied today,
the Group and each Trust Defendant has issued to its participants a security in
the form of an investment contract. HOWEY held that an investment contract
exists where there is (1) a contract, transaction, or scheme whereby (2) a
- ----------
(22) The Trust Defendants have entered into a inter-trust lending agreement with
various other trusts owned or controlled by the Horejsi family, and with
Badlands as the Manager, pursuant to which the Trust Defendants and other
Horejsi family trusts pursue inter-trust advances. The agreement provides that
the Trusts and other Horejsi family trusts will contribute to a "jointly funded
pool of cash reserves from which any Participant may draw," and contemplates
that the Trust entities and certain of the other participants will be either
borrowers or lenders from the pool. SEE Exhibit 2 to Schedule 13D containing the
Cash Management Agreement.
-27-
person invests his or her money (3) in a common enterprise and (4) is led to
expect profits through the efforts of others. There is certainly present here a
transaction or scheme through which the Group - including the Trust Defendants
and their affiliates - are investing their money in a common enterprise to
purchase securities, including shares of NRL and other closed-end investment
companies, under the guidance of common managers and advisors.
Each Trust Defendant likewise is a common enterprise, with each trust
beneficiary sharing the investment profits and other benefits flowing from the
efforts of others - including, for example, investment advisor Stewart Horejsi
and Stephen Miller, Vice President of the common trustee, Badlands Trust
Company. The trust agreement in each case constitutes the required contract or
scheme. And the investment by each beneficiary was and is made in two ways: (1)
through the irrevocable voluntary contribution to the Trust Defendant on the
beneficiary's behalf and for the beneficiary's benefit by the trust settlor, and
(2) through the voluntary reinvestment in the Trust Defendant of profits and
other funds the beneficiary could extract, if he wished, from the Trust
Defendant. The Trust Defendants and the beneficiaries acknowledge they are
looking to the efforts of others (the Trusts' managers and investment advisors)
to generate investment profits. Thus, applying the definitions in the 1940 Act
to the facts disclosed by Defendants shows that the Trust Defendants and the
Group are investment companies.
C. THE 1940 ACT'S INTEGRAL RULE OF CONSTRUCTION COMPELS THE CONCLUSION
THAT EACH TRUST DEFENDANT AND THE GROUP IS AN INVESTMENT COMPANY
The concluding text of Section 1(b) of the 1940 Act provides:
It is hereby declared that the policy and purposes of this
title, in accordance with which the provisions of this
title shall be interpreted, are to mitigate and, so far as
is feasible, to eliminate the conditions enumerated in this
section which adversely affect the national public interest
and the interest of investors.
-28-
Applying this rule, the SEC "looked to substance rather than form" in
determining that an entity with no shareholders was an investment company bound
by the limitations set forth in Section 12(d)(1). CLEMENTE GLOBAL GROWTH FUND,
705 F. Supp. at 965, citing THE M.A. HANNA CO., 42 S.E.C. 477, 481 (1964). In so
doing, the SEC warned against "providing an easy means of avoiding the
restrictions of Section 12(d)(1) by the simple expedient of organizing new
corporate investment vehicles" and noted that doing so would "frustrate the
purposes of that section and violate the mandate, set forth in Section 1(b) of
the [1940] Act, that the provisions of the Act be interpreted as far as is
feasible to eliminate the evils enumerated therein, including INTER ALIA, the
evils in Section 1(b)(4), to the elimination of which Section 12(d)(1) is
addressed." ID. Here, the above showing that the Trust Defendants and the Group
are investment companies is confirmed by the substance and the purpose for which
they now exist - to acquire controlling positions in the securities of
registered closed end investment companies - and by the statutory prohibitions
against such concentration of ownership.
