UNITED STATES DISTRICT COURT
DISTRICT OF MARYLAND
NORTHERN DIVISION
____________________________________
FULL VALUE PARTNERS L.P. *
43 WATERFORD DRIVE
MONTVILLE, NJ 07102 *
PLAINTIFF, * CIVIL ACTION NO.
V. *
NEUBERGER BERMAN REAL * CLASS ACTION COMPLAINT
ESTATE INCOME FUND, INC.,
*
SERVE ON:
CSC LAWYERS INCORPORATED *
SERVICE COMPANY,
REGISTERED AGENT *
11 E. CHASE STREET
BALTIMORE, MD 21202 *
PETER E. SUNDMAN *
605 THIRD AVENUE
NEW YORK, NY 10158 *
JACK L. RIVKIN *
605 THIRD AVENUE
NEW YORK, NY 10158 *
EDWARD L. O'BRIEN *
605 THIRD AVENUE
NEW YORK, NY 10158 *
JOHN CANNON *
605 THIRD AVENUE
NEW YORK, NY 10158 *
BARRY HIRSCH *
605 THIRD AVENUE
NEW YORK, NY 10158 *
JOHN P. ROSENTHAL *
605 THIRD AVENUE
NEW YORK, NY 10158 *
TOM D. SEIP *
605 THIRD AVENUE
NEW YORK, NY 10158 *
FAITH COLISH *
605 THIRD AVENUE
NEW YORK, NY 10158 *
C. ANNE HARVEY *
605 THIRD AVENUE
NEW YORK, NY 10158 *
CORNELIUS T. RYAN *
605 THIRD AVENUE
NEW YORK, NY 10158 *
PETER P. TRAPP *
605 THIRD AVENUE
NEW YORK, NY 10158 *
WALTER G. EHLERS *
605 THIRD AVENUE
NEW YORK, NY 10158 *
ROBERT A. KAVESH *
605 THIRD AVENUE
NEW YORK, NY 10158 *
HOWARD A. MIEAF *
605 THIRD AVENUE
NEW YORK, NY 10158 *
WILLIAM E. RULON *
605 THIRD AVENUE
NEW YORK, NY 10158 *
CANDACE L. STRAIGHT *
605 THIRD AVENUE
NEW YORK, NY 10158 *
DEFENDANTS *
____________________________________
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CLASS ACTION COMPLAINT
----------------------
Plaintiff, Full Value Partners L.P., for its class action complaint in the
above captioned matter, alleges as follows:
1. This action challenges the wrongful actions taken by Neuberger Berman
Real Estate Income Fund, Inc. ("NRL" or the "Fund") and its board of directors
to thwart the tender offer made by certain trusts controlled by Stewart Horejsi.
Those actions improperly prevent the shareholders from considering the trusts'
tender offer or any improved offer that the trusts or anyone else may make, and
otherwise illegally and inequitably interfere with an arms' length bidding
process pursuant to which shareholders of NRL should be able to voluntarily
liquidate their investment in the Fund. NLR and its directors have violated the
Investment Company Act of 1940, Maryland corporate law, and the fiduciary duties
imposed on directors under federal and state law.
2. If this Court does not issue the declaratory and injunctive relief
requested in this complaint, plaintiff and the class, consisting of all public
shareholders of NLR, other than the defendants and the trusts, will be denied
the opportunity to consider the tender offer made by the trusts, and any
improvements to the offer that the trusts would have made but for the
defendants' actions. Moreover, the defendants actions have foreclosed any
improved or competing offers, and plaintiff and the class will be coerced into
considering and accepting a self tender offer of NRL for only 20% of its shares.
3. In addition to the injury suffered as a result of the defendants'
interference with the tender offer, plaintiff and the class have suffered
monetary injury as a result of the series of actions that NLR and the directors
have pursued as "defensive" measures against the tender offer of the trusts. As
a result of those actions, NLR issued or will issue shares to an affiliate of
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the investment advisor of NLR at less than net asset value, which has resulted
or will result in the unfair dilution of the interests of plaintiff and the
class.
JURISDICTION AND VENUE
----------------------
4. This action arises under Sections 16, 18, 20 and 36 of the Investment
Company Act of 1940, as amended (the "1940 Act"), 15 U.S.C. ss.ss.80a-16,
80a-18, 80a-20, and 80a-35, as well as under state law.
5. This Court has jurisdiction pursuant to 15 U.S.C. ss. 80a-43, 28 U.S.C.
ss. 1331, and supplemental jurisdiction pursuant to 28 U.S.C. ss. 1367.
6. Venue is proper in this District because the corporate defendant, NLR,
is a corporation organized under the laws of the state of Maryland, and the
claims alleged in this complaint arose in this District.
