SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Amendment No. ______________)
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary proxy statement
/ / Confidential, for use of the Commission only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12
TEMPLETON CHINA WORLD FUND, INC.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing party:
(4) Date filed:
PAGE
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FRANKLIN/R/ TEMPLETON/R/
INVESTMENTS
TEMPLETON CHINA WORLD FUND, INC.
IMPORTANT SHAREHOLDER INFORMATION
These materials are for the Annual Meeting of Shareholders scheduled for
June 12, 2003 at 1:00 p.m. Eastern time. They discuss the proposals (the
"Proposals" or, each, a "Proposal") to be voted on at the meeting, and contain
the Notice of Meeting, proxy statement and proxy card. A proxy card is, in
essence, a ballot. When you vote your proxy by signing and returning your proxy
card, it instructs us how to cast your votes on important issues relating to
Templeton China World Fund, Inc. (the "Fund"). If you specify a vote for all
Proposals, your proxy will be voted as you indicate. If you specify a vote for
one or more Proposals, but not all, your proxy will be voted as specified on
such Proposals and, on the Proposal(s) for which no vote is specified, your
proxy will be voted FOR such Proposal(s). If you simply sign and date the proxy
card, but do not specify a vote for any Proposal, your proxy will be voted FOR
all Proposals.
We urge you to spend a few minutes reviewing the Proposals in the proxy
statement. Then, please fill out the proxy card and return it to us so that we
know how you would like to vote. When shareholders return their proxies
promptly, the Fund may be able to save money by not having to conduct
additional mailings.
We welcome your comments. If you have any questions, call Fund Information
at 1-800/DIAL BEN(R) (1-800-342-5236).
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TELEPHONE AND INTERNET VOTING
For your convenience, you may be able to vote by telephone or through the
Internet, 24 hours a day. If your account is eligible, a control number and
separate instructions are enclosed.
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[LOGO]
FRANKLIN/R/ TEMPLETON/R/
INVESTMENTS
TEMPLETON CHINA WORLD FUND, INC.
NOTICE OF 2003 ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders (the "Meeting") of Templeton China World
Fund, Inc. (the "Fund") will be held at the Tower Club, 28th Floor, Union
Planters Bank Building, 100 South East 3rd Avenue, Fort Lauderdale, Florida
33394 on June 12, 2003 at 1:00 p.m. Eastern time.
During the Meeting, shareholders of the Fund will vote on the following
Proposals and Sub-Proposals:
1. To elect three Directors of the Fund to hold office for the terms
specified.
2. To approve the conversion of the Fund from a closed-end fund organized
as a Maryland corporation to an open-end fund organized as a Delaware
statutory trust.
3. To approve amendments to certain of the Fund's fundamental investment
restrictions (includes six (6) Sub-Proposals):
(a) To amend the Fund's fundamental investment restriction regarding
borrowing and senior securities;
(b) To amend the Fund's fundamental investment restriction regarding
underwriting;
(c) To amend the Fund's fundamental investment restriction regarding
lending;
(d) To amend the Fund's fundamental investment restriction regarding
investments in commodities;
(e) To amend the Fund's fundamental investment restriction regarding
investments in real estate; and
(f) To amend the Fund's fundamental investment restriction regarding
industry concentration.
4. To approve the elimination of certain of the Fund's fundamental
investment restrictions.
By Order of the Board of Directors,
Barbara J. Green
Secretary
April 28, 2003
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YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. PLEASE
SIGN, DATE AND MAIL YOUR PROXY CARD AT YOUR EARLIEST CONVENIENCE. NO POSTAGE
IS REQUIRED IF MAILED FROM THE UNITED STATES. SHAREHOLDERS WITH QUESTIONS OR
REQUIRING ASSISTANCE MAY CALL D.F. KING & CO., INC., WHICH IS ASSISTING US,
TOLL-FREE AT 800-290-6427.
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TEMPLETON CHINA WORLD FUND, INC.
PROXY STATEMENT
TABLE OF CONTENTS
Page
----
Information About Voting........................................................................... 1
Proposal 1: To Elect Three Directors of the Fund.................................................. 2
Proposal 2: To Approve the Conversion of the Fund from a Closed-End Fund Organized as a Maryland
Corporation to an Open-End Fund Organized as a Delaware Statutory Trust.................. 11
Introduction to Proposals 3 and 4.................................................................. 21
Proposal 3: To Approve Amendments to Certain of the Fund's Fundamental Investment Restrictions
(this Proposal involves separate votes on Sub-Proposals 3a-3f)........................... 22
Sub-Proposal 3a: To amend the Fund's fundamental investment restriction regarding borrowing and
senior securities.................................................................. 23
Sub-Proposal 3b: To amend the Fund's fundamental investment restriction regarding underwriting.. 25
Sub-Proposal 3c: To amend the Fund's fundamental investment restriction regarding lending....... 25
Sub-Proposal 3d: To amend the Fund's fundamental investment restriction regarding investments in
commodities........................................................................ 26
Sub-Proposal 3e: To amend the Fund's fundamental investment restriction regarding investments in
real estate and.................................................................... 26
Sub-Proposal 3f: To amend the Fund's fundamental investment restriction regarding industry
concentration...................................................................... 27
Proposal 4: To Approve the Elimination of Certain of the Fund's Fundamental Investment
Restrictions............................................................................. 27
Information About the Fund......................................................................... 29
Audit Committee.................................................................................... 30
Further Information About Voting and the Meeting................................................... 32
EXHIBITS
Exhibit A--Form of Agreement and Plan of Reorganization between Templeton China World Fund, Inc.
(a Maryland Corporation) and Templeton China World Fund (a Delaware Statutory Trust)...... A-1
Exhibit B--A Comparison of Governing Documents and State Law....................................... B-1
Exhibit C--Fundamental Investment Restrictions Proposed to be Amended or Eliminated................ C-1
TEMPLETON CHINA WORLD FUND, INC.
PROXY STATEMENT
..INFORMATION ABOUT VOTING
Who is asking for my vote?
The Directors of Templeton China World Fund, Inc. (the "Fund"), in
connection with the Annual Meeting of Shareholders of the Fund to be held on
June 12, 2003 (the "Meeting"), have requested your vote on several matters.
Who is eligible to vote?
Shareholders of record at the close of business on April 16, 2003 are
entitled to be present and to vote at the Meeting or any adjourned Meeting.
Each share of record is entitled to one vote (and a proportionate fractional
vote for each fractional share) on each matter presented at the Meeting. The
Notice of Meeting, the proxy card, and Proxy Statement were first mailed to
shareholders of record on or about April 28, 2003.
On what issues am I being asked to vote?
You are being asked to vote on four Proposals:
1. To elect three Directors of the Fund;
2. To approve the conversion of the Fund from a closed-end fund organized
as a Maryland corporation to an open-end fund organized as a Delaware
statutory trust;
3. To approve amendments to certain of the Fund's fundamental investment
restrictions (includes six (6) Sub-Proposals); and
4. To approve the elimination of certain of the Fund's fundamental
investment restrictions.
How do the Fund's Directors recommend that I vote?
The Directors unanimously recommend that you vote:
1. FOR the election of the three nominees;
2. FOR the approval of the conversion of the Fund from a closed-end fund
organized as a Maryland corporation to an open-end fund organized as a
Delaware statutory trust;
3. FOR the approval of each of the proposed amendments to certain of the
Fund's fundamental investment restrictions; and
4. FOR the approval of the elimination of certain of the Fund's fundamental
investment restrictions.
How do I ensure that my vote is accurately recorded?
You may attend the Meeting and vote in person or you may complete and return
the enclosed proxy card. If you are eligible to vote by telephone or through
the Internet, a control number and separate instructions are enclosed.
Proxy cards that are properly signed, dated and received at or prior to the
Meeting will be voted as specified. If you specify a vote in connection with
any of the Proposals 1 through 4, your proxy will be voted as you indicate, and
any Proposal for which no vote is specified will be voted FOR that Proposal. If
you simply sign,
date and return the proxy card, but do not specify a vote for any of the
Proposals, your shares will be voted FOR the election of all nominees as
Directors (Proposal 1); FOR the approval of the conversion of the Fund from a
closed-end fund organized as a Maryland corporation to an open-end fund
organized as a Delaware statutory trust (Proposal 2); FOR the approval of each
of the proposed amendments to certain of the Fund's fundamental investment
restrictions (Sub-Proposals 3a-3f); and FOR the approval of the elimination of
certain of the Fund's fundamental investment restrictions (Proposal 4).
May I revoke my proxy?
You may revoke your proxy at any time before it is voted by forwarding a
written revocation or a later-dated proxy to the Fund that is received at or
prior to the Meeting, or by attending the Meeting and voting in person.
What if my shares are held in a brokerage account?
If your shares are held by your broker, then in order to vote in person at
the Meeting, you will need to obtain a "Legal Proxy" from your broker and
present it to the Inspector of Election at the Meeting.
..THE PROPOSALS
PROPOSAL 1: TO ELECT THREE DIRECTORS OF THE FUND
How are nominees selected?
The Board of Directors of the Fund (the "Board" or the "Directors") has a
Nominating and Compensation Committee (the "Committee") consisting of Andrew H.
Hines, Jr. (Chairman), Frank J. Crothers, Edith E. Holiday and Gordon S.
Macklin, none of whom is an "interested person" as defined by the Investment
Company of Act of 1940 (the "1940 Act"). Directors who are not interested
persons of the Fund are referred to as the "Independent Directors" and
Directors who are interested persons of the Fund are referred to as the
"Interested Directors." The Committee is responsible for the selection and
nomination of candidates to serve as Directors of the Fund. The Committee will
review shareholders' nominations to fill vacancies on the Board if these
nominations are submitted in writing and addressed to the Committee at the
Fund's offices. However, the Committee expects to be able to identify from its
own resources an ample number of qualified candidates.
Who are the nominees and Directors?
The Board is divided into three classes. Each class has a term of three
years. Each year the term of office of one class expires. This year, the terms
of three Directors expire. Betty P. Krahmer, Gordon S. Macklin and Fred R.
Millsaps have been nominated for three-year terms, set to expire at the 2006
Annual Meeting of Shareholders. These terms continue, however, until successors
are duly elected and qualified. All of the nominees are currently members of
the Board. In addition, all of the current nominees and Directors are also
directors or trustees of other Franklin(R) funds and/or Templeton(R) funds
(collectively, the "Franklin Templeton funds").
Certain Directors of the Fund hold director and/or officer positions with
Franklin Resources, Inc. ("Resources") and its affiliates. Resources is a
publicly owned holding company, the principal shareholders of which are Charles
B. Johnson and Rupert H. Johnson, Jr., who own approximately 17.85% and 14.84%,
respectively, of its outstanding shares. Resources, a global investment
organization operating as Franklin Templeton Investments, is primarily engaged,
through various subsidiaries, in providing investment management, share
distribution, transfer agent and administrative services to a family of
investment companies. Resources is a New York Stock Exchange, Inc. ("NYSE")
listed holding company (NYSE: BEN). Charles B. Johnson, Chairman of the Board,
Director and Vice President of the Fund, and Rupert H. Johnson, Jr., Vice
President of the Fund, are brothers. There are no family relationships among
any of the Directors or nominees for Director.
2
Each nominee currently is available and has consented to serve if elected.
If any of the nominees should become unavailable, the designated proxy holders
will vote in their discretion for another person or persons who may be
nominated as Directors.
Listed below, for each nominee and Director, are their name, age and
address, as well as their position and length of service with the Fund,
principal occupation during the past five years, the number of portfolios in
the Franklin Templeton Investments fund complex that they oversee, and any
other directorships held by the nominee or Director.
Nominees for Independent Director to serve until 2006 Annual Meeting of
Shareholders:
Number of
Portfolios in
Franklin
Templeton
Investments
Fund Complex
Length of Time Overseen by
Name, Age and Address Position Served Director* Other Directorships Held
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Betty P. Krahmer (73) Director Since 1993 22 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
Principal Occupation During Past 5 Years:
Director or Trustee of various civic associations; and formerly, Economic Analyst, U.S. government.
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Gordon S. Macklin (74) Director Since 1993 135 Director, White Mountains
500 East Broward Blvd. Insurance Group, Ltd. (holding
Suite 2100 company); Martek Biosciences
Fort Lauderdale, FL Corporation; MedImmune,
33394-3091 Inc. (biotechnology);
Overstock.com (Internet
services); and Spacehab, Inc.
(aerospace services).
Principal Occupation During Past 5 Years:
Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and formerly, Chairman, White
River Corporation (financial services) (until 1998) and Hambrecht & Quist Group (investment banking) (until
1992); and President, National Association of Securities Dealers, Inc. (until 1987).
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Fred R. Millsaps (73) Director Since 1993 28 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
Principal Occupation During Past 5 Years:
Director of various business and nonprofit organizations; manager of personal investments (1978-present); and
formerly, Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978); Financial Vice
President, Florida Power and Light (1965-1969); and Vice President, Federal Reserve Bank of Atlanta (1958-
1965).
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3
Independent Directors serving until 2005 Annual Meeting of Shareholders:
Number of
Portfolios in
Franklin
Templeton
Investments
Fund Complex
Length of Time Overseen by
Name, Age and Address Position Served Director* Other Directorships Held
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Harris J. Ashton (70) Director Since 1993 135 Director, Bar-S Foods (meat
500 East Broward Blvd. packing company).
Suite 2100
Fort Lauderdale, FL
33394-3091
Principal Occupation During Past 5 Years:
Director of various companies; and formerly, Director, RBC Holdings, Inc. (bank holding company) (until
2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery
and craft centers) (until 1998).
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Frank J. Crothers (58) Director Since 1999 18 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
Principal Occupation During Past 5 Years:
Chairman, Atlantic Equipment & Power Ltd.; Vice Chairman, Caribbean Utilities Co. Ltd.; Director and
President, Provo Power Company Ltd.; Director, Caribbean Electric Utility Services Corporation (Chairman until
2002); and director of various other business and nonprofit organizations.
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S. Joseph Fortunato (70) Director Since 1993 136 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
Principal Occupation During Past 5 Years:
Attorney; and formerly, member of the law firm of Pitney, Hardin, Kipp & Szuch.
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Edith E. Holiday (51) Director Since 1996 86 Director, Amerada Hess
500 East Broward Blvd. Corporation (exploration and
Suite 2100 refining of oil and gas);
Fort Lauderdale, FL Hercules Incorporated
33394-3091 (chemicals, fibers and resins);
Beverly Enterprises, Inc.
(health care); H.J. Heinz
Company (processed foods
and allied products); RTI
International Metals, Inc.
(manufacture and distribution
of titanium); and Canadian
National Railway (railroad).
Principal Occupation During Past 5 Years:
Director or Trustee of various companies and trusts; and formerly, Assistant to the President of the United States
and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-
1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United
States Treasury Department (1988-1989).
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4
Interested Director serving until 2005 Annual Meeting of Shareholders:
Number of
Portfolios in
Franklin
Templeton
Investments
Fund Complex
Length of Time Overseen by
Name, Age and Address Position Served Director* Other Directorships Held
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**Nicholas F. Brady (73) Director Since 1993 22 Director, Amerada Hess
500 East Broward Blvd. Corporation (exploration and
Suite 2100 refining of oil and gas); C2, Inc.
Fort Lauderdale, FL (operating and investment
33394-3091 business); and H.J. Heinz
Company (processed foods and
allied products).
Principal Occupation During Past 5 Years:
Chairman, Templeton Emerging Markets Investment Trust PLC, Darby Overseas Investments, Ltd., Darby
Emerging Markets Investments LDC and Darby Technology Ventures Group, LLC (investment firms) (1994-
present); Director, Templeton Capital Advisors Ltd. and Franklin Templeton Investment Fund; and formerly,
Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read &
Co., Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982).
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Independent Directors serving until 2004 Annual Meeting of Shareholders:
Andrew H. Hines, Jr. (80) Director Since 1993 28 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
Principal Occupation During Past 5 Years:
Consultant, Triangle Consulting Group; and formerly, Executive-in-Residence, Eckerd College (1991-2002);
Chairman and Director, Precise Power Corporation (1990-1997); Director, Checkers Drive-In Restaurant, Inc.
(1994-1997); and Chairman of the Board and Chief Executive Officer, Florida Progress Corporation (holding
company in the energy area) (1982-1990) and director of various of its subsidiaries.
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Constantine D. Tseretopoulos (49) Director Since 1999 18 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
Principal Occupation During Past 5 Years:
Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and formerly,
Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore
Medical Center (1982-1985).
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5
Interested Director serving until 2004 Annual Meeting of Shareholders:
Number of
Portfolios in
Franklin
Templeton
Investments
Fund Complex
Length of Time Overseen by
Name, Age and Address Position Served Director* Other Directorships Held
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**Charles B. Johnson (70) Chairman of the Chairman of 135 None
One Franklin Parkway Board, Director the Board and
San Mateo, CA and Vice Director since
94403-1906 President 1995 and Vice
President since
1993
Principal Occupation During Past 5 Years:
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company
International; officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc.; and officer of 45 of the investment companies in Franklin Templeton Investments.
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* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment adviser or
affiliated investment advisers, and may also share a common underwriter.
** Nicholas F. Brady and Charles B. Johnson are "interested persons" of the
Fund as defined by the 1940 Act. The 1940 Act limits the percentage of
interested persons that can comprise a fund's board of directors. Mr.
Johnson is considered an interested person of the Fund due to his position
as an officer and director and major shareholder of Resources, which is the
parent company of the Fund's investment manager, and his position with the
Fund. Mr. Brady's status as an interested person results from his business
affiliations with Resources and Templeton Global Advisors Limited. Mr. Brady
and Resources are both limited partners of Darby Overseas Partners, L.P.
("Darby Overseas"). Mr. Brady is Chairman and shareholder of Darby Overseas
Investments, Ltd., which is the corporate general partner of Darby Overseas.
In addition, Darby Overseas and Templeton Global Advisors Limited are
limited partners of Darby Emerging Markets Fund, L.P. ("DEMF"). Mr. Brady
serves as Chairman of the corporate general partner of DEMF, and Darby
Overseas and its general partner own 100% of the stock of the general
partner of DEMF. Resources also is an investor in Darby Technology Ventures
Group, LLC ("DTV") in which Darby Overseas is a significant investor and for
which Darby Overseas has the right to appoint a majority of the directors.
Templeton Global Advisors Limited also is a limited partner in Darby--BBVA
Latin America Private Equity Fund, L.P. ("DBVA"), a private equity fund in
which Darby Overseas is a significant investor, and the general partner of
which Darby Overseas controls jointly with an unaffiliated third party. Mr.
Brady is also a director of Templeton Capital Advisors Ltd. ("TCAL"), which
serves as investment manager to certain unregistered funds. TCAL and
Templeton Global Advisors Limited are both indirect subsidiaries of
Resources. The nominees and remaining Directors of the Fund are Independent
Directors.
6
The following tables provide the dollar range of the equity securities of
the Fund and of all funds overseen by the Directors in the Franklin Templeton
Investments fund complex beneficially owned by the Fund's Directors as of March
31, 2003.
Independent Directors:
Aggregate Dollar Range of
Equity Securities in all Funds Overseen by
Dollar Range of Equity the Director in the Franklin Templeton
Name of Director Securities in the Fund Investments Fund Complex
- ----------------------------------------------------------------------------------------------
Harris J. Ashton............ 1--$10,000 Over $100,000
Frank J. Crothers........... None Over $100,000
S. Joseph Fortunato......... $1--$10,000 Over $100,000
Andrew H. Hines, Jr......... $10,001--$50,000 Over $100,000
Edith E. Holiday............ $1--$10,000 Over $100,000
Betty P. Krahmer............ $10,001--$50,000 Over $100,000
Gordon S. Macklin........... $10,001--$50,000 Over $100,000
Fred R. Millsaps............ Over $100,000 Over $100,000
Constantine D. Tseretopoulos None Over $100,000
Interested Directors:
Aggregate Dollar Range of
Equity Securities in all Funds Overseen by
Dollar Range of Equity the Director in the Franklin Templeton
Name of Director Securities in the Fund Investments Fund Complex
- ------------------------------------------------------------------------------------
Nicholas F. Brady. $10,001--$50,000 Over $100,000
Charles B. Johnson $10,001--$50,000 Over $100,000
How often do the Directors meet and what are they paid?
The role of the Directors is to provide general oversight of the Fund's
business, and to ensure that the Fund is operated for the benefit of
shareholders. The Directors anticipate meeting at least five times during the
current fiscal year to review the operations of the Fund and the Fund's
investment performance. The Directors also oversee the services furnished to
the Fund by Templeton Asset Management Ltd.-Hong Kong branch, the Fund's
investment manager ("TAML" or the "Investment Manager"), and various other
service providers. The Fund currently pays the Independent Directors and Mr.
Brady an annual retainer of $2,000 and a fee of $200 per Board meeting
attended. Directors serving on the Audit Committee of the Fund and other
investment companies in Franklin Templeton Investments receive a flat fee of
$2,000 per Audit Committee meeting attended, a portion of which is allocated to
the Fund. Members of a committee are not compensated for any committee meeting
held on the day of a Board meeting.
During the fiscal year ended August 31, 2002, there were seven meetings of
the Board, three meetings of the Audit Committee, and four meetings of the
Nominating and Compensation Committee. Each Director then in office attended at
least 75% of the aggregate of the total number of meetings of the Board and the
total number of meetings held by all committees of the Board on which the
Director served.
7
Certain Directors and officers of the Fund are shareholders of Resources and
may receive indirect remuneration due to their participation in management fees
and other fees received by the Investment Manager and its affiliates from the
funds in Franklin Templeton Investments. The Investment Manager or its
affiliates pay the salaries and expenses of the officers. No pension or
retirement benefits are accrued as part of Fund expenses.
Number of Boards within
Total Compensation from Franklin Templeton
Aggregate Compensation Franklin Templeton Investments Fund Complex
Name of Director from the Fund* Investments Fund Complex** on which Director Serves***
- ----------------------------------------------------------------------------------------------------------
Harris J. Ashton............ $3,009 $372,100 45
Nicholas F. Brady........... 3,009 140,500 15
Frank J. Crothers........... 3,064 100,000 12
S. Joseph Fortunato......... 3,009 372,941 46
Andrew H. Hines, Jr......... 3,035 209,500 16
Edith E. Holiday............ 3,015 273,635 29
Betty P. Krahmer............ 3,009 142,500 15
Gordon S. Macklin........... 3,009 363,512 45
Fred R. Millsaps............ 3,035 219,500 16
Constantine D. Tseretopoulos 3,064 102,500 12
- --------
* Compensation received for the fiscal year ended August 31, 2002.
** For the calendar year ended December 31, 2002.
*** We base the number of boards on the number of U.S. registered investment
companies in the Franklin Templeton Investments fund complex. This number
does not include the total number of series or funds within each investment
company for which the Board members are responsible. Franklin Templeton
Investments currently includes 49 registered investment companies, with
approximately 150 U.S. based funds or series.
