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March 6, 2003


The opinion of the court was delivered by: Leonard B. Sand, United States District Judge


In the midst of a hard-fought proxy battle and just days before a shareholder vote scheduled for February 28, 2003, Plaintiff meVC Draper Fisher Jurvetson Fund I, Inc. ("MVC"), whose entire board of directors is up for election, brings this suit against Defendants Millennium Partners, L.P. ("MP"), MillenCo, L.P. ("Millenco"), and Karpus Management, Inc. ("Karpus"), alleging violation of § 12(d)(1)(A)(i) of the Investment Company Act of 1940 (the "ICA") (15 U.S.C. § 80a-12 (d)(1)(A)(i)) and §§ 13(d), 14(a), and 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act") (15 U.S.C. § 78m(d), 78n(a), and 78p(b)), and seeking preliminary injunctive relief.*fn1 Plaintiff claims that Defendants have violated the ICA's prohibition on ownership by one investment company of more than three percent of another investment company's voting stock, and violated the Exchange Act by forming a group for the purpose of buying and voting MVC shares without making the necessary disclosures, and by seeking proxies by means of false or misleading solicitations. Plaintiff requests that Millenco and its affiliates be prevented from voting more than 3% of MVC's stock at the upcoming election, and that Millenco and Karpus be required to correct their proxy materials by making the necessary disclosures.

After an expedited discovery and briefing schedule (extended slightly by the blizzard of February 17-18, 2003), the Court heard oral argument on February 19, 2003, and on February 24, 2003, issued an Order denying any injunction. In that Order, the Court stated, "Some of the questions raised in this proceeding are novel and complex and warrant the preparation and filing of an opinion stating in some detail the issues and the bases upon which the Court has reached its conclusions. This Court will issue such an Opinion in the near future." This is that Opinion.*fn2

I. Background

Plaintiff MVC is a closed-end investment company specializing in new-technology venture capital investments, and has elected to be treated as a business development company pursuant to § 54 of the ICA. See 15 U.S.C. § 80a-53. MVC's original five-member board included two "interested persons," Peter Freudenthal and John Grillos. Freudenthal served as CEO and chairman of MVC's investment adviser, meVC Advisers, and Grillos was a principal of MVC's sub-adviser, Draper Advisers. The remaining three directors were required by § 56(a) of the ICA to be independent. See 15 U.S.C. § 80a-55 (a).

The Millennium entities, of which only MP and Millenco are defendants in this matter, are a multibillion dollar complex of companies, each serving different investment functions. Taken together, the Millennium entities constitute MVC's largest shareholder and own roughly 6.7% of its 16,296,800 outstanding shares. Only four of the Millennium entities own MVC stock, however: Millenco, which owns 184,300 shares, or 1.13%; Millennium USA, L.P. ("Millennium USA"), which owns 434,771 shares, or 2.67%; Millennium International, Ltd. ("Millennium International"), which owns 334,729 shares, or 2.05%; and Millennium Global Estate, L.P., which owns 145,700 shares, or 0.89%.*fn3 (These four entities will henceforth be referred to collectively as the "stockholding Millennium entities." The entire complex, including non-stockholding entities, will be referred to simply as the "Millennium entities." The organization of the Millennium entities will be described in further detail in Part III.C of this Opinion.) Defendant Karpus is a registered investment adviser, and owns 3.9% of MVC's outstanding shares.

MVC's initial public offering raised over $300 million, but many of its initial investments were not successful, and by the end of fiscal year 2002 it had written off over $100 million. For much of the past year, MVC's stock has traded in the neighborhood of $8.00 per share, while its net asset value has declined to around $12.00 per share. This disparity between trading price and net asset value per share attracted the attention of MVC's large shareholders and, in some respects, fomented the present dispute.

At the annual meeting on March 27, 2002, the independent directors of MVC proposed renewing the investment advisory agreements with meVC Advisers and Draper Advisers, as well as empowering the board to renew subsequent agreements without shareholder approval. Millenco opposed the proposal, and after a contentious shareholder vote and litigation in Delaware Chancery Court, the contracts were not renewed. Instead, upon the resignation of the non-renewed advisers, MVC converted to an internal management structure, and retained various Draper Advisers personnel as MVC employees.