THE PARTIES
-----------
7. Plaintiff Full Value Partners L.P. ("Full Value") is a limited
partnership organized under the laws of the state of Delaware, headquartered at
43 Waterford Drive, Montville, New Jersey 07045. Full Value owns 32,070 shares
of common stock of NRL.
8. NRL is a corporation organized and existing under the laws of Maryland.
NRL's principal place of business is located at 605 Third Avenue, New York, New
York. NRL is a closed-end investment company and is registered under and subject
to the 1940 Act. NRL's common stock is listed and trades on the New York Stock
Exchange. As of August 23, 2004, NRL had 4,578,983 outstanding shares of common
stock.
9. Defendant Peter E. Sundman ("Sandman") is the Chief Executive Officer
and Chairman of the Board of Directors of NRL. Sundman is also the President of
Neuberger Berman Management, Inc. ("Neuberger Berman"), the investment advisor
of the Fund, and Executive Vice President of Neuberger Berman, Inc. ("NBI"), the
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parent of Neuberger Berman. NBI, in turn, is owned by Lehman Brothers Holdings,
Inc.
10. Defendant Jack L. Rivkin is a director of NRL, and is the Chairman of
Neuberger Berman and Executive Vice President and Chief Investment Officer of
Neuberger Berman's companies.
11. Defendant Edward I. O'Brien is a director of NRL, and a director of
Legg Mason, Inc., which serves, through its subsidiary, as a broker or dealer to
NRL and to other funds of which Neuberger Berman is the investment advisor.
12. Defendants John Cannon, Barry Hirsch, John P. Rosenthal, Tom D. Seip,
Faith Colish, C. Anne Harvey, Cornelius T. Ryan, Peter P. Trapp, Walter G.
Ehlers, Robert A. Kavesh, Howard A. Mileaf, William E. Rulon, and Candace L.
Straight are each directors of NRL and of six other Neuberger Berman funds, four
of which invest in securities unrelated to real estate. All of those funds issue
a common proxy statement for the election of directors, and conduct their
shareholders and directors meetings at the same time. For their services as
directors of seven Neuberger Berman funds, including NRL, each of the directors
named in this paragraph receives a salary of approximately $70,000 annually.
13. Because of their financial relationship with Neuberger Berman and its
closed end funds, none of the 16 directors are capable of acting independently
of NRL's investment advisor.
14. The individual defendants are referred to in this complaint
collectively as the "Board."
CLASS ACTION ALLEGATIONS
------------------------
15. Plaintiff brings this action on its own behalf and as a class action,
pursuant to Fed. R. Civ. P. 23, on behalf of all stockholders of the Fund,
except Neuberger Berman and its affiliates, Stewart Horejsi and any of his
affiliates, any of the individual defendants and any person, firm, trust,
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corporation, partnership, and other entity related or affiliated with any
defendant (the "Class"), who are being injured as a result of the breaches of
fiduciary duty and violations of law of the defendants (the "Class"). This
action is properly maintainable as a class action for the reasons set forth
below.
a) The Class is so numerous that joinder of all members is
impracticable. As of August 23, 2004, there were 4,578,983 shares of the Fund
outstanding. The shares are held by hundreds of stockholders of record, and
thousands of beneficial holders. Members of the Class reside throughout the
United States.
b) A class action is superior to other methods for the fair and
efficient adjudication of the claims herein and no unusual difficulties are
likely to be encountered in the management of this action. The likelihood of
individual Class members prosecuting separate claims is remote.
c) There are questions of law and fact common to the Class, which
predominate over questions affecting any individual Class members. The common
questions include (i) whether defendants breached their fiduciary duties under
federal and state law by, among other things, implementing measures to entrench
the Board and Neuberger Berman in control of the Fund and precluding the
shareholders from receiving offers for their shares that are superior to the
self tender offer made by the Fund; (ii) whether the actions of the defendants
violate federal and state statutes, and (iii) whether plaintiff and the other
members of the Class have been injured or damaged thereby.
d) Plaintiff is committed to prosecuting this action and has retained
competent counsel experienced in litigation of this nature. Plaintiff s claims
are typical of the claims of other members of the Class and plaintiff has the
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same interests as the other members of the Class. Plaintiff is an adequate
representative of the Class.
e) The prosecution of separate actions by individual members of the
Class would create the risk of inconsistent or varying adjudications with
respect to individual members of the Class, which would (a) establish
incompatible standards of conduct for defendants; or (b) as a practical matter,
be dispositive of the interests of the other Class members not parties to this
action or substantially impair or impede their ability to protect their
interests.
