Board seeks protection as shareholders advance
October 12, 1998
The struggle for control of closed-end funds has been boiling over as activist shareholders for the first time last month won a majority of board seats and another fund's board sought to change its bylaws to stave off the same fate.
Activists that have been trying to win changes in the Clemente Global Growth Fund on September 23 won five of the nine seats on the fund's board of directors. A week later, on Oct. 2, the board of trustees of USLife Income Fund filed a preliminary proxy statement with the Securities and Exchange Commission seeking to change its bylaws so that a 75 percent vote of shareholders was required to change it from a closed end to an open end fund. In addition, the board wants to double its size and stagger the terms of directors. Although many funds have sought such protections in their bylaws when they have started, it is rare for a board to make such changes once a fund is operating.
The struggle for control of closed-end funds has escalated in the last 18-months as institutional investors and arbitrageurs have built positions in closed-end funds which trade at a substantial discount. Since closed-end funds have a limited number of shares which are sold on exchanges, unlike open-end funds, demand for shares of closed-end funds effects their price and they can trade at a discount to their net asset value. Those investors who have recently built positions in funds trading at discounts have been pressing boards to take steps to eliminate the discount. The approach they have most frequently advocated is making the funds open-ended, allowing investors to liquidate at the higher net asset value price per share. When boards have resisted their efforts, shareholders have in many instances threatened to unseat the boards, as occurred with the Clemente fund.
"This is a very significant advance in the shareholder activism crusade," said Gregg Wolper, closed-end fund analyst at Morningstar in Chicago. "This is the first time where the activists have the majority of the board."
Philip Goldstein, a partner of Opportunity Partners in Pleasantville, NY and Gerald Hellerman, managing director of Hellerman Associates, were elected to replace board incumbents Lilia Clemente, chairman of Clemente Capital and Baron J.G.A. van Grouestins. At the same time, the board appointed activist Ron G. Olin, president of Deep Discount Advisors in Asheville, N.C. and two of his firm's officers -- Gary Bentz, the chief financial officer, and Ralph Bradshaw, vice president and secretary, to replace board members who resigned.
According to Wolper this is only the second time activist shareholders have won seats on closed-end fund boards. Last year, Bankgesellschaft Berlin, a shareholder activist bank in Germany won two seats on the boardroom of The Growth Fund of Spain, managed by Scudder Kemper Inc.
This victory for closed-end shareholders culminates a long struggle between Clemente management and the activists who have, in the past two years, been increasing pressure on at least a dozen closed-end fund sponsors to get fund managers to address the discounts or poor performance of their closed-end funds.
According to CDA/Wiesenberger, over the past two years Clemente Global Growth Fund has traded at a discount as high as 25.74 percent. As recently as August 31 of this year, the discount was over 20 percent, though it narrowed to 7.5 percent at the end of September.
On their proxy, the Clemente activists asked that shareholders make the fund open-ended or terminate Clemente's advisory contract. Both propositions failed to pass muster with shareholders last month.
In past years, shareholders who wanted to oust management had to make their plea to the fund's board of directors. Boards could then decide whether to replace advisers. That happened with the Clemente Growth Fund in 1997, when shareholders urged the board in a vote to hire a new adviser. The board dismissed the request. But last spring, shareholders gained additional leverage when the SEC gave them the ability to terminate a fund's advisory contract without the consent of the board.
The recent Clemente vote is also notable because shareholders approved reimbursing Goldstein for the $30,000 in costs he incurred in his proxy battle with Clemente.
Goldstein and Olin said their first goal as board members will be to get the fund sponsor to buy back shares in hopes of narrowing the discount. Goldstein said they have not determined the magnitude of the buyback program or the frequency.
Meanwhile, the USLIFE board said in its preliminary proxy statement that the proposed moves come "in light of recent events affecting closed-end investment companies in general" and not any specific event regarding USLIFE Income. The fund was trading at a discount to net asset value of 4.7 percent as of Sept. 30, according to Lipper Analytical Services. Its one-year return exceeds 16 percent. Lipper classifies USLIFE Income as a high-yield bond fund.
The 75 percent standard "will increase the Fund's ability to resist takeover attempts and attempts to change the business nature of the Fund that are not supported by either the board or a substantial majority of shareholders," the board said in its SEC filing.
USLIFE Income's current bylaws permits changes such as making the fund open-ended based on a majority vote. The fund now has six directors who are elected annually. Directors would be divided into three classes of four and elected to three-year terms under the proposal.
Shareholders are scheduled to vote at a meeting Nov. 20.