In August 2002, Millenco returned to Delaware Chancery Court and sued to void the results of MVC's 2001 and 2002 director elections. Millenco alleged that MVC's proxy materials had been misleading because they had failed to disclose that Grillos and two of the nominally independent directors had actually been involved in a second company in which MVC had invested. The Chancery Court granted summary judgment to Millenco, and ordered that new elections be held no later than February 28, 2003. See Millenco L.P. v. meVC Draper Fisher Jurvetson Fund I. Inc., C.A. No. 19523, 2002 Del. Ch. LEXIS 140 (Del. Ch. Dec. 19, 2002) (revised Dec. 30, 2002) (name corrected Jan. 17, 2002); Millenco L.P. v. meVC Draper Fisher Jurvetson Fund I. Inc., C.A. No. 19523 (Del. Ch. Jan. 10, 2003). On January 16, 2003, all of the directors except Grillos resigned, and the board was enlarged to seven members. Because of the combination of the new board seats, resignations, term expirations, and Delaware judgment, all seven board seats are now up for election. Both MVC and Millenco have nominated slates of directors for these positions. Millenco filed its definitive proxy materials on January 31, 2003. MVC initiated this action by Order To Show Cause on February 6, 2003.

II. Standard for a Preliminary Injunction

In order to merit preliminary injunctive relief, a party must establish "(1) that it will be irreparably harmed in the absence of an injunction, and (2) either (a) a likelihood of success on the merits or (b) sufficiently serious questions going to the merits of the case to make them a fair ground for litigation, and a balance of hardships tipping decidedly in its favor." Forest City Daly Hous., Inc. v. Town of North Hempstead, 175 F.3d 144, 149 (2d Cir. 1999) (citing Genesee Brewing Co. v. Stroh Brewing Co., 124 F.3d 137, 142 (2d Cir. 1997)). Where the requested injunction will "alter, rather than maintain, the status quo," however, the movant must meet a "more rigorous standard" and evidence a "clear or substantial showing of likelihood of success." Id. at 149-50 (quoting Tom Doherty Assocs. v. Saban Entm't. Inc., 60 F.3d 27, 33-34 (2d Cir. 1995)) (internal quotation marks omitted). There can be little doubt that the relief requested here — denying Defendants the opportunity to vote a substantial proportion of their shares in the upcoming election — would alter, rather than maintain, the status quo. As will be explained below, the Court finds that Plaintiff has failed to meet its burden of a clear or substantial showing of likelihood of success on any of its claims.

III. Claims Under the Investment Company Act of 1940

A. The Antipyramiding Provision

In 1940, Congress passed the original version of the ICA in order to "protect investors who entrusted their savings to others for expert management and diversification of investments." Rohrbaugh v. Inv. Co. Inst., 2002 U.S. Dist. LEXIS 13401, *3 (D.D.C. July 2, 2002).*fn4 A key element of the ICA's plan was the so-called antipyramiding provision, which forbade any one investment company from owning more than a certain portion of another investment company. As currently in force and in relevant part, the antipyramiding provision provides:

(d) Limitations on acquisition by investment companies of securities of other specific businesses.
(1)(A) It shall be unlawful for any registered investment company (the "acquiring company") and any company or companies controlled by such acquiring company to purchase or otherwise acquire any security issued by any other investment company (the "acquired company"), and for any investment company (the "acquiring company") and any company or companies controlled by such acquiring company to purchase or otherwise acquire any security issued by any registered investment company (the "acquired company"), if the acquiring company and any company or companies controlled by it immediately after such purchase or acquisition own in the aggregate —
(i) more than 3 per centum of the total outstanding voting stock of the acquired company;
(ii) securities issued by the acquired company having an aggregate value in excess of 5 per centum of the value of the total assets of the acquiring company; or
(iii) securities issued by the acquired company and all other investment companies (other than treasury stock of the acquiring company) having an aggregate value in excess of 10 per centum of the value of the total assets of the acquiring company.
15 U.S.C. § 80a-12 (d).

The original purpose of the antipyramiding provision was "to prevent a registered investment company from controlling other investment companies and creating complicated pyramid structures." S. Asia Portfolio, SEC No-Action Letter, 1997 SEC No-Act. LEXIS 419, *7 (Mar. 12, 1997). According to one commentator:

Section 12(d)(1) is intended to eliminate four potential abuses: (i) the acquisition of voting control of one investment company by another, thereby subverting the investment policies of one company to suit those of another; (ii) the layering of sales charges, advisory fees, and administrative costs; (iii) undue influence over portfolio management through the threat of large-scale redemptions and the disruption of the orderly management of the investment company through the maintenance of large cash balances to meet potential redemptions; and (iv) inefficient or overly complex fund holding companies as investment vehicles, thereby resulting in investor confusion.
Joseph R. Fleming, Regulation of Series Investment Companies Under the Investment Company Act of 1940, 44 Bus. Law. 1179, 1200-01 (1989) (citing SEC, Public Policy Implications of Investment Company Growth, H.R. Rep. No. 2337, 89th Cong., 2d Sess. 316, 318-20 (1966)).*fn5