FACTUAL ALLEGATIONS
-------------------
A. THE FUND
--------
16. NRL is part of a family or complex of approximately seven closed end
investment company funds that use the "Neuberger Berman" name. Neuberger Berman
provides investment management services to each of the seven closed end
investment companies. Neuberger Berman created NRL in 2002, and raised funds for
investment by issuing stock to the public offering.
17. Neuberger Berman provides investment advisory services to the Fund
pursuant to a written management agreement. NRL pays Neuberger Berman a fee for
these services based on a percentage of the Fund's net assets. Neuberger Berman
also supervises the business and affairs of the Fund pursuant to an
"Administration Agreement" dated November 3, 2003. Neuberger Berman is paid a
fee for those services as well.
18. Since the initial public offering of NRL stock in 2002, the common
stock of NRL has traded at substantially below its net asset value ("NAV"). As a
result, shareholders who wish to sell their shares would receive less than their
proportionate share of the value of the securities that NRL owns.
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19. Beginning in September, 2003, Neuberger Berman began to waive a portion
of the management fees that it charges to the Fund, As a result of that waiver,
the Fund pays approximately .6% of net assets annually in management and
administration fees.
B. HOREJSI'S TENDER OFFER FOR 50% OF THE FUND'S SHARES
---------------------------------------------------
20. Stewart Horejsi ("Horejsi") is the advisor to several family trusts,
including the Lola Brown Trust No. 1B ("Lola Brown Trust") and the Earnest
Horejsi Trust No. 1 B ("Horejsi Trust"), both of which are irrevocable grantor
trusts domiciled and administered in South Dakota. Horejsi is the grandson of
Lola Brown, and the son of Earnest Horejsi. Badlands Trust Company ("Badlands")
is a South Dakota corporation organized to act as a private trust company to
administer the Lola Brown Trust and the Horejsi Trust (the "Trusts"), as well as
other trusts associated with the family of Stewart Horejsi ("Horejsi"). Horejsi
is an advisor to the Trusts and to Badlands.
21. Between July 9, 2004, and September 2, 2004, the Lola Brown Trust
acquired 455,200 shares of NRL common stock through open market purchases on the
New York Stock Exchange. On August 31, 2004, the Horejsi Trust acquired 4,900
shares.
22. The Trusts and Horejsi jointly filed a Schedule 13D under the 1934
Exchange Act with the Securities Exchange Commission (the "SEC") in connection
with the trusts' purchases of Fund shares. The Schedule 13D showed that the
Trusts owned approximately 10.05% of the outstanding shares of NRL common stock.
It further indicated that the Trusts intended to nominate for consideration and
election to NRL's board of directors at NRL's 2005 annual meeting of
shareholders five directors, and that they will do likewise at subsequent annual
meetings of shareholders until all NRL directors meet the Trusts' criteria. The
8
Trusts' criteria, among other things, were that its directors would vote to
terminate the management agreement with Neuberger Berman and enter into a
management agreement with an affiliate or Horejsi.
23. Between September 2 and September 10, 2004, the Trusts acquired an
additional 8000 shares of stock of the fund. The Trusts owned approximately
10.22% of the Fund's stock on September 10, 2004.
24. On September 10, 2004, the Trusts commenced a tender offer (the "Tender
Offer") for up to 1,825,000 outstanding shares of NRL common stock at $19.89 per
share, which was the closing market price of the stock on the preceding day. The
Trusts would own, if they acquired the additional 1.8 million shares, 50% of the
outstanding shares of the Fund. The Tender Offer, after being amended and
extended, was to expire on October 15, 2004. The Tender Offer has been further
extended, and will now expire on October 25, 2004. The Tender Offer price of
$19.89 per share remains approximately equal to the market price at which
shareholders can currently sell their shares in the market.
25. The Trusts filed a "Schedule TO" with the SEC on September 10, 2004 in
connection with the Tender Offer. In the "Schedule TO," the Trusts stated:
We are making this Offer because we intend to acquire as much as 50% of the
outstanding shares so that we may take the fiend in a new direction. To
implement our plan to take the fund in a new direction, we intend to
propose that:
(X) NLR stockholders elect our nominees in place of the incumbent
directors at each of NRL's annual meetings until all NRL, directors
were nominated by us . . .
(X) NRL's incumbent investment adviser [Neuberger Berman] be terminated
and aced with Boulder Investment Advisors, LLC and Stewart West Indies
Trading Company, Ltd. [which are affiliates of Horejsi] . . .
(X) [Horejsi], an investment consultant to us, be appointed as NRL's
portfolio manager.
9
26. The "Schedule TO" further disclosed that "some of these changes are
likely to increase NRL's costs," and further indicated that in other funds
advised by Horejsi, the advisory fee is 1.25% of net assets, as opposed to
Neuberger Berman's fee of .6% of net assets.
