The Second Circuit has remanded the long-running case of Packer v. Raging Capital, which presents the question whether an investment fund beneficially owns, for purposes of the ten percent owner calculation, securities acquired for its account by a registered investment adviser pursuant to an investment management agreement which gives sole investment and voting power to the RIA and can’t be terminated on less than 61 days’ notice.
As noted in this earlier blog, the district court granted summary judgment to the plaintiff, holding that the fund beneficially owned the issuer’s stock because (1) all of the parties to the IMA (the fund, two feeder funds, and the RIA) were affiliated with one another, (2) the RIA was merely the fund’s agent, and (3) the RIA’s control person signed the IMA for all four parties and therefore could unilaterally amend the IMA to allow its termination at any time.
The Second Circuit rejected the district court’s holding that beneficial ownership may not be “delegated” to an affiliate, which the court said has no support in the language of Rule 13d-3 (which sets forth the standards for determining beneficial ownership) and is inconsistent with the basic principle that Section 16(b) is a strict liability statute which should be interpreted narrowly to avoid unfair application. The court also disagreed with the court’s reliance on the Huppe and Tonga cases, which held that a partnership beneficially owns its portfolio securities even though voting and investment decisions are made by the general partner as the partnership’s agent, to conclude that that the RIA’s status as an agent of the fund required attribution of beneficial ownership to the fund. The Second Circuit distinguished “state-law-based agency relationships” such as those addressed in Huppe and Tonga from the limited agency relationship between an investment adviser and its customer.
The Second Circuit was unable to reach a conclusion regarding whether the RIA’s control person could have amended the IMA unilaterally. The court noted that the district court assumed that, because the control person signed the IMA for all parties, he must also have had the authority to terminate the agreement for all parties. The IMA, however, required the consent of certain persons to terminate the IMA, and the record did not establish whether the control person had the power to compel those persons to grant consent. The court therefore remanded the case for a determination whether the control person had sufficient control over the fund and the feeder funds to have effective authority to terminate the IMA.
Separately, the Second Circuit agreed with the district court’s conclusion that the exemption from ten percent owner status available to the RIA and its control person had no bearing on the status of the fund as a beneficial owner.
-Alan Dye, Section16.net November 25, 2020
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