Superior Court of Massachusetts, Suffolk, Business Litigation Session
February 6, 2017
MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO
P. Leibensperger, Justice of the Superior Court.
case presents a paradoxical claim by a shareholder against
the trustees of two companies for strictly adhering
to the plain provisions of the companies' by-laws
with respect to the election of board members. Plaintiff,
Western Investment, LLC, alleges that the application by the
trustees of a duly adopted by-law, in existence for seven
years, was a breach of fiduciary duty. For the reasons
described below, Western's complaint fails to state a
valid claim. Defendants' motion to dismiss must be
following facts are taken from the complaint, supplemented by
documents referred to in the complaint such as the
declarations of trust and the by-laws of the two defendant
is a long-time shareholder in two closed-end investment
funds, defendants Deutsche Multi-Market Income Trust ("
KMM") and Deutsche Strategic Income Trust ("
KST"). Western purchased shares in KMM in 1997 and in
KST in 2002. Western brings this action to challenge the
action of the trustees of the trusts in connection with the
September 30, 2016, vote of shareholders for the election of
KST are organized as Massachusetts business trusts. They are
governed by declarations of trust and by-laws that for all
purposes relevant to this litigation are substantively
identical. The eleven individual defendants are trustees of
the two trusts. They constitute the board of trustees of both
KMM and KST. The boards are divided into three classes of
trustees. Each class is elected for a three-year term and the
elections are staggered so that only one class of trustees is
up for election per year. In 2016, four seats on the board
were up for election.
2016 election, Western nominated a slate of four individuals
to run against four incumbent members of the board. With
respect to both KMM and KST, the Western nominees obtained
more votes than the incumbent trustees. For the KMM election,
in which 11.97 million, or 53.47% of the 22.39 million
outstanding shares were present and voting, the Western
nominees each obtained the vote of approximately 6.2 million
shares, while the incumbents received the vote of
approximately 5.2 million shares. For the KST election, in
which 2.37 million, or 54.39% of the 4.35 million outstanding
shares were present and voting, the Western nominees each
obtained the vote of approximately 1.4 million shares, while
the incumbents received the vote of approximately 845, 000
shares. Stated another way, the Western nominees received the
vote of approximately 28% of the outstanding shares of KMM
and approximately 32% of the outstanding shares of KST.
Because, however, the number of votes cast for either the
Western nominees or the incumbents did not constitute a
majority of the total outstanding shares, the boards of both
trusts determined that the election did not produce a winner
of the contested seats. As a result, pursuant to a by-law
requiring that an incumbent trustee remain in office until
the election of a successor, the incumbent trustees, who lost
the plurality vote, remain in office.
connection with the 2016 elections, Western notified the
trustees that it intended to nominate candidates for the four
seats up for election and to present a shareholder proposal
recommending that the boards be declassified. The trusts and
Western then conducted a proxy contest in which each side
solicited proxies from shareholders. In the proxy materials,
the shareholders were expressly informed that a majority of
the shares outstanding and entitled to vote was required to
elect a member of the board of trustees.
declarations of trust expressly authorize the trustees to
adopt by-laws " not inconsistent with the
Declarations" and to amend or repeal by-laws relating to
the rights or powers of the shareholders. Declarations, Art.
IV, § 2. In addition, the declarations state that "
[ e ] xcept when a larger vote is required by
any provisions of . . . the By-Laws, the vote of a
majority of the Shares or Notes entitled to vote on a matter
shall decide the matter and the vote of a plurality of the
Shares or Notes entitled to vote shall elect a Trustee."
Declarations, Art. V, § 3 (emphasis added). The
declarations also provide that an incumbent trustee remains
in office " until the election and qualification of his
successor, if any, elected at such meeting . . ."
Declarations, Art. IV, § 1(c).
2009, the trustees adopted § 2.11 of the by-laws for
each trust entitled " Majority Voting for the Election
of Trustees." The section states, in full, that " A
majority of the Shares outstanding and entitled to vote on
the matter shall elect a Trustee. A Trustee may be but need
not be a Shareholder." This is referred to by Western in
its complaint as the " majority of outstanding"
by-law. It is the application of this by-law to the 2016
election that Western alleges was a breach of fiduciary duty
by the trustees.
did not challenge the adoption of the majority of outstanding
by-law when it was adopted in 2009 or, apparently, when it
was applied in annual elections in 2010, 2011, 2012, 2013,
2014 and 2015. Western alleges, however, that 2016 was the
first election of trustees that was contested. Western points
out that in uncontested elections a rule of the New York
Stock Exchange allows brokers to cast votes for their
clients, such that obtaining a vote of the majority of
outstanding is feasible to attain. But in a contested
election, Western avers, brokers may not, pursuant to New
York Stock Exchange rules, vote the shares of their clients.
As a result, Western says a vote of the majority of
outstanding in a contested election is " nearly
impossible" to achieve because of the difficulty of
obtaining proxies. Complaint, ¶ s 4, 32. Thus, Western
claims that " [a]pplication of the 'majority of
outstanding' bylaw to contested elections discriminates
only against the election of shareholder nominees."
Complaint, ¶ 31. Further, the application by the
trustees of the majority of outstanding by-law to a contested
election is alleged to be a " blatant and improper
entrenchment." Complaint, ¶ 5.
letter dated September 27, 2016, Western communicated a
demand to the boards. The letter demanded that the boards not
apply the majority of outstanding by-law to the 2016 election
and threatened that if the boards refused to comply with the
demand then the individual trustees would be in breach of
their fiduciary duties. The boards did not reply to the
demand before the September 30, 2016, annual meeting. The
annual meeting vote results were certified by the inspector
of elections on October 4, 2016. The boards effectively
rejected the demand by failing to seat the Western nominees.
On October 5, 2016, Western commenced this action.
complaint asserts five counts. The principal claim (Count 1)
is that the defendant trustees breached a fiduciary duty of
loyalty to the trusts and to the shareholders by applying the
majority of outstanding by-law. In Count 2, Western alleges
that applying the by-law violates an implied duty of good
faith and fair dealing inherent in the declarations and
by-laws. Count 3 avers that the majority of outstanding
by-law is " unconscionable as applied to a contested
election for trustees." Complaint, ¶ 55. Count 4
asserts that the trustees' conduct is a violation "
of the 40 Act." Complaint, ¶ 62. Count 5 does not
assert a cause of action but, instead, requests injunctive
relief by an order declaring that the majority of outstanding
by-law " ...