Exhibit (a)(44)
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT DEPARTMENT
OF THE TRIAL COURT
BUSINESS LITIGATION SESSION
CIVIL ACTION NO. _______________
- -----------------------------------------------------
BADLANDS TRUST COMPANY, LLC, )
an Alaska limited liability company, )
as trustee for )
)
MILDRED B. HOREJSI TRUST, )
an irrevocable Alaska trust, )
)
Plaintiff, )
)
v. )
)
PUTNAM CALIFORNIA INVESTMENT )
GRADE MUNICIPAL TRUST, )
a Massachusetts business trust, )
)
John A. Hill, Chairman, )
Jameson Adkins Baxter, Vice Chairman, )
George Putnam, III, )
Charles B. Curtis, )
Myra R. Drucker, )
Charles E. Haldeman, Jr., )
Paul L. Joskow, )
Elizabeth T. Kennan, )
W. Thomas Stephens, )
Richard B. Worley, )
Kenneth R. Leibler, and )
Robert E. Patterson, )
Trustees, )
)
Defendants. )
- -----------------------------------------------------)
PLAINTIFF'S MEMORANDUM IN SUPPORT OF MOTION FOR
TEMPORARY RESTRAINING ORDER AND PRELIMINARY INJUNCTION
Defendant Putnam California Investment Grade Municipal Trust ("PCA")
belongs to a family of more than one hundred registered investment companies
called the Putnam Funds complex. Putnam Investment Management, LLC ("Putnam") is
the registered investment adviser for all of the investment companies within the
Putnam Fund complex and receives significant fees from each of the investment
companies for its services. And the PCA trustees are trustees not just for PCA
but for many other of the funds in the Putnam Funds complex.
This case challenges conduct by PCA's Board of Trustees that is
inconsistent with PCA's own Agreement and Declaration of Trust (the "Trust
Declaration") and inconsistent with their fiduciary duties to shareholders. The
Plaintiff is Badlands Trust Company, LLC, as Trustee for the Mildred B. Horejsi
Trust (the "Mildred Trust"). The Mildred Trust is an irrevocable grantor trust
domiciled and administered in the State of Alaska. The trustor, the late Mildred
B. Horejsi, was the mother of Stewart R. Horejsi ("Mr. Horejsi"). Mr. Horejsi is
an investment advisor to the Mildred Trust, and is a registered investment
advisor under the federal securities laws. The Mildred Trust is the record owner
of 100 PCA shares, beneficially owns an additional 9,000 PCA shares held in a
brokerage account, and has commenced a tender offer in compliance with federal
tender offer rules to acquire up to 100% of PCA's shares at a price of $15.00
per share. That price, $15.00, is a price equal to 100% of the net asset value
of PCA and is higher than the price at which any PCA shares have traded since
2001.
I. THE FACTS UNDERLYING THIS EMERGENCY MOTION
Putnam has a long and sordid history of seeking its own interest -- i.e.,
maintaining access to the substantial fees it earns as the registered investment
adviser for the Putnam Fund complex -- ahead of the interests of the
shareholders it is supposed to serve. In recent years, the United States
Securities and Exchange Commission ("SEC"), the Massachusetts Securities
Division, and the Attorney General of the State of New York have all brought
enforcement actions against or reached legal settlements with the various
members and trustees of the Putnam Funds complex.(1) As a result of being caught
in this egregious conduct, Putnam's Assets Under Management ("AUM") value shrank
dramatically from $300 million dollars to approximately $160 million dollars.
Putnam is struggling desperately to stop the hemorrhage of AUM -- and this case
is another example of those efforts.
Dissatisfaction with Putnam's mismanagement of PCA is long-standing. And
responses by the PCA Board of Trustees to thwart shareholder proposals to change
PCA's management and operations are equally long-standing. Indeed, the only
consistent position taken by the PCA Board of Trustees is that whatever a
shareholder proposes they will oppose, even if -- as here, the action necessary
to oppose the shareholder is literally to liquidate the company!