The table above indicates the total fees paid to Directors by the Fund
individually and by all of the funds in Franklin Templeton Investments. These
Directors also serve as directors or trustees of other funds in Franklin
Templeton Investments, many of which hold meetings at different dates and
times. The Directors and the Fund's management believe that having the same
individuals serving on the boards of many of the funds in Franklin Templeton
Investments enhances the ability of each fund to obtain, at a relatively modest
cost to each separate fund, the services of high caliber, experienced and
knowledgeable Independent Directors who can more effectively oversee the
management of the funds.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in Franklin Templeton Investments, as
is consistent with their individual financial goals. In February 1998, this
policy was formalized through adoption of a requirement that each board member
invest one-third of the fees received for serving as a director or trustee of a
Templeton fund in shares of one or more Templeton funds and one-third of the
fees received for serving as a director or trustee of a Franklin fund in shares
of one or more Franklin funds until the value of such investments equals or
exceeds five times the annual fees paid to such board member. Investments in
the name of family members or entities controlled by a board member constitute
fund holdings of such board member for purposes of this policy, and a three
year phase-in period applies to such investment requirements for newly elected
board members. In implementing this policy, a board member's fund holdings
existing on February 27, 1998, were valued as of such date with subsequent
investments valued at cost.
8
Who are the Executive Officers of the Fund?
Officers of the Fund are appointed by the Directors and serve at the
pleasure of the Board. Listed below, for each Executive Officer, are their
name, age and address, as well as their position and length of service with the
Fund, and principal occupation during the past five years.
Name, Age and Address Position Length of Time Served
- --------------------------------------- ---------------------------------- -------------------------------------
Charles B. Johnson Chairman of the Board, Chairman of the Board and
Director and Vice President Director since 1995 and
Vice President since 1993
Please refer to the table "Interested Director serving until 2004 Annual Meeting of Shareholders" for additional
information about Mr. Charles B. Johnson.
- -------------------------------------------------------------------------------------------------------------------
Mark Mobius (66) President and Chief President since 1993 and Chief
Two Exchange Square Executive Officer-- Executive Officer--Investment
39th Floor Investment Management Management since 2002
Suites 3905-08
Hong Kong
Principal Occupation During Past 5 Years:
Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management
Ltd.; Executive Vice President and Director, Templeton Global Advisors Limited; officer of six of the
investment companies in Franklin Templeton Investments; officer and/or director, as the case may be, of some of
the subsidiaries of Franklin Resources, Inc.; and formerly, President, International Investment Trust Company
Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong
(1983-1986).
- ----------------------------------------------------------------------------------------------------------------
Jimmy D. Gambill (55) Senior Vice President and Since 2002
500 East Broward Blvd. Chief Executive Officer--
Suite 2100 Finance and Administration
Fort Lauderdale, FL 33394-3091
Principal Occupation During Past 5 Years:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of
50 of the investment companies in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------
Rupert H. Johnson, Jr. (62) Vice President Since 1996
One Franklin Parkway
San Mateo, CA 94403-1906
Principal Occupation During Past 5 Years:
Vice Chairman, Member--Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and
Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment
Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or
trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the
investment companies in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------
Harmon E. Burns (58) Vice President Since 1996
One Franklin Parkway
San Mateo, CA 94403-1906
Principal Occupation During Past 5 Years:
Vice Chairman, Member--Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and
Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director,
Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of some of
the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton
Investments.
- ----------------------------------------------------------------------------------------------------------------
9
Name, Age and Address Position Length of Time Served
- --------------------------------------- ---------------------------------- -----------------------------------
Martin L. Flanagan (42) Vice President Since 1993
One Franklin Parkway
San Mateo, CA 94403-1906
Principal Occupation During Past 5 Years:
President and Chief Financial Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial
Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director,
Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment
Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment
Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin
Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton
Investments.
- --------------------------------------------------------------------------------------------------------------
Jeffrey A. Everett (39) Vice President Since 2001
P.O. Box N-7759
Lyford Cay, Nassau Bahamas
Principal Occupation During Past 5 Years:
President and Director, Templeton Global Advisors Limited; officer of 15 of the investment companies in
Franklin Templeton Investments; and formerly, Investment Officer, First Pennsylvania Investment Research
(until 1989).
- --------------------------------------------------------------------------------------------------------------
John R. Kay (62) Vice President Since 1994
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
Principal Occupation During Past 5 Years:
Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.;
Senior Vice President, Franklin Templeton Services, LLC; and officer of one of the other subsidiaries of Franklin
Resources, Inc. and of 21 of the investment companies in Franklin Templeton Investments; and formerly, Vice
President and Controller, Keystone Group, Inc.
- --------------------------------------------------------------------------------------------------------------
Murray L. Simpson (65) Vice President and Since 2000
One Franklin Parkway Assistant Secretary
San Mateo, CA 94403-1906
Principal Occupation During Past 5 Years:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director of some of the
subsidiaries of Franklin Resources, Inc.; officer of 50 of the investment companies in Franklin Templeton
Investments; and formerly, Chief Executive Officer and Managing Director, Templeton Franklin Investment
Services (Asia) Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999).
- --------------------------------------------------------------------------------------------------------------
Barbara J. Green (55) Vice President and Secretary Vice President since 2000 and
One Franklin Parkway Secretary since 1996
San Mateo, CA 94403-1906
Principal Occupation During Past 5 Years:
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice President, Templeton
Worldwide, Inc.; officer of one of the other subsidiaries of Franklin Resources, Inc. and of 50 of the investment
companies in Franklin Templeton Investments; and formerly, Deputy Director, Division of Investment
Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special
Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers &
Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979).
- --------------------------------------------------------------------------------------------------------------
10
Name, Age and Address Position Length of Time Served
- -------------------------------------- ------------------------------------ ------------------------------------
David P. Goss (55) Vice President and Since 2000
One Franklin Parkway Assistant Secretary
San Mateo, CA 94403-1906
Principal Occupation During Past 5 Years:
Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; officer of 50 of the investment companies in Franklin Templeton Investments; and formerly,
President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin
Select Realty Trust (until 2000).
- ----------------------------------------------------------------------------------------------------------------
Michael O. Magdol (65) Vice President--AML Compliance Since 2002
600 Fifth Avenue
Rockefeller Center
New York, NY 10048-0772
Principal Occupation During Past 5 Years:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI
Banque, Arch Chemicals, Inc. and Lingnan Foundation; officer and/or director, as the case may be, of some of
the other subsidiaries of Franklin Resources, Inc.; and officer of 47 of the investment companies in Franklin
Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------
Bruce S. Rosenberg (41) Treasurer and Treasurer since 2000 and Chief
500 East Broward Blvd. Chief Financial Officer Financial Officer since 2002
Suite 2100
Fort Lauderdale, FL 33394-3091
Principal Occupation During Past 5 Years:
Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 21 of the investment companies in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires officers,
Directors and persons who own more than 10% of the Fund's common stock ("10%
beneficial owners") to file reports of ownership and changes in ownership with
the U.S. Securities and Exchange Commission ("SEC"). During the fiscal year
ended August 31, 2002, Michael O. Magdol inadvertently filed a late Form 3,
initial statement of beneficial ownership of securities, following his
appointment as an officer of the Fund in May 2002. In addition, the Fund
alleged in litigation described below under "Information About the Fund--Recent
Litigation" that the President and Fellows of Harvard College ("Harvard
College") were subject to, and had failed to file reports under, Section 16(a);
it is the Fund's understanding that Harvard disputes such allegation. Other
than the foregoing, no other officer, Director or 10% beneficial owner of the
Fund failed to file ownership reports on a timely basis for the fiscal year
ended August 31, 2002. This information is based upon review of the copies of
such forms received or written representations from the individuals required to
make Section 16(a) reports on the Fund's common stock.
PROPOSAL 2: TO APPROVE THE CONVERSION OF THE FUND FROM A CLOSED-END FUND
ORGANIZED AS A MARYLAND CORPORATION TO AN OPEN-END FUND ORGANIZED
AS A DELAWARE STATUTORY TRUST
The Directors unanimously recommend that you approve the conversion of the
Fund from a closed-end fund to an open-end fund. To implement the Conversion,
the Directors have approved an Agreement and Plan of Reorganization (the
"Plan"), substantially in the form attached to this Proxy Statement as Exhibit
A, that would change the Fund from a closed-end fund to an open-end fund and
also change the state and form of organization
11
of the Fund from a Maryland corporation to a newly formed Delaware statutory
trust named "Templeton China World Fund" (the "Trust"). This proposed
conversion will be referred to throughout this Proxy Statement as the
"Conversion." Shareholder approval of the Conversion will be deemed to be
approval of the Plan.
What will the Conversion mean for the Fund and its shareholders?
If the Conversion is effected following shareholder approval, the Trust
would operate as an open-end fund having the same principal executive offices
and substantially the same investment objective, policies and restrictions as
the Fund (including the changes to fundamental investment restrictions
described in Proposals 3 and 4 in this Proxy Statement). The trustees of the
Trust would be the same as the Directors of the Fund, including any persons
elected under Proposal 1. Similarly, the officers of the Trust would be the
same as the current officers of the Fund. The trustees and officers would
operate the Trust in essentially the same manner as they previously operated
the Fund, except for the differences discussed more fully below. The Board of
Trustees of the Trust has approved TAML as the investment manager of the Trust.
The Trust was formed solely for the purpose of becoming the successor
organization to, and carrying on the business of, the Fund. As the successor to
the Fund's operations, the Trust will adopt the Fund's notification of
registration under the 1940 Act. To accomplish the Conversion, the Plan
provides that the Fund will transfer all of its portfolio securities and any
other assets, subject to its liabilities, to the Trust on the effective date of
the Conversion (the "Closing Date"). In exchange for these assets and
liabilities, the Plan provides that, on the Closing Date, the Trust will issue
Advisor Class Shares of beneficial interest in the Trust to the Fund, which, in
turn, will distribute those Advisor Class Shares pro rata to you as a
shareholder of the Fund. Through this procedure, you will receive on the
Closing Date Advisor Class Shares of the Trust equivalent in number to, and
with the same net asset value ("NAV") as, the shares of the Fund ("Fund
Shares") owned by you immediately prior to the Closing Date. The Conversion is
designed to be tax-free for federal income tax purposes so that you will not
experience a taxable gain or loss when the Conversion is completed. The basis
and holding period of your shares in the Trust will be the same as the basis
and holding period of your shares in the Fund. As soon as practicable after the
Closing Date, the Fund will be dissolved and cease its corporate existence.
If the Conversion is not approved by shareholders, the Fund will continue to
operate as a closed-end fund organized as a Maryland corporation. The Board,
however, will call a special meeting of shareholders to be held not later than
December 31, 2003, to consider such Conversion proposal again. If approved by
shareholders of the Fund, the Conversion will be completed within 60 days
following the date of such approval or as soon thereafter as practicable.
Why are the Directors recommending approval of the Conversion?
On November 13, 2002, the Board of Directors of the Fund announced its
determination to recommend to shareholders at the Fund's Annual Meeting the
approval of a proposal to convert the Fund from a closed-end fund into an
open-end fund. The Board took this action because the Directors, including all
of the Independent Directors, believed it was in the best interests of the Fund
and its shareholders. In determining to recommend the Conversion, the Board
considered, among other things, the present and historical discount of the
Fund's market share price to the Fund's net asset value (the "Discount"), the
"trigger provision" (discussed below) in the Fund's corporate charter (the
"Charter"), other actions the Board had taken in prior years designed to
address the Discount (including open-market repurchase programs and the tender
offer conducted in 2002), the investment goals and policies of the Fund,
short-term and long-term investment performance and expense levels, the
portfolio composition and size of the Fund, the expenses related to the
Conversion, and communications with representatives of the President and
Fellows of Harvard College, a 30% stockholder ("Harvard College").
Meetings of the Board of Directors of the Fund were held on October 11,
November 12, and December 3, 2002, and February 25, 2003 to consider the
proposed Conversion. The Directors requested and received from TAML written
materials containing relevant information including fee and expense
information, on an actual,
12
pro forma and future estimated basis, and performance data. Additional
information reviewed and considered by the Board included: (i) the portfolio
composition and size of the Fund; (ii) the extent of stock ownership by certain
institutional investors; (iii) the expenses related to the Conversion; and (iv)
the tax consequences of the Conversion to the Fund and its shareholders. The
Board also considered the advantages and disadvantages to the Fund of remaining
closed-end and converting to an open-end fund. These advantages and
disadvantages are described in the next section, which shareholders are urged
to read carefully, entitled "What are the Principal Differences Between
Open-End and Closed-End Funds?"
After the Board became aware that Harvard College had filed its own proxy
statement at the end of December 2002, the Board considered and evaluated each
of the proposals contained in Harvard College's proxy statement. As part of the
Settlement Agreement described under the section entitled "Information About
the Fund --Recent Litigation" below, Harvard has agreed to withdraw all of its
shareholder proposals for the Meeting and announced that it intends to support
the open-ending proposal with the redemption-in-kind feature described below.
In considering the advantages of converting to an open-end fund, the
Directors noted that Fund shareholders will have the right to have shares
redeemed at NAV and would no longer hold shares in a fund whose market value
varies from its NAV. In considering the disadvantages of converting to an
open-end fund, particular attention was given to the potential negative impact
on the Fund's NAV arising from the need to sell portfolio securities in order
to raise cash to meet redemption requests, as well as from the anticipated
increase in the Fund's expense ratio. In this respect, the Directors believe
that the relatively small size of the Fund's portfolio, combined with TAML's
expertise and the marketing of the Fund through a continuous public offering of
its shares, are factors that may help to mitigate such negative impact. Other
factors that may help mitigate this negative impact include the Fund's
imposition of a fee on redemptions made within six months of the Conversion as
well as the Fund's ability to redeem-in-kind large redemptions meeting certain
conditions, as discussed in further detail later in this Proposal 2. The
Directors cannot, however, quantify the impact on NAV that may result from a
higher expense ratio or from raising liquidity to meet redemptions, because
this will be affected by market forces and other factors beyond the Board's
control, nor can the Board assure that such impact will not be significant,
particularly in the short-term following the Conversion.
The Fund's Charter contains a provision (the "Trigger Provision") requiring
the Fund's Directors to submit a proposal to shareholders to convert the Fund
from a closed-end fund to an open-end fund if, as of August 31, 2003 (the "Test
Date"), either (i) the shares of the Fund have traded at a Discount of 15% or
more, based on the closing sale price as of the last trading day of each week
during the fiscal quarter immediately preceding the Test Date, or (ii) the
shares of the Fund have traded at a price below $15 per share at any time
during the fiscal quarter immediately preceding the Test Date. Given the
current expectation that the conditions of the Trigger Provision would be met
on June 1, 2003 and shareholder concerns regarding the Discount, the Board of
Directors decided to present this Proposal at the Fund's Annual Meeting rather
than holding a special meeting later in the year that would likely be required
to accommodate the Trigger Provision.
The Directors also determined that investment companies formed as Delaware
statutory trusts have certain advantages over investment companies organized as
Maryland corporations and that the conversion of the Fund to an open-end fund
should be effectuated through the Conversion. Under Delaware law, investment
companies are able to simplify their operations by reducing administrative
burdens. For example, Delaware law allows greater flexibility in drafting and
amending an investment company's governing documents, which can result in
greater efficiencies of operation and savings for an investment company and its
shareholders. Delaware law also provides favorable state tax treatment. Most
significantly, an investment company formed as a Delaware statutory trust,
unlike one formed as a Maryland corporation, need not pay an organization and
capitalization tax on the aggregate par value of shares it issues to
shareholders. Furthermore, there is a well-established body of Delaware legal
precedent in the area of corporate law that may be relevant in deciding issues
pertaining to the Trust. This could benefit the Trust and its shareholders by,
for example, making litigation involving the interpretation of provisions in
the Trust's governing documents less likely or, if litigation should be
initiated, less
13
burdensome or expensive. Accordingly, on February 25, 2003, the Board of
Directors of the Fund, including all of its Independent Directors, approved the
Plan and decided to recommend that the conversion of the Fund to an open-end
fund be effected through the Conversion.
What are the principal differences between open-end and closed-end funds?
In evaluating the Conversion, shareholders of the Fund should also consider
(i) the important distinctions between open-end and closed-end funds; (ii) how
those distinctions bear upon management of the Fund and the Trust; and (iii)
the relative risks associated with an investment in them.
Premium and Discount. The Fund is a closed-end fund that is listed on the
NYSE. The shares of closed-end funds that are traded on a secondary market,
like the NYSE, may trade at either a discount or a premium to their NAV per
share. Historically, Fund Shares have generally traded at a discount to their
NAV per share. In contrast, the 1940 Act generally requires that the shares of
an open-end fund, such as the Trust, be purchased or sold by the Fund (not in a
secondary market) at their respective NAV per share, plus any applicable sales
charge or redemption fee, on any day that the open-end fund is open for
business. Thus, shares of the Trust, including Advisor Class Shares, will not
be sold at a discount or a premium because they will not trade on a secondary
market at a discount or a premium to their NAV.
Portfolio Management. The Fund was originally established as a closed-end
fund because of its investment objective: seeking long-term capital
appreciation by investing primarily in equity securities of "China companies."
"China companies" are defined in the Fund's Prospectus as companies (i)
organized under the laws of or with a principal office in, the People's
Republic of China ("China"), Hong Kong, or Taiwan, (ii) for which the principal
trading market is in China, Hong Kong or Taiwan, and (iii) that derive at least
50% of their revenues from goods or services sold or produced, or have at least
50% of their assets in China. As a closed-end fund, the Fund is not subject to
a limitation on the percentage of its assets held in illiquid securities
(securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which a Fund has valued them).
Closed-end funds, like the Fund, are permitted to invest in illiquid securities
without limitations in large part because they do not need to retain cash
reserves or be able to liquidate portfolio securities into cash in order to
meet redemptions, unless they announce a tender offer of their shares. This has
given TAML the flexibility to invest the Fund's assets in less liquid
securities that presented attractive long-term opportunities. While investing
in emerging markets like China involves certain risks, such as the relatively
small size and lesser liquidity of the markets involved, TAML believes that the
markets for the securities of China Companies in which the Fund invests have
become more liquid than they were when the Fund was started.
As an open-end fund, however, the Trust must be managed with the ability to
meet redemptions, which generally must be honored within seven days after
receipt of requests in good order. Payments to shareholders that redeem their
shares generally must be paid in cash, the source of which typically is
cash-on-hand or cash raised by the sale of portfolio securities. For this
reason, under interpretations by the SEC staff, open-end funds are limited in
the amount of their assets that may be invested in illiquid assets to 15% of
net assets. Therefore, the Trust's investment management flexibility is limited
by the need to be able to redeem Trust shares. This may be mitigated by the
relatively small size of the Fund's portfolio, TAML's expertise, and the
Trust's ability to engage in a continuous public offering of its shares,
although the effect on NAV cannot be quantified and may be significant in the
short-term.
Continuous Public Offering. The Trust, as an open-end fund that will engage
in a continuous public offering of its shares, has the potential for growth in
size through sales of additional shares. A larger asset base can provide
greater flexibility in portfolio management and could potentially reduce per
share expenses over time by spreading expenses over the larger asset base
(although expenses are expected to increase after the Conversion because of
anticipated redemptions). Even though an open-end fund like the Trust must be
managed in anticipation of possible redemptions, as the size of the fund
increases, its management options may increase proportionately. Similarly, as
the size of a fund increases, its fixed operating costs may be spread over the
larger asset base, possibly resulting in lower costs per share.
14
In contrast, a closed-end fund, like the Fund, does not present the same
potential for growth because it does not engage in a continuous offering of its
shares. In order to achieve growth through sales, the Fund would be required to
engage in an additional underwritten public offering or a rights offering, both
of which are expensive and time consuming.
However, unlike the Trust, whose size will fluctuate both because of sales
and redemptions of its shares as well as market appreciation and depreciation
in portfolio assets, the size of the Fund is generally affected only by market
appreciation and depreciation of its assets. As a result, the Trust may have to
maintain larger cash positions as compared to the Fund to meet redemptions or
as a result of new sales. For the same reason, the Trust's expense ratio may be
more volatile as compared to the Fund. In addition, if the Fund converts to an
open-end fund, its shares would be delisted from the NYSE, although
shareholders of the Trust would still have liquidity through their ability to
redeem their shares on any day that the Trust is open for business.
Purchases and Redemptions. Advisor Class Shares will be sold on a
continuous basis at NAV per share, without a sales charge. The NAV for each
class of shares of the Trust will be calculated each business day at the close
of trading on the NYSE. The NAV for each Advisor Class Share will be calculated
by dividing the total net assets attributable to that class by the number of
its shares outstanding. There are certain initial minimum investments, which
vary depending upon the purchaser. Subsequent investments generally must be at
least $50.
Advisor Class Shares may be sold (redeemed) at any time at NAV, subject to
any applicable redemption fees, including those described below. Advisor Class
Shares generally may also be exchanged for Advisor Class shares (or, if not
available, Class A or Class Z shares) of most other funds in Franklin Templeton
Investments, subject to certain limitations as provided in the prospectus of
the respective fund. Because an exchange is technically a sale and a purchase
of shares, an exchange is a taxable transaction.
Because the Fund is a closed-end fund, there are no exchange privileges for
its shares. In addition, the Fund does not typically engage in the repurchase
and selling of its shares.
The advantages that may flow from the potential increase in the size of the
Trust should be weighed against the disadvantages associated with a potential
diminution in size arising from redemptions. The Trust anticipates significant
redemptions immediately following the Conversion. While increased size may
result in improved management flexibility and the achievement of per share cost
savings and lower expenses, a contraction in the size of the Trust may
correspondingly result in reduced investment management flexibility and higher
expenses. If the Conversion is completed and former Fund shareholders redeem
their shares, absent new sales, the size of the Trust will be reduced
commensurately to the extent of those redemptions. Redemptions also may
increase significantly, for example, should the asset class for funds investing
in China, of which the Trust is a part, fall out of favor in the market place.
The need to sell portfolio securities to meet redemption requests may have
adverse tax consequences to shareholders remaining in the Trust. In the event
of a very large amount of redemptions, the Trust might be required to sell
appreciated securities to meet redemption requests, and capital and/or ordinary
gains might be generated. This would increase the amount of taxable
distributions to remaining shareholders and net realized capital gains would be
allocated among a smaller base of remaining shareholders than would otherwise
be the case.
Although redemptions of Trust shares after the Conversion (if approved) are
likely, there are several steps that the Trust will take to help mitigate the
adverse effects of such redemptions:
. The Trust will engage in a continuous public offering. Although other
classes of the Trust may be charged a 12b-1 fee, the Advisor Class shares
will not, so its class expense ratio will not be increased as a result of
distribution fees.