It is undisputed that MVC is a business development company, and thus a registered investment company for the purposes of § 12 of the ICA. See 15 U.S.C. § 80a-59. It is also undisputed that the four stockholding Millennium entities — Millenco, Millennium USA, Millennium International, and Millennium Global Estate — would each be investment companies within the definition of § 3(a) of the ICA,*fn6 but that they are exempted therefrom by § 3(c)(7). § 3(c)(7) provides that a company is not an investment company as long as its outstanding securities "are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers, and [the company] is not making and does not at that time propose to make a public offering of such securities." 15 U.S.C. § 80a-3 (c)(7)(A). Yet § 3(c)(7) also provides that "[a]n issuer that is excepted under this paragraph shall nonetheless be deemed to be an investment company for purposes of the limitations set forth in subparagraphs (A)(i) and (B)(i) of section 12(d)(1)." 15 U.S.C. § 80a-3 (c)(7)(D).*fn7 Both MVC and the stockholding Millennium entities are thus subject to § 12(d)(1)(A)(i).

Finally, it is undisputed that the four stockholding Millennium entities together own more than 6.7% of the voting stock of MVC, but that no one of those entities by itself owns more than 3%, and that none of the other Millennium entities — including MP and Millennium Management — own any MVC stock at all.

B. Private Right of Action

As a preliminary matter, Defendants assert that there is no private right of action under § 12(d)(1)(A), and that Plaintiff thus lacks standing to press its claim. This question has previously been addressed by several courts, each of which has found the existence of a private right of action. See, e.g., Bancroft Convertible Fund. Inc. v. Zico Inv. Holdings, Inc., 825 F.2d 731 (3d Cir. 1987); Clemente Global Growth Fund, Inc. v. Pickens, 705 F. Supp. 958 (S.D.N.Y. 1989). Defendants, relying on Olmsted v. Pruco Life Ins. Co. of New Jersey, 283 F.3d 429 (2d Cir. 2002), counter that these cases belong to an "ancien regime," id. at 434 (quoting Alexander v. Sandoval, 532 U.S. 275, 287 (2001)), whose overthrow is apparent in more recent jurisprudence.

In Olmsted, the Second Circuit was faced with the question whether there existed a private right of action under §§ 26(f) and 27(i) of the ICA (15 U.S.C. § 80a-26 (f) and 27(i)), provisions added to the ICA in 1996 and not otherwise at issue in this case. Beginning with the observation that "[d]etermining congressional intent to create a right of action is . . . a matter of statutory interpretation," the court found that the absence of an express private right of action established a "presum[ption] that Congress did not intend one." Id. at 432. Next, the court found that this presumption was strengthened by three additional factors: "First, § § 26(f) and 27(i) do not contain rights-creating language." Id. Rather, both sections begin with the phrase "It shall be unlawful. . . ." Here the court quoted Sandoval to the effect that "[s]tatutes that focus on the person regulated rather than the individuals protected create no implication of an intent to confer rights on a particular class of persons." Id. at 433 (quoting Sandoval, 532 U.S. at 289) (internal quotation marks omitted). Second, the court noted that § 42 of the ICA (15 U.S.C. § 80a-41) provides for enforcement by the SEC, and added that "[t]he express provision of one method of enforcing a substantive rule suggests that Congress intended to preclude others." Id. at 433 (quoting Sandoval, 532 U.S. at 290). Third, the court observed that in 1970 Congress added § 36(b) (15 U.S.C. § 80a-35(b)) to the ICA, providing an express private right of action for investors to sue advisers for breach of fiduciary duties. "Congress's explicit provision of a private right of action to enforce one section of a statute suggests that omission of an explicit private right to enforce other sections was intentional." Id.

Application of this inquiry to § 12(d)(1)(A) leads to results on all fours with the results obtained in Olmsted. First, § 12(d)(1)(A) does not provide an express private right of action, leading to a presumption that Congress did not intend one. Second, § 12(d)(1)(A) does not contain any rights-creating language, but, like §§ 26(f) and 27(i), begins with the phrase "It shall be unlawful. . . ." Third, § 42 authorizes the SEC to enforce § 12(d)(1)(A) just as it authorizes the SEC to enforce the rest of the ICA. Finally, Congress's provision of an express private right of action in § 36(b) compels a negative inference in this case similar to the one it ...

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