27. Because the Tender Offer did not, and does not, offer any premium over
the market price of NRL's shares, few shareholders of the fund will tender
their- shares, since they can obtain an identical price immediately by selling
their shares in the market, and would not have to wait for payment, at no
interest, as they would in the Tender Offer. Consequently, there is little or no
risk that the Trusts will obtain a significant number of shares in connection
with the Tender Offer unless they raise the tender offer price to provide a
significant premium over the market price. The Board decided to recommend
against the Tender Offer. However, the Board did not simply make that
recommendation, and allow shareholders either to accept or reject the Tender
Offer or persuade the Trusts to raise the Tender Offer price. Nor did the Board
provide or seek a more attractive offer for shareholders. Instead, on September
21, 2004, the Board decided to take three actions to preclude the Tender Offer,
any improvement to the Tender Offer, or any competing offers (the "Preclusive
Actions"). The Preclusive Actions were not designed to protect the shareholders
of the Fund, but rather, to protect the incumbent directors and Neuberger
Berman's investment advisory agreement. The Fund and its Board failed to pursue
the simple and legal course of action that would have protected the shareholders
from any danger presented by the Trusts' stated goal to assume control of the
Fund without precluding shareholders from considering the Tender Offer or
receiving either an improvement to the Tender Offer or a better competing offer.
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C. THE PRECLUSIVE ACTIONS OF THE FUND AND ITS BOARD OF DIRECTORS
-------------------------------------------------------------
28. The first Preclusive Action was to manipulate the number of outstanding
shares of NRL to reduce the Trusts' ownership to less than 10% of the stock,
followed by the Board's election to make the Fund subject to the Maryland
Control Share Acquisition Act., Md. Code Ann., Corps & Ass'ns ss. 3-701, et seq.
(the "Control Statute"). The Control Statute would deprive shares purchased by a
shareholder who did not own 10% of a Maryland corporation's stock prior to the
board's election to be subject to the Control Statute of the right to vote those
shares.
29. In order to reduce the Trusts' ownership to less than 10%, a
prerequisite to using the Control Statute to nullify the votes of shares
acquired by the Trusts, NRL signed a Common Stock Purchase Agreement on
September 22, 2004 providing for the private placement of 139,535 unregistered
shares of NRL common stock with its affiliate, Neuberger Berman LLC (hereafter,
the "Private Placement") at a price of $21.50 per share. The issuance of such
shares, which Neuberger Berman LLC may demand to have registered so they can be
sold in the open market, would increase the total number of shares outstanding
to 4,718,518 shares and decrease the Trusts' voting power to 9.92%.
30. According to the Fund, therefore, in its SEC filings, "[b]ased on
publicly available information, immediately following the issuance of the shares
pursuant to the Stock Purchase Agreement, no person owned any `control shares'
under the [Maryland] Control Share Act. . . ." The next day, at its September
23, 2004, meeting, the Board agreed to "adopt resolutions, to be effective
immediately after the issuance of shares to [Neuberger Berman LLC] pursuant to
the Stock Purchase Agreement, electing the Fund to be subject to both the
Maryland Control Share Acquisition Act. . . ."
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31. Thus, the Fund and its board, entered into the Private Placement for
the sole purpose of manipulating the percentage ownership of the Trusts in order
to deprive any shares acquired by the Trusts of the right to vote through the
Control Statute.
32. The second Preclusive Action pursued by the Board was the adoption, at
the September 23, 2004, meeting, of a so-called Rights Agreement, commonly known
as a "Poison Pill." Under the Rights Agreement, the Board issued rights to
shareholders to purchase from the Fund three shares of common stock at a price
of $0.0001 per share. The rights may be exercised ten days after a shareholder
acquires more than I 1 % of the stock of the Fund, but the acquiring shareholder
may not exercise any rights for stock owned in excess of 11% of the Fund's
stock.
33. As a consequence of the Poison Pill adopted, any shares owned by the
Trusts above 11%, including any shares acquired pursuant to the Tender Offer,
will immediately be diluted by a ratio of 3:1, rendering the shares of the
Trusts (or any other shareholder) in excess of 11%, but no one else's, worth 1/4
of their prior value.
34. The Poison Pill thus would effectively prevent the Trusts from pursuing
any tender offer, even one at a much higher price. NRL has stated that "because
of this Rights Agreement, [the NRL] board has a serious question about whether
the Horejsi Trusts will purchase common shares pursuant to the terms of the
Horejsi [tender] offer."
35. The third Preclusive Action taken by NRL was the Board's authorization,
at the September 23 meeting, of a "self tender offer" for 943,704 shares (20%)
of NRL common stock at a price of $20.00 per share (the "Self Tender"). The
Board stated that the Self Tender is "designed to provide liquidity to the
Fund's stockholders, if required, without requiring them to tender" to the
Trusts.
