August 8, 2020

Volume X, Number 221

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August 06, 2020

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August 05, 2020

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SEC Staff Reverses Position on State Control Share Statutes for Closed-End Funds

On May 27, 2020, the staff of the SEC’s Division of Investment Management withdrew previously issued guidance addressing the intersection between state control share acquisition statutes (control share statutes) and the voting requirements under Section 18(i) of the Investment Company Act of 1940. Under its new no-action position, the SEC staff stated that it would not recommend enforcement action against a closed-end fund for opting into and triggering a control share statute if the boards decision to do so was taken with reasonable care on a basis consistent with other applicable duties and laws. 

Generally, control share statutes provide that when a shareholder acquires a certain percentage of voting power of a company equal to a “control share,” that shareholder will have no or limited voting rights with respect to those shares. The percentage of voting power equal to a control share is specified in the statue (e.g., one-third but less than a majority). Voting rights can typically be restored to control shares only by a vote of the other shareholders. Control share statutes provide companies with the ability to prevent certain changes of control and protect from shareholder activism. Control share statutes, like other state corporation statutes, require companies to opt-in or opt-out of compliance with the statute’s provisions. 

Generally, control share statutes provide that when a shareholder acquires a certain percentage of voting power of a company equal to a “control share,” that shareholder will have no or limited voting rights with respect to those shares. The percentage of voting power equal to a control share is specified in the statue (e.g., one-third but less than a majority). Voting rights can typically be restored to control shares only by a vote of the other shareholders. Control share statutes provide companies with the ability to prevent certain changes of control and protect from shareholder activism. Control share statutes, like other state corporation statutes, require companies to opt-in or opt-out of compliance with the statute’s provisions. 

The SEC staff’s guidance is available here.

© 2020 Vedder PriceNational Law Review, Volume X, Number 188

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About this Author

Legal, Business, John Marten, Investment Attorney, Vedder Price Law FIrm
Shareholder

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

(312) 609 7753
Nathaniel Segal, Investment Attorney, Vedder Price Law Firm
Associate

Nathaniel Segal is an Associate at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due diligence and drafting regulatory disclosures in connection with fund reorganizations and management acquisitions. He counsels clients on a wide variety of regulatory matters, including interpretive and no-action letter requests and SEC exemptive orders, as well as governance matters and internal compliance procedures in response to SEC examinations and inquiries.

(312) 609 7747
Jacob Tiedt, Vedder Price, investment services attorney
Shareholder

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

312-609-7697
Kelly Carr Investment Attorney Vedder Price
Associate

Kelly Pendergast Carr is an Associate at Vedder Price and a member of the firm’s Investment Services group in the Chicago office.

Ms. Carr focuses her practice on representing registered investment companies, including mutual funds, closed-end funds and exchange-traded funds (ETFs), as well as their independent directors and investment advisers. She assists these clients with regulatory, transactional and compliance matters.

312-609-7719