PCA has historically traded on the American Stock Exchange at a price below
or "discounted" from the net asset value ("NAV") of its holdings. In 2006, PCA
received a shareholder proposal suggesting that PCA -- which is a "closed-end"
mutual fund -- merge with a Putnam open-end mutual fund that had a similar
investment strategy in order to allow shareholders to receive full NAV and
eliminate the discount. The PCA Trustees, however, recommended against the
shareholder's suggestion, claiming that they "believe[d] that the continued
operation of [PCA] as a closed-end fund is in the best long-term interests of
[PCA's] shareholders." See Exhibit 15 (Sept. 2006 Proxy Statement recommending
against shareholder proposal to merge with open-end fund), at 17-18.
Enter the Plaintiff, another shareholder. In January 2007 Plaintiff Mildred
B. Horesji Trust (the "Mildred Trust") decided that they, too, would seek a
change in management -- this time by issuing a tender offer to purchase 100% of
PCA's stock at above market prices:
[We] [p]ropose that PCA be given a fresh start with new management and
administration insofar as its current management is embroiled in
litigation, investigations and other allegations of varying
improprieties which have led to various settlements with the
Securities and Exchange Commission (the "SEC") and the Massachusetts
Securities Division. A former trustee of PCA has also recently settled
with the SEC allegations regarding breach of fiduciary duty in his
capacity as a trustee.
Putnam has been accused of excessive short-term trading and will pay a
total of at least $193.5 million in penalties and restitution for
these open-end fund abuses. As recently as January 9, 2007, Putnam was
forced to agree to a settlement on charges of breach of fiduciary duty
to you. Do you really want the people with this track record looking
after your money?
See Exhibit 5 (Jan. 22, 2007 Tender Offer).
The Trustees' response exposed their true strategy to oppose the
shareholders and retain control of PCA at any cost: They proposed a merger with
an open-end fund -- the very action they had just rejected four months earlier
with "the best long-term interests of PCA's shareholders" in mind! See Exhibit 6
(PCA's Schedule 14D-9).
The Mildred Trust then announced that it would not vote its shares in favor
of the proposed merger, and that it was raising its tender offer to a price that
was 27(cent) per share above the highest price that PCA shares had traded at
during 2007. See Exhibit 8 (Feb. 16, 2007 Amendment to Tender Offer). Again the
Trustees recommended against accepting the tender offer.
So the Mildred Trust raised its offer again -- this time to $15.00 per
share, the highest price paid for PCA shares in over five years and an amount
equal to 100% of NAV. The Mildred Trust also announced that it had already
received tenders for approximately 20% of the PCA shares, and that it would vote
those shares against the proposed merger. See Exhibit 10 (Mar. 9, 2007 Amendment
to Tender Offer).
Faced with this offer -- an offer that would allow every shareholder to
receive more money for his shares than had been available in over five years and
that would allow every shareholder to receive 100% of the net asset value of PCA
- -- PCA's trustees went, in a word, nuclear. Rather than advise the shareholders
to take the money, and rather than continue to advocate a merger with another
Putnam open-end fund, and rather than negotiate for yet a higher price with the
Mildred Trust, the PCA Board decided to undertake an emergency liquidation of
PCA's assets and to dissolve and terminate the PCA trust within one week! See
Exhibits 1 & 11 (PCA Mar. 19, 2007 Press Release and Amended Sch. 14D-9).
PCA offered no rationale for why liquidation, with its inherent costs,
delays, and uncertainties, is a better deal for the stockholders than the tender
offer. PCA did not try to negotiate with the Mildred Trust. The only reason the
trustees gave was that since the Mildred Trust appeared to control at least 20%
of the voting shares "it is no longer practical to pursue the merger." See
Exhibit 1. A scorched earth policy would be employed, a form of the "suicide
defense." The trustees simply provided one week's notice that all shares would
stop trading by March 26, 2007 and that PCA's liquidation distribution would be
made in April. Tellingly though -- this is, after all, Putnam with its big AUM
problem -- the trustees also included in the Press Release an announcement that
"[c]ommon shareholders of [PCA] will be provided an opportunity to invest all or
a portion of their liquidating distributions in Class A shares of other Putnam
Funds at net asset value, without paying an initial sales load." See Exhibit 1.