Should the Court determine instead that the Trust Defendants and the Group
are not investment companies, it will do exactly what the SEC fears, setting a
precedent that other sophisticated actors may exploit to form family or other
closely controlled trusts to evade the restrictions of Section 12(d)(1), at the
expense of individual shareholders.(23) Indeed, there is a suggestion in public
filings documenting the history of Defendants' ownership of several of the
- ----------
(23) By way of illustration, a wealthy individual can establish and fund under
Delaware law a limited liability company in which his three children are the
sole members, and provide in the limited liability company agreement the manner
in which its assets are to be managed. Such an entity can be the functional
equivalent of an irrevocable grantor trust, yet there is no doubt that such an
entity would be constrained in its acquisition of registered closed end
investment company shares by the provisions of Section 12(d)(1). It makes no
sense at all for that same wealthy individual to be able to evade those
restriction through the stratagem of organizing a functionally equivalent
enterprise in trust form, when the trust form is the equivalent of a corporation
under the 1940 Act. SEE 1940 Act ss. 2(a)(8).
-29-
registered investment companies they now control that this is precisely what
Defendants sought to do. Until 1999, Defendants' interest in the Boulder Total
Return Fund, Inc. was held in a corporate entity that was in turn controlled by
members of the Horejsi family trusts, including the Trust Defendants. However,
in 1999, as the Horejsi family trusts took control of Boulder Total Return Fund,
Inc. and began to acquire their interest in Boulder Growth & Income Fund, Inc.,
the intermediate corporation was eliminated and ownership was lodged directly in
the trusts.
It is time to implement the policy and purposes of the 1940 Act to protect
investors; the Court must put an end to Defendants' stratagem for hijacking
innocent investors while evading the restrictions on ownership clearly set forth
in Section 12(d)(1)(A)(i). SEE BANCROFT CONVERTIBLE FIND, INC. V. ZICO
INVESTMENT HOLDINGS, INC., 825 F.2d 731 (3d Cir. 1987) (enjoining tender offer
that violated concentration restrictions of Section 12(d)(1)); CLEMENTE, 705 F.
Supp. 958 (same).
IV. EVISCERATING THE DIRECTORS' ABILITY TO DEFEND AGAINST
AN UNDESIRABLE, COERCIVE TENDER OFFER WOULD DISSERVE
THE 1940 ACT'S PURPOSE TO PROMOTE CAPITAL FORMATION
Section 2(c) of the 1940 Act, entitled "CONSIDERATION OF PROMOTION OF
EFFICIENCY, COMPETITION, AND CAPITAL FORMATION," provides as follows:
Whenever pursuant to this title the Commission is engaged
in rulemaking and is required to consider or determine
whether an action is consistent with the public interest,
the Commission shall also consider, in addition to the
protection of investors, whether the action will promote
efficiency, competition, and capital formation.
It is thus clear that the 1940 Act should be construed and implemented to
enhance capital formation. Dismantling the takeover defenses validly erected by
the NRL directors would set a precedent that would discourage capital formation
through the formation of closed-end investment companies.
-30-
Creating capital through the formation of a registered closed-end
investment company like NRL requires a significant "up front" investment -
lawyers' and other professionals' fees, underwriters' fees and other selling
expenses, printing costs, and so forth are typically hundreds of thousands of
dollars. These costs are borne in large part by the stockholders, who are
informed in detail about all aspects of the investment company's business and
management BEFORE they agree to bear the underwriters' fees, and by the
sponsoring entity, such as Neuberger Berman Management, Inc., which anticipates
- - provided it performs satisfactorily - that it will continue to function in an
advisory capacity and direct the investment of capital.
The assumptions underlying this method of capital formation would be
undone, however, if, as Defendants are requesting, this Court were to rule that
registered closed-end investment companies cannot employ the full panoply of
recognized takeover defenses. Such a ruling would allow registered closed-end
investment companies to be ambushed by persons, like Defendants, who seek to
gain control of this capital without incurring any of the expenses of formation,
and who seek to change the nature of the investment companies' business in a
manner they fully expect will alienate a significant portion of the shareholder
populace.