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36. NRL stated that the Self-Tender "is one of several steps in your
board's plan to defend the fund and its stockholders against the unsolicited and
partial tender offer," At the same time, however, the Board recommended that
stockholders not tender into NRL's Self Tender, noting, as one reason not to
tender, that the Self Tender "will be at a price less than the net asset value
per share." Thus, the Board suggested to shareholders that they should not
accept any offer that is at a price less than NAV per share or that is for fewer
than all shares, yet provided no alternative to shareholders to realize NAV in
any of the defensive measures that were adopted. To the contrary, by adopting
the Preclusive Actions, the Fund and the Board sought to ensure, that the trusts
would not improve their offer (by increasing the price to NAV or by increasing
the size of the offer) and that no one else would make any such offer.
37. Although the Board recommended against tendering shares into the Fund's
own tender, the Self Tender is coercive to shareholders. The Preclusive Actions
make the Self Tender--a partial tender offer at a significant discount to
NAV--the only transaction available to shareholders, and foreclose any competing
tender offers. If shareholders do not tender at the Fund's inadequate price,
their percentage ownership of the Fund will increase and they will have to pay
an increased proportion of the fixed costs of operating the Fund.
38. The Fund and its Board have stated in SEC filings that the size of the
Self Tender was determined based upon the Board's belief that most stockholders
would not tender their shares. This belief is reasonable, considering that the
Self Tender is only slightly above the market price of NRL stock, and
substantially below NAV per share. The Board's conclusion, however, demonstrates
that its response to the lender Offer is unreasonable, since the Tender Offer is
at an even lower price and shareholders are even less likely to tender to the
Trusts. Consequently, as a result of the Preclusive Actions, shareholders
wishing to liquidate their holdings have been forced into tendering into the
13
inadequate SelfTender, and the Fund has eliminated any possibility of a
competing and improved tender offer from the Trusts or anyone else.
39. Rather than the inappropriate Preclusive Actions, the Board could have
adopted "defenses" that would not have irreparably injured the Fund's
shareholders. The Board was concerned about shareholders of the Fund being
trapped in an investment that Horejsi took in a different direction after a
successful voluntary tender offer for 50% of the shares. Given that concern, the
only appropriate responses of the Fund and the Board would be to provide a
superior alternative or to adopt measures to allow shareholders to liquidate
their holdings at NAV in the event they did not wish to remain part of a company
controlled by Horejsi. Thus, for example, the Fund and the Board could easily
have issued non-discriminatory "put" rights, through which any shareholder,
including the Trusts, could at certain times sell their shares to the Fund for
NAV. The Fund and the Board also could have adopted a resolution announcing that
the Fund would tender for all of its shares at NAV in the event that the Trusts
acquired more than a certain percentage of the Funds shares. "Put" rights or a
prospective self tender for all shares at NAV would protect shareholders without
violating the 1940 Act and without depriving shareholders of the opportunity to
receive competitive offers for their shares.
40. Such measures, however, while benefiting the shareholders of the Fund,
would not necessarily protect Neuberger Berman and its financial relationship
with the Fund. Because the Board was acting to protect Neuberger Berman, and not
the Fund and its shareholders, the Board failed to consider and approve
defensive measures other than the Preclusive Actions.
41. Having adopted the Preclusive Actions, the Fund and the Board also
commenced litigation against the Trusts, captioned NEUBERGER BERMAN REAL ESTATE
INCOME FUND INC. V. LOLA BROWN TRUST NO 1B, ET AL., District of Maryland, Civil
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Action No. AMD 04-3056, alleging that the Trusts failed to disclose certain
immaterial facts in connection with the Tender Offer. The Trusts have
counterclaimed, alleging that the Preclusive Actions violate the Maryland
Corporations and Associations Articles and the 1940 Act. The Fund and the Trusts
are now engaged in accelerated litigation, at a planned expense of over $500,000
to the Fund's shareholders, over issues that will have an enormous effect on the
Fund's shareholders. Neither the Fund nor the Trusts, however, are acting in the
best interests of the shareholders.
CAUSES OF ACTION
COUNT I
(DECLARATORY JUDGMENT- VIOLATION OF THE MARYLAND CONTROL SHARE ACT)
-------------------------------------------------------------------
42. Plaintiff re-alleges the preceding paragraphs as if fully set forth
here.
43. The Control Statute, Md. Code Ann., Corps & Ass'ns ss. 3-701 et seq.,
prohibits the voting of shares by a person who acquires more than 10% of a
company's stock without prior approval by 2/3 of the shareholders. It provides
an exception, however, to shareholders of stock of an investment company that
have acquired more than 10% of the stock on the date the company elects to be
subject to the Control Statute. That exception, set forth in Md. Code Ann.,
Corps & Ass'ns ss. 3-7029c)(4) provides:
(c) This subtitle does not apply to:
(4) A corporation registered under the Investment Company Act of 1940 as a
closed-end investment company unless its board of directors adopts a
resolution to be subject to this subtitle on or after June 1, 2000,
provided that the resolution 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.
