The District Court for the Southern District of New York dismissed both derivative and direct causes of action asserted against the trustees of an investment company organized as a business trust (the Trust) under Massachusetts law. Plaintiff alleged that the trustees violated §20(a) of the Investment Company Act (ICA) and breached fiduciary duties owed to shareholders in connection with their alleged failure to negotiate for more favorable fees in new advisory agreements approved by the Trustees and shareholders following the issuance of an allegedly false and misleading proxy statement.
In accordance with Massachusetts law governing derivative claims, Plaintiff made a written demand upon the Trustees to institute an action for the alleged breach, and after waiting the requisite 90-day statutory period, filed his complaint. After receiving the demand, the Board of Trustees formed an independent committee to consider it and, following the committee’s review and plaintiff’s commencement of the lawsuit, a quorum of the Board consisting entirely of independent Trustees, rejected the demand.
The Trustees moved to dismiss the derivative claim for failing to comply with Massachusetts’ statutory requirement that the plaintiff plead particular facts showing that the Board’s rejection of the demand was wrongful. Rather than come forward with such allegations, the plaintiff argued that the requirement did not apply because the Board did not reject the demand until after the filing of plaintiff’s suit. The Court rejected the plaintiff’s position, finding specific support in the legislative history demonstrating the Massachusetts legislature’s intent that the requirement apply in cases where the Board’s rejection of a demand occurs after the derivative lawsuit has been filed.
The court then addressed, and dismissed, the plaintiff’s two “direct” claims. First, the court ruled that these claims, notwithstanding plaintiff’s labeling them “direct,” were, in fact, derivative claims. Because the alleged injury impacted plaintiff (and other shareholders) only to the extent of their proportional interest in the Trust and did not impact plaintiff in a manner that was separate and distinct from all shareholders of the Trust, the claims belonged to the Trust and, accordingly, could not be asserted because of plaintiff’s failure to plead with particularity why the Board’s rejection of its demand was wrongful. Second, the court found that, in any event, no private right of action existed under §20(a) of the ICA because no provision expressly conferred such a right and nothing in the statute or legislative history suggested that Congress intended for such a right to implied from the statute. (Halebian v. Berv, 2007 WL 2191819 (S.D.N.Y. July 31, 2007))