The opinion of the court was delivered by: SOFAER
Both of the cases before this court concern the legality of a decision by defendant Daily Cash Accumulation Fund, Inc. ("the Fund"), a money-market mutual fund, to adopt a Plan of Distribution pursuant to Rule 12b-1, 17 C.F.R. § 270.12b-1(1984) ("the Plan"). The Plan allows the Fund to reimburse certain securities dealers for administrative and sales-related costs in rendering distribution assistance to the Fund. Plan P2 (1982 Fund Proxy Statement, Exh. A, at 19 (Mar. 25, 1982)). Plaintiff, a stockholder of the Fund, has challenged the legality of the Plan. For the reasons set out below, the Plan's legality is upheld.
Two factors render complicated this determination -- the relationship among the ten defendants and the prior litigation between the parties. Defendant Oppenheimer & Company owns nearly all of the stock of defendant Oppenheimer Holdings Company, which in turn owns virtually all of the stock of defendant Oppenheimer Management Corp. Oppenheimer Management Corp. owns all of the stock of defendant Oppenheimer Asset Management Corp. (collectively "the Oppenheimer defendants.") At the times relevant to these cases, Oppenheimer Asset Management Corp. owned a majority of the stock of defendant Centennial Capital Corp. ("CCC," formerly THE Management Group).CCC is the investment adviser to the Fund. The other four defendants -- A.G. Edwards & Sons, Inc., Thomson McKinnon Securities, Inc., Bateman Eichler, Hill Richards, Inc., and J.C. Bradford & Co. (collectively "the brokerage defendants") -- own the remaining stock of CCC. In addition, their clients own over ninety percent of the shares of the Fund. The brokerage defendants exercise substantial influence over their clients' decision to use the Fund as an investment vehicle.
The brokerage defendants play two roles. First, as the owners of CCC, they have an interest in maximizing CCC's profitability, since this will maximize their own income. Second, as agents for their individual clients, they have a duty to serve their clients' interests by maximizing the net return on investments in the Fund. Although an obvious potential for conflicts of interest exists in such a situation, similar relationships are prevalent throughout the money-market fund and brokerage industries.
In 1980, the plaintiff in these actions filed a stockholder derivative action against the Fund, the Oppenheimer defendants, the investment adviser (CCC was then called THE Management Group, Inc.), and two of the brokerage defendants, A.G. Edwards and Thomson McKinnon. Meyer v. Oppenheimer Management Corp. et al., No. 80 Civ. 397 (Meyer I). That suit alleged that the management fee charged by the investment adviser pursuant to its agreement with the Fund was excessive and therefore that the non-Fund defendants had violated section 36(b) of the Investment Company Act of 1940 ("ICA") as amended, 15 U.S.C. § 80a-35(b) (1982), which imposes a fiduciary duty on an investment adviser with respect to the receipt of compensation for services. At the time suit was filed, the adviser charged the Fund a constant percentage of the Fund's net assets.
At roughly the time Meyer I was filed, CCC and the Fund agreed to a new compensation scheme under which the management fee was to consist of decreasing percentages of the Fund's net assets as the Fund's assets increased. Following the commencement of the action, CCC and the Fund agreed to a further reduction of the management fee. After extensive discovery, Meyer I was settled in 1981. At that time, the fee schedule was reduced even further. In the Stipulation of Settlement, the parties agreed, among other things, that CCC would "perform and offer to continue to perform all of the investment advisory services specified or required by the terms of the Advisory Agreement currently in effect between [CCC] and the Fund. . . ." Stipulation of Settlement at 5 (June 16, 1981). The stipulation also provided that the Advisory Agreement could not be modified in any way that would "reduce the categories of service or expense guaranty undertaken by [CCC] pursuant to the terms of the current Advisory Agreement." Id. at 7.