From the publicly available information, it appears that Defendants have
devised a stratagem - a veritable cottage industry - of preying upon registered
closed-end investment companies, acquiring controlling positions that allow
Defendants to replace the companies' directors with their own hand-picked
nominees and then take the management functions (and fees) for themselves.
Defendants' motivation is clear. By thus leveraging their investments in these
companies (whose shares typically sell at a slight discount from net asset
value), Defendants (who would be investing their funds in any event) gain
control of a large capital pool, to invest as they wish and to milk for high
fees, without incurring the capital formation costs. Far from endorsing this
-31-
behavior, so inimical to the purposes of the 1940 Act, the Court should apply
the Act to put an end to Defendants' practices.
V. THE TRUSTS ARE NOT ENTITLED TO INJUNCTIVE RELIEF
We note at the outset that the Defendants, who petition this Court for
extraordinary equitable relief, come to this Court with unclean hands. As is
more fully detailed in NRL's Complaint herein, there are misrepresentations and
omissions of material fact in Defendants' tender offer and related disclosures.
Among other things, while touting the purported managerial skills of Stewart R.
Horejsi, Defendants fail to disclose to the shareholders that the funds
Defendants presently control and that are managed by Mr. Horejsi, performed
poorly in comparison to NRL. Similarly, Defendants have steadfastly refused to
come clean and fully disclose the connections between and among the various
entities with which the Trust Defendants are affiliated. In these circumstances
of unclean hands, equity is loathe to afford a remedy. SEE LYON V. CAMPBELL,
2002 WL 470860, at *5 (4th Cir. 2002).
Preliminary injunctions "are extraordinary remedies involving the exercise
of very far-reaching power to be granted only sparingly and in limited
circumstances." DIREX ISRAEL, LTD., 952 F.2d at 816 (internal quotation marks
omitted); SEE ALSO MICROSTRATEGY INC. V. MOTOROLA INC., 245 F.3d 335, 339 (4th
Cir. 2001); HOMESTORE MOBILITY TECHNOLOGIES, INC. V. HR SOLUTIONS, INC., 178 F.
Supp. 2d 584, 587 (M.D.N.C. 2001). A court may issue a preliminary injunction
only upon weighing four factors: (1) the likelihood of irreparable harm to the
plaintiff if the preliminary injunction is denied; (2) the likelihood of harm to
the defendant if the requested relief is granted; (3) the likelihood that the
plaintiff will succeed on the merits; and (4) the public interest. SEE DIREX
ISRAEL, LTD. V. BREAKTHROUGH MED. CORP., 952 F.2d 802, 812 (4th Cir. 1991);
BLACKWELDER FURNITURE CO. V. SEILIG MFG. CO., 550 F.2d 189 (4th Cir. 1977). The
party seeking the injunction bears the burden of establishing that each of the
above-mentioned factors supports granting the preliminary injunction. SEE, E.G.,
-32-
DIREX ISRAEL, LTD., 952 F.2d at 812; AL-ABOOD V. EL-SHAMARI, 71 F. Supp. 2d 511,
514 (E.D. Va. 1999). The Trusts have failed to meet this burden.
A. THE TRUSTS WILL NOT BE IRREPARABLY HARMED IF THE COURT DENIES
INJUNCTIVE RELIEF
A court cannot issue an injunction absent a "clear showing" of irreparable
harm. SEE, E.G., DIREX ISRAEL, LTD., 952 F.2d at 812 (failure to make "clear
showing is by itself sufficient ground upon which to deny a preliminary
injunction.") (quoting GELCO CORP. V. CONNISTON PARTNERS, 811 F.2d 414, 418 (8th
Cir. 1987); SEE ALSO AL-ABOOD V. EL-SHAMARI, 71 F. Supp. 2d at 515. The required
irreparable harm must be actual and imminent, and not merely remote or
speculative. SEE DIREX ISRAEL, LTD., 952 F.2d at 812; HOMESTORE MOBILITY
TECHNOLOGIES, INC, 178 F. Supp. 2d at 587; AL-ABOOD V. EL-SHAMARI, 71 F. Supp.