15
. Former Fund shareholders who redeem or exchange Advisor Class Shares
received in the Conversion within six months of the Closing Date will be
assessed a redemption fee of 2%. These fees will be retained by the Trust
and are charged in order to help defray the transaction costs associated
with such redemptions and exchanges, including the brokerage expenses
incurred in connection with the liquidation of portfolio securities
necessitated by the redemption, processing or other transaction costs
incident to the redemption, odd-lot premiums, transfer taxes,
administrative fees, custodian fees, and registrar and transfer agent
fees.
. The Trust intends to elect to be governed by Rule 18f-1 under the 1940
Act whereby it will have the right to satisfy large redemptions through
the direct transfer of portfolio securities to the redeeming shareholder,
subject to the delivery of the lesser of $250,000 or 1% of the Trust's
net assets in cash to the redeeming shareholder. If the Trust redeems its
shares by delivery of portfolio securities in-kind, the redeeming
shareholder would bear the transaction costs necessary to sell those
portfolio securities. As a general rule, however, redemptions-in-kind do
not generate capital gains for an open-end fund.
Dividends and Distributions. The Fund has a policy of distributing all of
its net investment income annually. The Trust also will have a policy of
distributing all of its net investment income annually. The Trust and the Fund
both distribute their net realized short-term and net realized long-term
capital gains, if any, at least annually. The amount of any distributions will
vary, and there is no guarantee that the Trust or the Fund will pay either
income dividends or capital gain distributions. The Trust, like the Fund,
expects to qualify for treatment under Part I of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), after the completion of the
Conversion.
Dividends and distributions from the Trust and the Fund, whether you receive
them in cash or in additional shares, are generally subject to federal income
tax as either ordinary income or capital gains. Shareholders who are generally
not subject to income tax, however, may not be required to pay income taxes on
such dividends and distributions. Like the Fund, the Trust will send annual
statements that reflect the tax status of distributions received.
The Fund offers a dividend reinvestment and cash purchase plan pursuant to
which shareholders may elect to have all distributions automatically reinvested
by Mellon Bank, N.A., the Fund's plan administrator. Participants in this plan
also have the option of submitting additional payments to the plan
administrator for the purchase of additional Fund shares for their account.
More information about the Fund's Dividend Reinvestment and Cash Purchase Plan
is available in the Fund's Annual Report to Shareholders for the fiscal year
ended August 31, 2002, which has previously been provided to Fund shareholders,
and is available upon request.
Unless a shareholder selects a different option, the Trust will
automatically reinvest all dividends and distributions in additional Advisor
Class Shares at NAV without the imposition of trading costs. Specific
instructions explaining how to select a different option will be outlined in
the Trust's Prospectus, when available.
16
Expenses. The expenses of the Trust are expected to be higher than those of
the Fund. The table below describes the fees and expenses that you pay if you
hold Fund Shares. The table also shows the estimated fees and expenses for the
Advisor Class Shares of the Trust after the Conversion. The purpose of the
table is to assist you in understanding the various costs and expenses that you
will bear directly or indirectly as a shareholder of the Trust.
FEE TABLE FOR SHARES OF THE FUND AND THE TRUST
Actual+ Projected++
-------- -----------
The Trust--
Advisor
Class After
The Fund Conversion
-------- -----------
Shareholder Transaction Expenses*
Maximum Sales Charge (as a percentage of Offering Price) None None
Paid at time of purchase None None
Paid at time of redemption None None
Redemption Fee None 2.00%/1/
Annual Fund Operating Expenses
(as percentage of average weekly net assets)
Management Fees 1.25% 1.25%
Distribution and Service (12b-1) Fees None None
Other Expenses 0.41% 0.72%/2/
Administration 0.25% 0.20%
Transfer Agency 0.03% 0.30%/3/
Other 0.13% 0.22%
---- ----
Total Annual Fund Operating Expenses 1.66% 1.97%
==== ====
- --------
+ Information for the Fund is provided for the 12-month period ended August
31, 2002.
++ Projected expenses based on anticipated Trust expenses, assuming 50%
redemptions following the Conversion.
* If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
/1/ Applied to former Fund shareholders who redeem or exchange Advisor Class
Shares received in the Conversion within six months of the Closing Date.
After six months, there is no redemption fee.
/2 /Other expenses of the Trust are anticipated to be higher than those of the
Fund, in large part because of increased transfer agency costs resulting
from: (1) anticipated redemptions immediately following the Conversion; (2)
increased account activity associated with open-end funds; and (3) more
diverse account types.
/3/ Transfer agency costs are estimated based on another fund in Franklin
Templeton Investments of similar size.
Example. This example can help you compare the cost of investing in Advisor
Class Shares of the Trust after the Conversion with the cost of investing in
the Fund. It assumes:
. You invest $10,000 for the periods shown;
. Your investment has a 5% return each year;
. The Fund's and the Trust's operating expenses remain the same; and
. You sell your shares at the end of the periods shown.
17
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
The Fund $169 $523 $ 902 $1,965
Projected Trust--Advisor Class
(after Conversion) $200 $618 $1,062 $2,296
What effect will the Conversion have on management of the Trust?
Under the 1940 Act, the shareholders of an investment company are entitled
to vote on the initial members of the board of directors or board of trustees
and the initial approval of the investment management agreement for the
investment company. Thus, if the Conversion is approved, shareholders of the
Trust would need to elect trustees (the members of the board of a Delaware
statutory trust are referred to as "trustees") and approve an investment
management agreement or the Trust would not be in compliance with the 1940 Act.
For investment companies that have already commenced operations and have public
shareholders, these matters typically must be submitted to shareholders for
their consideration at a meeting specially called for that purpose. In the case
of a reorganization from a Maryland corporation to a Delaware statutory trust
such as that contemplated by the Conversion, a meeting could not be called
until after the completion of the Conversion because only then would there
exist public shareholders of the Trust who could vote. Such a procedure would
be both impractical and expensive.
Therefore, in accordance with standard practice and announced positions of
the staff of the SEC, the Directors have determined that it is in the best
interests of the Fund's shareholders to avoid the considerable expense of an
extra shareholder meeting to obtain these approvals following completion of the
Conversion. Thus, the Directors have determined that shareholder approval of
the Conversion (Proposal 2) would, for purposes of the 1940 Act, also
constitute shareholder approval of: (1) the election, as trustees of the Trust,
of the Directors of the Fund who are in office at the time of the Conversion,
including those Directors elected at this Meeting pursuant to Proposal 1; and
(2) the new investment management agreement between the Trust and TAML, which
is substantially identical to the investment management agreement currently in
effect between the Fund and TAML.
Mechanically, this will be accomplished, prior to the Closing Date, by
issuing a single share of each class of shares of beneficial interest in the
Trust to the Fund, and having the Fund vote as sole shareholder of the Trust
FOR the election of the trustees of the Trust and approval of the investment
management agreement with TAML as specified above. This action will enable the
Trust to satisfy the requirements of the 1940 Act without involving the time
and expense of an extra shareholder meeting. As a result, if this Proposal 2 is
approved, TAML will be the Investment Manager for the Trust.
Shareholders are also entitled to vote under the 1940 Act on changes in
fundamental policies. The changes to the fundamental investment restrictions,
as described in Proposals 3 and 4 in this Proxy Statement, will already have
been adopted by the Trust in its open-end fund registration statement that it
will file with the SEC. As a result, it will not be necessary for the Fund, as
the initial shareholder of the Trust, to approve the Trust's fundamental
policies.
What effect will the Conversion have on other services?
Distribution. Franklin Templeton Distributors, Inc. ("Distributors") will
act as the principal underwriter in the continuous public offering of the
Trust's shares pursuant to a Distribution Agreement approved by the Trust's
Board of Trustees. Distributors is located at One Franklin Parkway, San Mateo,
California 94403-1906.
Advisor Class Shares will not pay any distribution fees. Distributors will
pay the expense of the distribution of Advisor Class Shares, including
advertising expenses and the costs of printing sales material and prospectuses
18
used to offer Advisor Class Shares to the public. The Trust will pay the
expenses of preparing and printing amendments to its registration statement and
prospectuses (other than those necessitated by the activities of Distributors)
and of sending prospectuses to existing shareholders. Other classes of shares
of the Trust, however, may pay a distribution fee, commonly known as a "12b-1
fee," to Distributors, in accordance with the plans under Rule 12b-1 of the
1940 Act which have been adopted by the Trust's Board of Trustees for each of
the other classes.
Because the Fund is a closed-end fund with shares that are listed and traded
on the NYSE, there is no continuous public offering of its shares.
Shareholder Servicing Agent, Transfer Agent and Dividend Paying Agent. The
shareholder servicing agent, transfer agent and dividend paying agent for the
Trust will be Franklin Templeton Investor Services, LLC ("Investor Services"),
an indirect, wholly owned subsidiary of Resources located at 100 Fountain
Parkway, St. Petersburg, Florida 33716-1205. Mellon Investor Services LLC
currently serves as transfer agent, registrar and dividend disbursing agent for
the Fund.
Custody Services. JPMorgan Chase Bank, MetroTech Center, Brooklyn, New York
11245, currently acts as the custodian of the securities and other assets of
the Fund and will also do so for the Trust.
Administrative Services. Franklin Templeton Services, LLC ("FT Services"),
an indirect, wholly owned subsidiary of Resources, will provide certain
administrative services to the Trust, including: (i) providing office space,
telephone, office equipment and supplies for the Trust; (ii) providing trading
desk facilities for the Trust (unless provided by TAML); (iii) authorizing
expenditures and approving bills for payment on behalf of the Trust; (iv)
supervising preparation of periodic reports to shareholders, notices of
dividends, capital gains distributions and tax credits, and attending to
correspondence and other communications with individual shareholders; (v)
coordinating the daily pricing of the Trust's investment portfolio, providing
fund accounting services and coordinating trade settlements; (vi) monitoring
relationships with other service providers to the Trust; and (vii) supervising
compliance by the Trust, including compliance with the federal securities laws,
federal tax laws, and other applicable state and federal laws, maintaining
books and records for the Trust (other than those maintained by the custodian
and transfer agent), and preparing and filing of tax reports, as well as
providing executive, clerical and secretarial personnel needed to carry out and
support services incidental to carrying out the above responsibilities.
FT Services serves as administrator for the Fund. In addition, Princeton
Administrators, L.P. acts as sub-administrator for the Fund.
How do the Maryland corporate law and the Fund's governing documents compare
to the Delaware statutory trust law and the Trust's governing documents?
If the Fund's shareholders approve the Conversion, the Fund's shareholders
will receive Advisor Class Shares of the Trust on the Closing Date. The
following summary compares certain rights and characteristics of the shares of
the Fund to the Advisor Class Shares of the Trust. The summary is qualified in
its entirety by the more complete comparisons of Maryland corporate law and
Delaware statutory trust law, and of the governing documents of the Fund and
the Trust attached as Exhibit B to the Proxy Statement, which is entitled "A
Comparison of Governing Documents and State Law."
The Maryland General Corporation Law (the "Maryland Code") contains
provisions specifically designed for investment companies, such as the Fund,
which take into account their unique structure and operations, and allow such
investment companies to operate more efficiently by reducing their
administrative burdens. For example, the charter or bylaws of an investment
company organized as a Maryland corporation may provide that an annual
shareholders' meeting is not required in any year unless required by the
federal securities laws. Because the Maryland Code contains detailed provisions
regarding corporate governance matters, it may provide Maryland corporations,
such as the Fund, more specific guidance on certain corporate law issues.
19
Reorganizing the Fund from a Maryland corporation to a Delaware statutory
trust is expected to provide many benefits to the Fund and its shareholders.
Funds formed as Delaware statutory trusts under the Delaware Statutory Trust
Act (the "Delaware Act") are granted a significant amount of operational
flexibility, resulting in efficiencies of operation that translate into savings
for a fund, such as the Trust, and its shareholders. For example, the Delaware
Act authorizes management to take various actions without requiring shareholder
approval if permitted by the governing instrument. Additionally, a fund formed
as a Delaware statutory trust need not hold an annual shareholders' meeting in
any year unless required by the federal securities laws or the fund's governing
instrument. Unlike the Maryland Code, the Delaware Act also permits any
amendment to the statutory trust's governing instrument without the need for a
state filing, which can reduce administrative burdens and costs.
The Trust was formed as a statutory trust on December 3, 2002 pursuant to
the Delaware Act. The operations of a Delaware statutory trust formed under the
Delaware Act are governed by a declaration of trust and by-laws. The Trust's
Agreement and Declaration of Trust ("Declaration of Trust") and By-Laws
streamline many of the provisions in the Fund's Charter and By-Laws, and should
thus lead to enhanced flexibility in management and administration as compared
to its current operation as a Maryland corporation. As a Delaware statutory
trust, the Trust should be able to adapt more quickly and cost effectively to
new developments in the fund industry and the financial markets.
Moreover, to the extent provisions in the Trust's Declaration of Trust and
By-Laws are not addressed by the Delaware Act but are addressed by rules and
principles established under Delaware corporation law and the laws governing
other Delaware business entities (such as limited partnerships and limited
liability companies), the Delaware courts may look to such other laws to help
interpret provisions of the Trust's Declaration of Trust and By-Laws. Applying
this body of law to the operation of the Trust should prove beneficial because
these laws are extensively developed and business-oriented. In addition,
Delaware's Chancery Court is dedicated to business law matters, which means
that the judges tend to be more specialized and better versed in the nuances of
the law that will be applied to the Trust. These legal advantages make more
certain the resolution of legal controversies and help to reduce legal costs
resulting from uncertainty in the law.
The Trust has authorized an unlimited number of shares of beneficial
interest without par value. As of the Closing Date, outstanding shares of the
Trust will be fully paid, nonassessable, freely transferable, and have no
preemptive or subscription rights. Shares of the Trust and the Fund each have
one vote per full share and a proportionate fractional vote for each fractional
share. Both the Trust and Fund provide for noncumulative voting in the election
of their Trustees/Directors. The Trust will also have the same fiscal year as
the Fund.
While former Fund shareholders, as holders of Advisor Class Shares of the
Trust, will have similar distribution and voting rights as they currently have
as Fund shareholders, there are certain differences. The organizational
structures differ in record date parameters for determining shareholders
entitled to notice, to vote and to a distribution, and differ in the proportion
of outstanding shares required to vote on certain matters.
The Fund is required by the rules of the NYSE and its By-Laws to hold annual
shareholder meetings. The Trust is not required by its governing instrument to
hold annual shareholder meetings, but shareholder meetings will be called when
deemed necessary or desirable by the Trust's Board of Trustees, or to the
extent required by the 1940 Act, by the chairperson of the Board, or at the
request of holders of 10% of the outstanding shares if such shareholders pay
the reasonably estimated cost of preparing and mailing the notice of such
meeting, for the purpose of electing trustees. With respect to shareholder
inspection rights of a fund's books and records, the Fund and the Trust each
provide certain inspection rights to its shareholders at least to the extent
required by applicable law.
Unlike the Fund, the Trust is authorized to issue series and classes and
will have more than one class of shares. Shareholders of the Trust are entitled
to vote by series or class where any matter affects only the interest of some
but not all series or classes. The different classes of the Trust may be
subject to different expenses, such
20
as different 12b-1 fees, and may also be subject to different sales charges,
including contingent deferred sales charges. However, the Advisor Class shares
of the Trust that shareholders of the Fund would receive in the Conversion
would not be subject to any 12b-1 fees or sales loads.
Under the Maryland Code, the shareholders of the Fund are not subject to any
personal liability for any claims against, or liabilities of, the Fund solely
by reason of being or having been a shareholder of the Fund. Under the Delaware
Act, shareholders of the Trust will be entitled to the same limitation of
personal liability as is extended to shareholders of a private corporation
organized for profit under the General Corporation Law of the State of Delaware.
A final, significant difference between the rights of the Fund shareholders
and those of shareholders of the Trust is that, because the Trust is an
open-end fund, shares of the Trust must be repurchased by the Trust when
offered by their shareholders for redemption, assuming any such shareholder
complies with the provisions set forth in the governing instruments and
prospectus of the Trust.
Will the Conversion result in any tax consequences for shareholders?
The Conversion is designed to be tax-free for federal income tax purposes so
that you will not experience a taxable gain or loss when the Conversion is
completed. The basis and holding period of your shares in the Trust will be the
same as the basis and holding period of your shares in the Fund. Consummation
of the Conversion is subject to receipt of a legal opinion from the law firm of
Stradley Ronon Stevens & Young, LLP that, under the Code, the exchange of
assets of the Fund for the shares of the Trust, the transfer of such shares to
the holders of Fund Shares, and the liquidation and dissolution of the Fund
pursuant to the Plan, will not give rise to the recognition of income, gain or
loss for federal income tax purposes to the Fund, the Trust, or the
shareholders of the Fund or the Trust.
What if I hold certificates representing shares of the Fund?
If the Conversion is approved then, under the Plan, shareholders of the Fund
will have the right to deliver their shares certificates of the Fund in
exchange for share certificates of the Trust. However, a shareholder need not
deliver such certificates to the Trust unless the shareholder so desires, as
all outstanding shares of the Fund on the Closing Date will be automatically
converted to Advisor Class shares of the Trust.
What if I choose to sell my shares at any time?
You may continue to trade your Fund Shares on the NYSE until the close of
trading on the business day before the Closing Date.
What is the effect of my voting "FOR" the Conversion?
By voting "FOR" the Conversion, you will be agreeing to become a shareholder
of an open-end investment company that has been formed as a Delaware statutory
trust with TAML as the Investment Manager, and with trustees, investment
objectives and policies that are substantially the same as those in place for
the Fund, except for the differences discussed in connection with this Proposal
2 and Proposals 3 and 4 described below.
THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL 2.
INTRODUCTION TO PROPOSALS 3 AND 4
The Fund is subject to a number of fundamental investment restrictions that
either are: (1) specifically for closed-end funds; (2) more restrictive than
those required under present law for either open-end or closed-end funds; (3)
no longer required for either open-end or closed-end funds; or (4) adopted in
response to regulatory,
21
business or industry conditions that no longer exist. Under the 1940 Act,
"fundamental" investment restrictions may be changed or eliminated only if
shareholders approve such action. The Board is recommending that shareholders
approve the amendment or elimination of certain of the Fund's fundamental
investment restrictions, principally to: (1) accommodate the proposed
Conversion from a closed-end fund to an open-end fund; (2) conform the Fund's
fundamental investment restrictions to the majority of the funds in Franklin
Templeton Investments; and (3) update those current restrictions that are more
restrictive than is required under the federal securities laws. In general, the
proposed amendments would: (1) simplify, modernize and standardize the
fundamental investment restrictions that are required to be stated by a fund
under the 1940 Act; and (2) eliminate those fundamental restrictions that are
no longer required by the federal securities laws, interpretations of the SEC
or state law, as preempted by the National Securities Markets Improvement Act
of 1996 ("NSMIA"). Because the proposed amendments are designed to be
applicable to either a closed-end fund or an open-end fund, the proposed
amendments will be effective immediately whether or not Proposal 2 is approved
and the Fund is converted to an open-end fund.
The Board believes there are several distinct advantages to revising the
Fund's fundamental investment restrictions at this time. First, certain of the
Fund's investment restrictions reflect the Fund's current status as a
closed-end fund. These investment restrictions need to be amended in connection
with its proposed Conversion. Second, by reducing the total number of
investment restrictions that can be changed only by a shareholder vote, the
Board and the Investment Manager believe that the Fund will be able to minimize
the costs and delays associated with holding future shareholders' meetings to
revise fundamental policies that become outdated or inappropriate. The Board
and the Investment Manager also believe that the Investment Manager's ability
to manage the Fund's assets in a changing investment environment will be
enhanced because the Fund will have greater investment management flexibility
to respond to market, industry, regulatory or technical changes by seeking
Board approval only when necessary to revise certain investment policies.
Finally, the standardized fundamental investment restrictions are expected to
enable the Fund to more efficiently and more easily monitor portfolio
compliance.
The proposed standardized fundamental investment restrictions cover those
areas for which the 1940 Act requires the Fund to have fundamental restrictions
and are substantially similar to the fundamental investment restrictions of
other funds in Franklin Templeton Investments that have recently amended their
investment policies. The proposed standardized amendments will not affect the
Fund's investment objectives or its current principal investment strategies.
Although the proposed amendments will give the Fund greater flexibility to
respond to possible future investment opportunities, the Board does not
anticipate that the changes, individually or in the aggregate, will result in a
material change in the current level of investment risk associated with
investment in the Fund, nor does the Board anticipate that the proposed changes
in fundamental investment restrictions will materially change the manner in
which the Fund is currently managed and operated, other than those changes to
the Fund's investment policies and strategies necessitated by the proposed
Conversion. However, the Board may change or modify the way the Fund is managed
in the future, as contemplated by the proposed amendments to, or elimination
of, the applicable investment restrictions. Should the Board in the future
modify materially the way the Fund is managed to take advantage of such
increased flexibility, the Fund will make the necessary disclosures, including
amending its prospectus and statement of additional information if the
Conversion is completed.
PROPOSAL 3: TO APPROVE AMENDMENTS TO CERTAIN OF THE FUND'S INVESTMENT
RESTRICTIONS (this Proposal involves separate votes on
Sub-Proposals 3a-3f)
Certain of the Fund's existing investment restrictions, together with the
recommended changes to the investment restrictions, are detailed in Exhibit C,
which is entitled "Fundamental Investment Restrictions Proposed to be Amended
or Eliminated." Shareholders are requested to vote separately on each
Sub-Proposal in Proposal 3. Any Sub-Proposal that is approved by shareholders
will be effective immediately. The Board of Directors recommends unanimously a
vote "FOR" each Sub-Proposal.
22
Sub-Proposal 3a: To amend the Fund's fundamental investment restriction
regarding borrowing and senior securities.
The 1940 Act requires investment companies to impose certain limitations on
borrowing activities and the Fund's borrowing limitations must be fundamental.
The 1940 Act also requires the Fund to have an investment policy describing its
ability to issue senior securities. The Fund currently has one fundamental
investment policy covering both activities. Management proposes that such
policies be amended and set forth in two separate policies as further described
below.
Borrowing. The 1940 Act limitations on borrowing are generally designed to
protect shareholders and their investment by restricting a fund's ability to
subject its assets to the claims of creditors who, under certain circumstances,
might have a claim to the fund's assets that would take precedence over the
claims of shareholders. Under the 1940 Act, an open-end fund may borrow up to
33 1/3% of its total assets (including the amount borrowed) from banks and may
borrow up to 5% of its total assets for temporary purposes from any other
person. Generally, a loan is considered temporary if it is repaid within sixty
days. Open-end funds typically borrow money to meet redemptions or other
short-term cash needs in order to avoid forced, unplanned sales of portfolio
securities. This technique allows a fund greater flexibility by allowing its
manager to buy and sell portfolio securities primarily for investment or tax
considerations, rather than for cash flow considerations.