The Trustees' goal is clear: keep all investments within the Putnam Fund
Complex. Whatever a shareholder proposes, oppose it. If a shareholder seeks to
merge with an open-end fund, state that being a closed-end fund is better. If
another shareholder proposes to purchase the Fund's shares at above-market
value, propose the same merger with an open-end fund that you just opposed. If
the shareholder says he'll vote against the merger, nuke the fund, blow it up
and close it -- and then invite the shareholders to transfer their liquidating
distribution to another Putnam fund for free.
The Trustees' ongoing misconduct violates the PCA's Trust Declaration as
well as the Trustees' fiduciary duties. The proposed liquidation and termination
also causes irreparable harm to the Mildred Trust and other PCA shareholders.
For all these reasons, the Court should grant the motion for a temporary
restraining order and preliminary injunction.
II. THE PCA TRUST AGREEMENT
PCA is a Massachusetts Business Trust formed under an Agreement and
Declaration of Trust (hereafter, the "Trust Declaration") filed with the
Secretary of State on October 8, 1992.
The Trust Declaration stated in Art. IX, Section 4 that "the Trust may be
terminated at any time by vote of Shareholders holding at least two-thirds of
the Shares entitled to vote ... or by the Trustees by written notice to the
Shareholders." The Trust Declaration stated in Art. IX, Section 5 that the
"Trust may ... liquidate or dissolve when and as authorized by the affirmative
vote of the holders of not less than two-thirds of the Shares entitled to
vote...." (See Compl., Ex. 2.) As written in 1992, therefore, the Trust
Declaration was ambiguous since it stated in Sections 4 and 5 that termination
or dissolution was subject to a two-thirds vote of the shareholders, except when
the trustees decided under the "or" language in Section 4 not to hold such a
vote.
The Registration Statement and Prospectus for PCA's shares filed with the
SEC on October 9, 1992 -- the very next day after the Trust Declaration itself
was filed with the Secretary of State -- resolved that ambiguity by stating that
a two-thirds vote was required for liquidation or dissolution and by stating
that the Trustees had determined in the exercise of their fiduciary duties that
"the two-thirds voting requirement[s], ... which are greater than the minimum
requirements under the [federal Investment Company Act of 1940], are in the best
interests of the Fund and its shareholders":
The Agreement and Declaration of Trust and Bylaws include provisions that
could have the effect of limiting the ability of other entities or persons
to acquire control of the Fund, or to cause it to engage in certain
transactions or to modify its structure. The affirmative vote of at least
two-thirds of the outstanding Common Shares ... is required to authorize
any of the following actions: ... (3) liquidation or dissolution of the
Fund....
The Trustees have determined that the two-thirds voting requirement[s]
described above, which are greater than the minimum requirements under the
[federal Investment Company Act of 1940], are in the best interests of the
Fund and its shareholders generally.
(See Compl., Ex. 3 at 35.) The SEC Registration Statement, of course, is the
legally governing disclosure about the nature and business of the company whose
stock is being registered, and given that it was written and filed
contemporaneously with the Trust Declaration its understanding and construction
of that Trust Declaration is compelling evidence of the construction intended to
be given to the Trust Declaration.
On July 13, 2001, PCA filed Amendment No. 1 to its Trust Declaration (the
"2001 Trust Amendment") with the Secretary of State. The 2001 Trust Amendment
purported to address the ambiguity in Sections 4 and 5 by removing the voting
requirement for liquidation or dissolution from Section 5, while leaving Section
4 to state that a vote might -- or might not -- be held regarding dissolution or
termination, and thus continuing the ambiguity or inconsistency. (See Compl. Ex.
4.) Importantly, the 2001 Trust Amendment was never filed with the SEC and was
never disclosed in any way to shareholders, who continued to rely on the
interpretation of the Trust Declaration's voting requirements for dissolution or
termination set forth in the Prospectus. The Prospectus was never amended
either.
III. THE MILDRED TRUST TENDER OFFER AND PCA'S RESPONSE
On January 22, 2007, the Mildred Trust announced and filed with the SEC its
tender offer to purchase up to 100% of the shares of PCA. The price offered was
$14.16 per share, which was above the market price of the shares at the time of
the offer. (See Compl., Ex. 5.)