2d at 514. Moreover, "because of the extraordinary nature of a preliminary
injunction the harm to the movant truly must be irreparable, rather than merely
substantial, for a preliminary injunction to be granted." WLR FOODS, 861 F.
Supp. at 1281.
The Trusts have not made a clear showing of irreparable harm absent the
grant of injunctive relief. The only harms the Trusts claim may befall them in
the absence of an injunction are "delay" (Trusts Mem. at 26-27) and the
"killing" of the tender offer. Neither of these purported harms is sufficient to
warrant the issuance of an injunction. In the context of takeover contests,
courts have long considered that the renewal of a tender offer, upon the
vindication of an offeror after a trial on the merits, constitutes a viable
solution to the purported problem of "delay." In these contexts, courts have
rejected the argument that the delay caused by the trial irreparably harms the
offeror or renders the offer "moot." SEE SONESTA INT'L HOTELS CORP. V.
WELLINGTON ASSOCS., 483 F.2d 247, 250 (2d Cir. 1973); RONSON CORP. V. LIQUIFIN
-33-
AKTIENGESELLSCHAFT, 483 F.2d 846, 851 (3d Cir. 1973); KOPPERS CO. V. AM. EXPRESS
CO., 689 F. Supp. 1371, 1382 (W.D. Pa. 1998); FEDERATED STRATEGIC INCOME FUND V.
MECHALA GROUP JAMAICA, LTD., 1999, No. 99 Civ. 10517 HB, WL 993648 at *9
(S.D.N.Y. Nov. 2, 1999) (renewal of tender offer following trial on merits "is
an especially viable alternative in light of the expedited schedule set down by
this Court.").(24)
Here, other than reciting the holdings from cases (that are often clearly
distinguishable on their facts or otherwise inapposite), Defendants have offered
no evidence that they will be harmed in fact by delay. They offer no explanation
for why their tender offer would not be as appealing to NRL's shareholders a
month from now as it is today. They make no effort at all to quantify any costs
resulting from delay (as opposed to litigation).(25) And their suggestion of
"illegal tactics" by NRL's management is, to put it mildly, hotly disputed.
Moreover, the Trust Defendants' prior voluntary extension of their tender offer
indicates that the offer would not be thwarted by further extension. SEE
- ----------
(24) The cases cited by Defendants are not to the contrary. The Trusts rely on
several decisions where courts determined that preliminary relief was required
because of the significant mandatory delays state statutes imposed on tender
offers in contravention of federal securities law. SEE HYDE PARK PARTNERS, L.P.
V. CONOLLY, 839 F.2d 837 (1st Cir. 1988) (one year delay); NAT'L CITY LINES,
INC. V. LLC CORP., 524 F. Supp. 906 (W.D. Mo. 1981) (multiple month delay);
KENNEKOTT CORP. V. SMITH, 627 F.2d. 181 (3d Cir. 1980). The Trusts also rely on
WLR FOODS, INC. V TYSON FOODS, INC, 861 F. Supp 1277, 1281 (W.D. Va. 1994),
AFF'D, 65 F.3d. 1172 (4th Cir. 1995) where the court denied the offeror's
request for injunctive relief. Notably, the offeror in WLR FOODS argued
unsuccessfully that Virginia state takeover legislation, including a control
shares acquisition statute, was pre-empted by federal law. Far from finding that
the possibility of delay warranted injunctive relief, the court merely
acknowledged that "several cases recognize the harm caused to tender offerors by
delay or defeat of its offer caused by improper or illegal practices undertaken
by management." WLR FOODS, INC. V TYSON FOODS, INC, 861 F. Supp. 1277, 1281.
Defendants' quotation of this decision on page 26 of their Memorandum, without
more, is misleading.