A closed-end fund may, under the 1940 Act, engage in borrowings (not limited
to borrowings from banks) if immediately after such borrowings, the aggregate
of such borrowings is in an amount that is not more than 33 1/3% of its total
assets (or lesser amounts, depending on the form of borrowing). Unlike open-end
funds, closed-end funds typically enter into line of credit agreements with
banks or issue a class of preferred stock or other debt obligations in order to
leverage the Fund - that is, to invest the borrowings in securities that are
expected to yield a higher return than the cost of borrowing.
What effect will amending the current borrowing restriction have on the Fund?
The Fund's current investment restriction relating to borrowing prohibits
the Fund from borrowing money, except that the Fund may borrow up to 5% of its
total assets, including the amount borrowed, for temporary or emergency
purposes and may borrow up to 33 1/3% of its total assets, including the amount
borrowed, in connection with repurchases of its shares or tender offers. In
addition, short-term credits necessary for settlement of securities
transactions are not considered "borrowings."
The proposed investment restriction would prohibit borrowing money, except
to the extent permitted by the 1940 Act or any rule, exemption or
interpretation thereunder issued by the SEC. In addition, the Fund's policy
that the Fund may borrow up to 5% for temporary or emergency purposes and up to
33 1/3% in connection with share repurchases or tender offers would be
eliminated. By so amending the investment restriction, the Fund would not
unnecessarily limit the Investment Manager if the Investment Manager determines
that borrowing is in the best interests of the Fund and its shareholders. In
addition, the references to repurchases of shares and tender offers would be
eliminated since they are only applicable to closed-end funds. As a general
matter, section 18 of the 1940 Act limits a fund's borrowings to not more than
33 1/3% of the fund's total assets, as is provided in the Fund's current
investment restriction, although the current restriction limits that use to
transactions that are only applicable to closed-end funds. If the Conversion is
not approved and this proposed fundamental policy is approved, the Fund would
be permitted to borrow for leveraging purposes and as a result would be
subject, to a greater degree, to the risks associated with borrowing, as
described below.
The proposed restriction would also permit the Fund to borrow money from
affiliated investment companies or other affiliated entities. In September
1999, the SEC granted an exemptive order to the Fund, together with other funds
in Franklin Templeton Investments, permitting the Fund to borrow money from
other funds in Franklin Templeton Investments (the "Inter-Fund Lending and
Borrowing Order"). The proposed borrowing restriction would permit the Fund,
under certain circumstances and in accordance with the Inter-Fund Lending
23
and Borrowing Order, to borrow money from other funds in Franklin Templeton
Investments at rates that are more favorable than the rates that the Fund would
receive if it borrowed from banks or other lenders. The proposed borrowing
restriction would also permit the Fund to borrow from other affiliated
entities, such as the Investment Manager, under emergency market conditions
should the SEC permit investment companies to engage in such borrowing in the
future, such as it did in response to the emergency market conditions that
existed immediately after the events of September 11, 2001.
Because the proposed borrowing restriction would provide the Fund with
additional borrowing flexibility, to the extent that the Fund uses such
flexibility, the Fund may be subject to additional costs and risks inherent to
borrowing, such as reduced total return and increased volatility. The
additional costs and risks to which the Fund may be exposed are limited,
however, by the borrowing limitations imposed by the 1940 Act and any rule,
exemption or interpretation thereof that may be applicable.
Issuing Senior Securities. A "senior security" is an obligation of a fund,
with respect to its earnings or assets, that takes precedence over the claims
of the fund's shareholders with respect to the same earnings or assets. The
1940 Act generally prohibits an open-end fund from issuing senior securities
and limits a closed-end fund's ability to issue senior securities, in each
case, in order to limit the fund's ability to use leverage. In general,
leverage occurs when a fund borrows money to enter into securities transactions
or acquires an asset without being required to make payment until a later time.
The senior securities issued by a closed-end fund may often be a class of
preferred stock. A closed-end fund is required to maintain a 300% asset
coverage on senior securities after deducting for any dividend, distribution or
repurchase of its shares, except only a 200% asset coverage is needed on
preferred stock of the fund after deducting for dividends paid.
SEC staff interpretations allow an open-end fund under certain conditions to
engage in a number of types of transactions that might otherwise be considered
to create "senior securities," for example, short sales, certain options and
futures transactions, reverse repurchase agreements and securities transactions
that obligate the fund to pay money at a future date (such as when-issued,
forward commitment or delayed delivery transactions). According to SEC staff
interpretations, when engaging in these types of transactions, an open-end fund
must mark on its books, or segregate with its custodian bank, cash or other
liquid securities to cover its future obligations, in order to avoid the
creation of a senior security. This procedure limits the amount of a fund's
assets that may be invested in these types of transactions and the fund's
exposure to the risks associated with senior securities. Such SEC staff
positions permitting open-end funds to use segregated assets to avoid creating
senior securities has also been applied to closed-end funds. Consequently, a
closed-end fund would not be deemed to issue a senior security that requires
the 300% asset coverage if it follows the same segregation procedures as an
open-end fund with respect to the types of transactions that may be considered
to create senior securities described above.
What effect will amending the current senior securities restriction have on
the Fund?
The current fundamental investment restriction relating to senior securities
prohibits the Fund from issuing senior securities, except as provided in the
Fund's current fundamental restrictions on borrowing and except that short-term
credits necessary for settlement of securities transactions are not considered
senior securities.
The proposed restriction would permit the Fund to issue senior securities as
permitted under the 1940 Act and any relevant rule, exemption, or
interpretation issued by the SEC. The proposed restriction also would clarify
that the Fund may, provided that certain conditions are met, engage in those
types of transactions that have been interpreted by the SEC staff as not
constituting senior securities, such as covered reverse repurchase transactions.
The Fund has no present intention of changing its current investment
strategies regarding transactions that may be interpreted as resulting in the
issuance of senior securities. Moreover, if this sub-proposal is approved and
the Conversion is not approved, the Fund will be able to issue preferred stock,
commercial paper, or other forms of leverage, although it has no present
intention to do so. Therefore, the Board does not anticipate that
24
amending the current restriction will result in additional material risk to the
Fund at this time. However, the Fund may initiate the use of these strategies
in the future to the extent described in the proposed new restriction. To the
extent the Fund does engage in such strategies in the future, it would be
subject to the risks associated with leveraging, including reduced total
returns and increased volatility. The additional risks to which the Fund may be
exposed are limited, however, by the limitations on senior securities imposed
by the 1940 Act and any rule, exemption or interpretation thereof that may be
applicable.
Sub-Proposal 3b: To amend the Fund's fundamental investment restriction
regarding underwriting.
Under the 1940 Act, the Fund's policy concerning underwriting is required to
be fundamental. Under the federal securities laws, a person or company
generally is considered to be an underwriter if the person or company
participates in the public distribution of securities of other issuers, which
involves purchasing the securities from another issuer with the intention of
re-selling the securities to the public. In addition, under certain
circumstances, the Trust may be deemed to be an underwriter of its own
securities. The proposed restriction would make clear that the Trust has the
ability to sell its own shares after the Conversion, if approved.
What effect will amending the current underwriting restriction have on the
Fund?
The Fund's current fundamental investment restriction relating to
underwriting prohibits the Fund from acting as an underwriter except in
connection with the disposition of portfolio securities it owns. The current
investment restriction does not provide any clarification regarding whether the
Fund may sell its own shares in those limited circumstances where the Fund
might be deemed to be an underwriter.
The proposed restriction relating to underwriting is substantially similar
to the Fund's current investment restriction by generally prohibiting the Fund
from engaging in underwriting except when disposing of securities it owns. The
proposed investment restriction, however, clarifies that the Fund may sell its
own shares as an open-end fund. It is not anticipated that the adoption of the
proposed restriction would involve additional material risk to the Fund at this
time or affect the way the Fund is currently managed or operated other than the
changes to its operations contemplated by the proposed Conversion.
Sub-Proposal 3c: To amend the Fund's fundamental investment restriction
regarding lending.
Under the 1940 Act, a fund must describe, and designate as fundamental, its
policy with respect to making loans. In addition to a loan of cash, the term
"loans" may, under certain circumstances, be deemed to include certain
transactions and investment-related practices. Among those transactions and
practices are lending of portfolio securities, entering into repurchase
agreements and the purchase of certain debt instruments. If a fund adopts a
fundamental policy that prohibits lending, the fund may still invest in debt
securities, enter into securities lending transactions, and enter into
repurchase agreements if it provides an exception from the general prohibition.
Under SEC staff interpretations, lending by an investment company, under
certain circumstances, may also give rise to issues relating to the issuance of
senior securities. To the extent that the Fund enters into lending transactions
under these limited circumstances, the Fund will continue to be subject to the
limitations imposed under the 1940 Act regarding the issuance of senior
securities. (See Proposal 3a above.)
What effect will amending the current lending restriction have on the Fund?
The Fund's current investment restriction regarding lending prohibits the
Fund from making loans, except that the Fund may (1) lend its portfolio
securities, (2) purchase and hold debt instruments in accordance with its
investment objective and policies, and (3) enter into repurchase agreements.
The proposed fundamental investment restriction is substantially similar to
the Fund's current investment restriction regarding lending; however, the
proposed investment restriction provides the Fund with additional flexibility
to make loans to affiliated investment companies by permitting the Fund to take
advantage of the
25
Inter-Fund Lending and Borrowing Order described above. These lending
transactions may include terms that are more favorable than those which would
otherwise be available from lending institutions. The proposed investment
restriction would permit the Fund, under certain conditions, to lend cash to
other Franklin Templeton funds at rates higher than those that the Fund would
receive if the Fund loaned cash to banks through short-term lending
transactions, such as repurchase agreements. Management anticipates that this
additional flexibility to lend cash to affiliated investment companies would
allow additional investment opportunities, and could enhance the Fund's ability
to respond to changes in market, industry or regulatory conditions.
Sub-Proposal 3d: To amend the Fund's fundamental investment restriction
regarding investments in commodities.
Under the 1940 Act, a fund's investment policy relating to the purchase and
sale of commodities must be fundamental. The most common types of commodities
are physical commodities such as wheat, cotton, rice and corn. Under the
federal securities and commodities laws, certain financial instruments such as
futures contracts and options thereon, including currency futures, stock index
futures or interest rate futures, may, under limited circumstances, also be
considered to be commodities. Funds typically invest in futures contracts and
related options on these and other types of commodity contracts for hedging
purposes, to implement a tax or cash management strategy, or to enhance returns.
What effect will amending the current commodities restriction have on the
Fund?
The current fundamental investment restriction on commodities states that
the Fund may not purchase or sell commodity contracts except futures contracts
as described in the Fund's Prospectus. The proposed investment restriction
relating to commodities clarifies that the Fund has the ability to engage in
futures contracts and related options. Notwithstanding the flexibility provided
by the proposed fundamental investment restriction, the Fund is subject to
guidelines established by the Board regarding the use of derivatives. The use
of futures contracts can involve substantial risks and, therefore, the Fund
would only invest in such futures contracts where the Investment Manager
believes such investments are advisable and then only to the extent permitted
by guidelines established by the Board. It is not currently intended that the
Fund would materially change its use of futures contracts, forward currency
contracts and related options. Thus, it is not currently anticipated that the
proposed amendments to the investment restriction relating to commodities would
involve additional material risk at this time.
Sub-Proposal 3e: To amend the Fund's fundamental investment restriction
regarding investments in real estate.
Under the 1940 Act, a fund's restriction regarding investment in real estate
must be fundamental. The 1940 Act does not prohibit an investment company from
investing in real estate, either directly or indirectly. The Fund's current
fundamental investment restriction relating to real estate prohibits the Fund
from investing in real estate, real estate mortgages or real estate limited
partnership interests, with two limited exceptions. The first exception permits
the Fund to invest in securities secured by real estate or interests therein.
The second exception permits the Fund to invest in securities issued by
companies that invest in real estate or interests therein.
What effect will amending the current real estate restriction have on the
Fund?
The proposed restriction would permit the Fund to continue to invest in the
two types of real estate investments in which the Fund may currently invest;
however, under the proposed restriction the Fund would not be prohibited from
investing in real estate limited partnership interests. In addition, the
proposed restriction would permit the Fund to hold and sell real estate
acquired by the Fund as a result of owning a security or other instrument.
Modifying the Fund's real estate restriction may expose the Fund to certain
risks inherent to these investments, such as relative illiquidity, difficulties
in valuation, and greater price volatility. In addition, like other investments
of this kind in developing countries, these investments are subject to risk of
forfeiture due to
26
governmental action. However, it is not currently intended that the Fund would
materially change its investment strategies as they relate to real estate or
interests therein. Thus, it is not currently anticipated that the proposed
amendments to the investment restriction relating to real estate would involve
additional material risk at this time.
Sub-Proposal 3f: To amend the Fund's fundamental investment restriction
regarding industry concentration.
Under the 1940 Act, a fund's policy regarding concentration of investments
in the securities of companies in any particular industry must be fundamental.
The SEC staff takes the position that a fund "concentrates" its investments if
it invests more than 25% of its "net" assets (exclusive of certain items such
as cash, U.S. government securities, securities of other investment companies,
and tax-exempt securities) in any particular industry or group of industries.
An investment company is not permitted to concentrate its investments in any
particular industry or group of industries unless it discloses its intention to
do so.
What effect will amending the current industry concentration restriction have
on the Fund?
The proposed concentration policy is substantially the same as the Fund's
current policy, except that (i) it modifies the Fund's asset measure (from
"total assets" to "net assets") by which concentration is assessed; (ii)
slightly increases (from "25% or more" to "more than 25%" the percentage limit
on permissible investments and (iii) it expressly references, in a manner
consistent with current SEC staff policy, the categories of investments that
are excepted from coverage of the restriction. The proposed restriction
reflects a more modernized approach to industry concentration, and provides the
Fund with investment flexibility that ultimately is expected to help the Fund
respond to future legal, regulatory, market or technical changes.
The proposed restriction would expressly exempt from the 25% limitation
those securities issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities, and the securities of other investment
companies, consistent with SEC staff policy. The proposed restriction thus
clarifies the types of U.S. government securities in which the Fund may invest.
In addition, although the Fund has always been permitted to invest in other
investment companies in accordance with the terms of its Prospectus, the
proposed restriction now makes explicit that such investments are exempted from
the Fund's concentration policy. Even with this modified restriction, however,
the Fund would continue to remain subject to the limitations on a fund's
investments in other investment companies as set forth in the 1940 Act, its
Prospectus and any exemptive orders issued by the SEC. In general, absent such
rules or orders from the SEC, the 1940 Act would prohibit the Fund from
investing more than 5% of its total assets in any one investment company and
investing more than 10% of its total assets in other investment companies
overall.
In addition, the current concentration policy includes the statement that
for purposes of the restriction a foreign government is deemed to be an
"industry." While the Staff of the SEC continues to take informally the
position that a foreign government is an "industry," the Board of Directors
proposes to remove such statement from the proposed fundamental policy on
concentration in order to retain flexibility should the SEC Staff in the future
modify its position.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" SUB-PROPOSALS 3a-3f
PROPOSAL 4: TO APPROVE THE ELIMINATION OF THE FUND'S FUNDAMENTAL INVESTMENT
RESTRICTIONS REGARDING PURCHASING ON MARGIN, SHORT SALES AND
INVESTING FOR PURPOSES OF EXERCISING CONTROL.
The Fund's existing investment restrictions, together with those recommended
to be eliminated, are detailed in Exhibit C, which is entitled "Fundamental
Investment Restrictions Proposed to be Amended or Eliminated." If shareholders
approve Proposal 4, the elimination of such investment restrictions will be
effective immediately.
27
Why is the Board recommending that certain fundamental investment
restrictions be eliminated, and what effect will their elimination have on
the Fund?
The Fund's fundamental investment restrictions regarding purchasing
securities on margin or engaging in short sales of securities are either
restatements of restrictions that are already included within the 1940 Act or
are more restrictive than current SEC Staff interpretations. The Fund's
fundamental investment restriction regarding investing for purposes of
exercising control was originally adopted to comply with state securities laws
and regulation. Due to the passage of NSMIA, and changes or clarifications in
SEC staff positions, these fundamental restrictions are either no longer
required by law or may be more restrictive that what the current laws and
regulations require.
Accordingly, the Investment Manager has recommended, and the Board has
determined, that these three restrictions (referred to in this Proposal 4 as
the "Restrictions") be eliminated and that their elimination is consistent with
the federal securities laws. By reducing the total number of investment
restrictions that can be changed only by a shareholder vote, the Board believes
that the Fund will be able to reduce the costs and delays associated with
holding future shareholder meetings for the purpose of revising fundamental
policies that become outdated or inappropriate. Elimination of the Restrictions
would also enable the Fund to be managed in accordance with the current
requirements of the 1940 Act, without being constrained by additional and
unnecessary limitations. The Board believes that the elimination of the
Restrictions is in the best interest of the Fund's shareholders as it will
provide the Fund will increased flexibility to pursue its investment objective
and will enhance the Investment Manager's ability to manage the Fund's assets
in a changing investment environment.
Which three (3) Restrictions is the Board recommending that the Fund
eliminate?
The Fund currently is subject to three Restrictions that are no longer
required by law and were adopted primarily in response to regulatory, business
or industry conditions that no longer exist. The exact language of the
Restrictions has been included in Exhibit C, which is entitled "Fundamental
Investment Restrictions Proposed to be Amended or Eliminated."
Purchasing Securities on Margin and Making Short Sales
The 1940 Act does not require the Fund to adopt a fundamental investment
restriction regarding purchasing on margin or making short sales, except to the
extent that these transactions may result in the creation of senior securities
(as described more fully above). The Fund's current fundamental investment
restrictions prohibit the Fund from purchasing securities on margin or engaging
in short sales of securities (or maintaining a short position), but do permit
the Fund to engage in delayed delivery or when-issued transactions or to make
such short term credits as are necessary for the clearance of transactions.
Because the 1940 Act already contains provisions limiting the ability of the
Fund to engage in short sales and purchase securities on margin, the
elimination of these fundamental policies is expected to have no impact on the
manner in which the Fund is currently managed. Therefore, the Investment
Manager does not anticipate that deleting the current restrictions will result
in additional material risk to the Fund at this time.
Investing for Purposes of Exercising Control
The 1940 Act does not require, and applicable state law no longer requires,
that the Fund adopt a fundamental investment restriction prohibiting it from
investing in any company for the purpose of exercising control or management.
Because the Fund is already subject to certain limitations with respect to how
much of a single issuer's voting securities the Fund may acquire, the Board is
recommending that this restriction be deleted.
What are the risks, if any, in eliminating the restrictions?
The Board does not anticipate that eliminating the Restrictions will result
in any additional material risk to the Fund at this time. Although the Fund's
Restrictions, as drafted, are no longer legally required, the Fund's
28
ability to invest in these three areas will continue to be subject to the
limitations of the 1940 Act, or any rule, SEC staff interpretation, or
exemptive orders granted under the 1940 Act. Moreover, the Fund does not
currently intend to change its present investment practices as a result of
eliminating the Restrictions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" PROPOSAL 4
..INFORMATION ABOUT THE FUND
The Investment Manager. The Investment Manager of the Fund is Templeton
Asset Management Ltd. -- Hong Kong branch, a Singapore company with a branch
office at Two Exchange Square, Hong Kong. Pursuant to an investment management
agreement, the Investment Manager manages the investment and reinvestment of
Fund assets. The Investment Manager is an indirect, wholly owned subsidiary of
Resources.
The Administrator. The administrator of the Fund is FT Services with
offices at One Franklin Parkway, San Mateo, California 94403-1906. FT Services
is an indirect, wholly owned subsidiary of Resources. Pursuant to an
administration agreement, FT Services performs certain administrative functions
for the Fund. In addition, FT Services and the Fund have entered into a
sub-administration agreement with Princeton Administrators, L.P. ("Princeton"),
pursuant to which Princeton performs, subject to FT Services' supervision,
various administrative functions for the Fund. Princeton is an affiliate of
Merrill Lynch, Pierce, Fenner & Smith Inc., an initial underwriter of the
Fund's shares, and its address is P.O. Box 9011, Princeton, New Jersey 08543.
The Transfer Agent. The transfer agent, registrar and dividend disbursement
agent for the Fund is Mellon Investor Services LLC, 85 Challenger Road,
Ridgefield Park, New Jersey 07660.
The Custodian. The custodian for the Fund is JPMorgan Chase Bank, MetroTech
Center, Brooklyn, New York 11245.
Recent Litigation. On January 29, 2003, the Fund, together with Templeton
Dragon Fund, Inc. ("Dragon Fund"), another closed-end management investment
company in Franklin Templeton Investments, and TAML, the investment adviser to
the Fund and Dragon Fund, filed a complaint in the United States District Court
for the District of Maryland, Northern Division, against Harvard College,
Harvard Management Company, Inc. ("Harvard Management"), which is an investment
advisor to Harvard College, and Steven Alperin, an officer of Harvard
Management (referred to collectively as "Harvard"). The complaint alleged that
Harvard violated several provisions of the Federal securities laws and the
rules of the SEC related to Harvard's ownership of Fund shares and actions as a
shareholder. On February 7, 2003, Harvard counterclaimed, alleging that the
Fund, Dragon Fund, TAML and each fund's directors violated certain provisions
of the Federal securities laws and SEC rules. Harvard also asserted
counterclaims of breach of fiduciary duty under Maryland state law against TAML
and each fund's directors. On March 20, 2003, the parties announced a
settlement that resulted in, among other things, the dismissal of their
litigation claims against each other and the withdrawal of shareholder
proposals submitted by Harvard College for the Meeting.
Dismissal of Lawsuit. Pursuant to the Settlement Agreement between the Fund
and Harvard, the complaint brought by the Fund, Dragon Fund and TAML against
Harvard, as well as the counterclaims brought by Harvard against the Fund,
Dragon Fund, each fund's directors and TAML, were dismissed without prejudice.
The parties have also entered into covenants not to sue each other with respect
to the claims that were made or could have been made in the litigation absent a
breach of the settlement agreements.
End of Proxy Contest. As part of the settlement, Harvard has agreed to
withdraw all of its shareholder proposals for the Meeting. Harvard also will
not solicit proxies from shareholders for the Meeting and will not vote any
proxies previously received.
Conversion of the Fund to an Open-End Fund. Harvard announced that it
intends to support the Board of Directors' proposal at the Meeting calling for
the open-ending of the Fund, with the redemption-in-kind feature described
below.
29
Harvard also announced that, if and when the Fund open-ends, Harvard College
will redeem all of its shares of the Fund within 30 days after the conversion,
and that under the settlement it will take its redemption proceeds through a
pro rata, in-kind distribution of portfolio investments and available cash. As
a result, the Fund will avoid having to sell significant portfolio assets to
raise cash to meet Harvard's redemption request--thus limiting the potential
adverse effect on the Fund's net asset value per share. Because Harvard College
currently owns approximately 30% of the outstanding shares of the Fund, its
redemption of those shares may be deemed to result in a change in control of
the Fund.
Representatives of Harvard and the Fund also have agreed to discuss, prior
to conversion, steps the Fund might take to minimize any adverse effect on the
net asset value per share of the Fund resulting from a need to sell portfolio
securities of the Fund to raise cash to satisfy redemption requests.
