United States
Securities and Exchange Commission
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. 5)
Putnam Dividend Income Fund
(Name of Issuer)
Common Stock
(Title of Class of Securities)
746706-10-0
(CUSIP Number)
The Commerce Group Inc.
211 Main Street
Webster, MA 01570
(508) 943-9000
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
May 1, 2001
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to
report the acquisition which is the subject of this Schedule 13D, and is
filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check
the following box: [X]
The information required on the remainder of this cover page shall not be
deemed to be "filed" for the purpose of Section 18 of the Securities
Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of
that section of the Act but shall be subject to all other provisions of
the Act.
Page 1 of 71
CUSIP No.: 746706-10-0 THE COMMERCE GROUP, INC.
SCHEDULE 13D
AMENDMENT NO. 5
MAY 1, 2001
1. NAME OF REPORTING PERSON
S.S. OR I.R.S. ID NO. OF ABOVE PERSON
The Commerce Group, Inc.
ID# 04-2599931
2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(a) [ ]
(b) [ ]
3. SEC USE ONLY
4. SOURCE OF FUNDS [WC]
5 CHECK BOX IF DISCLOSURE OF LEGAL [ ]
PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)
6. CITIZENSHIP OR PLACE OF ORGANIZATION
Massachusetts
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
SOLE VOTING POWER 5,420,950
SHARED VOTING POWER 0
SOLE DISPOSITIVE POWER 5,420,950
SHARED DISPOSITIVE POWER 0
11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
5,420,950
12. CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES [ ]
13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
50.1%
14. TYPE OF REPORTING PERSON
[HC]
Page 2 of 71
CUSIP No.: 746706-10-0 THE COMMERCE GROUP, INC.
SCHEDULE 13D
AMENDMENT NO. 5
MAY 1, 2001
ITEM 1. SECURITY AND ISSUER
This Schedule 13D relates to the shares of beneficial interest (the
"Shares"), of Putnam Dividend Income Fund (the "Fund"), a Massachusetts
business trust registered as an investment company under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The
principal executive offices of the Fund are located at One Post Office
Square, Boston, MA.
ITEM 2. IDENTITY AND BACKGROUND
(a) - (c) This Schedule 13D is being filed by The Commerce Group, Inc.
(the "Reporting Person"), a corporation formed under the laws of
Massachusetts. The Reporting Person is a corporation whose principal offices
are located at 211 Main Street Webster, MA 01570. The name, business address
and principal occupation of each director and executive officer of the
Reporting Person are set forth on Annex A hereto, which is incorporated by
reference. All information in this Schedule 13D with respect to the persons
listed on Annex A is given to the knowledge of the Reporting Person.
(d) During the past five years, neither the Reporting Person nor any of
the persons listed on Annex A has been convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors).
(e) During the past five years, neither the Reporting Person nor any of
the persons listed on Annex A has been a party to a civil proceeding of a
judicial or administrative body of competent jurisdiction and as a result of
such proceeding was or is subject to a judgment, decree or final order
enjoining future violations of, or prohibiting or mandating activities
subject to, federal or state securities laws or finding any violation with
respect to such laws.
(f) All of the individuals listed in Annex A are citizens of the United
States.
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
The source of the funds used by the Reporting Person to purchase Shares
listed in Item 5(a) was working capital. The amount of the funds used to
purchase such shares aggregated approximately $54,233,400.
Page 3 of 71
CUSIP No.: 746706-10-0 THE COMMERCE GROUP, INC.
SCHEDULE 13D
AMENDMENT No. 5
MAY 1, 2001
ITEM 4. PURPOSE OF TRANSACTION
On April 30, 2001, the Reporting Person filed suit in the Superior Court of
Massachusetts, Business Litigation Session, Suffolk County, C.A. No. 01-1939-
BLS, against each of Jameson A. Baxter, Hans H. Estin, John A. Hill, Ronald
J. Jackson, Paul L. Joskow, Elizabeth T. Kennan, John H. Mullin, III, Robert
E. Patterson, A.J.C. Smith, W. Thomas Stephens, and W. Nicholas Thorndike, as
Trustees of Putnam Dividend Income Fund, and Lawrence J. Lasser and George
Putnam, III, as trustees and officers of Putnam Dividend Income Fund,
alleging, in part, that such persons have breached their fiduciary duties to
shareholders of the Issuer by:
(a) seeking to liquidate the Issuer without shareholder approval in
violation of the specific requirements of Article IX, Section 5 of the
Declaration of Trust and of the provisions of the Issuer's Registration
Statement on Form N1-A filed with the Securities and Exchange Commission;
(b) dissolving the Issuer to prevent shareholders from voting to replace the
incumbent Putnam trustees and, in turn, Putnam Investment Management; and
(c) putting the interests of Putnam Investment Management ahead of the
interest of shareholders, by adopting coercive tactics that waste shareholder
assets, imposing unnecessary tax liabilities on shareholders and seeking to
shift assets to other Putnam funds with a history of substantially lower
investment returns.
The Complaint asserts that the breaches of fiduciary duty will result in a
substantial loss of value, including the permanent loss of an approximately
$10.7 million tax asset otherwise available to shareholders, as well as the
transaction costs and lost value from the immediate sale of the Issuer's
portfolio without regard to economic and market conditions. A full copy of
the Complaint is attached hereto as Appendix A.
Also on April 30, 2001, the Honorable Judge van Gestel, presiding Judge of
the Business Litigation Session, granted the Reporting Person's request for
an immediate hearing to restrain the action of the Issuer's Trustees.
Also, following the Issuer's announcement of the planned liquidation, the
Reporting Person has been in contact with the SEC and other regulatory
authorities seeking assistance to remedy the Trustees' violations of the
provisions of the Investment Company Act of 1940, and other securities laws,
including on account of alleged misrepresentations of investment policies and
performance of the Putnam Preferred Income Fund (the open-end fund into which
the Trustees have offered shareholders other than the Reporting Person the
opportunity to invest their liquidation proceeds), other alleged
misstatements made in the Issuer's Liquidation Notice to Shareholders, and
actions which nullify the corporate governance and other protections of such
Act.
If the Reporting Person is successful in its actions, it currently
anticipates that it would (i) as already proposed by it, seek to implement a
plan whereby each Issuer shareholder would be offered the choice of redeeming
their interest at net asset value per share, or continuing as a shareholder
of the Issuer, (ii) replace some or all of the current trustees, and (iii)
evaluate changing the Issuer's investment adviser. See Letter of Gerald Fels,
Chief Financial Officer of the Reporting Person to John Hill, Chairman of the
Board of Trustees, dated April 11, 2001, attached hereto as Appendix B.
The Reporting Person reserves the right to change some or all of the
intentions set forth herein, to adopt new purposes and intentions, and to
continue or to cease the actions described herein in its discretion, and from
time to time.
ITEM 5. INTEREST IN SECURITIES OF THE ISSUER
(a) The Fund's reports with the Securities and Exchange Commission
report that 10,828,107 Shares are outstanding. Based upon such number, the
Reporting Person beneficially owns 50.1% of the Fund's outstanding Shares.
Page 4 of 71
CUSIP No.: 746706-10-0 THE COMMERCE GROUP, INC.
SCHEDULE 13D
AMENDMENT No. 5
MAY 1, 2001
The Reporting Person is the beneficial owner (through its insurance
subsidiaries as listed below) of 5,420,950 Shares, over which it has sole
power of disposition and voting. Such number of Shares represents
approximately 50.1% of the outstanding shares.
Shares Cost
The Commerce Insurance Company 4,860,950 $48,834,719
Citation Insurance Company 100,000 966,500
American Commerce Insurance Company 300,000 2,858,906
Commerce West Insurance Company 160,000 1,573,275
Totals 5,420,950 $54,233,400
(c) No purchases of shares of Common Stock have been effected subsequent
to March 31, 2001. Purchases prior to April 1, 2001, all of which were made
on the New York Stock Exchange, were reported on previous Schedule 13D
filings.
(d) No person other than the Reporting Person has the right to receive
or the power to direct the receipt of dividends from, or the proceeds from
the sale of, the shares of Common Stock owned by the Reporting Person.
(e) It is inapplicable to state the date on which the Reporting Person
ceased to be the beneficial owner of more than five percent of the Common
Stock.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS
WITH RESPECT TO SECURITIES OF THE ISSUER
The Reporting Person does not have any contract, arrangement,
understanding or relationship (legal or otherwise) with any person with
respect to any securities of the Fund, including, but not limited to, the
transfer or voting of any such securities, finders' fees, joint ventures,
loan or option arrangements, puts or calls, guarantees of profits, division
of profits or loss, or the giving or withholding of proxies.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS
Annex A Officers and Directors of Reporting Person and
Insurance Subsidiaries
Appendix A Verified Complaint and Jury Demand
Memorandum in Support of Motion for Preliminary Injunction
Appendix B Letter from Gerald Fels to John Hill, dated April 11,2001
Page 5 of 71
CUSIP No.: 746706-10-0 THE COMMERCE GROUP, INC.
SCHEDULE 13D
AMENDMENT No. 5
MAY 1, 2001
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete
and correct.
MAY 1, 2001 THE COMMERCE GROUP, INC.
Gerald Fels
Executive Vice President &
Chief Financial Officer
Page 6 of 71
ANNEX A
THE COMMERCE GROUP, INC.
211 Main Street, Webster, MA 01570
DIRECTORS
Herman F. Becker......................... Owner of Sterling Realty and Huguenot
Development Corporation
Joseph A. Borski, Jr..................... Self-employed Certified Public Accountant
Eric G. Butler........................... Retired Vice President and General Claims Manager
of Commerce and Citation
Henry J. Camosse......................... Retired President, Henry Camosse & Sons Co., Inc.,
a building and masonry supplies company
Gerald Fels.............................. Executive Vice President and Chief Financial
Officer of the Company
David R. Grenon.......................... Chairman Emeritus and Assistant Clerk of The
Protector Group Insurance Agency, Inc.
Robert W. Harris......................... Retired Treasurer, H.C. Bartlett Insurance Agency,
Inc.
Robert S. Howland........................ Retired Clerk, H.C. Bartlett Insurance Agency,
Inc.
John J. Kunkel........................... President and Treasurer, Kunkel Buick and GMC
Truck; Treasurer, Kunkel Bus Company
Raymond J. Lauring....................... Retired President, Lauring Construction Company
Roger E. Lavoie.......................... Retired President and Treasurer, Lavoie Toyota-
Dodge, Inc.
Normand R. Marois........................ Retired Chairman of the Board, Marois Bros., Inc.,
a contracting firm
Suryakant M. Patel....................... Retired physician who specialized in internal
medicine
Arthur J. Remillard, Jr.................. President, Chief Executive Officer and Chairman
of the Board of the Company
Arthur J. Remillard, III................. Senior Vice President and Assistant Clerk of
the Company; Senior Vice President of Commerce
and Citation in charge of Policyholder Benefits
Regan P. Remillard....................... Senior Vice President of the Company; President
and Secretary of Commerce West Insurance Company;
President of ACIC Holding Co., Inc.; Vice Chairman
of the Board and Chief Executive Officer of
American Commerce Insurance Company
Gurbachan Singh.......................... Retired physician who specialized in general
surgery
John W. Spillane......................... Clerk of the Company and practicing attorney
Page 7 of 71
ANNEX A
DIRECTORS OF
COMMERCE HOLDINGS, INC.
The Commerce Insurance Company
Commerce West Insurance Company
Citation Insurance Company
211 Main Street, Webster, MA 01570
Arthur J. Remillard, Jr........... President, Chief Executive Officer and Chairman of
the Board
Gerald Fels....................... Executive Vice President and Chief Financial Officer;
Treasurer, Commerce Holdings, Inc.
Arthur J. Remillard, III.......... Senior Vice President and Clerk
Regan P. Remillard................ Senior Vice President; President and Secretary of
Commerce West Insurance Company
James A. Ermilio.................. Vice President and General Counsel
David R. Grenon................... Chairman Emeritus and Assistant Clerk of The
Protector Group Insurance Agency
John M. Nelson.................... Chairman of Brown & Sharpe Mfg., Co.
Suryakant M. Patel................ Retired physician who specialized in internal
medicine
William G. Pike................... Executive Vice President and Chief Financial Officer
of Granite State Bankshares, Inc.
H. Thomas Rowles.................. Chairman of the Board of ACIC Holding Co., Inc.;
Chairman of the Board of American Commerce Insurance
Company; President, Chief Executive Officer and
Director of AAA Southern New England
Mark A. Shaw...................... Treasurer of ACIC Holding Co., Inc.; Executive Vice
President and Chief Operating Officer of AAA Southern
New England
Page 8 of 71
ANNEX A
DIRECTORS OF
American Commerce Insurance Company
3590 Twin Creeks Drive, Columbus, OH 43204
H. Thomas Rowles.................. Chairman of the Board of ACIC Holding Co., Inc.;
Chairman of the Board of American Commerce Insurance
Company; President, Chief Executive Officer and
Director of AAA Southern New England
Regan P. Remillard................ President of ACIC Holding Co., Inc.; Vice Chairman of
the Board and Chief Executive Officer of American
Commerce Insurance Company; Senior Vice President of
The Commerce Group, Inc.; President and Secretary of
Commerce West Insurance Company
Mark A. Shaw...................... Treasurer of ACIC Holding Co., Inc.; Executive Vice
President and Chief Operating Officer of AAA Southern
New England
Gerald Fels....................... Executive Vice President and Chief Financial Officer
of The Commerce Group, Inc.
