Directors Accused of Thwarting Investors
April 23, 2001
A lawsuit filed April 2 in a Delaware state court could decide if a closed-end fund's board of directors acted properly in setting strict guidelines as to who qualifies for nomination as a fund board director, or if the guidelines were established to thwart shareholder activism and impede investors' rights.
On April 2, Kimberly Kahn, a shareholder of The Swiss Helvetia Fund, a closed-end fund with $415 million under management, filed what could become a class-action lawsuit against the fund, Hottinger Capital Corp., of New York, the fund's adviser, its executives and its five independent directors. Hottinger Capital is an affiliate of Hottinger & Cie of Zurich, Switzerland.
The suit, filed in the Court of Chancery in Delaware for New Castle County, alleges that the board of directors of The Swiss Helvetia Fund adopted various amendments to the fund's bylaws which "impede and interfere with the rights of shareholders ..."
In response to a dissident shareholder's proposal in 2000 to convert the closed-end fund to an open-end fund, the board, on two occasions last year, approved changes to the fund's bylaws aimed at silencing dissident investors and preventing them from being nominated to be fund directors, the suit alleges.
The bylaw changes made by The Swiss Helvetia's board members in May 2000 were intended to prevent shareholders from initiating changes to the fund's bylaws, the suit said. The changes require that at least 75 percent of investors approve future changes to the bylaws, the lawsuit said. Subsequent changes, made in October, set new qualifications for nomination to the Swiss fund's board, the lawsuit said.
The fund's new guidelines require that director nominees have "relevant" experience and country knowledge, the suit said. Relevant experience is defined as those who have worked for at least five years as a senior executive officer, senior legal officer or partner in a financial or industrial business in Europe or the U.S. with annual revenues of at least $500 million or managing at least $500 million in assets, or having worked for at least 10 years in a senior capacity within a financial, industrial, investment management, business consulting, accounting or law firm or for a government organization, central bank or international trade organization in the area of finance, economics, trade or foreign relations.
These qualifications effectively rule out nearly everyone but the incumbent directors and current officers of The Swiss Helvetia Fund, said Gregory Keller, attorney with Harnes, Keller in New York, the lead counsel for the plaintiff.
"They adopted these elaborate qualifications that, realistically, nobody could qualify for," he said. "They're not trying to protect the fund, they're trying to protect the adviser."
By requiring a minimum of 75 percent of shareholders to approve any future changes to the bylaws, the fund adviser has also made it virtually impossible for shareholders to change the bylaws, thereby stripping them of their rights, Keller said.
The suit charges that "the challenged bylaws impair stockholder voting rights" and that "the individual defendants breached their fiduciary and/or statutory authority duties by adopting the challenged bylaws." The suit seeks to void the amendments and reimbursement to the plaintiff for the costs involved in bringing the suit, in addition to other unspecified damages.
Qualifications for board candidacy are generally set by state law, said David Sturms, a partner with Vedder, Price, Kaufman & Kammholz in Chicago.
Setting those requirements can be a difficult balancing act between the rights of shareholders and the board's responsibility to the fund, Sturms said.
"This case may help define who is qualified [to become a director] and who is not qualified," said Tom Herzfeld, president of Thomas J. Herzfeld Advisors, a Miami firm that specializes in investing in and managing closed-end funds.
For years, shareholder activists have urged closed-end fund boards to open or liquidate funds, Herzfeld said. But, they have found that when closed-end fund boards are resistant to changes, the activists may accomplish more by nominating an opposition slate of directors which include the activists themselves.