Other Matters. The Fund's last audited financial statements and annual
report for the fiscal year ended August 31, 2002, and semi-annual report for
the period ended February 28, 2003, are available free of charge. To obtain a
copy, please call 1-800/DIAL BEN(R) (1-800-342-5236) or forward a written
request to Franklin Templeton Investor Services, LLC, P.O. Box 33030, St.
Petersburg, Florida 33733-8030.
Principal Shareholders. As of April 16, 2003, the Fund had 16,280,165
shares outstanding and total net assets of $190,465,105. The Fund's shares are
listed on the NYSE (Symbol: TCH). From time to time, the number of shares held
in "street name" accounts of various securities dealers for the benefit of
their clients may exceed 5% of the total shares outstanding. To the knowledge
of the Fund's management, as of April 16, 2003, there were no other entities
holding beneficially or of record more than 5% of the Fund's outstanding
shares, except as shown in the following table:
Amount and Nature Percent of
Name and Address of Beneficial Owner of Beneficial Ownership Outstanding Shares
------------------------------------ ----------------------- ------------------
President and Fellows of Harvard College 4,934,600/1/ 30.3%/2/
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, MA 02210
- --------
1. The nature of beneficial ownership is sole voting and dispositive power as
reported on Schedule 13D (Amendment No. 4), filed with the U.S. Securities
and Exchange Commission as of March 21, 2003.
2. As reported on Schedule 13D (Amendment No. 4), filed with the SEC as of
March 21, 2003.
In addition, to the knowledge of the Fund's management, as of April 16,
2003, no nominee or Director of the Fund owned 1% or more of the outstanding
shares of the Fund, and the Directors and officers of the Fund owned, as a
group, less than 1% of the outstanding shares of the Fund. However, Charles B.
Johnson, who is Chairman of the Board, Director and an officer of the Fund, and
Rupert H. Johnson, Harmon E. Burns and Martin L. Flanagan, who are officers of
the Fund, serve on the administrative committee of the Franklin Templeton
Profit Sharing and 401(k) Plan, which owns 136,101 shares or approximately
0.84% of the outstanding shares of the Fund. In that capacity, they participate
in the voting of such shares. Charles B. Johnson, Rupert H. Johnson, Harmon E.
Burns and Martin L. Flanagan disclaim beneficial ownership of any shares of the
Fund owned by the Franklin Templeton Profit Sharing and 401(k) Plan, except to
the extent of their pecuniary interest.
..AUDIT COMMITTEE
The Board has a standing Audit Committee consisting of Messrs. Millsaps
(Chairman), Crothers, Hines and Tseretopoulos, all of whom are Independent
Directors and also are considered to be "independent" as that term is defined
by the NYSE's listing standards. The Audit Committee reviews the maintenance of
the Fund's records and the safekeeping arrangements of the Fund's custodian,
reviews both the audit and non-audit work of the Fund's independent auditors,
and submits a recommendation to the Board as to the selection of independent
auditors.
30
Selection of Independent Auditors. Upon the recommendation of the Audit
Committee, the Board selected the firm of PricewaterhouseCoopers LLP ("PwC") as
independent auditors of the Fund for the current fiscal year. Representatives
of PwC are not expected to be present at the Meeting, but will have the
opportunity to make a statement if they wish, and will be available should any
matter arise requiring their presence.
Audit Fees. The aggregate fees paid to PwC in connection with the annual
audit of the Fund's financial statements for the fiscal year ended August 31,
2002 were $19,243.
Financial Information Systems Design and Implementation Fees. PwC did not
render any services with respect to financial information systems design and
implementation during the fiscal year ended August 31, 2002 to the Fund or
entities affiliated with the Fund that provide services to the Fund.
All Other Fees. The aggregate fees billed for all other non-audit services,
including fees for tax-related services, rendered by PwC to the Fund or
entities affiliated with the Fund that provide services to the Fund for the
fiscal year ended August 31, 2002 were $5,654. The Audit Committee of the Fund
has determined that provision of these non-audit services is compatible with
maintaining the independence of PwC.
Audit Committee Report. The Board has adopted and approved a formal written
charter for the Audit Committee, which sets forth the Audit Committee's
responsibilities. The charter was filed with the proxy statement for the Fund's
2001 Annual Meeting of Shareholders.
As required by the charter, the Audit Committee reviewed the Fund's audited
financial statements and met with management, as well as with PwC, the Fund's
independent auditors, to discuss the financial statements.
The Audit Committee received the written disclosures and the letter from PwC
required by Independence Standards Board Standard No. 1. The Audit Committee
also received the report of PwC regarding the results of their audit. In
connection with their review of the financial statements and the auditors'
report, the members of the Audit Committee discussed with a representative of
PwC, their independence, as well as the following: the auditors'
responsibilities in accordance with generally accepted auditing standards; the
auditors' responsibilities for information prepared by management that
accompanies the Fund's audited financial statements and any procedures
performed and the results; the initial selection of, and whether there were any
changes in, significant accounting policies or their application; management's
judgments and accounting estimates; whether there were any significant audit
adjustments; whether there were any disagreements with management; whether
there was any consultation with other accountants; whether there were any major
issues discussed with management prior to the auditors' retention; whether the
auditors encountered any difficulties in dealing with management in performing
the audit; and the auditors' judgments about the quality of the company's
accounting principles.
Based on its discussions with management and the Fund's auditors, the Audit
Committee did not become aware of any material misstatements or omissions in
the financial statements. Accordingly, the Audit Committee recommended to the
Board that the audited financial statements be included in the Fund's Annual
Report to Shareholders for the fiscal year ended August 31, 2002 for filing
with the U.S. Securities and Exchange Commission.
AUDIT COMMITTEE
Fred R. Millsaps (Chairman)
Frank J. Crothers
Andrew H. Hines, Jr.
Constantine D. Tseretopoulos
31
..FURTHER INFORMATION ABOUT VOTING AND THE MEETING
Solicitation of Proxies. Your vote is being solicited by the Board of
Directors of the Fund. The cost of soliciting proxies, including the fees of a
proxy soliciting agent, is borne by the Fund. The Fund reimburses brokerage
firms and others for their expenses in forwarding proxy material to the
beneficial owners and soliciting them to execute proxies. In addition, the Fund
has retained D.F. King & Co., Inc. ("D.F. King"), a professional proxy
solicitation firm, to solicit proxies from brokers, banks, other institutional
holders and individual shareholders at an anticipated cost, including
out-of-pocket expenses, ranging between $40,000 to $90,000. The Fund expects
that the solicitation would be primarily by mail, but may also include
telephone, telecopy, facsimile, electronic or oral solicitations. You may
receive a telephone call from D.F. King asking you to vote. The Fund does not
reimburse Directors and officers of the Fund, or regular employees and agents
of the Investment Manager involved in the solicitation of proxies. The Fund
intends to pay all costs associated with the solicitation and the Meeting.
Voting by Broker-Dealers. The Fund expects that, before the Meeting,
broker-dealer firms holding shares of the Fund in "street name" for their
customers will request voting instructions from their customers and beneficial
owners. If these instructions are not received by the date specified in the
broker-dealer firms' proxy solicitation materials, the Fund understands that
NYSE Rules permit the broker-dealers to vote on Proposal 1 on behalf of their
customers and beneficial owners. Certain broker-dealers may exercise discretion
over shares held in their name for which no instructions are received by voting
these shares in the same proportion as they vote shares for which they received
instructions.
Quorum. A majority of the shares entitled to vote--present in person or
represented by proxy--constitutes a quorum at the Meeting. The shares over
which broker-dealers have discretionary voting power, the shares that represent
"broker non-votes" (i.e., shares held by brokers or nominees as to which (i)
instructions have not been received from the beneficial owners or persons
entitled to vote and (ii) the broker or nominee does not have discretionary
voting power on a particular matter), and the shares whose proxies reflect an
abstention on any item will be counted as shares present and entitled to vote
for purposes of determining whether the required quorum of shares exists.
Methods of Tabulation. Proposal 1, the election of Directors, requires the
affirmative vote of the holders of a plurality of the Fund's shares present and
voting on the Proposal at the Meeting. Proposal 2, to approve the Conversion,
requires the affirmative vote of a majority of the Fund's shares outstanding
and entitled to vote as of the record date. Proposal 3, to approve amendments
to certain fundamental investment restrictions (including six (6)
Sub-Proposals); and Proposal 4, to approve the elimination of certain of the
Fund's fundamental investment restrictions, each require the affirmative vote
of the lesser of: (i) more than 50% of the outstanding shares of the Fund; or
(ii) 67% or more of the outstanding shares of the Fund present at the Meeting,
if the holders of more than 50% of the outstanding shares are present or
represented by proxy.
Abstentions and broker non-votes will be treated as votes present at the
Meeting, but will not be treated as votes cast. Abstentions and broker
non-votes will be treated as votes not cast and, therefore, will have no effect
on Proposal 1, which requires a plurality of the Fund's shares present and
voting, but will have the same effect as a vote "against" Proposal 2,
Sub-Proposals 3a-3f, and Proposal 4.
Adjournment. The holders of a majority of shares entitled to vote at the
Meeting and present in person or by proxy (whether or not a quorum is present
at the Meeting) or the presiding officer of the Fund for the Meeting or the
secretary of the Meeting may adjourn the Meeting. Such authority to adjourn the
Meeting may be used in the event a quorum is not present at the Meeting or, in
the event that a quorum is present but sufficient votes have not been received
to approve a Proposal or to permit further solicitation of proxies or for any
other reason consistent with Maryland law and the Fund's Charter and By-Laws.
The persons designated as proxies may use their discretionary authority to vote
as instructed by management of the Fund on questions of adjournment and on any
other proposals raised at the Meeting to the extent permitted by the SEC's
proxy rules, including proposals for which management of the Fund did not have
timely notice, as set forth in the SEC's proxy rules and the Fund's proxy
statement for the 2002 annual meeting and its press release dated March 7, 2003.
32
Shareholder Proposals. The shareholder vote on the Conversion will dictate
the requirements relating to shareholder proposals for the 2004 Annual Meeting
of Shareholders. If Fund shareholders approve Proposal 2 and the Conversion is
completed, Fund shareholders will hold Advisor Class shares of the Trust. The
Trust is not required, and does not intend, to hold regular annual
shareholders' meetings. If the Conversion is approved and completed,
shareholders wishing to submit proposals for consideration for inclusion in a
proxy statement for the next meeting of the Trust's shareholders should send
their written proposals to the Fund's offices, 500 East Broward Boulevard,
Suite 2100, Fort Lauderdale, Florida 33394-3091, Attention: Secretary, so they
are received within a reasonable time before any such meeting.
If Fund shareholders do not approve the Conversion, the Fund will not be
converted into an open-end fund organized as a Delaware statutory trust and the
Fund's By-Laws, in addition to the proxy rules under the federal securities
laws, will govern shareholder proposals. In such an event, the Fund anticipates
that its next annual meeting will be held in March 2004. A shareholder who
wishes to submit a proposal for consideration for inclusion in the Fund's proxy
statement for the 2004 Annual Meeting of Shareholders must send such written
proposal to the Fund's offices, 500 East Broward Boulevard, Fort Lauderdale,
Florida 33394-3091, Attention: Secretary, so that it is received no later than
October 16, 2003 in order to be included in the Fund's proxy statement and
proxy card relating to that meeting and presented at the meeting.
A shareholder of the Fund who has not submitted a written proposal for
inclusion in the Fund's proxy statement by October 16, 2003, as described
above, may nonetheless present a proposal at the Fund's 2004 Annual Meeting of
Shareholders if such shareholder notifies the Fund at the Fund's office of such
proposal by December 30, 2003. If a shareholder fails to give notice by this
date, then the persons designated as proxy holders for proxies solicited by the
Board of Directors for the 2004 Annual Meeting of Shareholders may exercise
discretionary voting power with respect to any such proposal.
A shareholder proposal may be presented at the 2004 Annual Meeting of
Shareholders only if such proposal concerns a matter that may be properly
brought before the meeting under applicable federal proxy rules and state law.
Submission of a proposal by a shareholder does not guarantee that the
proposal will be included in the Fund's proxy statement or presented at the
meeting.
By Order of the Board of Directors,
Barbara J. Green
Secretary
April 28, 2003
33
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN TEMPLETON CHINA WORLD FUND, INC.
AND TEMPLETON CHINA WORLD FUND
This Agreement and Plan of Reorganization ("Agreement") is made as of this
25th day of February, 2003 by and between Templeton China World Fund, a
Delaware statutory trust that is being registered as an open-end management
investment company ("Trust"), and Templeton China World Fund, Inc., a Maryland
corporation and a registered closed-end management investment company ("Fund")
(the Trust and the Fund are hereinafter collectively referred to as the
"parties").
In consideration of the mutual promises contained herein, and intending to
be legally bound, the parties hereto agree as follows:
1. Plan of Reorganization.
(a) Upon satisfaction of the conditions precedent described in Section 3
hereof, the Fund will convey, transfer and deliver to the Trust at the closing
provided for in Section 2 hereof (hereinafter referred to as the "Closing") all
of the Fund's then-existing assets. In consideration thereof, the Trust agrees
at the Closing to: (i) assume and pay when due, to the extent that there exist
Fund obligations and liabilities on or after the Closing on the Effective Date
of the Reorganization (as defined in Section 2 hereof), all of such obligations
and liabilities, whether absolute, accrued, contingent or otherwise, including
all fees and expenses in connection with the Agreement, which fees and expenses
shall, in turn, include, without limitation, costs of legal advice, accounting,
printing, mailing, proxy solicitation and transfer taxes, if any, such
obligations and liabilities of the Fund to become the obligations and
liabilities of the Trust; (ii) adopt as its own the Fund's Notification of
Registration on Form N-8A ("Form N-8A") for purposes of the Investment Company
Act of 1940, as amended ("1940 Act"); (iii) file with the U.S. Securities and
Exchange Commission (the "Commission") an amendment to such Form N-8A pursuant
to Section 8(a) of the 1940 Act; and (iv) deliver, in accordance with paragraph
(b) of this Section 1, full and fractional shares of beneficial interest,
without par value, of the Trust - Advisor Class ("Trust Shares"), equal in
number to the number of full and fractional shares of common stock, $.01 par
value per share, of the Fund outstanding immediately prior to the Closing on
the Effective Date of the Reorganization. The reorganization contemplated
hereby is intended to qualify as a reorganization within the meaning of Section
368 of the Internal Revenue Code of 1986, as amended ("Code"). The Fund shall
distribute to its shareholders the Trust Shares in accordance with this
Agreement and the resolutions of the board of directors of the Fund (the "Board
of Directors") authorizing the transactions contemplated by this Agreement.
(b) In order to effect the delivery of Trust Shares described in Section
1(a)(iv) hereof, the Trust will establish an open account for each shareholder
of the Fund and, on the Effective Date of the Reorganization, will credit to
such account Trust Shares equal to the number of full and fractional shares
such shareholder holds in the Fund at the close of regular trading on the New
York Stock Exchange, Inc. ("NYSE") on the Effective Date of the Reorganization.
Fractional Trust Shares will be carried to the third decimal place. At the
close of regular trading on the NYSE on the Effective Date of the
Reorganization, the net asset value per share of Trust Shares shall be deemed
to be the same as the net asset value per share of the common stock of the
Fund. Upon the Closing on the Effective Date of the Reorganization, each
certificate representing shares of the Fund will be deemed to represent the
same number of Trust Shares. Simultaneously with the crediting of the Trust
Shares to the shareholders of record of the Fund, the shares of common stock of
the Fund held by such shareholders shall be cancelled. Shareholders of the Fund
will have the right to deliver their share certificates of the Fund in exchange
for share certificates of the Trust. However, a shareholder need not deliver
such certificates to the Trust unless the shareholder so desires.
(c) As soon as practicable after the Effective Date of the Reorganization,
the Fund shall take all necessary actions to: (i) withdraw its shares from
listing on the NYSE, including making any necessary filings; and (ii) effect a
complete dissolution of the Fund under Maryland law.
A-1
(d) The expenses of entering into and carrying out the Agreement will be
borne by the Fund.
2. Closing and Effective Date of the Reorganization.
The Closing shall consist of (i) the conveyance, transfer and delivery of
the Fund's assets to the Trust, in exchange for the assumption and payment,
when due, by the Trust of the Fund's obligations and liabilities; (ii) the
adoption by the Trust as its own of the Fund's Form N-8A for purposes of the
1940 Act; (iii) the filing with the Commission of an amendment to such Form
N-8A pursuant to Section 8(a) of the 1940 Act containing such amendments to the
Form N-8A as are determined by the board of trustees of the Trust (the "Board
of Trustees") to be necessary and appropriate as a result of the transactions
contemplated by this Agreement; and (iv) the issuance and delivery of the Trust
Shares in accordance with Section 1 hereof, together with related acts
necessary to consummate such transactions. The Closing shall occur at the close
of regular trading on the NYSE either on (a) the business day immediately
following the later of the receipt of all necessary regulatory approvals and
the final adjournment of the meeting of shareholders of the Fund at which this
Agreement is considered and approved, or (b) such later date as the parties may
mutually agree (in the case of either (a) or (b), the "Effective Date of the
Reorganization").
3. Conditions Precedent.
The obligations of the Fund and the Trust to effectuate the transactions
hereunder shall be subject to the satisfaction of each of the following
conditions:
(a) Such authority and orders from the Commission, state securities
commissions and the NYSE as may be necessary to permit the parties to carry
out the transactions contemplated by this Agreement shall have been received;
(b) Each party shall have received an opinion of Stradley, Ronon, Stevens
& Young, LLP, to the effect that, assuming the reorganization contemplated
hereby is carried out in accordance with this Agreement, the laws of the
States of Delaware and Maryland, and in accordance with customary
representations provided by the parties in a certificate(s) delivered to
Stradley, Ronon, Stevens & Young, LLP, the reorganization contemplated by
this Agreement qualifies as a "reorganization" under Section 368 of the
Code, and thus will not give rise to the recognition of income, gain or loss
for federal income tax purposes to the Fund, the Trust or the shareholders
of the Fund or the Trust;
(c) The Fund shall have received an opinion of Stradley, Ronon, Stevens &
Young, LLP, dated the Effective Date of the Reorganization, addressed to and
in form and substance reasonably satisfactory to the Fund, to the effect
that: (i) the Trust is a statutory trust duly formed and in good standing
under the laws of the State of Delaware; (ii) effective upon the Closing the
Trust is an open-end investment company of the management type registered
under the 1940 Act; (iii) this Agreement and the transactions contemplated
thereby and the execution and delivery of this Agreement have been duly
authorized and approved by all requisite action of the Trust and this
Agreement has been duly executed and delivered by the Trust and is a legal,
valid and binding agreement of the Trust in accordance with its terms; and
(iv) the Trust Shares to be issued in the reorganization have been duly
authorized and, upon issuance thereof in accordance with this Agreement,
will have been validly issued and fully paid and will be nonassessable by
the Trust;
(d) The Trust shall have received the opinion of Stradley, Ronon, Stevens
& Young, LLP, dated the Effective Date of the Reorganization, addressed to
and in form and substance reasonably satisfactory to the Trust, to the
effect that: (i) the Fund is incorporated, validly existing and in good
standing under the laws of the State of Maryland; (ii) immediately prior to
the Closing the Fund is a closed-end investment company of the management
type registered under the 1940 Act; and (iii) this Agreement and the
transactions contemplated hereby and the execution and delivery of this
Agreement have been duly authorized and approved by all requisite corporate
action of the Fund and this Agreement has been duly executed and delivered
by the Fund and is a legal, valid and binding agreement of the Fund in
accordance with its terms;
(e) The Trust Shares to be delivered under this Agreement shall be
eligible for sale with each state commission, agency or jurisdiction with
which such eligibility is required in order to permit Trust Shares lawfully
to be delivered to each shareholder of the Fund on the Effective Date of the
Reorganization;
A-2
(f) This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by the appropriate action of the Board of
Directors and the shareholders of the Fund;
(g) The shareholders of the Fund shall have approved the transactions
contemplated by this Agreement, which approval is deemed to be approval to
direct the Fund to vote, and the Fund shall have voted, as sole shareholder
of the Trust, to:
(1) Elect as trustees of the Trust the following individuals: Harris
J. Ashton, Nicholas F. Brady, Frank J. Crothers, S. Joseph Fortunato,
Andrew H. Hines, Jr., Edith E. Holiday, Charles B. Johnson, Betty P.
Krahmer, Gordon S. Macklin, Fred R. Millsaps and Constantine D.
Tseretopoulos; and
(2) Approve an Investment Management Agreement between Templeton
Asset Management Ltd. ("TAML") and the Trust, which is substantially
identical to the then-current Investment Management Agreement between
TAML and the Fund, including an Addendum Pursuant to Section 6.2 of the
Code of Conduct of the Hong Kong Securities & Futures Commission;
(h) The Board of Trustees shall have duly adopted and approved this
Agreement and the transactions contemplated hereby and shall have taken the
following actions by unanimous consent or, where required, at a meeting duly
called for such purposes:
(1) Approval of the Investment Management Agreement described in
paragraph (g)(2) of this Section 3 for the Trust;
(2) Approval of a Distribution Agreement between the Trust and
Franklin/Templeton Distributors, Inc.;
(3) Approval of a Form of Dealer Agreement between Franklin/Templeton
Distributors, Inc. and securities dealers dated March 1, 1998, including
the Amendment to the Form of Dealer Agreement, dated May 15, 1998;
(4) Approval and adoption of a Multiple Class Plan for the Trust
pursuant to Rule 18f-3 under the 1940 Act;
(5) Approval, creation and designation of Class A, Class B, Class C,
Class R and Advisor Class shares of the Trust;
(6) Approval and adoption of a Class A Distribution Plan, Class B
Distribution Plan, Class C Distribution Plan and Class R Distribution
Plan for the Trust pursuant to Rule 12b-1 under the 1940 Act;
(7) Approval of a Transfer Agency Agreement between the Trust and
Franklin Templeton Investor Services, LLC;
(8) Approval of the assignment to the Trust of the Fund's Custody
Agreement dated September 7, 1993 (the "Custody Agreement"), with The
Chase Manhattan Bank, N.A. (now JPMorgan Chase Bank), including the
Amendment to the Custody Agreement, dated March 2, 1998, Amendment No. 2
to the Custody Agreement, dated July 23, 1998 and Amendment No. 3 to the
Custody Agreement, dated as of May 1, 2001;
(9) Approval of a Fund Administration Agreement between the Trust and
Franklin Templeton Services, LLC;
(10) Selection of PricewaterhouseCoopers LLP as the Trust's
independent auditors for the fiscal year ending August 31, 2003;
A-3
(11) Authorization of the issuance by the Trust, prior to the
Effective Date of the Reorganization, of one share of each class of
shares of beneficial interest of the Trust to the Fund in consideration
for the payment of $1.00 for each such share for the purpose of enabling
the Fund to vote on the matters referred to in paragraph (g) of this
Section 3;
(12) Submission of the matters referred to in paragraph (g) of this
Section 3 to the Fund as sole shareholder of the Trust;
(13) Authorization of the filing by the Trust with the Commission
prior to the Effective Date of the Reorganization a registration
statement on Form N-1A; and
(14) Authorization of the issuance and delivery by the Trust of its
Trust Shares on the Effective Date of the Reorganization and the
assumption by the Trust of the obligations and liabilities of the Fund
in exchange for the assets of the Fund pursuant to the terms and
provisions of this Agreement.