Patrick W. Doherty................ President and Chief Executive Officer of AAA Oklahoma
Terry R. Farias................... President and Chief Executive Officer of AAA Hoosier
Motor Club
Roger L. Graybeal................. President and Secretary of AAA Oregon/Idaho
Richard S. Hamilton............... President of AAA West Pennsylvania/West
Virginia/South Central Ohio
Gerald P. Hogan................... President and Chief Operating Officer of American
Commerce Insurance Company
Charles B. Liekweg................ President and Chief Executive Officer of AAA
Washington
D. James McDowell................. President and Chief Executive Officer of AAA Arizona
Peter C. Ohlheiser................ President of Ohio Motorists Association
Page 9 of 71
ANNEX A
THE COMMERCE GROUP, INC.
211 Main Street, Webster, MA 01570
Officers of the Commerce Group, Inc.
President, Chief Executive Officer and Chairman of the Board..... Arthur J. Remillard, Jr.
Executive Vice President and Chief Financial Officer............. Gerald Fels
Senior Vice President and Assistant Clerk........................ Arthur J. Remillard, III
Senior Vice President............................................ Regan P. Remillard
Senior Vice President............................................ Mary M. Fontaine
Vice President and General Counsel............................... James A. Ermilio
Clerk............................................................ John W. Spillane
Treasurer and Chief Accounting Officer........................... Randall V. Becker
Assistant Treasurer.............................................. Thomas A. Gaylord
Assistant Vice President......................................... Robert E. McKenna
Officers of Massachusetts Subsidiaries
President, Chief Executive Officer and Chairman of the Board..... Arthur J. Remillard, Jr.
Executive Vice President and Chief Financial Officer............. Gerald Fels
Senior Vice President and Secretary.............................. Arthur J. Remillard, III
Senior Vice Presidents........................................... David H. Cochrane
Peter J. Dignan
Mary M. Fontaine
Regan P. Remillard
Joyce B. Virostek
Vice Presidents.................................................. Elizabeth M. Edwards
Karen A. Lussier
Michael J. Richards
Angelos Spetseris
Henry R. Whittier, Jr.
Vice President and General Counsel............................... James A. Ermilio
Assistant Vice Presidents.................. David P. Antocci Susan A. Horan
Robert M. Blackmer John V. Kelly
Stephen R. Clark Ronald J. Lareau
Raymond J. DeSantis Donald G. MacLean
Warren S. Ehrlich Robert E. McKenna
Richard W. Goodus Robert L. Mooney
James E. Gow Emile E. Riendeau
Treasurer and Chief Accounting Officer........................... Randall V. Becker
Assistant Treasurer.............................................. Thomas A. Gaylord
Page 10 of 71
ANNEX A
Officers of American Commerce Insurance Company
3950 Twin Creeks Drive, Columbus, OH 43204
Chairman of the Board........................................... H. Thomas Rowles
Vice Chairman of the Board and Chief Executive Officer.......... Regan P. Remillard
President and Chief Operating Officer........................... Gerald P. Hogan
Senior Vice President and Chief Financial Officer............... Michael V. Vrban
Senior Vice President........................................... Carol R. Blaine
Treasurer....................................................... Richard B. O'Hara
Chief Legal Officer and Secretary............................... James A. Ermilio
Assistant Vice President........................................ Gregory S. Clark
Assistant Vice President, General Counsel, and
Assistant Secretary........................................... Julie Deley-Shimer
Page 11 of 71
APPENDIX A
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
C.A. NO.____________
BUSINESS LITIGATION SESSION
THE Commerce GROUP, INC., individually
and in a derivative capacity on behalf of
Putnam Dividend Income Fund
Plaintiff,
v.
JAMESON A. BAXTER, HANS H. ESTIN, JOHN A.
HILL, RONALD J. JACKSON, PAUL L. JOSKOW,
ELIZABETH T. KENNAN, JOHN H. MULLIN, III,
ROBERT E. PATTERSON, A.J.C. SMITH, W.
THOMAS STEPHENS, AND W. NICHOLAS
THORNDIKE, as Trustees of Putnam Dividend
Income Fund, and LAWRENCE J. LASSER and
GEORGE PUTNAM, III, as Trustees and
Officers of Putnam Dividend Income Fund,
Defendants,
and
PUTNAM DIVIDEND INCOME FUND,
Nominal Defendant.
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VERIFIED COMPLAINT AND JURY DEMAND
Introduction
This action is brought by The Commerce Group, Inc. ("CGI"),
individually and in a derivative capacity on behalf of Putnam Dividend
Income Fund (the "Fund"), a publicly-traded closed-end mutual fund
organized as a Massachusetts business trust, against the trustees of
the Fund (the "Trustees"). This action concerns breaches of fiduciary
duty by the Trustees arising out of their hastily-made plan to
liquidate the Fund without required shareholder approval. CGI seeks
immediate injunctive relief to protect itself and
Page 12 of 71
the other Fund shareholders against the devastating and irreparable
harm that will result if this liquidation
plan goes forward as planned on May 8, 2001.
The Trustees have made clear that the Fund is being liquidated
solely in order to avoid holding the Fund's usual annual meeting,
scheduled for early June 2001, at which CGI as the controlling
shareholder, as well as other shareholders, would have the opportunity
to replace some or all of the current Trustees and to replace the
Fund's portfolio manager. Such unauthorized action by the Trustees is
in direct violation of the express terms of the Declaration of Trust
and directly contrary to the Trustees' statements regarding their
obligations and the shareholders' rights under the Declaration of Trust
contained in the Fund's Registration Statements and Prospectus filed by
the Trustees with the Securities and Exchange Commission ("SEC"). Even
assuming that the Trustees have the authority under the Declaration of
Trust to liquidate the Fund, which they do not, it was a breach of the
Trustees' fiduciary duties to CGI and the other Fund shareholders to
take such extraordinary and fundamental action with regard to the Fund
without the approval of the shareholders, and in particular without
input from the majority shareholder, CGI, which owns 50.1% of the Fund.
The Trustees' planned action is against the interests of the
shareholders and will cause immediate, severe, and irreparable harm to
CGI in numerous respects. For example, it will deprive CGI and the
other shareholders of the opportunity to continue their tax-advantaged
ownership in the closed-end Fund; rob from CGI and the other
shareholders the long-term advantages of the Fund's portfolio
investment strategy, which the Trustees have previously strongly
advocated and on which CGI and the other shareholders relied in
investing in the Fund; force on CGI and the other shareholders an
unanticipated and currently taxable event; and cause CGI and the other
shareholders to lose the benefit of substantial tax assets held by the
Fund. Moreover, it will specifically deprive CGI the opportunity to
control this particular closed-end fund, of which it owns a majority
stake.
Page 13 of 71
In addition, the Trustees seek to deprive shareholders of their
right to participate in fundamental decisions that affect the Fund,
such as election of trustees, selection of portfolio managers to invest
the assets, and the most fundamental decision of whether to continue
operations or to incur the transaction and tax costs of a liquidation
of the Fund itself. This choice should be made by shareholders after
they have had the opportunity to consider: the effect of losing the
benefit of a nearly $10.7 million loss carry-forward, the major tax
asset held by the Trust, which can only be realized by shareholders if
the Fund continues to exist; the current market conditions affecting
the Fund's portfolio; the taxable gains and income that may result from
the distribution; and whether the shareholders would be better served
by liquidating their investment in a market sale. These are the
reasons that the Declaration of Trust requires shareholder approval of
a plan of liquidation, and why the Trustees stated so in their SEC
filings describing the key features of the Fund. Instead, the Trustees
have usurped this decision, and have done so explicitly to deny the
shareholders the right to make such decisions themselves.
Indeed, in the entire twelve-year existence of the Fund, the
Trustees 1) have never asserted - until now - that liquidation of the
Fund is a permissible or desirable transaction for the Fund; and 2)
with respect to a similar fund, have consistently claimed that the
closed-end Fund structure has significant value to shareholders that
can only be realized in the Fund stays in existence as a closed-end
fund. In tossing aside the requirements of the Declaration of Trust,
SEC documents, and the fundamental rights of shareholders, the Trustees
have pointed to the "threat" of being replaced with as yet unknown
successors. Even assuming this were the case, a wide range of
protective steps was available to the Trustees short of termination of
the Fund that would not result in imposition of tax liabilities on
shareholders, economic loss from portfolio liquidation, and loss of a
multi-million dollar tax asset in the form of a loss carry-forward.
The fact that the Trustees did not use such non-damaging protections,
and the fact that their planned action is directly contrary to years of
statements, evidences the fact that the Trustees are acting in their
own interests and in the interests of the Fund's portfolio managers by
attempting to thwart shareholder action that could result in their
being replaced.
Page 14 of 71
For these reasons and the allegations set forth below, it is clear
that the Trustees have violated their fiduciary duties of care and
loyalty to the Fund and its shareholders. The Trustees have not acted
in good faith and with reasonable belief that their actions were in the
best interests of the Fund. Further, the acts of the Trustees
constitute reckless and willful disregard of their duties as trustees
of the Fund. As such, the Trustees' plan to liquidate the Fund must be
enjoined, or else CGI, as well as the rest of the shareholders of the
Fund, will suffer irreparable harm as of May 8, 2001, the date on which
the Trustees have announced they will begin the liquidation process.
Parties
1. The Plaintiff, CGI, is a Massachusetts corporation whose
principal offices are located in Webster, Massachusetts.
2. The Defendants are the trustees of Putnam Dividend Income Fund
(the "Fund"), a Massachusetts business trust with principal executive
offices located at One Post Office Square, Boston, Massachusetts 02109.
Defendants Lasser and Putnam III are trustees and officers of the Fund.
3. The Nominal Defendant, Putnam Dividend Income Fund, is a
Massachusetts business trust with principal executive offices in
Boston, Massachusetts.
Jurisdiction and Venue
4. This Court has jurisdiction over the Defendants pursuant to
M.G.L. c. 223A, sec. 3.
5. Venue is appropriate pursuant to M.G.L. c. 223, sec. 1.
Facts
The Parties' Relationship
6. The Fund is a closed-end mutual fund listed on the New York
Stock Exchange, which was formed on July 26, 1989, under an Agreement
and Declaration of Trust ("Declaration of Trust"). (A copy of the
Declaration of Trust is attached to the Affidavit of Lisa C. Wood, Esq.
("Wood Aff."), as Exhibit A.)
Page 15 of 71
7. The Defendants are trustees of the Fund (the "Trustees"), which
is managed by Putnam Investment Management, Inc. ("Putnam"), a wholly-
owned subsidiary of Putnam Investments, Inc.
8. Defendants Lasser, Putnam III, and Smith have been identified
by the Trustees in the Fund's Definitive Proxy Statement they filed on
March 31, 2000 as "interested persons" of the Fund, as defined in the
Investment Company Act of 1940, because of their positions as officers
or affiliates of the Fund or as directors of Putnam, Putnam Mutual
Funds, or of Marsh & McLennan Companies, Inc., the parent company of
Putnam and Putnam Mutual Funds. (Definitive Proxy Statement Pursuant
to Section 14(a) of the Securities Exchange Act of 1934, dated March
31, 2000 ("Proxy Statement"), at 9; a copy of the Proxy Statement is
attached to the Wood Aff. as Exhibit B.)
9. Defendant Lasser is a Vice President of the Fund and the Chief
Executive Officer of Putnam Investments, Inc. Defendant Putnam III is
the President of the Fund. Defendant Putnam III is also the son of
George Putnam, the former Chairman of the Trustees and President of the
Putnam Funds.
10. The Trustees describe Defendant Joskow in the Proxy Statement
as someone, who, though not currently an interested person of the Fund,
"could be deemed by the Securities and Exchange Commission to be an
'interested person' on account of his prior consulting relationship
with National Economic Research Associates, Inc., which was terminated
as of August 31, 1998." (Proxy Statement at 9.)
11. All of the Trustees have a significant financial stake in the
Fund and in the 113 other funds managed by Putnam. As of March 31,
2000, the Trustees' aggregate investments in Putnam-managed funds was
nearly $100 million. (Proxy Statement at 10.)
Page 16 of 71
12. Moreover, all of the Trustees are highly compensated for their
services on behalf of many or all of the 114 Putnam funds. According
to the Proxy Statement, the range of compensation received annually by
each of the Trustees is $189,000-$240,000. (Proxy Statement at 12-13.)
13. CGI was incorporated in 1976 and is the publicly-traded parent
of Commerce Holdings, Inc., a holding company for several property and
casualty insurers, such as Commerce Insurance Company. Through
insurance subsidiaries, CGI offers predominantly private passenger
motor vehicle insurance along with a broad range of other property and
casualty insurance products. CGI has over $2 billion in total assets
and wrote over $1 billion in both direct and net premiums in the Year
2000. The Commerce Insurance Company continues to be the largest
writer of Massachusetts private passenger automobile insurance, as well
as the second largest writer for Massachusetts homeowners insurance.
The combined insurance companies were also ranked as the 27th largest
personal automobile insurance group in the country by AM Best Company,
based on the most recently available information.
14. The value of CGI's total investment portfolio was reported in
its Annual Report for the year end December 31, 2000 at over $1.4
billion, nearly 23% of which was in closed-end preferred stock mutual
funds.
15. Arthur J. Remillard, Jr. is the President, Chief Executive
Officer, and Chairman of the Board of CGI.
16. Gerald Fels is Executive Vice President, Chief Financial
Officer, and a Director of CGI. Mr. Fels is a certified public
accountant who was appointed Executive Vice President of CGI in
November 1989. From 1981 to November 1989, Mr. Fels was Senior Vice
President of CGI. He was Treasurer of CGI from 1976 to 1995. Mr. Fels
has also been Chief Financial Officer of CGI since 1976. Mr. Fels is
verifying this Complaint on behalf of CGI.