On February 5, 2007, PCA filed Schedule 14D-9 with the SEC, providing its
Board's recommendation to shareholders in response to the Mildred Trust's tender
offer. The Board recommended to shareholders that they not tender shares to the
Mildred Trust. Instead, PCA recommended that PCA be merged with an open-end fund
in the Putnam Fund complex that also invested in California municipal
securities. (See Compl., Ex. 6.)
On February 16, 2007, the Mildred Trust raised its offer price from $14.16
per share to $14.75, a price that was 27(cent) per share above the highest price
that PCA shares had traded at during 2007. The $14.75 per share price was also
equal at that time to about 99% of the net asset value of PCA's shares. The
Mildred Trust reiterated its intention to vote its shares against the proposed
merger of PCA into another Putnam fund. (See Compl., Ex. 8.) The PCA Board
reiterated its opposition to the tender offer of the Mildred Trust on February
27, even at the increased price, and "continue[d] to recommend the merger of PCA
into" the previously identified open-end Putnam fund. (See Compl., Ex. 9.)
On March 9, 2007, the Mildred Trust again raised its offer price, from
$14.75 per share to $15.00 per share, a price equal at that time to 100% of the
net asset value of PCA's shares, a price 21(cent) above the highest price of PCA
shares at any time during 2007, and the highest price paid for PCA shares in
over five years. The Mildred Trust reiterated its intention to vote its shares
against the proposed merger of PCA into another Putnam fund and noted that even
at the lower $14.75 price it had received tenders for approximately 20% of the
shares of PCA. (See Compl., Ex. 10.)
On Monday, March 19, 2007, PCA abruptly changed course. In a Press Release
issued at 9:08 a.m. that morning, PCA declared that it would no longer propose
to merge PCA into another Putnam California fund. Noting that the Mildred Trust
had received tenders of over 20% of the shares of PCA, the PCA Board stated that
because "the proposed merger would require the affirmative vote of a majority of
the Fund's outstanding common shares, the Board believes that it is no longer
practical to pursue the merger." (See Compl., Ex. 1.)
Instead, PCA announced that it would immediately commence liquidation of
the assets of the fund! And despite the statements in its Prospectus that it
interpreted the Trust Declaration to require a shareholder vote to dissolve or
terminate the Fund, and despite the statement in the Prospectus that the Board
believed "the two-thirds voting requirement[s] ... are in the best interests of
the Fund and its shareholders generally," and despite the fact that PCA had
never disclosed the 2001 Trust Amendment to the shareholders, PCA now announced
that it believed that "pursuant to the Fund's Trust Declaration, the Board may
authorize [immediate liquidation of the Fund] without a shareholder vote." (See
Compl., Ex. 11.)
Moreover, PCA deliberately timed the liquidation to thwart the execution by
the Mildred Trust of the tender offer and to block its shareholders who had
tendered from receiving the tender offer price. According to the March 19 PCA
Press Release (see Ex. 1), "The Fund has fixed the close of business on
[Monday,] March 26, 2007 as the record date for determining the shareholders
entitled to receive liquidating distributions. As of that time, the share
transfer books of the Fund will be closed, and trading of the Fund's shares on
the American Stock Exchange will be suspended." (Emphasis added.) PCA is aware
from the Mildred Trust's March 9 SEC filings (see Exhibit 7) that the Mildred
Trust's tender offer was set to expire the very next day, Tuesday, March 27,
2007, only one day after the time that PCA has now chosen as the time at which
"the share transfer books of the Fund will be closed, and trading of the Fund's
shares on the American Stock Exchange will be suspended."
As a result of PCA's plan of liquidation, the closing of the transfer books
of PCA on March 26, and suspension of trading on the American Stock Exchange,
the Mildred Trust will be unable to acquire and the tendering PCA shareholders
will be unable to sell any shares under the tender offer, even if those shares
have been validly tendered as of the March 27 expiration of the tender offer on
that day. As a result, PCA shareholders will be deprived of their ability to
tender their shares to the Mildred Trust.