(i) The officers of the Trust shall have filed, or caused to be filed,
with the Commission a registration statement on Form N-1A, and such
registration statement shall have become effective prior to the Closing, and
no stop order suspending the effectiveness of such registration statement
shall have been issued, and no proceeding for that purpose shall have been
initiated or threatened by the Commission (other than any such stop order,
proceeding or threatened proceeding which shall have been withdrawn or
terminated).
At any time prior to the Closing, any of the foregoing conditions may be
waived or amended, or any additional terms and conditions may be fixed, by the
Board of Directors or the Board of Trustees, if, in the judgment of such Board,
such waiver, amendment, term or condition will not affect in a materially
adverse way the benefits intended to be accorded to its shareholders under this
Agreement.
4. Dissolution of the Fund.
Promptly following the consummation of the distribution of the Trust Shares
to holders of Fund common stock under this Agreement, the officers of the Fund
shall take all steps necessary under Maryland law to dissolve its corporate
status, including publication of any necessary notices to creditors, receipt of
any necessary pre-dissolution clearances from the State of Maryland, and filing
for record with the State Department of Assessments and Taxation of Maryland of
Articles of Dissolution.
5. Redemption Fee.
The Fund and the Trust each agrees that, before the Closing, its Board shall
approve by appropriate action the imposition by the Trust of a 2% redemption
fee on those Trust Shares issued pursuant to this Agreement to shareholders of
the Fund in exchange for their Fund shares that are redeemed or exchanged out
of the Trust within six (6) months after the Effective Date of the
Reorganization.
6. Termination.
The Board of Directors may terminate this Agreement and abandon the
reorganization contemplated hereby, notwithstanding approval thereof by the
shareholders of the Fund, at any time prior to the Effective Date of the
Reorganization if, in the judgment of such Board, the facts and circumstances
make proceeding with this Agreement inadvisable.
7. Entire Agreement.
This Agreement embodies the entire agreement between the parties hereto and
there are no agreements, understandings, restrictions or warranties among the
parties hereto other than those set forth herein or herein provided for.
8. Further Assurances.
The Fund and the Trust shall take such further action as may be necessary or
desirable and proper to consummate the transactions contemplated hereby.
A-4
9. Counterparts.
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original, but all of which shall constitute
one and the same instrument.
10. Governing Law.
This Agreement and the transactions contemplated hereby shall be governed by
and construed and enforced in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the Trust and the Fund have each caused this Agreement
and Plan of Reorganization to be executed on its behalf by its Chairman,
President or a Vice President and attested by its Secretary or an Assistant
Secretary, all as of the day and year first-above written.
TEMPLETON CHINA WORLD FUND, INC.
(a Maryland corporation)
Attest: /s/ Lori A. Weber By: /s/ David P. Goss
---------------------------------- ----------------------------------
Name: Lori A. Weber Name: David P. Goss
Title: Assistant Secretary Title: Vice President and
Assistant Secretary
TEMPLETON CHINA WORLD FUND
(a Delaware statutory trust)
Attest: /s/ Lori A. Weber By: /s/ Barbara J. Green
---------------------------------- ----------------------------------
Name: Lori A. Weber Name: Barbara J. Green
Title: Assistant Secretary Title: Vice President and
Secretary
A-5
EXHIBIT B
A COMPARISON OF GOVERNING DOCUMENTS AND STATE LAW
A Comparison of:
The Law Governing Delaware Statutory Trusts and
The Charter Documents of Templeton China World Fund Under Such Law
With
The Law Governing Maryland Corporations and
The Charter Documents of Templeton China World Fund, Inc. Under Such Law
Delaware Statutory Trust
------------------------
Governing A Delaware statutory trust (a "DST") is formed by a
Documents/ governing instrument and the filing of a certificate of trust
Governing Body with the Delaware Secretary of State ("Secretary of State").
The Delaware law governing a DST is referred to in this
analysis as the "Delaware Act."
A DST is an unincorporated association organized under the
Delaware Act whose operations are governed by its
governing instrument (which may consist of one or more
instruments). Its business and affairs are managed by or
under the direction of one or more trustees.
The governing instrument for the DST, Templeton China
World Fund (the "Trust"), is comprised of an agreement and
declaration of trust ("Declaration") and by-laws ("By-
Laws"). The Trust's governing body is a board of trustees
(the "board" or "board of trustees" or collectively, the
"trustees").
Each trustee of the Trust shall hold office for the lifetime of
the Trust or until such Trustee's earlier death, resignation,
removal or inability otherwise to serve, or, if sooner than
any such events, until the next meeting of shareholders
called for the purpose of electing trustees or consent of
shareholders in lieu thereof for the election of trustees, and
until the election and qualification of his or her successor.
Designation of Under the Delaware Act, the ownership interests in a DST
Ownership Shares are denominated as "beneficial interests" and are held by
or Interests "beneficial owners." However, there is flexibility as to how
a governing instrument refers to "beneficial interests" and
"beneficial owners" and the governing instrument may
identify "beneficial interests" and "beneficial owners" as
"shares" and "shareholders," respectively.
Delaware Statutory Trust Maryland Corporation
------------------------ --------------------
A Delaware statutory trust (a "DST") is formed by a A Maryland corporation is created by filing articles
governing instrument and the filing of a certificate of trust of incorporation with the Maryland State
with the Delaware Secretary of State ("Secretary of State"). Department of Assessments and Taxation
The Delaware law governing a DST is referred to in this ("MSDAT"). The Maryland law governing
analysis as the "Delaware Act." corporations is referred to in this analysis as
"Maryland Law."
A DST is an unincorporated association organized under the A corporation is incorporated under the Maryland
Delaware Act whose operations are governed by its Law. A corporation's operations are governed by its
governing instrument (which may consist of one or more charter and by-laws, and its business and affairs are
instruments). Its business and affairs are managed by or managed by or under the direction of a board of
under the direction of one or more trustees. directors (the "board" or "board of directors" or
collectively, the "directors"). No public filing of the
by-laws is required.
The governing instrument for the DST, Templeton China Templeton China World Fund, Inc., a Maryland
World Fund (the "Trust"), is comprised of an agreement and corporation, is referred to in this analysis as the
declaration of trust ("Declaration") and by-laws ("By- "Corporation." The Corporation is governed by its
Laws"). The Trust's governing body is a board of trustees charter ("Charter") and by-laws ("By-Laws") and
(the "board" or "board of trustees" or collectively, the the Corporation's governing body is a board of
"trustees"). directors.
Each trustee of the Trust shall hold office for the lifetime of The board of directors of the Corporation is divided
the Trust or until such Trustee's earlier death, resignation, into three classes, each class having a term of three
removal or inability otherwise to serve, or, if sooner than years. At the annual meeting of stockholders in each
any such events, until the next meeting of shareholders year after the directors were first elected, the term of
called for the purpose of electing trustees or consent of one class shall expire and the directors chosen to
shareholders in lieu thereof for the election of trustees, and succeed those whose terms are expiring shall be of
until the election and qualification of his or her successor. the same class, and shall be elected for a term
expiring at the third succeeding annual meeting of
stockholders, or thereafter in each case when their
respective successors are elected and qualified. The
number of directorships are apportioned among the
classes so as to maintain the classes as nearly equal
in number as possible.
Under the Delaware Act, the ownership interests in a DST Equity securities of a corporation are generally
are denominated as "beneficial interests" and are held by denominated as shares of stock. Record owners of
"beneficial owners." However, there is flexibility as to how shares of stock are stockholders. Generally, equity
a governing instrument refers to "beneficial interests" and securities that have voting rights and are entitled to
"beneficial owners" and the governing instrument may the residual assets of the corporation, after payment
identify "beneficial interests" and "beneficial owners" as of liabilities, are referred to as "common stock."
"shares" and "shareholders," respectively.
B-1
Delaware Statutory Trust
------------------------
The Trust's beneficial interests, without par value, are
designated as "shares" and its beneficial owners are
designated as "shareholders." This analysis will use the
"share" and "shareholder" terminology.
Series and Under the Delaware Act, the governing instrument may
Classes provide for classes, groups or series of shares, shareholders
or trustees, having such relative rights, powers and duties as
set forth in the governing instrument. Such series, classes or
groups may be described in the DST's governing instrument
or in resolutions adopted by its trustees. No state filing is
necessary and, unless required by the governing instrument,
shareholder approval is not needed. Except to the extent
otherwise provided in the governing instrument of a DST,
where the statutory trust is a registered investment company
under the Investment Company Act of 1940, as amended
(the "1940 Act"), any class, group or series of shares
established by the governing instrument shall be a class,
group or series preferred as to distributions or dividends
over all other classes, groups or series with respect to assets
specifically allocated to such class, group or series as
contemplated by Section 18 (or any amendment or
successor provision) of the 1940 Act and any regulations
issued thereunder.
The Declaration authorizes the board of trustees to divide
the Trust's shares into separate and distinct series and to
divide a series into separate classes of shares as permitted
by the Delaware Act. Such series and classes will have the
rights, powers and duties set forth in the Declaration unless
otherwise provided in resolutions of the board with respect
to such series or class.
Amendments to The Delaware Act provides broad flexibility as to the
Governing manner of amending and/or restating the governing
Documents instrument of a DST. Amendments to the Declaration that
do not change the information in the DST's certificate of
trust are not required to be filed with the Secretary of State.
Declaration of Trust
The Declaration may be restated and/or amended at any
time by a written instrument signed by a majority of the
board of trustees and, if required by the Declaration, the
1940 Act or any securities exchange on which outstanding
shares are listed for trading, by approval of such amendment
by the shareholders, by the affirmative "vote of a majority
of the outstanding voting securities" (as defined in the 1940
Act) of the Trust entitled to vote at a shareholders' meeting
at which a quorum is present, subject to Article III, Section
6 of the Declaration relating to voting by series and classes.
Delaware Statutory Trust Maryland Corporation
------------------------ --------------------
The Trust's beneficial interests, without par value, are The Corporation's equity securities are shares of
designated as "shares" and its beneficial owners are common stock, par value $0.01 per share, and the
designated as "shareholders." This analysis will use the owners of such stock are "stockholders."
"share" and "shareholder" terminology.
Under the Delaware Act, the governing instrument may The Maryland Law permits a corporation to issue
provide for classes, groups or series of shares, shareholders one or more series and classes of stock. If the stock
or trustees, having such relative rights, powers and duties as is to be divided into series or classes, the charter
set forth in the governing instrument. Such series, classes or must describe each series and class, including any
groups may be described in the DST's governing instrument preferences, conversion or other rights, voting
or in resolutions adopted by its trustees. No state filing is powers, restrictions, limitations as to dividends,
necessary and, unless required by the governing instrument, qualifications and terms or conditions of redemption
shareholder approval is not needed. Except to the extent among such classes and series. To change the terms
otherwise provided in the governing instrument of a DST, of an existing series or class or create a new series or
where the statutory trust is a registered investment company class, the charter must be amended. Generally,
under the Investment Company Act of 1940, as amended amendments to the charter must receive board and
(the "1940 Act"), any class, group or series of shares stockholder approval.
established by the governing instrument shall be a class,
group or series preferred as to distributions or dividends Under Maryland Law, the charter may also authorize
over all other classes, groups or series with respect to assets the board to classify or reclassify any unissued stock
specifically allocated to such class, group or series as from time to time, without stockholder approval, by
contemplated by Section 18 (or any amendment or setting or changing the preferences, conversion or
successor provision) of the 1940 Act and any regulations other rights, voting powers, restrictions, limitations
issued thereunder. as to dividends, qualifications, or terms and
conditions of redemption, by filing articles
supplementary to the charter with the Maryland
State Department of Assessments and Taxation.
The Declaration authorizes the board of trustees to divide The Charter does not classify or authorize the board
the Trust's shares into separate and distinct series and to to classify the Corporation's stock.
divide a series into separate classes of shares as permitted
by the Delaware Act. Such series and classes will have the
rights, powers and duties set forth in the Declaration unless
otherwise provided in resolutions of the board with respect
to such series or class.
The Delaware Act provides broad flexibility as to the Under Maryland Law, amendments to the charter
manner of amending and/or restating the governing must generally be approved by the board and by the
instrument of a DST. Amendments to the Declaration that affirmative vote of two-thirds of all votes entitled to
do not change the information in the DST's certificate of be cast (unless the charter permits amendment by a
trust are not required to be filed with the Secretary of State. higher or lesser proportion of the voting stock, but
not less than a majority of the shares outstanding).
Declaration of Trust Charter
The Declaration may be restated and/or amended at any The Charter provides that the Charter may be
time by a written instrument signed by a majority of the amended, altered, repealed, or added to upon vote of
board of trustees and, if required by the Declaration, the holders of a majority of the shares outstanding and
1940 Act or any securities exchange on which outstanding entitled to vote thereon, except that amendment or
shares are listed for trading, by approval of such amendment repeal of provisions pertaining to the number of
by the shareholders, by the affirmative "vote of a majority directors and classification, removal of directors,
of the outstanding voting securities" (as defined in the 1940 directors' liability, indemnification, reorganizations,
Act) of the Trust entitled to vote at a shareholders' meeting dissolution or conversion to open-end company, and
at which a quorum is present, subject to Article III, Section amendments to the Charter require the affirmative
6 of the Declaration relating to voting by series and classes. vote of the holders of at least 66 2/3% of the
outstanding shares entitled to vote, unless such
action has previously been approved by the
affirmative vote of two-thirds of the board of
directors. Upon such a two-thirds vote by the board
of directors, such provisions may be amended upon
the vote of holders of a majority of the shares
outstanding and entitled to vote thereon (the general
vote needed to amend the other provisions of the
Charter).
B-2
Delaware Statutory Trust
------------------------
By-Laws
The By-Laws may be amended, restated or repealed or new
By-Laws may be adopted by the affirmative vote of a
majority of the outstanding shares entitled to vote. The By-
Laws may also be amended, restated or repealed or new By-
Laws may be adopted by the board of trustees, by a vote of
a majority of the trustees present at a meeting at which a
quorum is present
Certificate of Trust
Pursuant to the Declaration, amendments and/or
restatements of the certificate of trust shall be made at any
time by the board of trustees, without approval of the
shareholders, to correct any inaccuracy contained therein.
Any such amendments/restatements of the certificate of trust
must be executed by at least one (1) trustee and filed with
the Secretary of State in order to become effective.
Preemptive Rights Under the Delaware Act, a governing instrument may
and Redemption of contain any provision relating to the rights, duties and
Shares obligations of the shareholders. Unless otherwise provided
in the governing instrument, a shareholder shall have no
preemptive right to subscribe to any additional issue of
shares or another interest in a DST.
The Declaration provides that no shareholder shall have the
preemptive or other right to subscribe for new or additional
shares or other securities issued by the Trust or any series
thereof.
Unless otherwise provided in the Trust's prospectus relating
to the outstanding shares, as such prospectus may be
amended from time to time, the Trust shall purchase the
outstanding shares offered by any shareholder for
redemption upon such shareholder's compliance with the
procedures set forth in the Declaration and/or such other
procedures as the board may authorize. The Trust shall pay
the net asset value for such outstanding shares, in
accordance with the Declaration, the By-Laws, the 1940 Act
and other applicable law. The Trust's payments for such
outstanding shares shall be made in cash, but may, at the
option of the board of trustees or an authorized officer, be
made in kind or partially in cash and partially in kind. In
addition, at the option of the board of trustees, the Trust
may, from time to time, without the vote of the
shareholders, but subject to the 1940 Act, redeem
outstanding shares or authorize the closing of any
shareholder account, subject to such conditions as may be
established by the board of trustees.
Delaware Statutory Trust Maryland Corporation
------------------------ --------------------
By-Laws By-Laws
The By-Laws may be amended, restated or repealed or new Under Maryland Law, after the organizational
By-Laws may be adopted by the affirmative vote of a meeting, the power to adopt, alter or repeal the by-
majority of the outstanding shares entitled to vote. The By- laws is vested in the stockholders, except to the
Laws may also be amended, restated or repealed or new By- extent that the charter or by-laws vest such power in
Laws may be adopted by the board of trustees, by a vote of the board.
a majority of the trustees present at a meeting at which a
quorum is present The By-Laws may be adopted, amended or repealed
by "vote of the holders of a majority of the
Certificate of Trust [Corporation's] stock" (as defined in the 1940 Act);
Pursuant to the Declaration, amendments and/or except that provisions in the By-Laws regarding
restatements of the certificate of trust shall be made at any increasing/decreasing the number of directors and
time by the board of trustees, without approval of the removal of directors may be amended only by the
shareholders, to correct any inaccuracy contained therein. vote of the holders of 75% of the common stock,
Any such amendments/restatements of the certificate of trust unless the amendment is approved by the affirmative
must be executed by at least one (1) trustee and filed with vote of two-thirds of the total number of directors
the Secretary of State in order to become effective. fixed in accordance with the By-Laws, in which case
the affirmative vote of a majority of the outstanding
shares is required. Directors may adopt, amend or
repeal By-Laws (not inconsistent with any By-Law
adopted, amended or repealed by stockholders) by
majority vote of all of the directors in office, subject
to applicable law.
Under the Delaware Act, a governing instrument may Under Maryland Law, a stockholder does not have
contain any provision relating to the rights, duties and preemptive rights unless the charter expressly grants
obligations of the shareholders. Unless otherwise provided such rights.
in the governing instrument, a shareholder shall have no
preemptive right to subscribe to any additional issue of The Corporation does not provide shareholders with
shares or another interest in a DST. preemptive rights.
The Declaration provides that no shareholder shall have the Shareholders of the Corporation do not have
preemptive or other right to subscribe for new or additional redemption rights.
shares or other securities issued by the Trust or any series
thereof.
Unless otherwise provided in the Trust's prospectus relating
to the outstanding shares, as such prospectus may be
amended from time to time, the Trust shall purchase the
outstanding shares offered by any shareholder for
redemption upon such shareholder's compliance with the
procedures set forth in the Declaration and/or such other
procedures as the board may authorize. The Trust shall pay
the net asset value for such outstanding shares, in
accordance with the Declaration, the By-Laws, the 1940 Act
and other applicable law. The Trust's payments for such
outstanding shares shall be made in cash, but may, at the
option of the board of trustees or an authorized officer, be
made in kind or partially in cash and partially in kind. In
addition, at the option of the board of trustees, the Trust
may, from time to time, without the vote of the
shareholders, but subject to the 1940 Act, redeem
outstanding shares or authorize the closing of any
shareholder account, subject to such conditions as may be
established by the board of trustees.
B-3
Delaware Statutory Trust
------------------------
Dissolution and The Trust shall be dissolved upon the first to occur of the
Termination Events following:
(i) upon the vote of the holders of a majority of the
outstanding shares of the Trust entitled to vote; (ii) at the
discretion of the board of trustees at any time there are no
shares outstanding of the Trust; (iii) upon the sale,
conveyance and transfer of all of the assets of the Trust to
another entity; or (iv) upon the occurrence of a dissolution
or termination event pursuant to any provision of the
Delaware Act.
A particular series shall be dissolved upon the first to occur
of the following:
(i) upon the vote of the holders of a majority of the
outstanding shares of that series entitled to vote; (ii) at the
discretion of the board of trustees at any time there are no
shares outstanding of that series; (iii) upon any event that
causes the dissolution of the Trust.
A particular class shall be terminated upon the first to occur
of the following:
(i) upon the vote of the holders of a majority of the
outstanding shares of that class entitled to vote; (ii) at the
discretion of the board of trustees at any time there are no
shares outstanding of that class; or (iii) upon the dissolution
of the series of which the class is a part.
Liquidation upon Under the Delaware Act, a DST that has dissolved shall first
Dissolution pay or make reasonable provision to pay all known claims
and obligations, including those that are contingent,
conditional and unmatured, and all known claims and
obligations for which the claimant is unknown. Any
remaining assets shall be distributed to the shareholders or
as otherwise provided in the governing instrument.
Under the Delaware Act, a series that has dissolved shall
first pay or make reasonable provision to pay all known
claims and obligations of the series, including those that are
contingent, conditional and unmatured, and all known
claims and obligations of the series for which the claimant is
unknown. Any remaining assets of the series shall be
distributed to the shareholders of such series or as otherwise
provided in the governing instrument.
The Declaration provides that any remaining assets of the
dissolved Trust and/or each series thereof (or the particular
dissolved series, as the case may be) shall be distributed to
the shareholders of the Trust and/or each series thereof (or
the particular dissolved series, as the case may be) ratably
according to the number of outstanding shares of the Trust
and/or such series thereof (or the particular dissolved series,
as the case may be) held of record by the several
shareholders on the date for such dissolution distribution;
provided, however, that if the outstanding shares of a series
are divided into classes, any remaining assets held with
respect to such series shall be distributed to each class of
such series according to the net asset value computed for
such class and within such particular class, shall be
distributed ratably to the shareholders of such class
according to the number of outstanding shares of such class
held of record by the several shareholders on the date for
such dissolution distribution.
Delaware Statutory Trust Maryland Corporation
------------------------ --------------------
The Trust shall be dissolved upon the first to occur of the See Voting Rights, Meetings, Notice, Quorum,
following: Record Dates and Proxies--Stockholder Vote for
(i) upon the vote of the holders of a majority of the the Maryland Law as to the stockholder vote
outstanding shares of the Trust entitled to vote; (ii) at the required to voluntarily dissolve a corporation.
discretion of the board of trustees at any time there are no
shares outstanding of the Trust; (iii) upon the sale, Depending on the grounds for involuntary
conveyance and transfer of all of the assets of the Trust to dissolution, under Maryland Law (i) stockholders
another entity; or (iv) upon the occurrence of a dissolution entitled to cast at least 25% of all the votes entitled
or termination event pursuant to any provision of the to be cast in the election of directors; (ii) any
Delaware Act. stockholder entitled to vote in the election of
directors; or (iii) any stockholder or creditor of the
A particular series shall be dissolved upon the first to occur corporation, may petition a court of equity to
of the following: dissolve the corporation.
(i) upon the vote of the holders of a majority of the
outstanding shares of that series entitled to vote; (ii) at the See Voting Rights, Meetings, Notice, Quorum,
discretion of the board of trustees at any time there are no Record Dates and Proxies--Stockholder Vote on
shares outstanding of that series; (iii) upon any event that Certain Transactions for the stockholder vote
causes the dissolution of the Trust. required under the Charter to voluntarily dissolve the
Corporation.