Page 17 of 71
Why CGI Invested in the Fund: The Unique Attributes of Closed-End
Funds
17. CGI began investing in the Fund in 1996. It invested in the
Fund because it is a "closed-end" mutual fund, which has certain
advantages over "open-end" mutual funds. A closed-end mutual fund is
an investment vehicle that provides long-term value beyond day-to-day
market price of its investments. It is similar to an open-end fund in
that it pools the money of numerous investors and professionally
manages the money according to specified restrictions and goals. A
closed-end fund issues a fixed number of shares, and those shares trade
on a stock exchange or over the counter markets. Unlike an open-end
fund, investors do not have the right to redeem their investment in a
closed-end fund with the issuing company. This allows the closed-end
fund to be fully invested in long-term securities, rather than to
maintain cash to be ready to satisfy redemptions. The only way to get
in or out of a closed-end fund is to buy shares from previous
shareholders in the stock market or sell them on that market. Thus,
the price of these shares is not determined by the value of the
underlying investments in which the fund participates, but by supply
and demand forces in the market.
18. The nature of the closed-end fund, then, is that it allows the
Fund to maximize returns by being fully invested for long-term results,
without being affected by redemptions and liquidity concerns. In
addition, closed-end funds are able to use substantial leverage,
whereas an open-end fund, under usual circumstances, may not. Finally,
another key attribute of a closed-end fund is that ownership is tax
efficient, with the shareholder deciding when to sell shares and
thereby avoid, or at least minimize, any taxable gain. Open-end fund
shareholders can receive taxable income from owning such shares, even
without selling the shares or receiving a dividend.
19. In the Semi-Annual Report on Performance and Outlook filed by
the Trustees on December 31, 2000, the Trustees described the Fund as a
diversified, closed-end management investment company whose objective
is to seek high current income eligible for the dividends-received
deduction allowed to corporations under Section 243 of the Internal
Revenue Code, consistent with preservation of capital by investing in a
portfolio of preferred and common equity securities.
Page 18 of 71
The Trustees further explained that the Fund may also use leverage by
issuing preferred shares in an effort to increase the income to the
common shares. In the same report, the Trustees reported that the Fund
had a net unrealized depreciation of investments of over $10,693,000 as
of December 31, 2000. (Semi-Annual Report on Performance and Outlook,
December 31, 2000, at "Statement of Assets and Liabilities" & Note 1; a
copy of the Semi-Annual Report is attached to the Wood Aff. as Exhibit
C.)
20. The Trustees themselves have advocated closed-end funds as
preferable to redeemable open-ended funds. As explained more fully in
paragraphs 70-79, infra, in 1996 and 1997, the Defendant Trustees, in
their capacity as trustees of two other Putnam-managed closed-end
funds, Putnam Master Income Trust and Putnam Premier Income Trust,
unanimously recommended to shareholders that those funds not be
converted from closed-end to open-end funds, in response to a minority
shareholder's request that such a conversion take place. (See, e.g.,
Preliminary Proxy Statement of Putnam Master Income Trust, August 7,
1997 ("1997 PMIT Proxy Statement" at 4-5; a copy of the 1997 PMIT Proxy
Statement is attached to the Wood Aff. as Exhibit V.)
21. In that context, in 1997, the Trustees included a letter from
George Putnam to shareholders in a Proxy Statement issued to all the
shareholders of the Putnam Master Income Trust, stating:
The Trustees believe that remaining a closed-end fund
provides significant investment benefits that are not available
to open-end funds. In general, if the fund remains a closed-end
fund, the portfolio manager can continue to manage the fund with
a steadier, longer-term perspective without the short-term
pressures from sales and redemptions of fund shares typically
experienced by open-end funds.
(1997 PMIT Proxy Statement at 4-5.)
CGI Has Become Dissatisfied with the Fund's Performance
22. For several years, CGI has been a major shareholder in the
Fund. During that time, CGI, like any shareholder, monitored the
Fund's management and capital structure. Over the last year, however,
it has become disappointed in the Fund's performance and developed
concerns about the long-term investment strategy of the Fund.
Specifically, CGI believes that, among other things, the Fund should
consider utilizing its authority to leverage as it had done in the
past.
Page 19 of 71
23. In November 2000, CGI elected, per the amended rules under the
Securities Exchange Act of 1934, to convert its Schedule 13G filing
(the type of securities ownership report filed by an insurance company
holding company) to a Schedule 13D in order to publicly disclose its
interest in communicating with other shareholders and managers of the
Fund regarding the Fund's capital structure and other matters, and in
acquiring additional shares and increased ownership in the Fund. CGI
stated, in its "Purpose of Transaction," Item 4 of the Schedule 13D, as
follows:
The shares of beneficial interest of the Fund ("Shares")
held by the Reporting Person [CGI] were acquired in the ordinary
course of business by the Reporting Person and its subsidiaries
for the purpose of investment and capital appreciation. In
pursuing this investment philosophy, the Reporting Person
routinely monitors the performance, trading prices, investment
strategy and portfolio securities of the Fund, and of the other
investment funds in which it invests, and may discuss such
matters with fund management, shareholders, or others. The
Reporting Person, as an insurance company holding company, is
entitled to file securities ownership reports required by the
Securities and Exchange Act of 1934 on Schedule 13G. Under
amended rules under the Securities Exchange Act of 1934, a person
reporting on Schedule 13G may elect to convert such filing to a
Schedule 13D, in part, to ensure that discussions with
management, or other actions by the Reporting Person, do not
limit the Reporting Person's ability to acquire additional
Shares, or to vote the shares it already owns. Accordingly, in
order to maintain desired flexibility for such transactions and
discussions, the Reporting Person is electing to convert its
ownership filing on Schedule 13G to a filing on Schedule 13D.
(Copies of the Fund's Schedule 13G, dated February 3, 2000, and
its Schedule 13D, dated November 22, 2000, are attached to the Wood
Aff. as Exhibits D and E.)
24. CGI's disclosed intent reflected the broad range of
alternatives that are available to a closed-end fund to enhance values
for shareholders, as well as CGI's desire to be free to consider all
such alternatives, depending upon circumstances, market conditions, and
possible conversations with Fund management and others. It also made
clear that it would continue to monitor a range of conditions in
considering such alternatives.
Page 20 of 71
The matters which the Reporting Person intends to consider, discuss
or pursue may include additional purchases of Shares, ceasing the
purchase of additional Shares, sales of Shares or one or more of the
items described in items (a) through (j) of Item 4 Whether any of
such actions are taken by the Reporting Person will depend upon the
Reporting person's evaluation of several factors, including the
Fund's business and prospects, future developments, the level of
discount in Share market prices from net asset value ("NAV"), the
performance of the Funds' investments, the availability of funds to
the Reporting Person, alternative uses of funds, stock and money
market conditions, and general economic conditions. Such factors
may materially affect the Reporting Person's decision to purchase
additional Shares, or take other actions, and may result in the
Reporting Person's increasing its ownership to a majority or more of
the outstanding Shares, and/or proposing changes in operations,
governance or capitalization of the Fund. The Reporting Person will
review its investment in the Fund from time to time and reserves the
right to take or not take any action it deems to be in its best
interest or to change its intention as set forth in this Item 4.
(Exhibit E, Item 4.)
CGI Acquires a Controlling Interest in the Fund and Attempts To
Meet with the Fund's Independent Trustees
25. As of its November 22, 2000 filing of Schedule 13D, CGI owned
5,169,800 shares, or 47.8% of the Fund. (Exhibit E to the Wood Aff. )
Over the next several months, CGI purchased additional shares of the
Fund, and filed Schedules 13D as appropriate. By the time of its April
5, 2001 Schedule 13D filing, CGI owned 5,420,950 shares, or 50.1% of
the shares outstanding. (Copies of the Fund's Schedules 13D, dated
January 16, 2001, February 27, 2001, April 5, 2001, and April 11, 2001
(its most recent filing), are attached to the Wood Aff. as Exhibits F,
G, H; and I, respectively.)
26. A review of the trading price of the Fund's shares of the NYSE
reveals that the market did not react negatively to CGI's disclosures
in its various Schedules 13D. (See copy of print-out for CBS Market
Watch, attached to the Wood Aff. as Exhibit J.) In fact, the trading
price of the Fund's shares has steadily increased since November 2000,
when Commerce filed its first Schedule 13D. (Id.)
Page 21 of 71
27. Since February 2001, CGI has sought to meet with one or more of
the independent Trustees to discuss, generally, ways to further the
interests of Fund shareholders. They may, but would not necessarily,
include the possibility of having new, shareholder-nominated trustees,
and perhaps changing the day-to-day portfolio management of the Fund.
However, the independent Trustees, through the Fund's representatives,
have consistently refused to meet or even speak with CGI. Instead, they
offered CGI only a meeting with the Fund's legal counsel, Ropes & Gray,
in the presence of the Fund managers, Putnam.
28. In particular, on March 16, 2001, John Gerstmayr of Ropes &
Gray stated in a letter to counsel for CGI that "Putnam would welcome
an opportunity for representatives of Commerce Insurance to meet with
the Fund's portfolio manager to discuss current investment strategy."
Mr. Gerstmayr went on to state that the issues raised by CGI "should be
discussed with the appropriate representatives of the Fund and Putnam
Investment Management." (A copy of the March 16, 2001 Gerstmayr letter
is attached to the Wood Aff. as Exhibit K.)
29. At the one and only meeting granted to CGI, on March 30, 2001,
CGI, through its legal representatives attending the meeting, generally
raised its concern that the Fund was not taking full advantage of its
fundamental investment strategies and policies and that it wished to
discuss such issues with independent Trustees on behalf of all
shareholders. Officers of the Putnam informed counsel for CGI that:
given the "small" asset base of the Fund relative to the balance
of the Putnam fund complex, the Trustees devote substantially all of
their time to some or all of the other Putnam-managed funds;
the Trustees have little, if any, involvement in decisions on
the Fund's capital structure or management;
Page 22 of 71
according to Putnam, the Fund was well positioned for long-term
performance, and that there were no plans to change its capital
structure or operations; and
Putnam then offered that it would be interested in directly
managing CGI's substantial investment portfolios.
30. In response to this, CGI stated, through its legal
representatives attending the March 30, 2001 meeting, that it was
considering whether decisions regarding the Fund's future should be
made by new "independent" trustees who could better focus on the
interests of the Fund, rather than the Putnam trustees who oversee
Putnam's many other funds. Moreover, contrary to assertions made by
the Trustees in defense of their decision to liquidate the Fund,
discussed below, CGI's representatives stated at this meeting that: a)
it had made no decision regarding whether it would request replacement
of any, all, or some of the Trustees; b) it had not identified
potential new trustees, but it could develop a proposal for review by
the Trustees before any formal nominations were made, if CGI decided to
pursue that option; and c) it was not a registered investment advisor,
and, therefore, could not, and would not, attempt to manage the Fund
itself.
31. In essence, then, CGI and the representatives of the Fund and of
Putnam were engaged in very preliminary discussions of shareholder
concerns raised by CGI. At the end of the meeting, CGI again requested
that its concerns be relayed to the Trustees, so that direct
discussions with the Trustees could take place concerning what steps
might be agreed upon that would benefit all shareholders.
The Trustees Announce Their Plan To Liquidate the Fund
32. The Trustees' reaction to CGI's general inquiries concerning
the Fund was not only unauthorized but an outrageous and unreasonable
reaction to legitimate questions from a beneficial holder of the Fund.
Rather than accepting CGI's request to discuss shareholder concerns in
greater detail or seeking input from all shareholders, the Trustees'
decided to dispose of all the Fund's assets and to liquidate the Fund.
On April 9, 2001, counsel for CGI received a letter from counsel for
the Fund,
Page 23 of 71
attaching a press release dated April 6, 2001, which, according to the
Fund's counsel, had been "distributed at the end of the day on Friday
announcing the board's decision to liquidate the Fund." (A copy of the
April 9, 2001 cover letter, together with the April 6, 2001 press
release (the "April 6 Press Release"), is attached to the Wood Aff. as
Exhibit L.)
33. The April 6 Press Release stated that the Trustees "approved a
plan of liquidation of the Fund under which shareholders will receive
their pro rata share of the Fund's net asset value in early May." The
April 6 Press Release clearly and expressly reveals that the sole
motivation behind the liquidation plan was to thwart any action by CGI
that would offer shareholders one or more new trustees or a new
investment manager:
Over the past few years an institutional investor has
built a substantial position in the Fund's shares approximating
50% of the Fund. During recent discussions with representatives
of the Fund, this investor made clear its intention to elect its
own slate of Trustees at a shareholder meeting later this year.
The investor has not identified its slate of nominees, and also
has not revealed its plans for the management of the Fund and
servicing the Fund's shareholders. However, in various previous
communications the investor had indicated interest in pursuing
changes in the Fund's investment strategy and operating
arrangements.
34. According to the April 6, 2001 Release, the liquidation plan
offers shareholder other than CGI the option of transferring their
investment into another Putnam-managed fund, an open-end fund, which
Putnam asserts is "managed in the same investment style as the Fund."
This, of course, could not possibly be true in light of the fact that
the Fund is a closed-end fund (and the replacement fund is open-end),
and it is authorized to use substantial leverage (and the open-fund is
not). The inaccuracy of this claim is evident in the fact that, while
the two funds are managed by the same person, the Fund has
substantially outperformed the open-end Putnam alternative over the
last five years - a performance difference that shows in the value of
the closed-end structure.
35. All shareholders holding at least 10,000 shares, including CGI,
are offered the option of receiving cash or securities:
The liquidation plan approved today provides for
distribution of the net assets of the Fund to shareholders as
soon as practicable. All shareholders holding at least 10,000
shares will be given the opportunity to elect to receive cash or
securities for their investment at the Fund's net asset value.