Both sides were aware that the brokerage defendants, who owned CCC, also performed significant services for the Fund without compensation. See, e.g., Defendants' Memorandum in Support of Proposed Settlement, Meyer I, at 20 (Aug. 5, 1981) ("defendants Edwards and Thomson . . . administer their own customers' accounts at a total savings to the Fund of between $2 million and $3 million per year [and] . . . also save the Fund 'in excess of probably $50,000 a month in postage alone" by incorporating the Fund's monthly dividend statements in [their own] account statements"); Affidavit of Mordecai Rosenfeld P13 (July 31, 1981) (affidavit in support of proposed settlement filed by plaintiff's counsel) (noting that "the very substantial costs of keeping all shareholder accounts current, . . . sending monthly statements, and responding to all shareholder inquiries . . . are borne, not by the Fund, but by the brokerage firms that own the Adviser"). Nevertheless, nowhere in the stipulation is there any mention of a duty on the part of the brokerage defendants to continue performing these services. The only party which was required by the settlement to perform any services was CCC.
During the year following the settlement in Meyer I, the Fund included a proposal to adopt a Rule 12b-1 distribution plan in proxy materials for its annual stockholders' meeting. All of the Fund's independent directors had voted in favor of the Plan at a Board meeting held on February 23, 1982. The Plan would authorize CCC to enter into agreements with securities dealers under which the Fund would reimburse these dealers for administrative and sales-related costs incurred in rendering distribution assistance to the Fund. The Plan placed a number of restrictions on the Fund's ability to enter into such plans provide reimbursement of expenses. The most significant of these was a cap placed on the amount of reimbursement -- it was limited to the lesser of (1) the actual costs incurred by a dealer or (2) two-tenths of one percent of the average net asset value of the shares held by the broker's clients in broker-administered accounts.
The proxy statement explained that the Fund's primary motivation for adopting the Plan was to maintain its position in a competitive field. Other money-market funds had enacted Rule 12b-1 plans to reimburse securities dealers for their fund-related costs, and the directors believed that, unless the Plan were adopted, the brokerage firms that used the Fund for their administered accounts would switch these accounts to funds that provided distribution payments.
Following adoption of the Plan at the 1982 annual meeting, the plaintiff in Meyer I filed the present action, another stockholder derivative suit against the Fund, the Oppenheimer defendants, and all four of the brokerage defendants. Meyer v. Oppenheimer Management Corp. et al., No. 82 Civ. 2120 (Meyer II). This suit alleges that the Plan violates the Stipulation of Settlement in Meyer I, since the management fee agreed to as part of the settlement was meant to include all the costs incurred by the brokerage firms in adminstering Fund accounts. In addition, the complaint in Meyer II alleges violations of sections 36(b) and 48 of the ICA, 15 U.S.C. §§ 80a-35(b) and 80a-47(a) (1982), because the management fee is excessive (and therefore a breach of the non-Fund defendants' fiduciary duty) if it covers only investment advice. Plaintiff also claims that the Fund violated section 14(a) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78n(a) (1982) and section 20 of the ICA, 15 U.S.C. § 80a-20 (1982), because the proxy statement fails to state that the management fee paid by the Fund to CCC was meant to include the expenses for which the Plan would reimburse brokers. Finally, the complaint alleges that defendants had violated section 15 of the ICA, 15 U.S.C. § 80a-15 (1982), in connection with the sale of two of the Oppenheimer defendants; as a result of that sale, control of CCC would change and the "undue burden" placed on the Fund by the Plan would affect the price of that sale. (That sale was in fact consummated.)
On July 30, 1982, defendants moved to dismiss the complaint in Meyer II, on the grounds both that it failed to state a legally cognizable claim and that plaintiff had failed to make a demand upon the Fund's directors pursuant to Fed. R. Civ. P. 23.1. At a hearing on October 15, 1982, the court dismissed plaintiff's section 15 claim, since the court's decision on the breach of settlement and section 36(b) claims would effectively render the section 15 claims nugatory. Transcript of October 15, 1982 hearing at 4-5, 19.The court also held that plaintiff had an obligation to present his demand to the Fund's Board, both because of Rule 23.1 and because of plaintiff's counsel's responsibilities as an officer of the court in enforcing the settlement in MeyerI. Transcript at 8-10. The court ordered that the case be put on the suspense docket pending the outcome of plaintiff's demands upon the Fund's Board. Transcript at 19. Finally, the court made clear that "the proper way to treat this case if it comes back [from the suspense docket] will be as a motion to enforece the settlement. . . ." Id.
