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CLEMENTE GLOBAL GROWTH FUND v. PICKENS

January 23, 1990

CLEMENTE GLOBAL GROWTH FUND, INC., PLAINTIFF,
v.
T. BOONE PICKENS, III, OLIVER R. GRACE, JR., JOHN S. GRACE, GRACE-PICKENS ACQUISITION CORP., SUMTER PARTNERS, L.P., GRACE-MERRILL, L.P., DRAKE ASSOCIATES L.P., ANGLO AMERICAN SECURITY FUND, L.P., STERLING GRACE CAPITAL MANAGEMENT, L.P., AND CHURCHILL ASSOCIATES, L.P., DEFENDANTS.



The opinion of the court was delivered by: Keenan, District Judge.

OPINION AND ORDER

BACKGROUND

The central facts of this case are set forth in Clemente Global Growth Fund, Inc. v. Pickens, 705 F. Supp. 958 (S.D.N Y 1989), familiarity with which is assumed. There, this Court ruled that plaintiff, a closed-end management investment company (the "Fund"), had standing to sue to enforce § 12(d)(1) of the Investment Company Act of 1940 (the "1940 Act") and that plaintiff was entitled to a preliminary injunction enjoining defendants from closing a tender offer for up to 100% of plaintiff's stock.

Although the Court will avoid repetition of its prior decision where possible, a significant change in the circumstances surrounding the proposed tender offer necessitates frequent comparison of the factual background existing in January, 1989 with that today in January, 1990. Most notably T. Boone Pickens, III and Sumter Partners, L.P. ("Sumter") have announced that they have abandoned the tender offer and intend to sell all or substantially all of the Fund stock which they presently hold. This Court held in its previous decision that Sumter satisfied the definition of an investment company and had over 100 beneficial owners under the counting mechanisms of the 1940 Act. See Clemente, 705 F. Supp. at 964-68; 15 U.S.C. § 80a-3(c)(1)(A). Accordingly, Grace Pickens Global Acquisition Partners ("GPGAP"), the tender offer vehicle consisting of Sumter and five other limited partnerships, could not lawfully acquire more than 3% of the Fund's stock under § 12(d)(1)(A) of the 1940 Act, 15 U.S.C. § 80a-12(d)(1)(A).

The case is now before this Court on the application of T. Boone Pickens, III and his partnership, Sumter, for summary judgment or, alternatively, vacatur of the preliminary injunction. The other defendants have likewise moved for vacatur of the preliminary injunction and dismissal of the second amended complaint or, alternatively, for summary judgment. Plaintiff has cross-moved against all of the defendants for an order directing them to sell their Fund shares in excess of 3% of the Fund's outstanding voting stock. For the reasons detailed below, the Court denies all of the parties' motions.

FACTS

On April 19, 1989 the GPGAP partnership agreement was amended to effect Sumter's withdrawal from the partnership. The amendment also provided that the remaining partners would be associated under the name Grace Global Acquisition Partners ("Grace Global"). The defendants emphasize that the cleavage between Sumter and the other members of Grace Global was absolute and irrevocable. On April 21 Grace Global notified the Securities and Exchange Commission of these changes in an amendment to the group's Schedule 13D and 14D-1 filings. The amendment represents that "[i]n the event Grace Global and its partners obtain control of the Fund, Sumter will not participate financially or otherwise." Grace Def't's Exh. A. In addition, Sumter filed a separate Schedule 13D confirming the split. Sumter avows in this filing that there are no "contracts, arrangements, understandings or relationships (legal or otherwise) among" Sumter and its former partners. Sumter also states that it will not acquire any more Fund shares and that it intends "to dispose of all or substantially all" of the Fund shares it holds. Grace Def't's Exh. B.

Apart from Sumter's withdrawal, the composition of the tender offer vehicle is unchanged. Grace Global is a general partnership with five general partners, each of which is a limited partnership: Anglo American Security Fund, L.P. ("Anglo American"); Sterling Grace Capital Management, L.P. ("Sterling Grace"); Drake Associates, L.P. ("Drake"); Grace-Merrill, L.P. ("Grace-Merrill"); and Churchill Associates, L.P. ("Churchill"). The general partners in Grace Global maintain that each partner actively participates in management and that no partner has an expectation of profits derived solely from the efforts of others.

Sumter's 46% stake in the former GPGAP is now gathered in the two Grace Global partners with the greatest economic resources: Anglo American and Sterling Grace. If all Fund shares are now tendered, Grace Global will be funded as follows:

    Anglo American             38.6%
    Sterling Grace             44.6%
    Drake                       4.3%
    Grace-Merrill               4.3%
    Churchill                   8.2%

Plaintiff does not dispute that each of the five limited partnerships that comprise Grace Global has fewer than 100 beneficial securities owners. Plaintiff challenges, however, Grace Global's assertion that this conclusion attaches when the five are regarded as a group or as Grace Global. See Mattingly Aff. ¶¶ 31, 39-45. Plaintiff also contends that a factual question exists with respect to the completeness of the split between Sumter and the other limited partnerships.

DISCUSSION

Sumter contends that it has decided the game is not worth the candle and thus has abandoned the tender offer. To demonstrate its good faith, Sumter points out that it has severed all ties to the other limited partnerships and avows that no agreements or understandings exist between those limited partnerships and Sumter. Sumter has also announced that it intends to sell all or substantially all of its Fund stock. On this basis Sumter argues that the Fund's claims against it are moot and therefore the injunction entered against it should be vacated and summary judgment entered in its favor.

A defendant seeking to dismiss a case as moot bears a heavy burden. See United States v. W.T. Grant Co., 345 U.S. 629, 633, 73 S.Ct. 894, 897-98, 97 L.Ed. 1303 (1953). This burden is not satisfied until it is "`absolutely clear that the alleged wrongful behavior could not reasonably be expected to recur.'" Gwaltney of Smithfield v. Chesapeake Bay Found., Inc., 484 U.S. 49, 66, 108 S.Ct. 376, 386, 98 L.Ed.2d 306 (1987) (quoting United States v. Phosphate Export Ass'n, Inc., 393 U.S. 199, 203, 89 S.Ct. 361, ...


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