Page 24 of 71
36. Under the Trustees' liquidation plan, however, the Trustees
intentionally discriminate against one shareholder - CGI - in the
redemption:
Shareholders (other than the 50% shareholder) will also
be offered the opportunity to exchange their liquidation proceeds
at net asset value into Putnam Preferred Income Fund, an open-end
fund managed in the same investment style as the Fund.
Shareholders holding fewer than 10,000 shares who do not elect
such an exchange will receive cash.
37. The April 6, 2001 Press Release also states that the
"liquidation distribution will be payable on or about May 4, 2001 to
shareholders of record on April 16, 2001." And further that the
"Fund's share transfer books will be closed as of the close of business
on the record date and it is expected that the Fund's shares will no
longer be listed for trading on the NYSE following that date." In
fact, the Trustees caused cessation of trading of the Fund as of April
16, 2001. Thus, the April 6 Press Release purported to give
shareholders just five trading days between this first "notice" of its
plan and the cessation of trading. This left shareholders little means
of exiting their investment based on their own investment decisions and
timing, which is a fundamental right of a shareholder of a closed-end
mutual fund. Moreover, the Trustees gave no notice to shareholders of
this significant event other than this one press release, so many
shareholders may not have learned of the event before the Fund's shares
stopped trading on April 16, 2001.
38. The Trustees provided no justifiable reason for such hasty
action and short notice, nor did they disclose any details of the
factors they considered before taking action that would imply that
their decision-making was a deliberative process. The only meeting of
the Trustees that was disclosed was the one on the same day as the
April 6 Press Release, which, incidentally, was just one day after CGI
filed its Schedule 13D announcing that it had a controlling position in
the Fund. In light of the very short time between preliminary
discussions with CGI on March 30, 2001, and the April 6, 2001 Press
Release, it is impossible that the Trustees actually took into
consideration any factors other than the potential challenge by CGI, or
any of the consequences of their proposed action.
Page 25 of 71
CGI's Attempts To Dissuade the Trustees from Pursuing the Unauthorized
and Ill-Advised Liquidation Plan
39. On April 10, 2001, counsel for CGI, contacted Mr. Gerstmayr of
Ropes & Gray and suggested, again, that CGI have an opportunity to meet
with the Trustees, this time to discuss alternatives to liquidation of
the Fund. Mr. Gerstmayr responded by letter dated April 11, 2001, to
the effect that the Trustees had no interest in such a meeting. Mr.
Gerstmayr further stated:
In the face of the significant risks for public
shareholders presented by Commerce's stated intention to assume
control of the Fund, and its unwillingness to discuss its plans
for the Fund or any alternatives, the Fund's trustees exercised
their authority under the Fund's Declaration of Trust to liquidate
the Fund in a manner that protects the interests of all
shareholders.
(A copy of the April 11, 2001 letter from Gerstmayr is attached to
the Wood Aff. As Exhibit M.) Again, such statements are inaccurate in
that CGI never stated its intention to assume management of the Fund or
refused to discuss its plans. In fact, it was CGI's request to have
discussions with the Trustees that apparently precipitated the
Trustees' actions.
40. On April 11, 2001, CGI Executive Vice President and Chief
Financial Officer, Gerald Fels, wrote to John Hill, Chairman of the
Trustees of the Fund, to again request a meeting with the independent
Trustees to discuss an alternative to liquidation. Mr. Fels pointed
out that, for several years, CGI has held more than 30% or more of the
outstanding shares of the Fund and that CGI chose to invest in the Fund
as a tax-efficient pooled investment vehicle and an alternative to
redeemable open-end funds. Mr. Fels noted that CGI had asked numerous
times for a meeting with one or more of the independent Trustees to
discuss furthering the interests of all shareholders. He conveyed
CGI's belief that there is untapped value in the Fund and that certain
changes in strategy could enhance the Fund's value. Mr. Fels stated
that CGI strongly disagreed that liquidation was in the best interests
of the shareholders. (A copy of the April 11, 2001 letter from Fels is
attached to the Wood Aff. as Exhibit N.)
Page 26 of 71
41. In his April 11, 2001 letter, Mr. Fels proposed that the
Trustees, as an alternative, continue the Fund's operation and give
shareholders the options of receiving a distribution of net asset value
in cash or in kind or of retaining ownership in the Fund. Mr. Fels
pointed out that such a plan is preferable to a forced redemption of
shares in an inopportune market and an unplanned taxable event. Mr.
Fels implored Mr. Hill to respond before the Trustees take steps to
irreparably harm the value of the Fund.
42. On April 12, 2001, Mr. Hill responded, refusing Mr. Fels's
request for a meeting with the independent Trustees to discuss the
liquidation decision. Mr. Hill noted that CGI, or its counsel, had had
the opportunity to meet with Mr. Gerstmayr of Ropes & Gray and with a
Mr. Porter, the Executive Vice President of the Fund. Mr. Hill further
noted that "[b]oth of these individuals are responsible directly to me
and the other independent trustees and serve only the interests of the
Putnam Funds and their shareholders." (A copy of the April 12, 2001
letter from Hill is attached to the Wood Aff. as Exhibit O.)
43. On April 13, 2001, Mr. Fels of CGI wrote to Mr. Hill to give
notice to the Trustees that CGI intended to pursue all appropriate
legal action regarding the Trustees' plan to liquidate the Fund
without shareholder approval. Mr. Fels pointed out that the Trustees'
plan violates the Declaration of Trust and is directly contrary to the
express statements contained in the Fund's Initial Registration
Statement dated July 27, 1989, the Fund's Final Registration Statement
dated September 11, 1989, and the Fund's Final Prospectus dated
September 21, 1989. (A copy of the April 13, 2001 letter from Fels is
attached to the Wood Aff. as Exhibit P.)
The Trustees Ignore CGI's Requests and Take Steps Towards Its Announced
Unauthorized Plan of Liquidation
44. On April 20, CGI received from the Fund, through The Bank of
New York, notices to shareholders entitled "Plan of
Liquidation/Election," which stated that "the Trustees of the Putnam
Dividend Income Fund (the 'Fund') have voted to terminate the fund and
to liquidate its assets and to pay them to shareholders. The
Liquidation proceeds will be paid on or about 5/18/2001 to shareholders
of record as of the close of business on 4/16/2001."
Page 27 of 71
The notice also indicates that the election deadline is May 8, 2001, by
which time shareholders must elect to a) invest the proceeds of
liquidation in shares of Putnam Preferred Income Fund; b) invest the
proceeds in Putnam Money market Fund; c) receive fund portfolio
securities as payment at net asset value; or d) choose non-election.
(Copies of the notices to the separate CGI entities, dated April 19,
2001, are attached to the Wood Aff. as Exhibit Q.)
45. On April 26, 2001, CGI received a group of materials from
Putnam, by mail dated April 17, 2001, including a letter from John
Hill, Chairman of the Trustees, a "Liquidation Election" form, and a "Q
& A"-type presentation regarding the purpose of the proposed action
entitled "Notice to Shareholders of Termination of the Fund." Mr. Hill
reiterates in his letter that the sole purpose of the decision to
liquidate is to avoid a possible vote of shareholders to replace the
existing Trustees:
On April 6, 2001, the Trustees voted to liquidate Putnam
Dividend Income Fund. The Trustees took this action to protect
the interests of the fund's shareholders. An outside
institutional investor had purchased approximately 50% of the fund
and had expressed the intention of electing a new, undisclosed
slate of Trustees to govern the fund. The Trustees concluded that
it would be in the best interests of shareholders to liquidate the
fund in light of the fact that this investor had not disclosed its
long-term plans for management of the fund and had no apparent
experience in managing a mutual fund.
(Copies of the April 17, 2001 letter from Hill, "Liquidation
Election," and "Notice to Shareholders of Termination of the Fund" are
attached to the Wood Aff. As Exhibit R.)
46. Mr. Hill goes on to state in his letter that the shareholders
have two alternatives: 1) to invest liquidation proceeds into shares
of two other Putnam-managed funds, the Putnam Preferred Income Fund or
the Putnam Money Market Fund; or 2) for shareholders owning at least
10,000 shares, to receive a portion of the Fund's portfolio securities,
or cash, equal to the net asset value of one's shares. (Hill letter,
Exhibit R.)
47. Mr. Hill also concedes that, by adopting the plan of
liquidation, the Trustees had forced a tax event on all shareholders
because, regardless of which option is chosen, "the liquidation will be
a taxable event for federal income tax purposes." (Id.)
Page 28 of 71
48. The option to invest in other Putnam-managed funds is still not
an option offered to CGI. Buried on page 4 of the Q & A materials is
the statement: "The option to invest in shares of Putnam Preferred
Income Fund and the option to invest in shares of Putnam Money Market
Fund are not available to The Commerce Group, Inc. and its direct and
indirect subsidiaries and affiliates either directly or indirectly
through a nominee holding shares of record of the Fund for the benefit
of any such person." ("Notice to Shareholders" at 4, Exhibit R.)
49. According to Mr. Hill's April 17, 2001 letter, which, again,
was not received by CGI until April 26, 2001, shareholders must make
their elections by May 8, 2001. According to the "Notice to
Shareholders," those who do not respond by the election deadline will
be deemed to have chosen cash redemption Payments will be made on or
about May 18, 2001. (Exhibit R.) This means that, as of the election
deadline of May 8, 2001, the Trustees will begin the process of
liquidation by selling securities and other investments of the Fund.
50. The "Notice to Shareholders" includes the assertion by the
Trustees that "[t]he decision to terminate the Fund was made, and this
Notice is being given to shareholders, in accordance with Article IX,
Section 4 of the Fund's Agreement and Declaration of Trust." (Page 1.)
This reference to Article IX, Section 4 of the Fund's Declaration of
Trust, however, was the first time the Trustees asserted that their
liquidation plan is a termination plan. Perhaps not so coincidentally,
this new characterization by the Trustees' of its proposed action was
made after CGI's written challenge to the authority of the Trustees to
liquidate the Fund without shareholder approval. Nowhere in Article
IX, Section 4 does the word "liquidation" appear. Procedures for
implementing a liquidation, however, are specifically set forth in
Article IX, Section 5, and such procedures include shareholder
approval. (Discussed further infra.) Moreover, the Fund's SEC
Page 29 of 71
documents specifically state that a liquidation requires shareholder
approval. (Discussed infra.) And further, the April 17, 2001 "Notice
to Shareholders" refers to the Trustees' action as a "liquidation"
approximately 50 times.
51. The "Notice to Shareholders" also, again, expressly states that
the Trustees plan to liquidate the Fund specifically to avoid any
action taken by CGI to propose new, shareholder-nominated trustees, new
Fund management, or a different investment strategy. (Page 1.)
52. The Trustees assert that their liquidation plan "is in the best
interests of the Fund's shareholders." ("Notice to Shareholders" at
1.) The Trustees make this assertion despite the fact that CGI posed
no threat to the Fund, that the Trustees have chosen to resist becoming
fully informed about CGI's intentions prior to making fundamental
decisions concerning the Fund, and that other, less draconian and
costly alternatives to liquidation were available. Such reckless
action by the Trustees cannot be in the best interests of the
shareholders.
The Putnam Dividend Income Fund Agreement and Declaration of Trust
Prohibits Liquidation of the Fund Without Shareholder Approval
53. Article IV, Section 3, of the Declaration of Trust (Exhibit A)
sets out the powers and authority of the Trustees. Included among
those powers is (b) "[t]o sell, exchange, lend, pledge, mortgage,
hypothecate, write options on and lease any or all of the assets of the
Trust except as otherwise provided in Article IX, Section 5."
(Emphasis added.)
54. Article IX, Section 5, concerning the "Merger, Consolidation
and Sale of Assets," states as follows:
Page 30 of 71
The Trust may merge or consolidate with any other corporation,
association, trust or other organization or may sell, lease or exchange
all or substantially all of its assets, including its good will, upon
such terms and conditions and for such consideration when and as
authorized at any meeting of Shareholders called for the purpose, or
may liquidate or dissolve when and as authorized, by the affirmative
vote of the holders of not less than two-thirds of the Shares entitled
to vote, provided, however, that if such merger, consolidation, sale,
lease or exchange is recommended by two-thirds of the total number of
Trustees then in office, the vote of the holders of a majority of the
Shares entitled to vote shall be sufficient authorization. Nothing
contained herein shall be construed as requiring approval of the
Shareholders for any sale of assets in the ordinary course of business
of the Trust. The provisions of this Section shall be subject to the
voting powers of one of more classes or series of Share as set forth in
the Bylaws.
(Emphasis added.)
55. Therefore, according to the express terms of Article IV,
Section 3(b), and Article IX, Section 5, the Trustees must obtain
shareholder approval before liquidating the assets of the Fund.
Indeed, at least a majority and, in some instances, a super-majority of
shareholder votes, is required before the Trustees may take such
fundamental action with respect to the Fund. In no event is
shareholder approval not required for liquidation - even if there is a
unanimous recommendation of the Trustees.
56. In contrast, Article IX, Section 4, concerning "Duration and
Termination of the Trust," provides as follows:
Unless terminated as provided herein, the Trust shall
continue without limitation of time. Subject to the voting
powers of one or more classes or series of Shares as set forth in
the Bylaws, the Trust may be terminated at any time by vote of
Shareholders holding at least two-thirds of the Shares entitled
to vote (provided, however, if such termination is recommended by
two-thirds of the total number of the Trustees then in office,
the vote of a majority of the Shares entitled to vote shall be
sufficient authorization) or by the Trustees by written notice to
the Shareholders. Upon termination of the Trust, after paying or
otherwise providing for all charges, taxes, expenses and
liabilities, whether due for accrued or anticipated of the Trust
as may be determined by the Trustees, the Trust shall in
accordance with such procedures as the Trustees consider
appropriate reduce the remaining assets to distributable form in
cash or shares or other property, or any combination thereof, and
distribute the proceeds to the Shareholders, ratably according to
the number of Shares held by the several Shareholders on the date
of termination, except to the extent otherwise required or
permitted by the preferences and special or relative rights and
privileges of any classer or series of Shares.
