Investment Fund is 10% Owner Despite Delegation of Voting and Investment Power to Affiliated Adviser
I wrote about Packer v. Raging Capital last year, when the district court denied the defendants’ motion to dismiss. The judge has now granted the plaintiff’s motion for summary judgment, holding that Raging Capital Master Fund, which owned more than 10% of the stock of 1-800-Flowers.com, was a ten percent owner even though it had entered into an investment management agreement with Raging Capital Management which could not be terminated on less than 61 days’ notice.
The defendants in the case are the Fund, Management, and Management’s principal, William Martin. The Fund took the position that it did not beneficially own its portfolio securities for purposes of the ten percent owner calculation because it had delegated voting and investment power to Management and could not acquire beneficial ownership within 60 days. Management and Martin took the position that they were not ten percent owners because they could exclude the Fund’s holdings in reliance on the registered investment adviser exemption in Rule 16a-1(a)(1)(v) and the control person exemption in Rule 16a-1(a)((1)(vii).
The court held that the Fund was a ten percent owner and therefore was liable for short-swing profits of $4.9 million. The court concluded that the IMA did not divest the Fund of beneficial ownership of its portfolio securities, because Management was acting as the Fund’s agent. The court relied in part of the Huppe case, in which the court held that a partnership beneficially owns its portfolio securities even though voting and investment decisions are made by its general partner, as agent.
The court acknowledged that the SEC staff has said in a CDI that a person may divest itself of beneficial ownership by delegating voting and investment power to an investment adviser and not retaining a right to revoke the delegation within 60 days, but the court said that, even if delegation may prevent a fund from acquiring beneficial ownership, here Martin signed the IMA for both the Fund and Management and therefore could easily have amended the IMA unilaterally to allow termination at any time. The court seemed to leave open the question whether delegation might be effective where the RIA is not an affiliate of the fund.
The court also rejected the notion that the Fund did not beneficially own its portfolio securities because the exclusions for Management and Martin extended to the Fund as well. The court said that the RIA and control person exclusions apply only to RIAs and control persons, and do not “inoculate” the securities under their control from being deemed beneficially owned by their advisees.
-Alan Dye, Section16.net August 23, 2019
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