IV. STANDARD
In determining whether to issue a preliminary injunction, a court
"evaluates in combination the moving party's claim of injury and chance of
success on the merits." Packaging Indus. Group v. Cheney, 380 Mass. 609, 617
(1980). If the court is persuaded that "failure to issue the injunction would
subject the moving party to a substantial risk of irreparable harm," it must
next "balance this risk against any similar risk of irreparable harm which
granting the injunction would create for the opposing party." Id. If the moving
party "can demonstrate both that the requested relief is necessary to prevent
irreparable harm to it and that granting the injunction poses no substantial
risk of such harm to the opposing party," the movant is only required to show a
"substantial possibility" of success on the merits to warrant an injunction."
Id. at 617 n.12.
V. ARGUMENT
A temporary restraining order is warranted in this case for four reasons.
First, both the Mildred Trust and the other PCA shareholders will suffer
irreparable harm if the Board is not enjoined from haphazardly dissolving PCA in
the emergency manner it has proposed. Second, granting the preliminary
injunction would merely preserve the status quo, and cause no harm to PCA or the
trustees. Third, PCA is likely to prevail on the merits of this action, because
the Trustees' dissolution proposal violates both the Trust Declaration and the
Trustees' fiduciary duty. Finally, the Trustees have not -- and cannot --
articulate a legitimate business reason for dissolving PCA instead of, for
example, (i) allowing the shareholders to vote on the liquidation and
dissolution, or (ii) allowing the shareholders to vote on the Trustees' own
proposed merger, or (iii) recommending that all of the shareholders take the
tender offer, which, after all, is at 100% of net asset value and at a price
higher than PCA shares have traded in five years. The trustees' claim of acting
in the best interests of the shareholders is a sham. The only apparent reason
for dissolving PCA is to keep as much as possible of PCA's AUM within the Putnam
family of investment companies. For all these reasons, the Court should issue a
temporary restraining order precluding the Board from proceeding with its plan
of dissolution.
A. Dissolving the Corporation Will Irreparably Injure PCA and Its
Shareholders
In the context of a TRO or preliminary injunction, irreparable harm occurs
if the rights lost "cannot be vindicated ... after a full hearing on the
merits." Am. Grain Prods. Processing Inst. v. Dept. of Public Health, 392 Mass
309, 327 (1984) (citing Cheney, 380 Mass. at 616.) Such harm is patent here: if
the requested restraining order is not issued PCA will have liquidated its
assets and closed its stock trading books by Monday, March 27, 2007, less than
three court days from now.
Pursuant to CPA's Trust Declaration, its bylaws, and the applicable laws of
this Commonwealth, the Board has a fiduciary duty toward the Shareholders that
require it to make decisions in the best interests of the Shareholders. See
Demoulas v. Demoulas Super Markets, Inc., 424 Mass. 501 (1997). The dissolution
of CPA--particularly in the hasty, haphazard manner proposed by the
Board--violates that fiduciary duty and causes immediate monetary damages to the
Shareholders, as well as ongoing, immeasurable, and irreparable harm by
disrupting the Shareholder's currently profitable investments. If the Board's
dissolution plan is allowed to go forward, the Shareholders will suffer harm
that can never be vindicated for one simple reason: CPA will no longer exist.
The harm the Shareholders will suffer is immediate, real, and easily
identifiable. For example, dissolution and the closing of the stock transfer
books prevents the Shareholders from being able either (1) to sell to the
Mildred Trust at the offered prices, which are above market value or (2) to vote
on the dissolution or (3) to vote on the merger that the trustees were proposing
up until this Monday, March 19. Those opportunities will no longer be available
and will not be recoverable if CPA is dissolved. In the process, the dissolution
unnecessarily threatens to diminish the value of PCA's assets. For example,
abruptly announcing that PCA's assets will be liquidated within one week creates
a significant likelihood that they will be sold at price lower than market
value. Not only is there insufficient time to ensure that market value is
ascertained amongst competing purchasers, but the illiquid nature of PCA's
assets -- largely municipal bonds from various California towns and cities for
such things as municipal sewer projects or roads -- means that the inevitable
outcome of a hasty dissolution will be sales at below-market prices. In
addition, by dissolving PCA, the Board will incur unnecessary liquidation costs
and sales commissions on items that otherwise could be held to maturity. The
shareholders will lose the commissions they paid to purchase their shares in the
first place, plus they will likely be required to pay at least some capitol
gains tax -- thereby defeating one of the primary reasons shareholders bought
the fund. See Verified Complaint Paragraph 47.