Page 31 of 71
(Emphasis added.)
57. Not once does Article IX, Section 4, of the Declaration of
Trust mention the word "liquidation" or any variation thereof.
58. In light of the fact that a two-thirds vote of the
Shareholders, or a majority vote with a recommendation of two-thirds of
the Trustees, is required to liquidate the Fund, it is illogical that
Article IX, Section 4, would allow the Trustees simply to bypass that
very rigid authorization requirement by terminating the Fund under
Article IX, Section 4, and then liquidating. Indeed, if Article IX,
Section 4, is interpreted to allow termination without shareholder
approval and to include liquidation, then Article IX, Section 5, which
expressly requires shareholder approval for liquidation would be
rendered meaningless.
59. If, as permitted by the Declaration of Trust, the Fund had
converted to an open-end fund, then Article IX, Section 4, becomes more
relevant since redemptions by open-end fund shareholders can result in
all, or essentially all, shares being cancelled, so that legal
termination of the remaining trust entity would need to be undertaken
by the Trustees. In the case of the Fund, as it exists, it is clear
that the Trustees may not liquidate the Fund without the required
shareholder approval, and that, if usable at all while the Fund remains
closed-end, Article IX, Section 4, is only used to accomplish a final
termination of the entity, after a plan of liquidation is approved by
the shareholders. This is made indisputable by the Trustees' own
statements in their SEC documents. (Discussed further infra.) The
Trustees may not simply characterize a liquidation of a substantial
operating company as a "termination" in order to avoid the requirements
of Section 5.
60. In fact, despite the pretext of a termination, the Trustees
have been unable to avoid the reality of the situation and have
consistently described their intended action as a "liquidation." The
plan of liquidation described in the April 6, 2001 press release and
the April 17, 2001 notice to shareholders provides for a two-step
process for distribution of the assets to shareholders, with the
"record date" that determines the level of shareholder investment and
the "payment date" for distribution of the proceeds. In contrast,
Article IX, Section 4, regarding termination provides for just one
date, stating that the distribution will take place "on the date of
termination."
Page 32 of 71
61. Having made such error, it can be predicted that the Trustees
will again manipulate the situation to fit the pretext and may have
already done so by denying shareholders the right to transfer their
shares, in order to assure that the holders as of the April 16 "record
date" will also be the holders on the "date of termination." Despite
these gymnastics, the plain fact is that the process of establishing a
record date/payment date plan is, on its face, more consistent with
Article IX, Section 5, regarding liquidation, rather than with Section
4.
62. Had the Trustees sought shareholder approval for their proposed
plan to liquidate, they would not have obtained it because CGI owns
50.1% of the outstanding shares of the Fund and opposes the liquidation
plan as not in the best interests of the Fund or the interests of the
shareholders. It is clear, however, that the Fund could have attained
approval of the very step that would have preserved both shareholder
choice and valuable assets - a plan to offer voluntary redemption to
all shareholders, even one that could be voted and implemented before
any changes are made to the board of trustees.
Statements Made by the Trustees in Prior Filings with the SEC Similarly
Stress the Requirement of Shareholder Approval
63. That the Declaration of Trust requires shareholder approval for
a liquidation of the Fund is consistent with the Fund's filings with
the SEC at the inception of the Fund, in particular, its Initial
Registration Statement, Form N-2, dated July 27, 1989, its Final
Registration Statement, Form N-2, dated September 11, 1989, and its
Final Prospectus, dated September 21, 1989. (Copies of relevant pages
of containing of the Initial Registration Statement, Final Registration
Statement, and Final Prospectus, containing language cited below, are
attached to the Wood. Aff. as Exhibits S, T, and U, respectively.)
64. The Trustees touted in the Final Prospectus the protections
offered by the Agreement and Declaration of Trust to the shareholders:
Page 33 of 71
The Agreement and Declaration of Trust and By-Laws
include provisions that could have the effect of limiting the
ability of other entities or other persons to acquire control of
the Fund, or to cause it to engage in certain transactions or to
modify its structure. The affirmative vote of at least two-
thirds of the outstanding common shares and APS of the Fund each
voting as a separate class is required to authorize any of the
following actions: (1) merger or consolidation of the Fund, (2)
sale of all or substantially all of the assets of the Fund, (3)
liquidation or dissolution of the Fund, or (4) amendment of the
Agreement and Declaration of Trust to reduce the two-thirds vote
required to authorize the actions in (1) through (4), unless with
respect to any of (1), (2), or (3) above such action has been
authorized by the affirmative vote of two-thirds of the total
number of Trustees then in office, in which the case the
affirmative vote of a majority of the outstanding shares of each
class is required. .
The Trustees have determined that the two-third voting
requirements described above, which are greater than the minimum
requires under the 1940 Act, are in the best interests of the
Fund and its shareholders generally.
(Exhibit U; emphasis added.)
65. The Trustees made similar representations in their Initial and
Final Registration Statements on Form N-2 filed for the Fund. (See
Exhibits S and T.)
66. These clear statements in the Registration Statements and
Prospectus amount to terms and conditions upon which shareholders
relied when they invested. Therefore, the Trustees' plan to liquidate
without shareholder approval is either inconsistent with their initial
offering, or their initial offering materials were materially
misleading with respect to a fundamental right of shareholders.
The Trustees' Liquidation Plan is Contrary to the Interests of the Fund
and of the Shareholders
67. The Trustees' assertion that their plan of liquidation is in
the best interests of the shareholders is false and clearly a pretext
for their true motivation, which is to protect their position as
Trustees and the position of Putnam as the manager of the Fund. In the
entire existence of the Fund, the Trustees have never before indicated
that liquidation would be a desirable method of furthering the
interests of the shareholders of the Fund. On the contrary, the Fund's
public filings, used to solicit investment in the Fund, clearly tout as
a protection to shareholders that liquidation would not be possible
without the required shareholder approval under the Declaration of
Trust.
Page 34 of 71
68. In addition, the fact that the Trustees are encouraging
shareholders to transfer assets from the Fund to another fund managed
by Putnam, which is not a closed-end fund, reveals a conflict of
interest for the Trustees. Even the purportedly "independent" Trustees
are clearly aligned with Putnam and are intertwined with Putnam
financially, both by way of investments and compensation. It would not
behoove either the Trustees or Putnam to allow a majority shareholder
to seek a shareholder vote among new, shareholder-nominated trustees.
As such, the so-called independent Trustees are not truly independent
and are, therefore, unable to make objective decisions in the interests
of the shareholders when their first priority is to protect their
beneficial relationship with Putnam.
69. Further, in light of the Trustees' obligations as trustees for
the 114 Putnam-managed funds, and the very limited time that the
Trustees spend reviewing the performance and management of the Fund, it
appears impossible that their decision to liquidate was made
objectively and without the heavy influence of Putnam. In addition,
the Trustees' lack of careful evaluation of their possible alternatives
is evidenced by the extreme haste in which it made its decision, which
had no reasonable justification.
70. The Trustees' assertion in the notice of liquidation to
shareholders is similarly disingenuous to the extent that it leads
shareholders to believe that the transfer of assets from the fund to an
open-end fund managed by Putnam is in the best interests of
shareholders. Indeed, the Trustees have in the past marketed closed-
end funds as preferable to open-end funds and have attempted to
persuade shareholders that a conversion of a closed-end fund to an
open-end fund would not in the interests of shareholders. For example,
in 1997, the Trustees strongly argued against the conversion of the
Putnam Master Income Trust from a closed-end fund to an open-end fund.
Specifically, they stressed that closed-end funds are preferable to
open-end funds because closed-end funds are managed over the long term,
in long-term, higher-yielding investments, allowing shareholders of
closed-end funds to realize unique and significant investment value.
Page 35 of 71
[R]emaining a closed-end fund provides significant
investment benefits that are not available to open-end funds. In
general, if the fund remains a closed-end fund, the portfolio
manager can continue to manage the Fund with a steadier, longer
term perspective without the short-term pressures from sales and
redemptions of fund shares typically experienced by open-end
funds.
(Letter from Trustees to shareholders of the Putnam Master Income Trust
1997 PMIT Proxy Statement, dated August 7, 1997 (Exhibit V to Wood
Aff.), at 4.) The Trustees went on to state in their reasons for their
recommendation of a vote against conversion to an open-end fund:
The Trustees believe that your fund's closed-end status
provides significant investment benefits not available to open-
end fund investors. Because your fund's shares are not
redeemable, your fund is not required to maintain short-terms,
lower yielding investments in anticipation of possible
redemptions, but can be fully invested in higher yielding
securities in pursuit of the fund's investment objective.
. . .
The Trustees believe that your fund has achieved
favorable investment results for its shareholders over its life
as a closed-end fund, which demonstrates the benefits of the
closed-end structure. . . . [T]he Trustees believe that, in
deciding whether to make major structural changes, the long-term
performance of your fund is an important factor to consider.
(1997 PMIT Proxy Statement at 19.)
71. The Trustees also argued in the 1997 PMIT Proxy Statement that
a closed-end fund typically enjoys higher current yields than an open-
end fund because it has fewer expenses and lower transaction costs.
[A] conversion to open-end status, while ending the
discount, is likely to result in a lower yield because of
increased fund expenses. This result appears to be inconsistent
with the fund's investment objective of seeking high current
income.
(Id. at 4.) The Trustees continued this thought in their
recommendation against conversion to an open-end fund:
Page 36 of 71
The Trustees believe that your fund's operating
expenses are likely to increase if your fund is converted to
open-end status. First, as an open-end fund, your Fund would be
required, as a practical matter, to make a continuous public
offering of its shares in order to offset redemptions and
maintain the economies of scale available at its current size.
The Trustees expect that in order to market your fund's shares
effectively and to conform generally to sales practices of
competing dealer sold funds, following a conversion to open-end
status, the Trustees would likely recommend that shareholders
approve the adoption of a distribution plan under Rule 12b-1.
Such a plan would permit your fund to pay annual distribution
fees of up to .35% of your fund's net assets. If such
distribution plan were approved, the Trustees would expect to
authorize the payment of distribution fees at the annual rate of
.25% of net assets, as is the case with similar open-end Putnam
Funds. In addition, all shareholders would bear the brokerage
and other transactional costs associated with purchases and sales
of securities in response to the sale or redemption of shares if
your fund were converted to open end status (except to the extent
that the Trustees decide to impose a temporary redemption fee, as
described below). Second, in addition to the likelihood of
increased fees, it is also possible that the fund may shrink
following conversion to open-end status, resulting in increased
expense ratios.
(Id. at 19-20.)
72. The Trustees who signed the 1997 PMIT Proxy Statement citing
the benefits of closed-end funds are the very same Trustees who voted
to liquidate the closed-end Fund, and recommend to shareholders (other
than CGI) that they convert their shares in the Fund to open-end funds
managed by Putnam: James Atkins Baxter, Hans H. Estin, John A. Hill,
Ronald J. Jackson, Elizabeth T. Kennan, Lawrence J. Lasser, Robert E.
Patterson, and Nicholas Thorndike. (Id. at 6.)
73. These Trustees further stated in the 1997 PMIT Proxy Statement
that they were recommending against a shareholder vote to convert this
fund to an open-end fund because in the Trustees' unanimous view, as a
closed-end fund, the fund was afforded significant investment
advantages. The Trustees explained that if the conversion plan were
approved, the conversion would result in a "de-listing" of the Fund's
shares on the New York Stock Exchange, where they then could be bought
and sold at prevailing market prices. The Trustees described this de-
listing possibility as a negative. (Id. at 24.) In an abrupt about-
face, this is the exact course that the Trustees of the Fund took after
their initial announcement of liquidation on April 6, 2001.
Page 37 of 71
74. With a closed-end fund, there is no need to have liquid assets
to meet redemption requests at inopportune times, as in open-end funds.
In their 1997 recommendation against the open-end structure, the
Trustees stated:
Furthermore, as a closed-end fund, your fund does not
experience the cash flows associated with sales and redemptions
of open-end fund shares. As a result, your fund's portfolio
manager does not have to invest additional cash from new sales at
times when market conditions are unfavorable or sell securities
to meet redemptions in an opportune times.
(Id. At 19.)
75. Further, closed-end funds have significant tax advantages that
open-end funds do not. The Trustees in 1997 also thought it
significant in recommending against conversion that if the fund were
converted, the need to sell securities to meet redemptions may have
adverse tax consequences to shareholders remaining in the fund: "If
your fund sells securities to meet redemptions and realizes a gain for
tax purposes, your fund will be required to allocate the tax gain to
all shareholders, not simply to those redeeming." (Id. at 21.) The
Trustees stated that they believed that most shareholders in the fund
had purchased their shares with a long term investment perspective that
recognized the special advantages of a closed-end structure. (Id. at
21-22.)
76. For all these reasons , the Trustees in the 1997 PMIT Proxy
Statement, strongly recommended against the conversion from a closed-
end fund to an open-end fund as a major structural change. (See id. at
19.)
77. In addition, the Trustees in 1997 argued that a conversion from
closed-end to open-end status would also require a number of changes in
the Agreement and Declaration of Trust under which the fund had been
established. (Id. at 26.) Interestingly, the Trustees now claim to
have a different view of the requirements of the Declaration of Trust.