A particular class shall be terminated upon the first to occur
of the following:
(i) upon the vote of the holders of a majority of the
outstanding shares of that class entitled to vote; (ii) at the
discretion of the board of trustees at any time there are no
shares outstanding of that class; or (iii) upon the dissolution
of the series of which the class is a part.
Under the Delaware Act, a DST that has dissolved shall first Under Maryland Law, a corporation that has
pay or make reasonable provision to pay all known claims voluntarily dissolved shall pay, satisfy and discharge
and obligations, including those that are contingent, the existing debts and obligations of the corporation,
conditional and unmatured, and all known claims and including necessary expenses of liquidation, before
obligations for which the claimant is unknown. Any distributing the remaining assets to the stockholders.
remaining assets shall be distributed to the shareholders or
as otherwise provided in the governing instrument.
Under the Delaware Act, a series that has dissolved shall
first pay or make reasonable provision to pay all known
claims and obligations of the series, including those that are
contingent, conditional and unmatured, and all known
claims and obligations of the series for which the claimant is
unknown. Any remaining assets of the series shall be
distributed to the shareholders of such series or as otherwise
provided in the governing instrument.
The Declaration provides that any remaining assets of the
dissolved Trust and/or each series thereof (or the particular
dissolved series, as the case may be) shall be distributed to
the shareholders of the Trust and/or each series thereof (or
the particular dissolved series, as the case may be) ratably
according to the number of outstanding shares of the Trust
and/or such series thereof (or the particular dissolved series,
as the case may be) held of record by the several
shareholders on the date for such dissolution distribution;
provided, however, that if the outstanding shares of a series
are divided into classes, any remaining assets held with
respect to such series shall be distributed to each class of
such series according to the net asset value computed for
such class and within such particular class, shall be
distributed ratably to the shareholders of such class
according to the number of outstanding shares of such class
held of record by the several shareholders on the date for
such dissolution distribution.
B-4
Delaware Statutory Trust
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Voting Rights, Under the Delaware Act, the governing instrument may set
Meetings, Notice, forth any provision relating to trustee and shareholder
Quorum, Record voting rights, including the withholding of such rights from
Dates and Proxies certain trustees or shareholders. If voting rights are granted,
the governing instrument may contain any provision relating
to meetings, notice requirements, written consents, record
dates, quorum requirements, voting by proxy and any other
matter pertaining to the exercise of voting rights. The
governing instrument may also provide for the
establishment of record dates for allocations and
distributions by the DST.
One Vote Per Share
Subject to Article III, Section 6 of the Declaration relating
to voting by series and classes, the Declaration provides that
each outstanding share is entitled to one vote and each
outstanding fractional share is entitled to a fractional vote.
Voting by Series
In addition, the Declaration provides that all outstanding
shares of the Trust entitled to vote on a matter shall vote on
the matter, separately by series and, if applicable, by class,
provided that: (1) where the 1940 Act requires all
outstanding shares of the Trust to be voted in the aggregate
without differentiation between the separate series or
classes, then all of the Trust's outstanding shares shall vote
in the aggregate; and (2) if any matter affects only the
interests of some but not all series or classes, then only the
shareholders of such affected series or classes shall be
entitled to vote on the matter.
Delaware Statutory Trust Maryland Corporation
------------------------ --------------------
Under the Delaware Act, the governing instrument may set
forth any provision relating to trustee and shareholder
voting rights, including the withholding of such rights from
certain trustees or shareholders. If voting rights are granted,
the governing instrument may contain any provision relating
to meetings, notice requirements, written consents, record
dates, quorum requirements, voting by proxy and any other
matter pertaining to the exercise of voting rights. The
governing instrument may also provide for the
establishment of record dates for allocations and
distributions by the DST.
One Vote Per Share One Vote Per Share
Subject to Article III, Section 6 of the Declaration relating Under Maryland Law, unless a corporation's charter
to voting by series and classes, the Declaration provides that provides for a greater or lesser number of votes per
each outstanding share is entitled to one vote and each share, or limits or denies voting rights, each
outstanding fractional share is entitled to a fractional vote. outstanding share of stock is entitled to one vote on
each matter submitted to a vote at a meeting of
stockholders. A corporation may issue fractional
shares of stock.
The Charter provides that each outstanding share of
stock is entitled to one vote and each outstanding
fractional share of stock is entitled to a fractional
vote.
Voting by Series
In addition, the Declaration provides that all outstanding
shares of the Trust entitled to vote on a matter shall vote on
the matter, separately by series and, if applicable, by class,
provided that: (1) where the 1940 Act requires all
outstanding shares of the Trust to be voted in the aggregate
without differentiation between the separate series or
classes, then all of the Trust's outstanding shares shall vote
in the aggregate; and (2) if any matter affects only the
interests of some but not all series or classes, then only the
shareholders of such affected series or classes shall be
entitled to vote on the matter.
B-5
Delaware Statutory Trust Maryland Corporation
------------------------ --------------------
Shareholders' Meetings Stockholders' Meetings
The Delaware Act does not mandate annual shareholders' Under Maryland Law, every corporation must hold
meetings. Therefore, the By-Laws authorize the calling of a an annual stockholders' meeting to elect directors
shareholders' meeting (i) when deemed necessary or and transact other business, except that the charter or
desirable by the board of trustees; or (ii) to the extent by-laws of a corporation registered under the 1940
permitted by the 1940 Act, by the chairperson of the board, Act may provide that an annual meeting is not
or at the request of holders of 10% of the outstanding shares required in any year in which the election of
if such shareholders pay the reasonably estimated cost of directors is not required by the 1940 Act. Maryland
preparing and mailing the notice thereof, for the purpose of Law authorizes, and permits the charter and By-
electing trustees. However, no meeting may be called at the Laws to authorize, certain persons to call special
request of shareholders to consider any matter that is meetings of stockholders.
substantially the same as a matter voted upon at a
shareholders' meeting held during the preceding twelve The By-Laws require annual meetings for the
(12) months, unless requested by holders of a majority of election of directors and the transaction of other
all outstanding shares entitled to vote at such meeting. business. The By-Laws also authorize the calling of
a special meeting, unless otherwise "prescribed" by
statute or the Charter, by the board or the president,
and shall be called by the president or the secretary
upon the written request of a majority of the
directors or at the written request of stockholders
owning 10% "in amount of the entire capital stock"
of the Corporation then issued and outstanding, if
the stockholders requesting such meeting pay the
reasonably estimated cost of preparing and mailing
the notice thereof. However, no special meeting will
be called at the request of stockholders to consider
any matter that is substantially the same as a matter
voted upon at a stockholders' special meeting held
during the preceding 12 months, unless requested by
holders of a majority of all outstanding shares
entitled to vote at such meeting.
Record Dates Record Dates
In order to determine the shareholders entitled to notice of, Under Maryland Law, unless the by-laws otherwise
and to vote at, a shareholders' meeting, the Declaration provide, the board may set a record date, which date
authorizes the board of trustees to fix a record date. The must be set within the parameters outlined by the
record date may not precede the date on which it is fixed by Maryland statute, for determining stockholders
the board and it may not be more than one hundred and entitled to notice of a meeting, vote at a meeting,
twenty (120) days nor less than ten (10) days before the date receive dividends or be allotted other rights.
of the shareholders' meeting. The By-Laws provide that
notice of a shareholders' meeting shall be given to In order to determine the stockholders entitled to
shareholders entitled to vote at such meeting not less than notice of, and to vote at, a stockholders' meeting, the
ten (10) nor more than one hundred and twenty (120) days By-Laws authorize the board of directors to fix a
before the date of the meeting. record date not less than ten (10) nor more than
ninety (90) days prior to the date of the meeting or
prior to the last day on which the consent or dissent
of stockholders may be effectively expressed for any
purpose without a meeting.
To determine the shareholders entitled to vote on any action If the board does not fix a record date, the record
without a meeting, the Declaration authorizes the board of date shall be the later of the close of business on the
trustees to fix a record date. The record date may not day on which notice of the meeting is mailed or the
precede the date on which it is fixed by the board nor may it 30th day before the meeting, except if all
be more than thirty (30) days after the date on which it is stockholders waive notice, the record date is the
fixed by the board. close of business on the 10th day next preceding the
day the meeting is held.
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Delaware Statutory Trust Maryland Corporation
------------------------ --------------------
Pursuant to the Declaration, if the board of trustees does not
fix a record date:
(a) the record date for determining shareholders
entitled to notice of, and to vote at, a meeting will be
the day before the date on which notice is given or,
if notice is waived, on the day before the date of the
meeting; (b) the record date for determining
shareholders entitled to vote on any action by
consent in writing without a meeting, (i) when no
prior action by the board of trustees has been taken,
shall be the day on which the first signed written
consent is delivered to the Trust, or (ii) when prior
action of the board of trustees has been taken, shall
be the day on which the board of trustees adopts the
resolution taking such prior action.
To determine the shareholders of the Trust or any series or To determine the stockholders entitled to a dividend,
class thereof entitled to a dividend or any other distribution any other distribution, or delivery of evidences of
of assets of the Trust or any series or class thereof, the rights or interests from the Corporation, the By-
Declaration authorizes the board of trustees to fix a record Laws authorize the board to fix a record date not
date. The record date may not precede the date on which it exceeding ninety (90) days preceding the date fixed
is fixed by the board nor may it be more than sixty (60) days for the payment of the dividend or distribution or
before the date such dividend or distribution is to be paid. delivery of the evidences.
The board may set different record dates for different series
or classes.
Quorum for Shareholders' Meeting Quorum for Stockholders' Meeting
To transact business at a shareholders' meeting, the Under Maryland Law, unless the charter or
Declaration provides that forty percent (40%) of the Maryland Law provides otherwise, in order to
outstanding shares entitled to vote at the meeting, which are constitute a quorum for a meeting, there must be
present in person or represented by proxy, shall constitute a present in person or by proxy, stockholders entitled
quorum at such meeting, except when a larger quorum is to cast a majority of all the votes entitled to be cast
required by the Declaration, the By-Laws, applicable law or at the meeting.
any securities exchange on which such shares are listed for
trading, in which case such quorum shall comply with such To transact business at a meeting, the By-Laws
requirements. When a separate vote by one or more series or provide that a majority of the outstanding shares
classes is required, forty percent (40%) of the outstanding entitled to vote, which are present in person or
shares of each such series or class entitled to vote at a represented by proxy, shall constitute a quorum at a
shareholders' meeting of such series or class, which are stockholders' meeting.
present in person or represented by proxy, shall constitute a
quorum at such series or class meeting, except when a larger
quorum is required by the Declaration, the By-Laws,
applicable law or the requirements of any securities
exchange on which outstanding shares of such series or
class are listed for trading, in which case such quorum shall
comply with such requirements.
B-7
Delaware Statutory Trust Maryland Corporation
------------------------ --------------------
Shareholder Vote Stockholder Vote
The Declaration provides that, subject to any provision of Under Maryland Law, for most stockholder actions,
the Declaration, the By-Laws, the 1940 Act or other unless the charter or Maryland Law provides
applicable law that requires a different vote: (i) in all otherwise, a majority of all votes cast at a meeting at
matters other than the election of trustees, the affirmative which a quorum is present is required to approve any
"vote of a majority of the outstanding voting securities" (as matter. Actions such as (i) amendments to the
defined in the 1940 Act) of the Trust entitled to vote at a corporation's charter, (ii) mergers, (iii)
shareholders' meeting at which a quorum is present, shall be consolidations, (iv) statutory share exchanges, (v)
the act of the shareholders; and (ii) trustees shall be elected transfers of assets and (vi) dissolutions require the
by a plurality of the votes cast of the holders of outstanding affirmative vote of two-thirds of all votes entitled to
shares entitled to vote present in person or represented by be cast on the matter unless the charter provides for
proxy at a shareholders' meeting at which a quorum is a lesser proportion which may not be less than a
present. Pursuant to the Declaration, where a separate vote majority of all votes entitled to be cast on the matter.
by series and, if applicable, by classes is required, the Unless the charter or by-laws require a greater vote,
preceding sentence shall apply to such separate votes by a plurality of all votes cast at a meeting at which a
series and classes. quorum is present is required to elect a director.
Election of Directors. Under the By-Laws, at a
stockholders' meeting at which a quorum is present,
a plurality of the votes cast of the holders of
outstanding shares entitled to vote, shall be required
to elect directors at the annual meeting, and to fill
any vacancy resulting from an increase in the
number of directors on the board (adopted by vote of
the stockholders) and any other then existing
vacancies on the board.
Other matters for which the vote is not expressly
designated otherwise. For all other matters, other
than any specific matter for which the Charter or By-
Laws expressly provides for a different vote, the
affirmative vote of the holders of a majority of the
total number of shares outstanding and entitled to
vote thereon, at a stockholders' meeting at which a
quorum is present, shall be the act of the
stockholders.
Shareholder Vote on Certain Transactions Stockholder Vote on Certain Transactions
Pursuant to the Declaration, the board of trustees, by vote of Under the Charter, in order to consummate a merger,
a majority of the trustees, may cause the merger, consolidation, sale of all or substantially all of the
consolidation, conversion, share exchange or reorganization assets, liquidation or dissolution of the Corporation,
of the Trust, or the conversion, share exchange or or a conversion from a closed-end company to an
reorganization of any series of the Trust, without the vote of open-end company (as defined in the 1940 Act),
the shareholders of the Trust or such series, as applicable, such transaction shall be approved in the following
unless such vote is required by the 1940 Act; provided manner:
however, that the board of trustees shall provide 30 days'
prior written notice to the shareholders of the Trust or such The transaction must be approved by the affirmative
series, as applicable, of such merger, consolidation, vote of at least 66 2/3% of the outstanding shares
conversion, share exchange or reorganization. entitled to vote, unless such action has been
previously approved by the affirmative vote of two-
If permitted by the 1940 Act, the board of trustees, by vote thirds of the total number of directors fixed pursuant
of a majority of the trustees, and without a shareholder vote, to the By-Laws, in which case the affirmative "vote
may cause the Trust to convert to a master feeder structure of a majority of the outstanding voting securities"
and thereby cause series of the Trust to either become (as defined in the 1940 Act) of the Corporation shall
feeders into a master fund, or to become master funds into be required, but not less than a majority of the
which other funds are feeders. outstanding voting shares for purposes of Maryland
Law.
B-8
Delaware Statutory Trust Maryland Corporation
------------------------ --------------------
With respect to the Corporation's conversion to an
open-end company, the Charter also provides that, if,
as of August 31, 2003, the shares have traded
(during a certain time period) at (i) an average
discount of 15% or more or (ii) a price below the
original offering price of $15 per share, the board
shall submit a conversion proposal (and related
Charter amendment) to the stockholders. The
affirmative vote of 66- 2/3% of the outstanding shares
entitled to vote shall be required to effectuate the
conversion.
Cumulative Voting Cumulative Voting
The Declaration provides that shareholders are not entitled Maryland law provides that the charter may
to cumulate their votes on any matter. authorize cumulative voting for the election of the
directors and if the charter does not so provide, then
the stockholders are not entitled to cumulative voting
rights.
The Charter and By-Laws do not have any
provisions as to whether stockholders are entitled to
cumulate their votes on any matter and
consequently, the stockholders are not entitled to
cumulate their votes on any matter.
Proxies Proxies
The By-Laws permit a shareholder to authorize another Under Maryland Law, a stockholder may sign a
person to act as proxy by the following methods: execution writing authorizing another person to act as a proxy
of a written instrument or by "electronic transmission" (as or may transmit such authorization by telegram,
defined in the Delaware Act), telephonic, computerized, cablegram, datagram, electronic mail, or any other
telecommunications or another reasonable alternative to the electronic or telephonic means.
execution of a written instrument. Unless a proxy provides
otherwise, it is not valid more than 11 months after its date. Unless a proxy provides otherwise, it is not valid
In addition, the By-Laws provide that the revocability of a more than 11 months after its date. The proxy is
proxy that states on its face that it is irrevocable shall be revocable unless certain statutory requirements are
governed by the provisions of the general corporation law of met.
the State of Delaware.
Action by Written Consent Action by Written Consent
Shareholders Stockholders
The Declaration authorizes shareholders to take action Maryland Law provides that any action required or
without a meeting and without prior notice if written permitted to be taken at a stockholders' meeting may
consents setting forth the action taken are signed by the be taken without a meeting, if a unanimous written
holders of all outstanding shares entitled to vote on that consent is signed by each stockholder entitled to
action. A consent transmitted by "electronic transmission" vote on the matter.
(as defined in the Delaware Act) by a shareholder or by a
person(s) authorized to act for a shareholder shall be
deemed to be written and signed for purposes of this
provision.
Board of Trustees Board of Directors
The Declaration also authorizes the board of trustees or any The By-Laws also provide that the board or any
committee of the board of trustees to take action without a committee of the board may act by written consent
meeting and without prior written notice if written consents signed by all the members of the board or
setting forth the action taken are executed by trustees having committee, respectively.
the number of votes necessary to take that action at a
meeting at which the entire board of trustees or any
committee thereof, as applicable, is present and voting. A
consent transmitted by "electronic transmission" (as defined
in the Delaware Act) by a trustee shall be deemed to be
written and signed for purposes of this provision.
B-9
Delaware Statutory Trust
------------------------
Removal of The governing instrument of a DST may contain any
Trustees/ provision relating to the removal of trustees; provided
Directors however, that there shall at all times be at least one trustee
of the DST.
Under the Declaration, any trustee may be removed, with or
without cause, by the board of trustees, by action of a
majority of the trustees. Shareholders shall have the power
to remove a trustee only to the extent provided by the 1940
Act.
Vacancies on Pursuant to the 1940 Act, vacancies on the board of trustees
Board of may be filled by a majority vote of the trustee(s) then in
Trustees/ office, regardless of the number and even if less than a
Directors quorum. However, a shareholders' meeting shall be called
to elect trustees if required by the 1940 Act.
In the event all trustee offices become vacant, the
investment adviser shall serve as the sole remaining trustee,
subject to the provisions of the 1940 Act, and shall, as soon
as practicable, fill all of the vacancies on the board.
Thereupon, the investment adviser shall resign as trustee
and a shareholders' meeting shall be called to elect trustees.
Limitation on The Delaware Act explicitly authorizes limitation on
Interseries interseries liability so that the debts, liabilities, obligations
Liability and expenses incurred, contracted for or otherwise existing
with respect to a particular series of a multiple series DST
will be enforceable only against the assets of such series,
and not against the general assets of the DST or any other
series, and, unless otherwise provided in the governing
instrument of the DST, none of the debts, liabilities,
obligations and expenses incurred, contracted for or
otherwise existing with respect to the DST generally or any
other series thereof will be enforceable against the assets of
such series. This protection will be afforded if (i) the DST
separately maintains the records and the assets of such
series; (ii) notice of the limitation on liabilities of the series
is set forth in the certificate of trust; and (iii) the governing
instrument so provides.
The Declaration and certificate of trust of the Trust provide
for limitation on interseries liability.
Delaware Statutory Trust Maryland Corporation
------------------------ --------------------
The governing instrument of a DST may contain any Under Maryland Law, unless otherwise provided in
provision relating to the removal of trustees; provided the charter, a director may generally be removed
however, that there shall at all times be at least one trustee with or without cause by the vote of a majority of all
of the DST. the votes entitled to be cast generally for the election
of directors unless (i) such director is elected by a
certain class or series, (ii) the charter provides for
cumulative voting or (iii) the board is classified.
Under the Declaration, any trustee may be removed, with or Under the Charter, a director may be removed with
without cause, by the board of trustees, by action of a or without cause by holders of 66 2/3% of shares then
majority of the trustees. Shareholders shall have the power entitled to vote in an election of directors and a
to remove a trustee only to the extent provided by the 1940 stockholders' meeting may be called for such
Act. purpose if requested in writing by holders of not less
than 10% of outstanding shares of the Corporation.
Pursuant to the 1940 Act, vacancies on the board of trustees Under Maryland Law, stockholders may elect
may be filled by a majority vote of the trustee(s) then in persons to fill vacancies that result from the removal
office, regardless of the number and even if less than a of directors. Unless the charter or by-laws provide
quorum. However, a shareholders' meeting shall be called otherwise, a majority of the directors in office,
to elect trustees if required by the 1940 Act. whether or not comprising a quorum, may fill
vacancies that result from any cause except an
In the event all trustee offices become vacant, the increase in the number of directors. A majority of
investment adviser shall serve as the sole remaining trustee, the entire board of directors may fill vacancies that
subject to the provisions of the 1940 Act, and shall, as soon result from an increase in the number of directors.
as practicable, fill all of the vacancies on the board.
Thereupon, the investment adviser shall resign as trustee Under the By-Laws, directors may increase or
and a shareholders' meeting shall be called to elect trustees. decrease their number; if the number is increased,
the added directors may be elected by a majority of
directors in office. For other vacancies, the directors
then in office (though less than quorum) shall
continue to act and may by majority vote fill any
vacancy until the next meeting of stockholders,
subject to the 1940 Act.
The number of directors may also be increased or
decreased by vote of stockholders at any meeting
called for the purpose and if the vote is to increase
the number, stockholders will vote by plurality to
elect the directors to fill the new vacancies as well as
any then existing vacancies. The By-Laws further
provide that "[a]ny vacancy may be filled by the
[s]tockholders at any meeting thereof."
The Delaware Act explicitly authorizes limitation on The Maryland Law does not contain an express
interseries liability so that the debts, liabilities, obligations provision addressing interseries or class liability
and expenses incurred, contracted for or otherwise existing with respect to a multiple series or class Corporation.
with respect to a particular series of a multiple series DST
will be enforceable only against the assets of such series,
and not against the general assets of the DST or any other
series, and, unless otherwise provided in the governing
instrument of the DST, none of the debts, liabilities,
obligations and expenses incurred, contracted for or
otherwise existing with respect to the DST generally or any
other series thereof will be enforceable against the assets of
such series. This protection will be afforded if (i) the DST
separately maintains the records and the assets of such
series; (ii) notice of the limitation on liabilities of the series
is set forth in the certificate of trust; and (iii) the governing
instrument so provides.
The Declaration and certificate of trust of the Trust provide
for limitation on interseries liability.
B-10
Delaware Statutory Trust
------------------------
Shareholder Under the Delaware Act, except to the extent otherwise
Liability provided in the governing instrument of a DST,
shareholders of a DST are entitled to the same limitation of
personal liability extended to shareholders of a private
corporation organized for profit under the General
Corporation Law of the State of Delaware.
Under the Declaration, shareholders are entitled to the same
limitation of personal liability as that extended to
shareholders of a private corporation organized for profit
under the General Corporation Law of the State of
Delaware. However, the board of trustees may cause any
shareholder to pay for charges of the trust's custodian or
transfer, dividend disbursing, shareholder servicing or
similar agent for services provided to such shareholder.