44. Since the Fund's formation in 2002, the Board had never made it subject
to the Control Statute. The Board did not consider making the Fund subject to
the Control Statute until September 22, 2003, after the Trusts had acquired over
10% of the Fund's stock.
15
45. At that time, however, it was too late wider the Control Statute for
the Board to make the Control Statute apply to the Trusts, since they had
already acquired more than 10% of the stock. Consequently, the Fund and its
Board pursued the Private Placement to the advisor's affiliate in order to
immediately dilute the Trusts to a position of less than 10% so that they could
argue that the resolution electing to make the company subject to the Control
Statute would prohibit the Trusts from voting their shares.
46. The election to be subject to the Control Statute does not, by the
plain language of the statute, apply to prohibit the Trusts from voting their
shares. The Trusts acquired more than 10% of the Fund's stock "before the time
that the resolution [was] adopted." The Fund's attempt to manipulate the number
of outstanding shares through the Private Placement does not alter the status of
the statutory exemption.
47. Moreover, at the time that the Board adopted the resolution electing to
make the Fund subject to the Control Statute, the Fund had not issued shares
pursuant to the Private Placement. Consequently, at the time the resolution was
approved and adopted, the Trusts owned more than 10% of the Fund's stock and the
Control Statute cannot under any circumstances apply to the Trusts.
48. Plaintiffs and the Class are entitled to relief declaring that the
Control Statute does not apply to shares acquired by the Trusts, and to any
necessary relief enjoining the Fund from any further attempts to preclude the
Trusts' voting power through the election to be subject to the Control Statute.
COUNT II
DECLARATORY JUDGMENT - CONTROL STATUTE ELECTION VIOLATES 1940 ACT)
------------------------------------------------------------------
49. Plaintiff re-alleges the preceding paragraphs as if fully set forth
here.
50. Section 18(i) of the 1940 Act provides:
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(i) Future issuance of stock as voting stock; exceptions
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... shall be a voting stock and have equal voting
rights with every other outstanding voting stock. . . .
The Control Statute conflicts with Section 18(i) of the 1940 Act, since it
declares that certain shares do not have equal voting rights with every other
outstanding share. Because the Fund is registered under the 1940 Act, it must
comply with all of the provisions of that statute, and has no power to elect to
be subject to the Control Statute. The election of the Fund, therefore, to be
subject to the Control Statute is therefore invalid and ultra vires.
51. Plaintiff and the Class are entitled to relief declaring that the Fund
cannot elect to make itself subject to the Control Statute, and enjoining any
and all actions taken pursuant to the Fund's election to do so.
COUNT III
(BREACH OF FIDUCIARY DUTY RELATING TO PRIVATE PLACEMENT AND CONTROL STATUTE)
----------------------------------------------------------------------------
52. Plaintiff re-alleges the preceding paragraphs as if fully set forth
here.
53. The Private Placement, followed by the Board's election to be subject
to the Control Statute, was a device to evade the exception in the Control
Statute "with respect to any person who has become a holder of control shares
before the time that the resolution is adopted." As such, these actions were
undertaken solely for the purpose of interfering with the voting rights of
shareholders of the Fund and constitute inequitable conduct on the part of the
Board. The actions are also ultra vires, in that the Board cannot, trader the
Maryland Corporate Code, preclude the Trusts from voting by electing to make the
Fund subject to the Control Statute, since the Trusts acquired more than 10% of
the stock before the resolution was adopted. The Board cannot, consistent with
its fiduciary duties, use the Control Statute to preclude any shareholder from
17
voting, since the Control Statute cannot be adopted consistent with the 1940
Act.
54. The Board's actions in pursuing the Private Placement and electing to
be subject to the Control Statute are a breach of the directors' fiduciary duty
of loyalty to the shareholders.
55. Plaintiff and the class are entitled to relief declaring the Board has
violated its fiduciary duty, and further declaring that the Trusts cannot be
prohibited from voting any shares of the Fund that they acquire.
COUNT IV
(VIOLATION OF SS.SS. 18(D), 18(I) AND 23(B) OF 1940 ACT)
--------------------------------------------------------
56. Plaintiff re-alleges the preceding paragraphs as if fully set forth
here.