(25) Many of the cases cited by the Trusts also cite specific non-recoverable
financial costs that the tender offeror would incur absent injunctive relief,
such as interest payments for loans destined to finance the tender offer. SEE
KENNEKOTT CORP. V. SMITH, 627 F.2d. 189-190. As previously noted, the Trust
Defendants will not incur such costs because they intend to - but have not thus
far - take out margin loans on securities they currently hold in a brokerage
account and use "cash on hand" to fund the purchase of any shares tendered.
Similarly, in BLACK & DECKER CORP. V. AM. STANDARD, INC., 682 F. Supp. 772,
787-788 (D. Del. 1988), plaintiffs specifically alleged damages, even though the
damages were not quantifiable. MULTI-CHANNEL TV CABLE CO. V. CHARLOTTESVILLE
QUALITY CABLE OPERATING CO., 22 F.3d 546, 551 (4th Cir. 1994) and STARLIGHT
SUGAR, INC. V. SOTO, 114 F.3d 330 (1st Cir. 1988), do not involve tender offers.
In BUCKHORN, INC. V. ROPAK CORP., 656 F. Supp. at 236, the court granted an
injunction after conducting a full evidentiary hearing and issuing detailed
findings of fact.
-34-
FEDERATED STRATEGIC INCOME FUND V. MECHALA GROUP JAMAICA, LTD., 1999, No. 99
Civ. 10517 HB, WL 993648 at *10 (S.D.N.Y., Nov. 2, 1999) (prior extension of
tender offer indicates that subsequent renewal of tender offer is viable
solution). Thus, the Trusts may not credibly claim that they will be irreparably
harmed absent injunctive relief.
B. NRL WILL BE HARMED IF THE COURT GRANTS INJUNCTIVE RELIEF
Defendants' facile statement that NRL and its directors will suffer no harm
is mistaken, and also ignores the harm that will befall shareholders if
operation of the anti-takeover defenses is enjoined and the tender offer
closes.(26) Courts have long acknowledged that tender offers may harm target
companies, considering that once a tender offer has been consummated, it is
difficult "if not impossible to undo the situation or `unscramble the egg.'"
FEDERATED STRATEGIC INCOME FUND V. MECHALA GROUP JAMAICA, LTD., 1999, No. 99
Civ. 10517 HB, WL 993648 at *9 (quoting SONESTA INT'L HOTELS CORP. V. WELLINGTON
ASSOCS., 483 F.2d 247, 250); SEE ALSO RONSON CORP. V. LIQUIFIN
AKTIENGESELLSCHAFT, 483 F.2d 846, 851; KOPPERS CO. V. AM. EXPRESS CO., 689 F.
Supp. 1371, 1382; CONSOL. GOLD FIELDS PLC V. MINORCO, S.A., 871 F.2d 252, 261
(2d Cir. 1989); BARON V. STRAWBRIDGE & CLOTHIER, 646 F. Supp. 690, 696 (E.D. Pa.
1986). This risk of harm is intensified where, as here, there is a serious issue
about Defendants' ability to complete the offer without violating section
12(d)(1) of the 1940 Act - an issue which, if decided in NRL's favor after
trial, would mean that the by then completed offer had been entirely unlawful.
So, too, it is recognized that preventing a target from deploying its
legitimate takeover defenses before a determination on the merits would cripple
its ability to protect its shareholders by ensuring the adequacy of the offer.
SEE, E.G., WLR FOODS, INC. V TYSON FOODS, INC, 861 F. Supp. 1277, 1281 (finding
that the
- ----------
(26) The Trust Defendants were required to disclose under the securities laws
the amount of shares in their depository and failed to do so when they amended
their tender offer. SEE SEC Rule 14e-1(d).
-35-
target would be "robbed of its opportunity to take legitimate defensive measures
presumably designed to ensure the adequacy of [the bidder's] tender offer.")