These looming costs, along with the disruption of the shareholder's
interest in continuing with the fund or selling to the Mildred Trust at above
market value, significantly injure the shareholders and are entirely
unnecessary. Furthermore, once CPA is dissolved, those harms are irreparable.
See Engine Specialties, Inc. v. Bombardier Ltd., 454 F.2d 527, 531 (1st Cir.
1972) (finding that monetary damages were "not `readily computable or
recompensable," and concluding that an injunction was "proper to prevent the
threatened extinction of [the] business") (citing Semmes Motors, Inc. v. Ford
Motor Co., 429 F.2d 1197, 1205 (2d Cir. 1970)). Accordingly, the Court should
find that a preliminary injunction is warranted.
B. Imposing a Preliminary Injunction Will Not Impose Any Harm, Let
Alone Irreparable Harm, On PCA
Imposing a preliminary injunction in this case will do no more than
preserve the status quo. Thus, no harm at all will result from enjoining the
Board's impulsive and reckless decision to dissolve PCA simply to thwart the
Mildred Trust legitimate offer to purchase stock from other shareholders. See
Engine Specialties, Inc. v. Bombardier Ltd., 454 F.2d 527, 531 (1st Cir. 1972)
("[I]t is well to emphasize that a preliminary injunction serves primarily to
maintain the status quo pending a full evidentiary hearing on the merits");
Suffolk Const. Co. v. Cmwlth. of Mass., No. 05-3600-A, 2005 WL 3630421, at *5
(Mass. Super. Dec. 15, 2005) (indicating that requests for an injunction
preserving the status quo are favored over requests for an injunction seeking an
affirmative action).
C. Likelihood of Success on the Merits
Finally, the Shareholders have a high likelihood of succeeding on the
merits of both causes of action set forth in the Complaint. The Shareholders are
likely to succeed on Count I of the Complaint, because the Board's decision to
dissolve PCA violated its own public assurances that dissolution could occur
only upon the vote of two-thirds of all shareholders. The Shareholders are
likely to succeed on Count II of the Complaint, because the Board's drastic
decision to blow up PCA -- solely to obstruct the Mildred Trusts tender offer --
was a breach of the Board's fiduciary duty.
1. The Mildred Trust Will Prevail on Count I, Because a
Shareholder Vote Is Required To Terminate the Trust
As originally drafted, Article IX, Section 5 of the Trust Declaration
provided in relevant part as follows:
The Trust may ... liquidate or dissolve when and as authorized by the
affirmative vote of the holders of not less than two-thirds of the Shares
entitled to vote...."
Section 4 of Article IX simultaneously set forth that:
the Trust may be terminated at any time by vote of Shareholders holding at
least two-thirds of the Shares entitled to vote ... or by the Trustees by
written notice to the Shareholders.
Thus, by granting the Trustees the option to terminate "by written notice to the
Shareholders," the Trust Declaration -- as originally filed in 1992 -- created
an ambiguity by stating that dissolution was subject to a two-thirds vote of the
shareholders except when the trustees decided not to hold such a vote.
All such ambiguity, however, was resolved by the PCA Prospectus filed with
the SEC. In relevant part, it stated as follows:
The affirmative vote of at least two-thirds of the outstanding ... is
required to authorize ... liquidation or dissolution of the Fund....
The Trustees have determined that the two-thirds voting requirement
described above, which are greater than the minimum requirements under the
1940 Act, are in the best interests of the Fund and its shareholders
generally.
Notably, the PCA Prospectus was filed on October 9, 1992, exactly one day
after the Trust Declaration was originally filed with the Secretary of State.