57. Section 18(d) of the 1940 Act provides;
(d) Warrants and rights to subscription
It shall be unlawful for any registered management company to issue any
warrant or right to subscribe to or purchase a security of which such
company is the issuer, except in the form of warrants or rights to
subscribe expiring not later than one hundred and twenty days after their
issuance and issued exclusively and ratably to a class or classes of such
company's security holders; except that any warrant may be issued in
exchange for outstanding warrants in connection with a plan of
reorganization.
58. "Ratably" means "proportionately." The issuance of rights pursuant to
the Poison Pill is disproportionate since the only purpose of the pill is to
treat a greater-than-11% shareholder differently from other shareholders. Any
rights plan that allows the exercise of rights with respect to some, but not
all, shares in certain circumstances violates the requirement that the rights or
warrants be issued ratably.
59. The Poison Pill would deprive certain shares--those shares owned by a
stockholder in excess of 11% of the outstanding stock of the Fund--of the right
to purchase three additional shares at less than a penny per share. The Poison
Pill therefore violates Section 18(d) of the 1940 Act.
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60. Section 23(b) of the 1940 Act further provides:
(b) Sale of common stock at price below current net asset value No
registered closed-end company shall sell any common stock of which it is
the issuer at a price below the current net asset value of such stock . . .
except (4) upon the exercise of any warrant outstanding on August 22, 1940,
or issued in accordance with the provisions of section 18(d). . . .
61. The Poison Pill constitutes the sale of common stock of the Fund at a
price of $.0001 per share, far less than the net asset value per share of
approximately $21.00. The rights issued pursuant to the Poison Pill were not
issued in accordance with ss. 18(d). The Poison Pill, therefore, is ultra vices
under ss.23(b) of the 1940 Act.
62. In addition, the Poison Pill would violate ss. 18(i) of the 1940 Act
because it would provide certain shares--those shares held by a shareholder in
excess of I 1 % of the outstanding shares of the Fund--different voting rights
from the voting rights of the other outstanding shares of common stock of the
Fund.
63. Plaintiff and the Class are entitled to relief declaring that the
Poison Pill is ultra vires and in violation of the 1940 Act. Plaintiff and the
Class are further entitled to injunctive relief prohibiting the issuance of any
rights or common stock pursuant to the Poison Pill, or the use of the Poison
Pill in any manner as a "defensive" measure against purchasers of the Fund's
stock.
COUNT V
(VIOLATION OF FIDUCIARY DUTY IN CONNECTION WITH POISON PILL)
------------------------------------------------------------
64. Plaintiff re-alleges the preceding paragraphs as if fully set forth
here.
65. The Board's adoption of the Poison Pill in response to the Tender Offer
constitutes a disproportionate response to a non-existent threat to the Fund and
its shareholders. The purpose of the Poison Pill is to protect Neuberger Berman
19
and the Board, not to protect the Fund and its shareholders. As such, the
adoption of the Poison Pill was in violation of the Board's fiduciary duties.
66. Moreover, the Poison Pill violates the 1940 Act, and the adoption of a
"defensive" measure in violation of the 1940 Act constitutes a violation of the
Board's fiduciary duties.
67. Plaintiff and the Class are entitled to relief declaring that the
Poison Pill was adopted in violation of the Board's fiduciary duties, and
enjoining the use of the Poison Pill to foreclose the Tender Offer or any better
competing offers.
COUNT VI
(VIOLATION OF & 23(B) OF THE 1940 ACT AND BREACH OF FIDUCIARY DUTY)
-------------------------------------------------------------------
68. Plaintiff re-alleges the preceding paragraphs as if filly set forth
here.
69. Section 23(b) of the 1940 Act is intended to insure that an issuance of
common stock other than to all existing holders of such stock be at a price
equal to NAV per share. Thus, ss.23(b) provides that "No registered closed-end
company shall sell any common stock of which it is the issuer at a price below
the current net asset value of such stock."
70. The Fund and its Board have acted to violate ss.23(b) by agreeing to
the Private Placement simultaneously with its decision to pursue a self-tender
of the Fund for 20% of its stock at a price below the NAV per share of the
stock. In the Private Placement, Neuberger Berman LLC will purchase stock at
$21.50, which would have been the NAV per share but for the Self Tender. As a
consequence of the Self Tender, in which shares will be repurchased at less than
NAV, the NAV of the remaining shares of the Fund will increase, as the Board has
recognized in its public filings. Thus, by timing the Private Placement to occur
immediately before the Self Tender, the Board will be selling stock to an
affiliate of Neuberger Berman at a price that is a discount to the NAV that will
result from the Self Tender. The timing of the Private Placement and the Self
Tender are controlled by the Board and by Neuberger Berman, and as a result of
20
the timing, Neuberger Berman will be receiving an unfair windfall by buying the
Fund's stock at a price that it knows will be less than NAV, and the
shareholders of the Fund will be unfairly diluted.