C. THE TRUST DEFENDANTS FAIL TO ESTABLISH A LIKELIHOOD OF SUCCESS ON THE
MERITS
Where the balance of harm tips away from the movant, the movant must make
a strong showing on the merits in order to obtain injunctive relief. SEE DIREX
ISRAEL, LTD., 952 F.2d at 813; VILLAGES OF CORNWALLIS OWNERS ASS'N V. DURHAM
HOUSING AUTH., 894 F. Supp. at 239; HOMESTORE MOBILITY TECHNOLOGIES, INC., 178
F. Supp. 2d at 587. Even where the hardship balance decidedly tilts in favor of
the plaintiff, the plaintiff is nonetheless required to make a clear and
convincing showing of likelihood of success on the merits. SEE DIREX ISRAEL,
LTD., 952 F.2d at 817-818. For the reasons set forth at length in the preceding
portions of this memorandum, Defendants have failed to show that they have any
likelihood of success on the merits.
D. THE TRUST DEFENDANTS' REQUEST FOR INJUNCTIVE RELIEF CONTRADICTS
PUBLIC POLICY
In the context of a tender offer, public policy mandates that the
interests of investors be protected. SEE, E.G., REALTY ACQUISITION CORP. V PROP.
TRUST OF AM., Civ. No. JH-89-2503, 1989 WL 214477 at *5 (D. Md. Oct. 27, 1989);
CTS CORP., 481 U.S. at 83. The Trusts mistakenly argue that "the public interest
is served by permitting the tender offer to progress through its regular
course." (Trusts' Mem. at . 28.) Such an interest is not served in a situation
such as this one where shareholders are faced with a coercive offer. The Trust
Defendants' reliance on two related cases (MARTIN MARIETTA CORP. V. BENDIX
CORP., 547 F. Supp. 533 (D. Md. 1982); MARTIN MARIETTA CORP. V. BENDIX CORP.,
549 F. Supp. 623 (D. Md. 2003)) is misplaced. Indeed in both of these cases, the
courts concluded that the tender offers were not coercive. Investor protection
"simply does not mandate that management have no advantage over the offeror, as
long as such advantage does not harm the investors." WLR FOODS, INC. V TYSON
-36-
FOODS, INC., 861 F. Supp. 1277, 1284. This is particularly true in the context
of coercive tender offers, such as the partial tender offer proposed by the
Trusts. Courts have thus held that rights plans and other anti-takeover actions
by the target company "serve legitimate corporate purposes" and that "the
fiduciary duty of corporate directors to act in the best interests of the
corporation's shareholders ... requires the directors to attempt to block
takeovers that would in their judgment be harmful to the target company." BARON
V. STRAWBRIDGE & CLOTHIER, 646 F. Supp. 690, 697 (internal quotations omitted).
In the present case, the public interest of protecting investors will not
be served by allowing the tender offer to proceed. Far from allowing NRL's
shareholders to "vote with their wallets," as the Trusts would have the Court
believe, NRL's shareholders will be coerced into tendering their shares without
any certainty that their tender will buy them out of the fund, and against the
possibility that the entire tender offer may be, indeed, likely is, unlawful.
-37-
CONCLUSION
----------
For the above reasons, Plaintiff respectfully requests that this Court
deny Defendants' motion for declaratory judgment and/or a preliminary
injunction.
Dated: October 11, 2004
Baltimore, Maryland
Respectfully submitted,
/s/ David Clarke, Jr.
-----------------------------------------
David Clarke, Jr.
John R. Wellschlager
PIPER RUDNICK LLP
6225 Smith Avenue
Baltimore, MD 21209
(410) 580-3000
-and-
Michael L. Hirschfeld
Stacey J. Rappaport
Daniel M. Perry
MILBANK, TWEED, HADLEY & McCLOY LLP
1 Chase Manhattan Plaza
New York, NY 10005-1413
(212) 530-5000
ATTORNEYS FOR PLAINTIFF NEUBERGER BERMAN
REAL ESTATE INCOME FUND INC.
-38-