Thus, the PCA Prospectus reflects the Board's contemporaneous understanding of
the Trust Declaration at the time it was filed. Indeed, the PDA Prospectus is
the only explanation of intent that has ever been shown to the Shareholders or
filed with the SEC, and thus is binding on the Board.
The 2001 Trust Amendment filed by PCA with the Secretary of State is not to
the contrary and must be disregarded. It purported to resolve the ambiguity in
Sections 4 and 5 by removing the voting requirement for liquidation or
dissolution from Section 5, but it did not resolve the ambiguity because it left
Section 4 to state that a vote might or might not be held. The PCA Prospectus,
however, was never amended, and the 2001 Trust Amendment was never filed with
the SEC. The substantive change imposed by the 2001 Trust Amendment was never
shown to the Shareholders in PCA's semi-annual or annual reports, through a
proxy statement, or in any other way. Thus, in view of its continued and ongoing
representation in the PCA Prospectus that the two-thirds voting requirement is
"in the best interests of the Fund and its shareholders generally," the Trustees
should not now be heard to argue that they can dissolve the Fund whenever they
want to.(2)
2. The Mildred Trust Will Prevail on Count II Because
the Dissolution Proposed by the Board Constitutes a
Breach of Fiduciary Duty
"It is axiomatic" that the trustees of a business trust under Massachusetts
law stand "in a fiduciary relationship to all of the beneficiaries of the
trust." Fogelin v. Nordblom, 402 Mass. 218, 222 (1988). Thus, trustees owe the
fiduciary duties of loyalty, prudence, and good faith. Cf., Mass. Gen. Laws ch.
156b, sec. 65; Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501, 528-29
(1997) (collecting cases); see also ING Princ. Protection Funds Deriv. Lit., 369
F. Supp. 2d 163, 171 (D. Mass 2005) (indicating that "a business trust in
practical effect is in many respects similar to a corporation").
The duty of loyalty is set forth by statute in G.L.c. 156D, ss. 8.30(a)(3),
which "mandates each director to discharge his or her duties `in the manner that
the director reasonably believes to be in the best interests of the
corporation.'" Id. (quoting G.L. c. 156D, ss. 8.30(a)(3)). The duty of good
faith is "just another permutation of the fiduciary's duty of loyalty," and
breach of that duty "occurs where a director's conduct is motivated by
subjective bad faith, which is an actual intent to do harm, or where the
director has engaged in an intentional dereliction of duty or a conscious
disregard for his or her responsibilities." Id. at *7.
The Board violated its duties in this case by disregarding the best
interests of the shareholders, and instead pursuing Putnam's interests, by
selfishly attempting to disrupt the Mildred Trust's tender offer. The court's
decision in Joseph E. Seagram & Sons, Inc. v. Abrams, 510 F. Supp. 860 (S.D.N.Y.
1981), is compelling in this regard. In that case, as here, the directors of the
target company, St. Joe's, "announced they [we]re prepared to sell off its
assets and, failing this to destroy the charter of the company, seemingly in
order to circumvent the plaintiff's offer to purchase St. Joe's stock from
stockholders willing to sell to the plaintiff." Id. at 861. The court instantly
recognized that a "full justification" of such egregious conduct was "in order,"
noting as follows:
There must be some radical defect or gap in existing securities and
corporation law and regulation which would allow an assumption of power by
caretakers of a corporation to deal with its assets and its life in
retaliation for a hostile tender not otherwise intended or defensible as
good corporate business. Surely they were not elected and permitted to
serve as directors on any such platform. It is inconceivable that an
alleged flourishing enterprise has authorized its board to subject the
assets and charter of the company to a scorched earth policy to be
accomplished in the name of an exercise of business judgment, but in fact
... merely to thwart a change in the existing stock ownership which may end
the tenure of the present directors and key officers of the company.
Id. at 861. While the court noted the general deference shown to corporate
boards under the business judgment doctrine, it held that the rule had no
application under such outlandish facts:
The[se] events pose a possible case of a determination to keep control of
the company entrenched within the present board of directors regardless of
the company's real best interests or else to dismember it piece by piece,
even to the point of liquidation of the enterprise, regardless of the
proclaimed profitability and in the absence of all evidence whatsoever that
the actual owners of the enterprise want its demise.