71. The Fund, in a situation similar to the stale pricing arbitrage
scandals that were widespread in the mutual fund industry, will be selling stock
to an affiliate of its advisor at a price that the Board knows will be below the
NAV of such stock. The timing of the transactions to allow the sale of stock at
less than NAV violates ss.23(b) and the Board's fiduciary duties. Plaintiff and
the Class will be injured by timing and pricing of the Private Placement and
Self Tender, and are entitled to relief declaring that the combination of the
Private Placement and Self Tender violate ss.23(b) of the 1940 Act, and further,
that the Board is violating its fiduciary duty in timing the transactions in a
manner that will improperly dilute the public shareholders of NRL. Plaintiff and
the Class are further entitled to relief enjoining or rescinding the Private
Placement.
COUNT VII
(FOR VIOLATION OF FIDUCIARY DUTY)
---------------------------------
72. Plaintiff re-alleges the preceding paragraphs as if fully set forth
here.
73. The Board has determined that the Tender Offer is not in the best
interests of the Fund's stockholders. The Board, however,, has caused the Fund
to pursue the Preclusive Actions, all of which violate state and federal
statutes, as well as the fiduciary duties of the directors. The Board has failed
to pursue "defensive" measures that would protect the Fund's shareholders and
not, at the same time, interfere with the shareholders' right and ability to
obtain the best offer available for their shares.
74. the Preclusive Actions pursued by the Board present a danger to
shareholders, not only because they deprive shareholders of the ability to
obtain a better offer and unreasonably coerce shareholders into the Self Tender.
For example, under the Poison Pill, the Trusts could purchase one share in
21
excess of the 11% trigger threshold, and exercise the right to purchase shares
at $.0001 per share with respect to their entire 11% stake. Unsuspecting
shareholders of the Fund who fail to exercise the Poison Pill rights will be
enormously diluted to approximately one quarter of their original stake. The
Board has thus recklessly endangered the ownership takes of many existing
shareholders with its Preclusive Actions.
75. The Fund and the Board could have, but did not, pursue simple courses
of action that are both permissible under state and federal law and would
benefit the shareholders of the Fund, unlike the Preclusive Actions adopted by
the Board. The Fund could have distributed "put" rights, pursuant to which
shareholders would have the option, at designated times, to "put" their shares
to the Fund at NAV per share. The Board also could have resolved to conduct a
self tender for all shares at NAV in the event the Trusts acquired more than a
specified percentage of the Fund's stock. Such a put right or prospective self
tender could have been implemented by the Board on September 23, 2004, and would
have addressed the Board's stated concern that the Tender Offer did not pay
shareholders NAV per share. However, because Neuberger Berman and its investment
advisory agreement would not be protected by such put rights or by a self tender
for all shares at NAV, the Board did not pursue these options.
76. Plaintiff and the Class are entitled to relief declaring that the Fund
should only implement defensive actions that will benefit shareholders, rather
than the investment advisor of the Fund, by allowing shareholders the ability to
obtain NAV per share for their shares under appropriate circumstances.
Plaintiffs and the Class are further entitled to injunctive relief and its Board
to pursue "defensive" actions that will benefit shareholders, rather than the
investment advisor to the Fund.
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WHEREFORF, plaintiff prays for relief as follows:
a. For an order certifying this action as a class action on behalf of all
shareholders of the Fund, other than Neuberger Berman and its
affiliates or the Trusts and its affiliates;
b. For relief declaring that the Preclusive Actions violate Maryland law
and the 1940 Act;
c. For relief declaring that the Preclusive Actions violate the fiduciary
duties of the Board and that the Board has breached its fiduciary
duties by failing to implement "defensive" actions that will benefit
the shareholders, as opposed to the investment advisor, of the Fund;
d. For relief enjoining the Board from implementing the Preclusive
Actions, or rescinding them if necessary, and requiring the Board to
implement appropriate "defensive" measures designed to benefit the
Fund's shareholders, rather than the investment advisor of the Fund;
e. For an award of plaintiffs attorneys' fees and costs in prosecuting
this action; and
f. For such other and further relief as the Court deems just and proper.
Dated: October 20, 2004
TYDINGS & ROSENBERG LLP
/s/ John B. Isbister
--------------------------------------------
By: John B. Isbister, Fed. Bar No. 00639
Lawrence J. Quinn, Fed. Bar No. 07545
100 East Pratt Street, 26th Floor
Baltimore, MD 21202
(410) 752-9700
Fax (410) 727-5460
23
HARNES KELLER LLP
/s/ Gregory E. Keller
--------------------------------------------
By: Gregory E. Keller
964 Third Avenue
Seventh Floor
New York, NY 10022
(212) 755-0022
Fax (212) 755-0005
Attorneys for Plaintiff
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