Appeal from a judgment of the United States District Court for the Southern District of New York (Naomi Reice Buchwald, Judge) dismissing a three-count complaint arising from the renegotiation of certain investment-advisory agreements.
The opinion of the court was delivered by: Sack, Circuit Judge:
(Argued: February 5, 2009
Question Certified: December 29, 2009
Certified Question Answered: August 23, 2010
Before: SACK and PARKER, Circuit Judges, and STANCEU, Judge.*fn2
We certified a question to the Supreme Judicial Court of Massachusetts as to the circumstances under which that State's business judgment rule may be asserted in response to a shareholder derivative suit under the Massachusetts Business Corporation Act. Upon receipt of the answer, we affirm the district court's dismissal of two of the plaintiff's claims brought pursuant to various provisions of the Investment Company Act, 15 U.S.C. §§ 80a-15(a) & 80a-20(a), and Massachusetts state law. Regarding the third claim -- a derivative state-law claim for breach of fiduciary duty to which the certified question related and as to which the district court granted a motion to dismiss -- we vacate the district court's judgment and remand with instructions to the court to convert the motion to dismiss to a motion for summary judgment, and to rule on that motion, after further discovery should the court in the sound exercise of its discretion determine that such further discovery is warranted.
Affirmed in part; vacated and remanded in part.
Descriptions of the facts underlying this appeal have now been published in three different reported decisions -- in the opinion of the United States District Court for the Southern District of New York, Halebian v. Berv ("Halebian I"), 631 F. Supp. 2d 284, 287-91 (S.D.N.Y. 2007); in this Court's previous opinion certifying a question of state law to the Supreme Judicial Court of Massachusetts, Halebian v. Berv ("Halebian II"), 590 F.3d 195, 199-203 (2d Cir. 2009); and in the opinion of the Supreme Judicial Court answering our question on certification, Halebian v. Berv ("Halebian III"), 457 Mass. 620, 621-24, 931 N.E.2d 986, 987-89 (2010). We see no need to reiterate them here except insofar as we think it necessary to an understanding of our resolution of the narrow issues remaining before us.
On May 30, 2006, John Halebian, a holder of shares in one of six separate investment funds (the "Funds") within CitiFunds Trust III (the "Trust"), a Massachusetts business trust, filed a complaint raising three claims in the United States District Court for the Southern District of New York against members of the Trust's board of trustees (the "Board").
The suit arose in connection with the June 23, 2005 corporate sale (the "Transaction") of investment-adviser subsidiary companies that advised the six Funds. Pursuant to the Transaction, Citigroup, Inc., which owned the adviser subsidiaries, sold substantially all of its asset-management business to Legg Mason, Inc., automatically terminating, under federal law, the Funds' existing investment-advisory contracts.
Following the sale and contract termination, the Trust's Board approved new investment-advisory agreements (the "New Agreements") between the Trust and Legg Mason and then issued a proxy statement to Trust shareholders recommending that they vote to approve the New Agreements.
In his complaint, Halebian challenges two principal
aspects of the Transaction. First, he questions the
New Agreements' authorization of the payment of "soft dollars,"
which permitted Legg Mason to hire broker-dealers that also
perform research services -- a combination that often results in
higher commissions for the chosen broker-dealer than those paid
to standard broker-dealers. Second, he challenges
shareholder voting procedures permitting "echo voting," which in this
case allows Citigroup-affiliated service agents, as record holders
of certain shares of the Funds, to vote their total number of
shares in proportion to the votes they received from the
shares' beneficial owners, even if the service agents had not
received voting instructions from all of their customers.
Halebian asserts, in sum, that the "defendants . . . failed to
avail themselves of the opportunity to negotiate lower fees or
seek competing bids from other qualified investment advisers"
and "utterly ignored their obligations of loyalty and good faith
to CitiTrust and its beneficiaries." Complaint ¶¶ 35, 40,
Halebian v. Berv, No. 06 Civ. 4099 (S.D.N.Y. May 30, 2006).
Halebian's Claim One, presented as a derivative claim on behalf of the Trust, alleges that the defendants breached their fiduciary duties to the Trust "in considering the . ..
[T]ransaction and in recommending the new advisory agreements." Id. ¶ 54. Claims Two and Three, styled as direct claims, allege that the defendants violated federal and state law by issuing materially false and misleading statements and by omitting material information from the proxy statement as part of an effort to induce their ...