Page 38 of 71
78. In the same 1997 PMIT Proxy Statement, the Trustees also stated
that the fact that closed-end funds are required to hold Annual
Shareholder Meetings for the purposes of electing trustees and
ratifying the selection of auditors was another benefit not available
to an open-end fund. (Id. at 24.) The Trustees' planned action with
respect to the Fund today is directly contrary to this, their prior
description to shareholders of the requirements of a close-end fund.
79. These same Trustees made similar statements recommending
against the conversion of this closed-end fund to an open-end fund in
the Putnam Master Income Trust Proxy Statement dated August 16, 1996.
(A copy of the 1996 PMIT Proxy Statement dated August 16, 1996, is
attached to the Wood. Aff. as Exhibit W.) Likewise, many of the
Trustees, in their capacity as trustees of the Putnam Premier Income
Trust ("PPIT"), recommended to the shareholders of that closed end
mutual fund in May 1997, and earlier in May 1996, that the shareholders
not vote to convert that closed-end Fund to an open end Mutual Fund.
The trustees making that recommendation at that time were Jameson
Baxter, Hans Estin, John Hill, Ronald Jackson, Elizabeth Kennan,
Lawrence Lasser, Robert Patterson, George Putnam III, A.J.C. Smith and
Nicholas Thorndike. (Copies of the PPIT Proxy Statements, dated May
30, 1997, and May 10, 1996, are attached to the Wood Aff. as Exhibits X
and Y.)
The Trustees Plan of Liquidation Will Cause Irreparable Harm
80. As the Trustees warned shareholders in the past, it is true
that their plan to effectively end the closed-end Fund will have some
serious financial consequences to shareholders. Regardless of what
shareholders elect to do with their proceeds, the unplanned
distribution of assets will be a taxable event - by the Trustees' own
admission in the April 17, 2001 notice to shareholders, the
distribution of assets will result in the shareholders' realizing
taxable gains and taxable dividend income. Such tax liabilities would
not incurred if the Fund continued operation.
Page 39 of 71
81. In addition, the damage arising from tax liability is made more
egregious by the fact that the Fund has a tax loss carry-forward of
nearly $10.7 million , according to December 31, 2000 valuations
published by the Fund, which represents roughly 10% of the original
value of the Fund's investments. According to the most recent
information available, there has been an additional loss of
approximately 3% since the beginning of 2001. Liquidating the Fund
now, at these valuation levels, will result in a permanent loss to
shareholders of significant tax benefits because the losses can only be
realized if the Fund continues to exist - the benefits, which represent
several millions of dollars to shareholders, cannot be distributed to
shareholders. This intentional abandonment by the Trustees of such a
valuable asset of the Fund, while at the same time seeking shareholder
transfers to another Putnam-managed fund, smacks of self-dealing in the
form of dissipating the assets of one fund to benefit another.
82. Liquidation of the Fund also deprives shareholders of the full
value of their investment because they will not reap the value of the
intangible assets of a 12-year, closed-end fund.
83. In addition, because the Trustees have acted with unreasonable
haste, they have deprived shareholders sufficient notice of liquidation
in order to protect their investments. The decision to liquidate is
wholly inconsistent with the investment strategy of the Fund as a non-
redeemable, long-term investment vehicle. Closed-end Fund shareholders
are entitled to choose when to exit their investment, based on the
shareholders' review of market conditions, portfolio values, and tax
considerations. There is no evidence whatsoever, and, indeed, only
evidence to that contrary, that the Trustees based their decision to
liquidate on a careful review of market conditions, portfolio values,
and tax considerations. As such, their actions are irresponsible and
contrary to the interests of shareholders.
Page 40 of 71
84. Aside from outright financial harm, the actions of the Trustees
will also harm CGI and the other shareholders by virtue of the fact
that it deprives them of their basic rights as investors, specifically,
the right to approve a fundamental change in Fund policy. Indeed, the
unambiguous statement in the Fund's Registration Statement that
liquidation of the Fund requires shareholder approval amounts to the
most fundamental of policies of the Fund.
85. The Trustees have not reacted proportionately to the perceived
threat to their continued service as Trustees of the Fund, and they
have not acted for the purpose of protecting shareholder interests.
There are numerous less restrictive means possible to protect
shareholders than hasty liquidation of the Fund. Indeed, CGI has
proposed many such possible courses of action as alternatives to
liquidation - consideration of new nominees for trustees, consideration
of retaining new portfolio management before any changes in trustees,
offering elective redemption to shareholders before new trustees are
seated - but all proposals were rejected. CGI's proposal to offer
shareholders the choice of receiving a distribution of net asset value
in cash or in kind or of retaining their Fund ownership affords large
and small shareholders the opportunity to maintain their chosen long-
term strategy in a tax-efficient manner. Shareholders could continue
having their assets managed by Putnam or a successor, or shareholders
could choose liquidity and exit rather than continue with potentially
new trustees and Fund managers.
COUNT I
(Breach of Fiduciary Duty - Intentional and Express Violation
of the Declaration of Trust)
86. Plaintiff, CGI, realleges and incorporates by reference the
allegations contained in paragraphs 1 through 85, as if fully set forth
herein.
87. As Trustees and officers of the Fund, the Defendants owe
fiduciary duties to CGI as a shareholder of the Fund.
Page 41 of 71
88. The Defendants' conduct as described above, specifically, their
intentional violation of the express terms of the Declaration of Trust
by attempting to liquidate the Fund without the required shareholder
approval in order to thwart the possible decision by shareholders to
replace the existing Trustees and the Fund's portfolio manager, Putnam,
constitutes a breach of the Defendants' fiduciary duties. The
Defendants have violated their fiduciary duties of care and loyalty to
CGI. The Defendants have not acted in good faith and with reasonable
belief that their actions were in the best interests of the Fund.
Further, the acts of the Defendants constitute reckless and willful
disregard of their duties as Trustees of the Fund.
89. CGI will be irreparably harmed and will suffer substantial
money damages in an amount not yet determined by the breach of
fiduciary duty if the planned liquidation is allowed to take place.
COUNT II
(Breach of Fiduciary Duty - Actions Taken by the Defendants
Are Contrary to the Interests of the Shareholders of the Fund)
90. Plaintiff, CGI, realleges and incorporates by reference the
allegations contained in paragraphs 1 through 85, as if fully set forth
herein.
91. As Trustees and officers of the Fund, the Defendants owe
fiduciary duties to CGI as a shareholder of the Fund.
92. The Defendants' conduct as described above, including their
draconian, disproportionate response to a perceived "threat" by CGI in
a corporate control context, was not in the best interest of the
shareholders but, rather, in the interests of the Trustees and the
Fund's manager, Putnam, and constitutes a breach of the Defendants'
fiduciary duties. The Defendants have violated their fiduciary duties
of care and loyalty to CGI. The Defendants have not acted in good
faith and with reasonable belief that their actions were in the best
interests of the Fund. Further, the acts of the Defendants constitute
reckless and willful disregard of their duties as Trustees of the Fund.
93. CGI will be irreparably harmed and will suffer substantial
money damages in an amount not yet determined by the breach of
fiduciary duty if the planned liquidation is allowed to take place.
Page 42 of 71
COUNT III
(Breach of Fiduciary Duty, Derivatively on Behalf of the Fund -
Intentional and Express Violation of the Declaration of Trust)
94. Plaintiff, CGI, realleges and incorporates by reference the
allegations contained in paragraphs 1 through 85, as if fully set forth
herein.
95. As Trustees and officers of the Fund, the Defendants owe
fiduciary duties to the Fund and to all shareholders of the Fund.
96. The Defendants' conduct as described above, specifically, their
intentional violation of the express terms of the Declaration of Trust
by attempting to liquidate the Fund without the required shareholder
approval in order to thwart the possible decision by shareholders to
replace the existing Trustees and the Fund's portfolio manager, Putnam,
constitutes a breach of the Defendants' fiduciary duties. The
Defendants have violated their fiduciary duties of care and loyalty to
the Fund and its shareholders. The Defendants have not acted in good
faith and with reasonable belief that their actions were in the best
interests of the Fund. Further, the acts of the Defendants constitute
reckless and willful disregard of their duties as Trustees of the Fund.
97. Upon discovery of this breach, CGI made numerous demands on the
Defendants that the breach be remedied. Any further demand on the
Defendants would have been futile because the interest of the
Defendants in protecting themselves and the Fund's managers is contrary
to the interests of the Fund, CGI, and the other shareholders of the
Fund.
98. The Fund, CGI, the other shareholders will be irreparably harmed
and will suffer substantial money damages in an amount not yet
determined by the breach of fiduciary duty if the planned liquidation
is allowed to take place.
COUNT IV
(Breach of Fiduciary Duty, Derivatively on Behalf of the Fund -
Actions Taken by the Defendants Are Contrary to the Interests
of the Shareholders of the Fund)
99. Plaintiff, CGI, realleges and incorporates by reference the
allegations contained in paragraphs 1 through 85, as if fully set forth
herein.
Page 43 of 71
100. As Trustees and officers of the Fund, the Defendants owe
fiduciary duties to the Fund and to all shareholders of the Fund.
101. The Defendants' conduct as described above, including their
draconian, disproportionate response to a perceived "threat" by CGI in
a corporate control context, was not in the best interest of the
shareholders but, rather, in the interests of the Trustees and the
Fund's manager, Putnam, and constitutes a breach of the Defendants'
fiduciary duties. The Defendants have violated their fiduciary duties
of care and loyalty to the Fund and its shareholders. The Defendants
have not acted in good faith and with reasonable belief that their
actions were in the best interests of the Fund. Further, the acts of
the Defendants constitute reckless and willful disregard of their
duties as Trustees of the Fund.
102. Upon discovery of this breach, CGI made numerous demands on the
Defendants that the breach be remedied. Any further demand on the
Defendants would have been futile because the interest of the
Defendants in protecting themselves and the Fund's managers is contrary
to the interests of the Fund, CGI, and the other shareholders of the
Fund.
103. The Fund, CGI, the other shareholders will be irreparably
harmed and will suffer substantial money damages in an amount not yet
determined by the breach of fiduciary duty if the planned liquidation
is allowed to take place.
WHEREFORE, Plaintiff, CGI, asks this Court to enter judgment in
its favor and against the Defendants, or any of their agents, servants,
assigns, and those acting in concert with the Defendants, by:
a) Ordering as preliminary relief, that the Defendants be
enjoined from effectuating the plan of liquidation of the Fund,
including, but not limited to, selling any portion of the Fund's
portfolio securities or otherwise liquidating any assets of the Fund,
and staying or extending indefinitely the election deadline for CGI and
all other shareholders of the Fund, now scheduled for May 8, 2001;
b) Awarding CGI damages with prejudgment and postjudgment
interest;
c) Awarding such other relief as the Court deems just and
reasonable.
Page 44 of 71
JURY CLAIM
Plaintiff demands a trial by jury on all claims so triable.
THE COMMERCE GROUP, INC.
By its attorneys,
_________________________________
James A. Ermilio (BBO #550697) Lisa C. Wood (BBO #543811)
General Counsel Elizabeth M. Harvey (BBO #633916)
The Commerce Group, Inc. Erik P. Bartenhagen (BBO #640003)
211 Main Street Nutter, McClennen & Fish, LLP
Webster, MA 01570 One International Place
(508) 949-4554 Boston, MA 02116
(617) 439-2000
Dated: April 30, 2001
VERIFICATION
I, Gerald Fels, hereby verify under the penalties of perjury that
I have read the foregoing Verified Complaint and that the facts
contained in the Verified Complaint are true and correct to the best of
my knowledge, information, and belief based upon by personal knowledge,
except paragraphs 2-5, 7, 29-31, which I believe to be true based on
information and belief and based upon information collected and made
available to me by my agents, representatives, and employees, and
except paragraphs 6, 8-12, 19-21, 26, 28, 32-39, 42, 46-61, 63-80,
which are supported by exhibits to the Wood Affidavit. Signed this
30th day of April 2001.
_____________________________
Gerald Fels
Page 45 of 71
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
C.A. NO.____________
BUSINESS LITIGATION SESSION
THE Commerce GROUP, INC., individually
and in a derivative capacity on behalf of
Putnam
Dividend Income Fund
Plaintiff,
v.
JAMESON A. BAXTER, HANS H. ESTIN, JOHN A.
HILL, RONALD J. JACKSON, PAUL L. JOSKOW,
ELIZABETH T. KENNAN, JOHN H. MULLIN, III,
ROBERT E. PATTERSON, A.J.C. SMITH, W.
THOMAS STEPHENS, AND W. NICHOLAS
THORNDIKE, as Trustees of Putnam Dividend
Income Fund, and LAWRENCE J. LASSER and
GEORGE PUTNAM, III, as Trustees and
Officers of Putnam Dividend Income Fund,
Trustees,
and
PUTNAM DIVIDEND INCOME FUND,
Nominal Defendant.
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MEMORANDUM IN SUPPORT OF MOTION FOR PRELIMINARY INJUNCTION
This action is brought by The Commerce Group, Inc. ("CGI"),
individually and in a derivative capacity on behalf of Putnam Dividend
Income Fund (the "Fund"), a publicly-traded closed-end mutual fund
organized as a Massachusetts business trust, against the trustees of
the Fund (the "Trustees"). This action concerns breaches of fiduciary
duty by the Trustees arising out of their hastily-made plan to
liquidate the Fund without required shareholder approval and to
distribute the assets. CGI seeks immediate injunctive relief to
protect against the devastating and irreparable harm that will result
if this liquidation plan goes forward on May 8, 2001, as announced.