Id. at 862. Thus, to preserve the "interests of potential and actual
stockholders and investors and the integrity of the market," the court issued a
temporary restraining order and ordered "a full-scale hearing on whether there
is indeed business judgment justification for what is taking place." Id.
The same outcome should be reached in this case. The Defendant Trustees
have plainly demonstrated a pattern of maintaining control of the Trust within
their own hands, regardless of the consequences and regardless of the best
interests of the shareholders. Whatever a shareholder proposes, this Board has
determined to oppose it. When a shareholder proposed in 2006 to merge with an
open-end fund, this Board stated that being a closed-end fund is better. Four
months later, when the Mildred Trust proposed to purchase the Fund's shares at
above-market value, this Board proposed the same merger with an open-end fund
that it had just opposed! When the Mildred Trust indicated that it would vote
against the merger, this Board decided to take the "scorched earth" approach
condemned in Seagram & Sons, supra -- to nuke the fund, blow it up and close it
- -- and then invite the shareholders to transfer their liquidating distribution
to another Putnam fund for free. The Trustees should not be permitted to
continue down this path -- to extinguish the trust -- without further review
from the Court. Accordingly, the preliminary injunction should issue.
V. CONCLUSION
For all the foregoing reasons, the Mildred Trust requests the Court to
grant its Motion for Temporary Restraining Order and Preliminary Injunction.
Respectfully submitted,
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Robert D. Hillman, Esq.
Deutsch Williams Brooks
DeRensis & Holland, P.C.
99 Summer Street
Boston, Massachusetts 02110-1235
Telephone: (617) 951-2300
Attorneys for Plaintiff Badlands Trust
Company LLC, as trustee for the
Mildred B. Horejsi Trust
Of Counsel:
James H. Hulme
Donald B. Mitchell, Jr.
ARENT FOX, LLP
1050 Connecticut Avenue, NW
Washington, D.C. 20036-5339
T: (202) 857-6000
Dated: March 21, 2007
FOOTNOTES:
(1) Putnam itself admits, for example, that it "entered into agreements with
the [SEC] and the Massachusetts Securities Division settling [the] charges
connected with excessive short-term trading by Putnam employees....
Pursuant to these settlement agreements, Putnam Management will pay a total
of $193.5 million in penalties and restitution." Statement by Putnam
Investments, attached as Exhibit 12. As recently as January 9, 2007, the
SEC fined Lawrence J. Lasser, the former CEO of Putnam and until recently a
trustee of Defendant PCA, $75,000 for willfully aiding and abetting
Putnam's violation of Section 206(2) of the federal Investment Advisers
Act, which prohibits "the use of the mails or any means or instrumentality
of interstate commerce, directly or indirectly ... to engage in any
transaction, practice, or course of business which operates as a fraud or
deceit upon any client or prospective client." See Jan. 9, 2007 SEC Order,
attached as Exhibit 13. And former New York Attorney General (now Governor)
Eliot Spitzer stated that "[m]y office's examination suggests that the
problems [with Putnam] stem from a governance system that favors mutual
fund managers at the expense of mutual fund investors." Dow Jones
MarketWatch (Nov. 17, 2003), attached as Exhibit 14.
(2) There is substantial uncertainty that the 2001 Trust Amendment is even
valid. Art. IX, Section 9, states that amendments to Art. IX, Section 5
"require the vote of Shareholders holding two-thirds f the Shares entitled
to vote," and no such vote was held. The same section provides, however,
that "Amendments having the purpose of ... curing any ambiguity or curing,
correcting or supplementing any defective or inconsistent provision
contained herein shall not require authorization by shareholder vote," but
using that provision to amend fundamental rules of corporate existence
without notice to shareholders creates significant potential for harm. It
is, at any rate, not necessary to reach the issue here because the 2001
Trust Amendment, even if valid under the fixing-an-inconsistency clause of
Section 9, did not fix the latent inconsistency in Art. IX, Section 4,
which must be interpreted in light of the bell-clear language of the
contemporaneous Prospectus.