Trustee/Director Subject to the provisions in the governing instrument, the
Liability Delaware Act provides that a trustee or any other person
managing the DST, when acting in such capacity, will not
be personally liable to any person other than the DST or a
shareholder of the DST for any act, omission or obligation
of the DST or any trustee. To the extent that at law or in
equity, a trustee has duties (including fiduciary duties) and
liabilities to the DST and its shareholders, such duties and
liabilities may be expanded or restricted by the governing
instrument.
The Declaration provides that any person who is or was a
trustee, officer, employee or other agent of the Trust or is or
was serving at the request of the Trust as a trustee, director,
officer, employee or other agent of another corporation,
partnership, joint venture, trust or other enterprise (an
"Agent") will be liable to the Trust and to any shareholder
solely for such Agent's own willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved
in the conduct of such Agent (such conduct referred to as
"Disqualifying Conduct"). Subject to the preceding
sentence, Agents will not be liable for any act or omission
of any other Agent or any investment adviser or principal
underwriter of the Trust. No Agent, when acting in such
capacity, shall be personally liable to any person (other than
the Trust or its shareholders as described above) for any act,
omission or obligation of the Trust or any trustee.
Indemnification Subject to such standards and restrictions contained in the
governing instrument of a DST, the Delaware Act
authorizes a DST to indemnify and hold harmless any
trustee, shareholder or other person from and against any
and all claims and demands.
Delaware Statutory Trust Maryland Corporation
------------------------ --------------------
Under the Delaware Act, except to the extent otherwise The stockholders of a corporation are not liable for
provided in the governing instrument of a DST, the obligations of the corporation.
shareholders of a DST are entitled to the same limitation of
personal liability extended to shareholders of a private
corporation organized for profit under the General
Corporation Law of the State of Delaware.
Under the Declaration, shareholders are entitled to the same
limitation of personal liability as that extended to
shareholders of a private corporation organized for profit
under the General Corporation Law of the State of
Delaware. However, the board of trustees may cause any
shareholder to pay for charges of the trust's custodian or
transfer, dividend disbursing, shareholder servicing or
similar agent for services provided to such shareholder.
Subject to the provisions in the governing instrument, the Maryland Law requires a director to perform his or
Delaware Act provides that a trustee or any other person her duties in good faith, in a manner he or she
managing the DST, when acting in such capacity, will not reasonably believes to be in the best interests of the
be personally liable to any person other than the DST or a corporation and with the care that an ordinarily
shareholder of the DST for any act, omission or obligation prudent person in a like position would use under
of the DST or any trustee. To the extent that at law or in similar circumstances. A director who performs his
equity, a trustee has duties (including fiduciary duties) and or her duties in accordance with this standard has no
liabilities to the DST and its shareholders, such duties and liability to the corporation, its stockholders or to
liabilities may be expanded or restricted by the governing third persons by reason of being or having been a
instrument. director. A corporation may include in its charter a
provision expanding or limiting the liability of its
directors and officers for money damages to the
corporation or its stockholders, provided however,
that liability may not be limited to the extent the
person has received an improper benefit or profit in
money, property or services or where such person
has been actively and deliberately dishonest.
The Declaration provides that any person who is or was a The Charter expressly provides that no director or
trustee, officer, employee or other agent of the Trust or is or officer shall be protected from liability to the
was serving at the request of the Trust as a trustee, director, Corporation and its stockholders to which such
officer, employee or other agent of another corporation, person would otherwise be subject by reason of
partnership, joint venture, trust or other enterprise (an willful misfeasance, bad faith, gross negligence or
"Agent") will be liable to the Trust and to any shareholder reckless disregard of the duties involved in the
solely for such Agent's own willful misfeasance, bad faith, conduct of such person's office.
gross negligence or reckless disregard of the duties involved
in the conduct of such Agent (such conduct referred to as
"Disqualifying Conduct"). Subject to the preceding
sentence, Agents will not be liable for any act or omission
of any other Agent or any investment adviser or principal
underwriter of the Trust. No Agent, when acting in such
capacity, shall be personally liable to any person (other than
the Trust or its shareholders as described above) for any act,
omission or obligation of the Trust or any trustee.
Subject to such standards and restrictions contained in the Unless limited by its charter, Maryland Law requires
governing instrument of a DST, the Delaware Act a corporation to indemnify a director or officer who
authorizes a DST to indemnify and hold harmless any has successfully defended a proceeding to which
trustee, shareholder or other person from and against any such person was a party because of such person's
and all claims and demands. service in such capacity, against reasonable expenses
incurred in connection with the proceeding.
B-11
Delaware Statutory Trust Maryland Corporation
------------------------ --------------------
Maryland Law permits a corporation to indemnify a
director, officer, employee or agent who is a party or
threatened to be a party, by reason of service in that
capacity, to any threatened, pending or completed
action, suit or proceeding, against judgments,
penalties, fines, settlements and reasonable expenses
unless it is established that (i) the act or omission of
such person was material to the matter giving rise to
the proceeding, and was committed in bad faith or
was the result of active and deliberate dishonesty;
(ii) such person actually received an improper
personal benefit; or (iii) such person had reasonable
cause to believe that the act or omission was
unlawful. This permissible indemnification
obligation may become mandatory or may be
prohibited through a corporation's charter, by-laws,
a board resolution or another agreement. However, if
the proceeding is a derivative suit, the corporation
may not indemnify a person who has been adjudged
to be liable to the corporation. Corporations are
authorized to advance payment of reasonable
expenses.
Pursuant to the Declaration, the Trust will indemnify any The Charter provides that the Corporation shall, to
Agent who was or is a party or is threatened to be made a the full extent permitted by Maryland Law,
party to any proceeding by reason of such Agent's capacity, indemnify all persons whom it may indemnify under
against attorneys' fees and other certain expenses, Maryland Law. However, no director or officer shall
judgments, fines, settlements and other amounts incurred in be protected from liability to the Corporation or its
connection with such proceeding if such Agent acted in stockholders to which such person would otherwise
good faith or in the case of a criminal proceeding, had no be subject by reason of willful misfeasance, bad
reasonable cause to believe such Agent's conduct was faith, gross negligence or reckless disregard of the
unlawful. However, there is no right to indemnification for duties involved in the conduct of his office. Note
any liability arising from the Agent's Disqualifying that the 1933 Act, in the opinion of the SEC, and the
Conduct. As to any matter for which such Agent is found to 1940 Act also limit the ability of the Corporation to
be liable in the performance of such Agent's duty to the indemnify such persons.
Trust or its shareholders, indemnification will be made only
to the extent that the court in which that action was brought
determines that in view of all the circumstances of the case,
the Agent was not liable by reason of such Agent's
Disqualifying Conduct. Note that the Securities Act of 1933,
as amended (the "1933 Act"), and the 1940 Act also limit
the ability of the Trust to indemnify an Agent.
Expenses incurred by an Agent in defending any proceeding The By-Laws provide that, to the fullest extent
may be advanced by the Trust before the final disposition of permitted by Maryland Law, any current or former
the proceeding on receipt of an undertaking by or on behalf director or officer seeking indemnification shall be
of the Agent to repay the amount of the advance if it is entitled to the advancement of reasonable expenses
ultimately determined that the Agent is not entitled to from the Corporation. The Corporation may advance
indemnification by the Trust. expenses to employees and agents.
B-12
Delaware Statutory Trust
------------------------
Insurance The Delaware Act is silent as to the right of a DST to
purchase insurance on behalf of its trustees or other persons.
However, as the policy of the Delaware Act is to give
maximum effect to the principle of freedom of contract and
to the enforceability of governing instruments, the
Declaration authorizes the board of trustees, to the fullest
extent permitted by applicable law, to purchase with Trust
assets, insurance for liability and for all expenses of an
Agent in connection with any proceeding in which such
Agent becomes involved by virtue of such Agent's actions,
or omissions to act, in its capacity or former capacity with
the Trust, whether or not the Trust would have the power to
indemnify such Agent against such liability.
Shareholder Under the Delaware Act, except to the extent otherwise
Right of provided in the governing instrument and subject to
Inspection reasonable standards established by the trustees, each
shareholder has the right, upon reasonable demand for any
purpose reasonably related to the shareholder's interest as a
shareholder, to obtain from the DST certain information
regarding the governance and affairs of the DST.
Under the Declaration, and to the extent permitted by
Delaware Law and the Trust's By-Laws, a shareholder,
upon reasonable written demand to the Trust for any
purpose reasonably related to such shareholder's interest as
a shareholder, may inspect certain information as to the
governance and affairs of the Trust during regular business
hours. However, reasonable standards governing, without
limitation, the information and documents to be furnished
and the time and location of furnishing the same, will be
established by the board or any officer to whom such power
is delegated in the By-Laws. In addition, as permitted by the
Delaware Act, the By-Laws also authorize the board or an
officer to whom the board delegates such powers to keep
confidential from shareholders for such period of time as
deemed reasonable any information that the board or such
officer in good faith believes would not be in the best
interest of the Trust to disclose or that could damage the
Trust or that the Trust is required by law or by agreement
with a third party to keep confidential.
Delaware Statutory Trust Maryland Corporation
------------------------ --------------------
The Delaware Act is silent as to the right of a DST to Under Maryland Law, a corporation may purchase
purchase insurance on behalf of its trustees or other persons. insurance on behalf of any person who is or was a
However, as the policy of the Delaware Act is to give director, officer, employee or agent against any
maximum effect to the principle of freedom of contract and liability asserted against and incurred by such person
to the enforceability of governing instruments, the in any such capacity whether or not the corporation
Declaration authorizes the board of trustees, to the fullest would have the power to indemnify such person
extent permitted by applicable law, to purchase with Trust against such liability.
assets, insurance for liability and for all expenses of an
Agent in connection with any proceeding in which such The By-Laws authorize the Corporation to purchase
Agent becomes involved by virtue of such Agent's actions, insurance on behalf of any person who is or was a
or omissions to act, in its capacity or former capacity with director, officer, employee or agent against any
the Trust, whether or not the Trust would have the power to liability asserted against and incurred by such person
indemnify such Agent against such liability. in any such capacity. However, no insurance may be
purchased which would indemnify any director or
officer against any liability to the Corporation or its
stockholders to which such person would otherwise
be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the
duties involved in the conduct of such person's
office.
Under the Delaware Act, except to the extent otherwise Under Maryland Law, a stockholder may inspect,
provided in the governing instrument and subject to during usual business hours, the corporation's by-
reasonable standards established by the trustees, each laws, stockholder proceeding minutes, annual
shareholder has the right, upon reasonable demand for any statements of affairs, voting trust agreements and, if
purpose reasonably related to the shareholder's interest as a the corporation is not an open-end investment
shareholder, to obtain from the DST certain information company, a statement showing all stock and
regarding the governance and affairs of the DST. securities issued by the corporation for a period of
not more than the previous 12 months. In addition,
stockholders who have individually or together been
holders of at least 5% of the outstanding stock of any
class for at least 6 months, may inspect and copy the
corporation's books of account, its stock ledger and
its statement of affairs.
Under the Declaration, and to the extent permitted by The Charter grants stockholders inspection rights
Delaware Law and the Trust's By-Laws, a shareholder, only to the extent provided by Maryland Law. Such
upon reasonable written demand to the Trust for any rights are subject to reasonable regulations of the
purpose reasonably related to such shareholder's interest as board of directors not contrary to Maryland Law.
a shareholder, may inspect certain information as to the
governance and affairs of the Trust during regular business
hours. However, reasonable standards governing, without
limitation, the information and documents to be furnished
and the time and location of furnishing the same, will be
established by the board or any officer to whom such power
is delegated in the By-Laws. In addition, as permitted by the
Delaware Act, the By-Laws also authorize the board or an
officer to whom the board delegates such powers to keep
confidential from shareholders for such period of time as
deemed reasonable any information that the board or such
officer in good faith believes would not be in the best
interest of the Trust to disclose or that could damage the
Trust or that the Trust is required by law or by agreement
with a third party to keep confidential.
B-13
Delaware Statutory Trust
------------------------
Derivative Actions Under the Delaware Act, a shareholder may bring a
derivative action if trustees with authority to do so have
refused to bring the action or if a demand upon the trustees
to bring the action is not likely to succeed. A shareholder
may bring a derivative action only if the shareholder is a
shareholder at the time the action is brought and: (i) was a
shareholder at the time of the transaction complained about
or (ii) acquired the status of shareholder by operation of law
or pursuant to the governing instrument from a person who
was a shareholder at the time of the transaction. A
shareholder's right to bring a derivative action may be
subject to such additional standards and restrictions, if any,
as are set forth in the governing instrument.
The Declaration provides that, subject to the requirements
set forth in the Delaware Act, a shareholder may bring a
derivative action on behalf of the Trust only if the
shareholder first makes a pre-suit demand upon the board of
trustees to bring the subject action unless an effort to cause
the board of trustees to bring such action is excused. A
demand on the board of trustees shall only be excused if a
majority of the board of trustees, or a majority of any
committee established to consider the merits of such action,
has a material personal financial interest in the action at
issue. A trustee shall not be deemed to have a material
personal financial interest in an action or otherwise be
disqualified from ruling on a shareholder demand by virtue
of the fact that such trustee receives remuneration from his
service on the board of trustees of the Trust or on the boards
of one or more investment companies with the same or an
affiliated investment advisor or underwriter.
Management The Trust is an open-end management investment company
Investment Company under the 1940 Act (i.e., a management investment
Classification company whose securities are redeemable).
Delaware Statutory Trust Maryland Corporation
------------------------ --------------------
Under the Delaware Act, a shareholder may bring a Under Maryland Law, in order to bring a derivative
derivative action if trustees with authority to do so have action, a stockholder (or his predecessor if he
refused to bring the action or if a demand upon the trustees became a stockholder by operation of law) must be a
to bring the action is not likely to succeed. A shareholder stockholder (a) at the time of the acts or omissions
may bring a derivative action only if the shareholder is a complained about; (b) at the time the action is
shareholder at the time the action is brought and: (i) was a brought and (c) until the completion of the litigation.
shareholder at the time of the transaction complained about A derivative action may be brought by a stockholder
or (ii) acquired the status of shareholder by operation of law if (i) a demand upon the board of directors to bring
or pursuant to the governing instrument from a person who the action is improperly refused or (ii) a request
was a shareholder at the time of the transaction. A upon the board of directors would be futile.
shareholder's right to bring a derivative action may be
subject to such additional standards and restrictions, if any, Under Maryland Law, a director of an investment
as are set forth in the governing instrument. company who "is not an interested person, as
defined by the Investment Company Act of 1940,
The Declaration provides that, subject to the requirements shall be deemed to be independent and disinterested
set forth in the Delaware Act, a shareholder may bring a when making any determination or taking any action
derivative action on behalf of the Trust only if the as a director."
shareholder first makes a pre-suit demand upon the board of
trustees to bring the subject action unless an effort to cause
the board of trustees to bring such action is excused. A
demand on the board of trustees shall only be excused if a
majority of the board of trustees, or a majority of any
committee established to consider the merits of such action,
has a material personal financial interest in the action at
issue. A trustee shall not be deemed to have a material
personal financial interest in an action or otherwise be
disqualified from ruling on a shareholder demand by virtue
of the fact that such trustee receives remuneration from his
service on the board of trustees of the Trust or on the boards
of one or more investment companies with the same or an
affiliated investment advisor or underwriter.
The Trust is an open-end management investment company The Corporation is a closed-end management
under the 1940 Act (i.e., a management investment investment company under the 1940 Act (i.e., a
company whose securities are redeemable). management investment company whose securities
are not redeemable).
B-14
EXHIBIT C
FUNDAMENTAL INVESTMENT RESTRICTIONS PROPOSED
TO BE AMENDED OR ELIMINATED
CURRENT FUNDAMENTAL PROPOSED FUNDAMENTAL
PROPOSAL OR RESTRICTION RESTRICTION
SUB-PROPOSAL RESTRICTION The Fund may not: The Fund may not:
- ------------ ----------------- ----------------------------------- -----------------------------------
3a Borrowing and Issue senior securities or borrow Borrow money, except to the
Senior Securities money, except that (a) short-term extent permitted by the 1940 Act
credits necessary for settlement or any rules, exemptions or
of securities transactions are not interpretations thereunder that
considered borrowings or senior may be adopted, granted or
securities, and (b) the Fund may issued by the SEC.
borrow up to 5% of its total Issue senior securities, except to
assets (including the amount the extent permitted by the 1940
borrowed) for temporary or Act or any rules, exemptions or
emergency purposes and may interpretations thereunder that
borrow up to 33-1/3% of its total may be adopted, granted or
assets (including the amount issued by the SEC.
borrowed) in connection with
repurchases of its Shares or
tender offers.
3b Underwriting Underwrite the securities of Act as an underwriter except to
other issuers, except to the extent the extent the Fund may be
that, in connection with the deemed to be an underwriter
disposition of portfolio when disposing of securities it
securities, it may be deemed to owns or when selling its own
be an underwriter. shares.
3c Lending Make loans, except that the Fund Make loans to other persons
may (a) purchase and hold debt except (a) through the lending of
instruments (including bonds, its portfolio securities, (b)
debentures or other obligations through the purchase of debt
and certificates of deposit, securities, loan participations
bankers' acceptances and fixed and/or engaging in direct
time deposits) in accordance corporate loans in accordance
with its investment objective and with its investment objectives
policies, (b) enter into and policies, and (c) to the extent
repurchase agreements with the entry into a repurchase
respect to portfolio securities, agreement is deemed to be a
and (c) make loans of portfolio loan. The Fund may also make
securities, as described under loans to other investment
"Additional Investment Practices companies to the extent
- Loans of Portfolio Securities" permitted by the 1940 Act or any
in this Prospectus. rules or exemptions or
interpretations thereunder that
may be adopted, granted or
issued by the SEC.
C-1
CURRENT FUNDAMENTAL PROPOSED FUNDAMENTAL
PROPOSAL OR INVESTMENT RESTRICTION INVESTMENT RESTRICTION
SUB-PROPOSAL RESTRICTION The Fund may not: The Fund may not:
- ------------ ------------------- ----------------------------------- -----------------------------------
3d Commodities Purchase or sell commodities or Purchase or sell commodities as
commodity contracts, including defined in the Commodity
futures contracts and options Exchange Act, as amended, and
thereon, except that the Fund the rules and regulations
may engage in hedging thereunder, unless acquired as a
transactions as described in this result of ownership of securities
Prospectus. or other instruments and
provided that this restriction
does not prevent the Fund from
engaging in transactions
involving futures contracts and
options thereon or investing in
securities that are secured by
physical commodities.
3e Real Estate Purchase real estate, real estate Purchase or sell real estate unless
mortgage loans or real estate acquired as a result of ownership
limited partnership interests of securities or other instruments
(other than securities secured by and provided that this restriction
real estate or interests therein or does not prevent the Fund from
securities issued by companies purchasing or selling securities
that invest in real estate or secured by real estate or interests
interests therein); therein or securities of issuers
that invest, deal or otherwise
engage in transactions in real
estate or interests therein.
3f Industry Invest 25% or more of the total Invest more than 25% of its net
Concentration value of its assets in a particular assets in securities of issuers in
industry. For purposes of this any one industry (other than
restriction, a foreign government securities issued or guaranteed
is deemed to be an "industry." by the U.S. government or any of
its agencies or instrumentalities
or securities of other investment
companies).
4 Purchase Securities Purchase securities on margin Proposed to be Eliminated.
on Margin (except for delayed delivery or
when-issued transactions or such
short-term credits as are
necessary for the clearance of
transactions);
4 Short Sales Make short sales of securities or Proposed to be Eliminated.
maintain a short position
4 Control Invest for the purpose of Proposed to be Eliminated.
exercising control over
management of any company.
C-2
TLTCH PROXY 04/03
TEMPLETON CHINA WORLD FUND, INC.
ANNUAL MEETING OF SHAREHOLDERS - JUNE 12, 2003
The undersigned hereby revokes all previous proxies for his/her shares and
appoints BARBARA J. GREEN, BRUCE S. ROSENBERG and LORI A. WEBER, and each of
them, proxies of the undersigned with full power of substitution to vote all
shares of Templeton China World Fund, Inc. (the "Fund") that the undersigned is
entitled to vote at the Fund's Annual Meeting of Shareholders (the "Meeting") to
be held at Tower Club, 28th Floor, Union Planters Bank Building, 100 South East
3rd Ave., Fort Lauderdale, Florida 33394 at 1:00 p.m., Eastern time, on the
12th day of June 2003, including any postponements or adjournments thereof, upon
the matters set forth below and instructs them to vote upon any matters that may
properly be acted upon at the Meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. IT WILL BE VOTED AS
SPECIFIED. IF NO SPECIFICATION IS MADE, THIS PROXY SHALL BE VOTED FOR PROPOSALS
1 (INCLUDING ALL NOMINEES FOR DIRECTOR), 2, 3 (INCLUDING 6 SUB-PROPOSALS) AND
4. IF ANY OTHER MATTERS PROPERLY COME BEFORE THE MEETING TO BE VOTED ON, THE
PROXY HOLDERS WILL VOTE, ACT AND CONSENT ON THOSE MATTERS IN ACCORDANCE WITH THE
VIEWS OF MANAGEMENT.
(CONTINUED, AND TO BE SIGNED ON THE OTHER SIDE)
FOLD AND DETACH HERE
PLEASE MARK VOTES AS
INDICATED IN THIS
EXAMPLE [X]
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSALS 1 THROUGH 4.
Proposal 1 - Election of Directors.
FOR all nominees WITHHOLD Nominees: 01 Betty P. Krahmer, 02 Gordon S. Macklin
listed (except as AUTHORITY and 03 Fred R. Millsaps
marked to the right) to vote for all
nominees listed
[ ] [ ] TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, WRITE THAT NOMINEE'S NAME ON THE LINE
BELOW.
------------------------------------------------------------
Proposal 2 - To approve the conversion of the Fund from a closed-end fund
organized as a Maryland corporation to an open-end fund organized
as a Delaware statutory trust.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Proposal 3 - To approve amendments to certain of the Fund's fundamental
investment restrictions (includes six (6) Sub-Proposals):
3a. To amend the Fund's fundamental investment restriction
regarding borrowing and senior securities.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3b. To amend the Fund's fundamental investment restriction
regarding underwriting.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3c. To amend the Fund's fundamental investment restriction
regarding lending.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3d. To amend the Fund's fundamental investment restriction
regarding investments in commodities.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3e. To amend the Fund's fundamental investment restriction
regarding investments in real estate.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3f. To amend the Fund's fundamental investment restriction
regarding industry concentration.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Proposal 4 - To approve the elimination of certain of the Fund's fundamental
investment restrictions.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
I PLAN TO ATTEND THE MEETING. YES NO
[ ] [ ]
SIGNATURE(S): DATED , 2003
------------------------------------------ -----------
Please sign exactly as your name appears on this Proxy. If signing for estates,
trusts or corporations, title or capacity should be stated. If shares are held
jointly, each holder should sign.
FOLD AND DETACH HERE