Page 46 of 71
I. BRIEF FACTUAL BACKGROUND
CGI has been a major shareholder of the Fund since 1996, and
through purchases made between November, 2000 and April, 2001 became
the controlling shareholder of the Fund with 50.1% of the outstanding
shares. (Compl. 17, 22, 25). Within days of CGI obtaining this
controlling position, the Trustees abruptly announced by press release
on April 6, 2001 a "plan of liquidation" which would liquidate the Fund
in a mere two to three weeks and halt trading of Fund shares in five
trading days. (Id. at 32-37; Wood Aff., Exh. L). No shareholder
approval was obtained by the Trustees for this plan of liquidation, and
the timing proposed by the Trustees for this liquidation was so
precipitous that it would be complete before the Fund's regular annual
meeting in June, and before CGI could call a special meeting of Fund
shareholders. (Compl. 49-50, Wood Aff., Exh. A).
In their April 6, 2001 press release, the Trustees admitted that
the purpose of the Fund's liquidation was solely to thwart any possible
attempt by CGI, as the majority shareholder and new owner, to select
different trustees or money managers. (Compl. 33). The Trustees
came to this decision hastily after only one meeting, and without the
benefit of much information at all. (Id. at 38, 52). It would
appear that the Trustees made their decision without considering the
current market conditions affecting the Fund's portfolio, the taxable
gains and income that may result from the distribution, and whether the
shareholders would be better served by liquidating their investment in
a market sale. (Id. at 52, 69, 80-83). Indeed, in the entire
twelve-year existence of the Fund, the Trustees 1) have never asserted
- until now - that liquidation of the Fund is a permissible or
desirable transaction for the Fund; and 2) with respect to a similar
fund, have consistently claimed that the closed-end fund structure has
significant value to shareholders that can only be realized in the Fund
stays in existence as a closed-end fund. (Id. at 67, 70-79).
Page 47 of 71
CGI is opposed to the liquidation plan because it is against the
interests of the shareholders (including CGI) and will cause immediate,
severe, and irreparable harm to CGI in numerous respects. For example,
it will deprive CGI and the other shareholders of the opportunity to
continue their tax-advantaged ownership in the closed-end fund, rob
from CGI and the other shareholders the long-term advantages of the
Fund's portfolio investment strategy, force on CGI and the other
shareholders an unanticipated and currently taxable event, and cause
CGI and the other shareholders to lose the benefit of substantial tax
assets held by the Fund in the form of nearly $10.7 million in loss
carry-forwards which can only be realized by the shareholders if the
fund continues to exist. (Id. at 80-83). Moreover, it will
specifically deprive CGI of the opportunity to control this particular
closed-end fund, of which it owns a majority stake. In addition, the
Trustees seek to deprive all shareholders of their right to participate
in fundamental decisions that affect the Fund, such as election of
trustees, selection of portfolio managers to invest the assets, and the
most fundamental decision of whether to continue operations or to incur
the transaction and tax costs of a liquidation of the Fund itself.
(Id. at 84).
The Trustees justify this draconian measure by raising the
"threat" of being replaced with as yet unknown successors. (Id. at
33, 39, 45). Even assuming for the sake of argument only that this was
a legitimate threat from which to protect shareholders, a wide range of
steps was available to the Trustees short of termination of the Fund
that do not result in imposition of tax liabilities on shareholders,
economic loss from portfolio liquidation, and loss of a multi-million
dollar tax asset in the form of a loss carry-forward. (Id. at 41,
85). The fact that the Trustees did not use such non-damaging
protections, and the fact that their planned action is directly
contrary to years of statements to the shareholders, evidences that
they are acting in their own interests and in the interests of the
Fund's portfolio managers rather than in the interests of the
shareholders, to whom they owe utmost duties of care and loyalty.
Page 48 of 71
CGI has raised two distinct causes of action against the Trustees
for separate breaches of their fiduciary duties as a result of their
rushed plan to liquidate the Fund. The first is based on the fact that
the Trustees' actions are in clear violation of the terms of the
Declaration of Trust. The second posits that, irrespective of the
language in the Declaration of Trust, the Trustees' unauthorized
actions were draconian, disproportional to the perceived "threat" that
CGI allegedly posed, and not in the best interests of the Fund's
shareholders. CGI seeks a preliminary injunction on the basis of both
of these egregious breaches of fiduciary duty.
II. ARGUMENT
Massachusetts law entitles a party to a preliminary injunction
where (1) it is reasonably likely to succeed on the merits of its
claim; (2) it will suffer irreparable harm in the absence of injunctive
relief; and (3) such harm outweighs any injury which the other party
will suffer if the injunction is granted. See Mass. R. Civ. P. 65(b);
T&D Video, Inc. v. City of Revere, 423 Mass. 577, 580 (1996);
Packaging Industries Group, Inc. v. Cheney, 380 Mass. 609, 617 (1980).
In applying these requirements, the court initially looks to the moving
party's chance of success on the merits and, if it appears reasonable,
then balances the potential harm to each party from the grant or denial
of the injunction "in light of [that] party's chance of success on the
merits." Packaging Industries, 380 Mass. at 617. In this case, an
injunction is warranted.
A. CGI is likely to succeed on the merits of its claims
Before delving into the legal aspects of each of CGI's breach of
fiduciary duty claims, it is first necessary to briefly provide some
background on business trusts and fiduciary duties in Massachusetts.
The Fund is a business trust formed pursuant to G.L. c. 182, sec. 1 et
seq. Because a business trust so closely resembles a corporation in
most important respects, the fiduciary duty law associated with
corporations applies with equal force to business trusts. As noted by
a leading Massachusetts corporate treatise, "[t]he [business trust]
arrangement in form obviously resembles the corporation, the trustees
taking the place of the corporate directors, the certificate holders
taking the place of the shareholders, and the declaration of
Page 49 of 71
trust fulfilling the function of the certificate of incorporation."
Donovan & Cavitch, Massachusetts Corporation Law, vol. 1, sec. 1.14,
pp. 1-35 to 1-36 (2000). See also Minkin v. Commissioner of Revenue,
425 Mass. 174, 180 (1997) ("The status of the corporate trust
shareholder resembles that of a counterpart in a corporation.");
Commissioner of Revenue v. Northeast Petroleum Corp., 401 Mass. 44, 47
(1987) ("[T]here is no intrinsic difference between a corporate
business trust and a corporation."); Richardson v. Clarke, 372 Mass.
859, 861-62 (1977) ("Business trusts possess many of the attributes of
corporations and for that reason cannot be governed solely by the rules
which have evolved for traditional trusts.").
In the first instance, the duties and responsibilities of the
Trustees are derived from the declaration of trust established at the
time the trust is created. See State Street Trust Co. v. Hall, 311
Mass. 299 (1942); Ripley v. Brown, 218 Mass. 33, 35 (1914). At the
same time, the Trustees must meet their common law fiduciary duties to
the shareholders - the duties of care and loyalty. See Fogelin v.
Nordblom, 420 Mass. 218, 222 (1988) (holding that trustees of a
business trust stand in a fiduciary relationship to all the trust's
beneficiaries, and must not favor one class of shareholders over
another); Ashley v. Winkley, 209 Mass. 509, 525 (1911) (holding that
trustees of a business trust are bound to exercise reasonable skill,
prudence and judgment in the discharge of their duties); 12A C.J.S.
Business Trusts sec. 31, at 527 ("trustees . occupy a fiduciary
relationship to the certificate holders"). These fiduciary duties are
basically identical to those imposed on corporate directors with
respect to their shareholders. See Steves v. United Service Auto
Ass'n, 459 S.W.2d 930 (Tex. Civ. App. 1970) (holding that trustees are
liable for their fidelity to the trust, and for all profits made in the
business, in the same manner that a board of directors is liable to the
shareholders in an incorporated company). Therefore, in the
absence of much case law in the realm of business trusts, this
memorandum will examine the fiduciary duties of corporate directors -
which by extension also apply to trustees of a business trust such as
the Fund.
Page 50 of 71
While this memorandum focuses primarily on the fiduciary duty
standards imposed on corporate directors and applies the same to
trustees of business trusts, the fiduciary duty standards imposed on
trustees under trustee-beneficiary relationships might be the better
analogy. The fiduciary standards imposed on the Trustees under common
law trust principles are even higher than those discussed in this
memorandum. See Whitney v. Whitney, 317 Mass. 253 (1944) (holding that
it is the paramount duty of the trustee to put the interests of the
beneficiaries first at all times). In addition, the business of
this particular trust - that of being a registered investment company -
results in the Trustees having to satisfy the similarly high standard
of being "watchdogs" in protecting shareholder interests. See, e.g.,
Burks v. Lasker, 441 U.S. 471 (1978); Tannenbaum v. Zeller, 552 F.2d
402 (2d Cir. 1977). Regardless of the source of such duty, it is owed
to all shareholders, including a majority shareholder.
In addition, where Massachusetts case law is lacking, this
memorandum will turn to the well-developed and much-borrowed corporate
jurisprudence of Delaware. See Block et al., Defensive Measures in
Anticipation of and in Response to Unsolicited Takeover Bids, reprinted
in New Strategies in Contests for Corporate Control 1999, (Practicing
Law Institute, eds. 1998) at 119 ("[C]ourts generally follow the law of
Delaware, America's preeminent corporate jurisdiction.").
1. CGI is likely to succeed on the merits of its claim that
the Trustees breached their fiduciary duties by violating the terms of
the Declaration of Trust
CGI's first count for breach of fiduciary duty focuses on the
language of the Fund's Declaration of Trust, and certain actions of the
Trustees in clear contravention of such language. The relevant
provision of the Declaration of Trust, Article IX, Section 5, reads as
follows:
The Trust . may liquidate or dissolve when and as
authorized, by the affirmative vote of the holders of not less
than two-thirds of the Shares entitled to vote, provided,
however, that if such . [liquidation] is recommended by two-
thirds of the total number of Trustees then in office, the vote
of the holders of a majority of the Shares entitled to vote shall
be sufficient authorization.
Page 51 of 71
(Wood Aff., Exh. A).
This provision clearly requires either a majority or super-
majority vote of the shareholders before the Trustees can liquidate or
dissolve the Fund. (Id.; Compl. 55). Despite this clear language,
the Trustees are attempting to circumvent the voting requirement and
force this hasty liquidation plan on the shareholders without their
consent. Such a blatant and clear violation of the terms of the
Declaration of Trust constitutes a breach of the Trustees' fiduciary
duties to the shareholders. See Ripley, 218 Mass. at 35 (holding that
it is the duty of a trustee to carry out the terms of a trust as
directed by the trust instruments unless these instruments are declared
invalid by a court of competent jurisdiction).
The Trustees may argue that they are proceeding under a separate
section of Article IX of the Declaration of Trust which does not
require shareholder approval. That section - Section 4 - reads as
follows:
[T]he Trust may be terminated at any time . by the
Trustees by written notice to the Shareholders. Upon termination
of the Trust, . the Trust shall . reduce the remaining assets to
distributable form in cash or shares of other property . and
distribute the proceeds to the Shareholders, ratably according to
the number of Shares held by the several Shareholders on the date
of termination.
(Wood Aff., Exh. A). For a variety of reasons, the Trustees cannot be
said to be proceeding under this section, and therefore they acted in
violation of their fiduciary duties by failing to obtain shareholder
consent.
The action announced by the Trustees in their press release, in
correspondence with CGI, and in notices to shareholders, is described
as, and is consistent with, a liquidation subject to the provisions of
Section 5 rather than with a termination of the trust under Section 4.
The plan announced a "record date" that long precedes the as-yet
unknown "termination date" of the trust. (Wood Aff., Exh. L).
However, Article IX, Section 4 of the Declaration of Trust provides for
only one date, requiring that the distribution of proceeds be made to
the shareholders who own shares "on the date of termination." The
Trustees' record date/payment date plan is a clearly not consistent
with Article IX, Section 4. (Compl. 60). In fact, CGI believes that
in order to make their actions appear consistent, the Trustees have
intentionally deprived shareholders of the right to sell their shares,
closing the transfer books, so that holders are forced to retain
Page 52 of 71
their shares from April 16 to some unknown future date. (Id. at 61).
This allows the Trustees to later claim that the distribution is being
made to persons who hold shares on the "termination date." (Id.). In
fact, the Trustees' action is actually a classic plan of liquidation
(as opposed to termination), and is clearly more consistent with
Article IX, Section 5.
Indeed, the Trustees themselves have repeatedly described the
process they are attempting to implement as a "plan of liquidation"
rather than a termination, in correspondence with CGI, public press
releases, and notices to shareholders (which refer to it as a
"liquidation" approximately 50 times). (Id. at 32-33, 39, 44-45,
50, 60). Furthermore, the Trustees' registration statements filed with
the SEC upon the Fund's creation, include the specific statement that
"[t]he affirmative vote of at least two-thirds of the outstanding
Common Shares and APS of the Fund each voting as a separate class is
required to authorize . liquidation or dissolution of the fund." (Id.
at 64-65). Such prior statements are consistent with the clear
language of the Declaration of Trust stressing the need to obtain
shareholder approval before liquidating the Fund.
Basic concepts of contract interpretation also favor CGI's
position that the Trustees may not liquidate the Fund without
shareholder approval. If Article IX, Section 4 of the Declaration of
Trust involving termination without shareholder approval is interpreted
to include the concept of liquidation, then the liquidation provisions
in Article IX, Section 5 which require shareholder approval would be
rendered meaningless and without effect. (Id. at 58). A basic tenet
of contract interpretation is that a contract is to be construed to
give reasonable effect to each of its provisions. See, e.g., McMahon
v. Monarch Life Ins. Co., 345 Mass. 261, 264 (1962). "[E]very phrase
and clause must be presumed to have been designedly employed, and must
be given meaning and effect, whenever practicable, when construed with
all the other phraseology contained in the instrument, which must be
considered as a workable and harmonious means for carrying out and
effectuating the intent of the parties." J.A. Sullivan Corp. v.