Plaintiff then served his demands upon the Fund's Board. Barely one month later, on December 10, 1982, plaintiff moved to restore Meyer II to the active calendar and to enforce the settlement in Meyer I. Defendants opposed restoring the case, both because the settlement had not been violated and because the Board had not yet had sufficient time to respond to plaintiff's demand letter. The court denied that motion on February 9, 1983, and ruled that the case would be restored no later than May 1, 1983, by which time the Fund's Board would have had "a reasonable opportunity to evaluate and respond to plaintiff's demands." On April 27, 1983, the Fund responded to plaintiff's letter. It informed plaintiff that "[t]he Board has unanimously concluded that your contentions are without merit and your demands must properly be rejected in the interest of the Fund and its shareholders" (Defendants' Second Motion to Dismiss, Exh. 2, at 1). In May 1983, plaintiff served a demand for production of documents on the defendants. On June 27, 1983, defendants again moved to dismiss Meyer II. It is this second motion to dismiss which is now before the court.
Meyer II raises two questions. First, did enactment of the Rule 12b-1 Distribution Plan violate the settlement agreement in Meyer I? Second, assuming that the Plan does not violate Meyer I, does the Plan violate section 36? For the reasons given below, the answer to both questions must be negative. Neither the language and spirit of Meyer I nor the legal requirements of section 36 is violated by the Fund's payment of distribution expenses.
II. The Settlement in Meyer I.
"Since a consent decree or order is to be construed for enforcement purposes basically as a contract, reliance upon certain aids to construction is proper, as with any other contract." United States v. ITT Continental Baking Co., 420 U.S. 223, 238, 43 L. Ed. 2d 148, 95 S. Ct. 926 (1975); see Ashare v. Brill, 560 F. Supp. 18, 21 (S.D.N.Y. 1983) (approving use of "a contract analysis" to examine settlement of shareholder derivative action against money-market fund). One of these contractual principles is that "the scope of a consent decree must be discerned within its four corners, and not by reference to what might satisfy the purposes of one of the parties to it. . . . [T]he instrument must be construed as it is written, and not as it might have been written had the plaintiff established his factual claims and legal theories in litigation." United States v. Armour & Co., 402 U.S. 673, 682, 29 L. Ed. 2d 256, 91 S. Ct. 1752 (1971); see Hart Schaffner & Marx v. Alexander's Department Stores, Inc., 341 F.2d 101, 102 (2d Cir. 1965) (per curiam) ("consent decrees 'are to be read within their four corners, and especially so . . . because they represent the agreement of the parties, and not the independent examination of the subject-matter by the court").Thus, the language of the stipulation of settlement in Meyer I must be read narrowly; only if the language is ambiguous do the broader purposes of the agreement become relevant. See United States v. Olin Ski Co., 503 F. Supp. 141, 143 (S.D.N.Y. 1980).
The Meyer I stipulation provides that "all claims asserted or which might have been asserted on the basis of any and all of the matters and transactions alleged by the complaint and the amended and supplementary complaint herein be dismissed with prejudice on the merits and that judgment be entered in favor of all defendants, upon the following terms and conditions." Stipulation at 5. Two provisions of the stipulation are relevant to the question raised in Meyer II. The first condition provides that:
From and after the Effective Date of this Stipulation, as hereinafter defined, and for the period hereinafter specified, Centennial will perform and offer to continue to perform all of the investment advisory services specified or required by the terms of the Advisory Agreement currently in effect between Centennial and the Fund, for a management fee to be computed in the manner contemplated by the current Advisory ...