Commonwealth of Massachusetts, 397 Mass. 789, 795 (1986). Therefore,
the Trustees' argument that Article IX, Section 4 allow them to
liquidate the Fund without a shareholder vote would be at odds with
these long-standing Massachusetts rules of contract interpretation.
Page 53 of 71
The more likely interpretation of Article IX, Section 4 is that
the Trustees would utilize this section in the event that the Fund is
never used after it is established (i.e., no shares are issued), or
after plans of liquidation are approved by vote of the shareholders,
and the only remaining ministerial task is to officially terminate the
Fund. (Compl. 59) In addition, if the trust were ever converted to
an open-ended fund, there may be a time when shareholder redemptions
eliminate all outstanding shares, and the Trustees would then have to
terminate the entity. (Id.). In other words, such a termination
provision would only be used in situations where there is a
substantially empty trust corpus, or where the shareholders have
already approved a liquidation and subsequent termination of the entity
is necessary. This interpretation is consistent with the language
of both sections, and has the benefit of harmonizing the two sections
in a consistent and logical manner. It also explains why there is no
discussion in the Trustees' various registration and offering
statements filed with the SEC of such a significant potential use of
the termination provisions. (Id. at 63-66).
2. CGI is likely to succeed on the merits of its claim that
the Trustees breached their fiduciary duties by taking unauthorized and
draconian actions that were not in the best interests of the Fund
shareholders
CGI's second count for breach of fiduciary duty asserts that
irrespective of the language in the Declaration of Trust, the Trustees'
unauthorized actions were draconian, disproportional to the perceived
"threat" that CGI allegedly posed, and not in the best interests of the
Fund's shareholders. Based on both Massachusetts and Delaware
corporate fiduciary duty law, as applied to the facts of this case, CGI
is also likely to succeed on the merits of this cause of action.
Page 54 of 71
Directors and officers - and by extension trustees of business
trusts - have common law fiduciary duties to the business and the
shareholders such that "[t]hey must exercise the strictest good faith
in respect to the . business, and must subordinate their own personal .
interest to those of the [business]." 14A Mass. Practice sec. 8.43.
The law recognizes that directors and officers of a corporation are
fiduciaries, by providing pursuant to statute that they should perform
their duties "in good faith and in a manner [they] reasonably believe .
to be in the best interest of the corporation and with such care as an
ordinarily prudent person in a like position would use under similar
circumstances." G.L. c. 156B, sec. 65.
Such fiduciary duties include a duty of care, which is regulated
in both Massachusetts and Delaware by the "business judgment" rule. In
Massachusetts, the business judgment rule has been codified at G.L. c.
156B, sec. 65, whereas in Delaware the same business judgment rule
remains controlled by common law. In both cases, the rule holds that
directors and officers of a corporation will not be found to have
breached the duty of care when their actions were taken in good faith
but turn out to be erroneous, mistaken or unsound. Thus, the business
judgment rule acts as a judicial presumption that a board's actions are
protected from challenge unless the plaintiff demonstrates that the
board has not satisfied the presumptive elements of the rule. This
typically requires that the plaintiff prove that the board acted with
"gross negligence."
Given the clarity of both the Declaration of Trust and the
Trustees' own statements to the SEC and potential Fund investors
concerning the need for shareholder approval before liquidation, the
Trustees have acted recklessly and with gross negligence. This means
that they are not entitled to the protections that the business
judgment rule provides. However, CGI need not rely on this
argument to succeed, because there are a number of other reasons why
the Trustees do not enjoy and protection from the business judgment
rule here.
Page 55 of 71
According to an influential Delaware decision, the deferential
nature of the business judgment rule does not automatically apply in a
takeover context because in such circumstances there exists the
"omnipresent specter that a board may be acting primarily in its own
interests, rather than those of the corporation and its shareholders."
Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985).
Under the so-called Unocal test, when a board undertakes measures in
anticipation of or in response to a possible takeover attempt, the
burden shifts to the board to demonstrate that (1) it had "reasonable
grounds for believing that a danger to corporate policy and
effectiveness existed" and (2) that the defensive measure adopted was
"reasonable in relation to the threat posed." Id. at 955. A board
receives the benefit of the business judgment rule only if both
elements of the test are satisfied.
Here, because there is a contest for corporate control, the Unocal
test applies. CGI has been a major shareholder in the Fund for some
time, and on November 22, 2000, CGI made a 13D filing with the SEC.
(Compl. 22-23). Subsequent to the 13D filing, CGI asked to meet
with the Trustees about the Fund's past performance and future
management direction. (Id. at 27). In that meeting, CGI suggested
the possibility that shareholders be given the opportunity to consider
electing different trustees for the Fund. (Id. at 30). Based on the
press release distributed on April 6, 2001, it is clear that the
Trustees perceived these actions to constitute a contest for control
over the Fund. As a result, the Trustees are subject to the Unocal
test.
Page 56 of 71
Examining the facts of this case, the Trustees cannot possibly
meet the Unocal test. Under the first prong, the Trustees had no
reasonable grounds for believing that CGI's preliminary inquiries after
obtaining a majority shareholder interest posed a "danger to corporate
policy or effectiveness." CGI described its purpose for filing the
Schedule 13D in the most general of terms and included only the
possibility of its purchasing additional shares and proposing changes
in operations or governance of the Fund. (Id. at 24). CGI had not
made any specific proposed changes to any corporate policy, and in fact
asked for additional meetings with the Trustees to determine what
changes it might propose. (Id. at 27, 30, 39-40). The Trustees
refused and simply assumed the worst without obtaining any kind of
concrete information to substantiate their unfounded fears. (Id. at
39, 42, 52).
The Trustees also clearly fail to meet the second prong of the
Unocal test. Delaware case law subsequent to the Unocal decision has
clarified that the defensive measures implemented by a board in
response to a perceived threat must not be "coercive or preclusive,"
and will only be upheld if the measures fall within a "range of
reasonableness." See, e.g., Unitrin, Inc. v. Shareholders Litig., 651
A.2d 1361 (Del. 1995). Here, the hasty liquidation of the Fund without
shareholder approval is clearly both coercive (in that it forces
management's preferred course of action on shareholders without the
ability of shareholders to consider alternatives) and preclusive (in
that it does not allow for a shareholder vote on the matter). Because
the Trustees cannot meet the Unocal test, they must be found to have
breached their fiduciary duties.
Page 57 of 71
In addition to the Unocal test, a second body of Delaware law
applies to the actions of directors when they have made the decision to
"sell" the corporation when a change of control is inevitable and
imminent. Under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.,
506 A.2d 173 (Del. 1986), the board's fiduciary obligations must be
exercised so that shareholder value is maximized. While Revlon
duties typically arise where the corporation is involved in an auction-
like bidding process, such duties are also imposed on directors where
they are attempting to "effect a business reorganization" or abandoning
a long-term strategy and seeking an alternative transaction involving
the "breakup of the company." Paramount Communications, Inc. v. Time,
Inc., 571 A.2d 1140, 1150 (Del. 1990).
Here, the Trustees are most certainly causing a "reorganization"
and "breakup" of the Fund by liquidating the Fund's assets and allowing
current shareholders to exchange shares held in the Fund for another of
Putnam's open-ended funds. (Compl. 44-46). Under Revlon, the
Trustees in so reorganizing and breaking up the Fund have a fiduciary
duty to see that the shareholders obtain the maximum value for their
investment in the Fund. The Trustees clearly cannot meet this standard
of care, since the immediate and precipitous liquidation of the Fund's
shares without warning or shareholder approval will lead to a large and
unplanned taxable event and the loss of significant unrealized value in
the Fund. (Id. at 67-70; 80-85). Far from obtaining the maximum value
for shareholders, the Trustees' plan of liquidation could very well be
the most costly of all possible alternatives. (Id.).
While the above analysis indicates that the Trustees have failed
to uphold their most basic fiduciary duties under Unocal and Revlon,
such failure is made even more glaring because the Trustees have robbed
CGI and the other Fund shareholders of their right to vote on the plan
of liquidation. (Id. at 84). While Unocal and Revlon apply to any
and all defensive measures employed by directors in corporate control
contests, a specific heightened standard applies in Delaware to
defensive measures which affect shareholder voting rights. Under
Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651 (Del. 1988), the
Page 58 of 71
Delaware Supreme Court, building upon Unocal, adopted a new test which
provides that a board that acts "for the sole or primary purpose of
thwarting a shareholder vote" must overcome "the heavy burden of
demonstrating a compelling justification for such action." Id. at 661-
62. Here, the Trustees' liquidation plan certainly thwarted
shareholder voting rights as described above, requiring the Trustees to
demonstrate a compelling justification for their actions. Given that
the Trustees cannot even meet the less stringent Unocal and Revlon
tests, there is no doubt that the Trustees fall well short of
satisfying the requirements set out in Blasius.
A good case applying the Blasius standard to facts similar to this
case is Hilton Hotels Corp. v. ITT Corp., 978 F. Supp. 1342 (D. Nev.
1997). The court granted Hilton's request for preliminary injunction
after finding that ITT failed to show Hilton's inability or
ineffectiveness to run ITT if successful in its takeover attempt. See
id. at 1347. The court also found that ITT also failed to show real
harm to corporate policy or effectiveness in Hilton's tender offer.
See id. at 1348. Here, the Trustees have similarly failed to make
either of these showings with respect to CGI.
In addition, the Hilton Hotels court held that the primary
purpose of ITT's defensive measure was to disenfranchise shareholders.
It reached this conclusion based on a number of facts that are also
present in this case, including that (1) the timing of the measure
coincided to closely with the Hilton tender offer, (2) the
implementation of the measure was primarily designed to entrench the
current ITT board, (3) ITT stated no credible purpose for not seeking
shareholder approval of the plan, (4) the effect of the measure was to
absolutely preclude the shareholders from voting on the restructuring,
and (5) the ITT board failed to obtain independent advice concerning
the tax consequences of the measures. See id. at 1348-50. These five
factors apply with equal force to the Trustees' plan of liquidation,
indicating that the Trustees have failed to meet their fiduciary duties
and that their liquidation plan should be enjoined.
In addition to the Unocal/Revlon/Blasius standards, the Trustees
have also run afoul of several other basic tenets of fiduciary duty
law. First, from all indications it appears that the Trustees have
rushed into this course of action without first stopping to obtain all
of the relevant information needed to make a thoughtful and reasoned
decision. The Trustees apparently met only once as a group to discuss
CGI's recent majority shareholder status before deciding to liquidate
the Fund, and there is no indication that they
Page 59 of 71
consulted with any independent financial or legal advisors before
deciding to take this drastic measure. (Compl. 38). In addition,
the Trustees met only once with CGI prior to adopting their plan of
liquidation, and this meeting only discussed CGI's future plans in the
most general of terms. (Id. at 29-30). Despite repeated requests
to meet more substantively with the independent trustees of the Fund,
the Trustees stubbornly refused to do so. (Id. at 27, 39, 42).
Instituting defensive measures in haste in the face of a perceived
threat without having all of the necessary information is grounds for
finding a breach of fiduciary duty, even under the deferential business
judgment rule. See Smith v. Van Gorkom, 488 A.2d 858, 873-73 (Del.
1985) (holding that the business judgment rule requires that directors
make decisions "in an informed and deliberate manner," and that
"[u]nder the business judgment rule there is no protection for
directors who have made an unintelligent or unadvised judgment").
A breach of fiduciary duty is even more likely to be found when
such hasty and ill-researched defensive measures have the actual and
perceived effect of entrenching or benefiting current management at the
expense of the shareholders. See Strassburger v. Earley, 752 A.2d 557,
572 (Del. Ch. 2000) (holding that "it is improper to cause the
corporation to repurchase its stock for the sole or primary purpose of
maintaining the board or management in control," particularly "where
board of directors did not seriously consider alternatives to the
repurchases"). This is exactly the situation presented here. In both
correspondence with CGI and in public statements, the Trustees have
articulated their main concern as being the possibility that CGI will
replace the Fund's current board of trustees with its own slate.
(Compl. 33, 39, 45, 51). Thus, faced with the prospect of losing
their positions, the Trustees have instituted a plan that will transfer
shareholder interests from the defunct Fund to two other Putnam-managed
funds, thereby keeping as much as possible of these investment
securities within the Putnam franchise. (Id. at 34, 44, 46, 68-69).
When such a self-serving transaction is so harmful to shareholders as
is the plan of liquidation proposed by the Trustees, the strong
implication arises that the plan is nothing more than an entrenchment
tool implemented without thought or consideration for shareholder
interests as a means of preserving the Trustees' positions.
Page 60 of 71
Furthermore, in transactions involving self-dealing where
directors have interests (economic or otherwise) that are in conflict
with those of the shareholders, the directors generally have the burden
to demonstrate that the transaction is entirely fair to the corporation
and the shareholders. See Kahn v. Tremont Corp., 694 A.2d 422, 428
(Del. 1997). In order to insulate themselves from such accusations of
self-dealing and to demonstrate the fairness of a transaction, boards
commonly form a separate committee of truly disinterested directors who
are advised by independent and separate financial advisors and legal
counsel, and who are charged with ensuring that the proposed
transaction is truly in the shareholders' best interest. See id. The
Trustees never formed such an independent committee, nor did they
consult with any independent financial or legal advisors. (Compl.
38). The law firm of Ropes & Gray, while consulted by the Trustees, is
also counsel to the Fund and all or nearly all of Putnam's other funds,
and therefore cannot be considered "independent" by any stretch of the
imagination. (Id. at 27). Indeed, while some of the Trustees
technically qualify as "independent" under the '40 Act (and therefore
not subject to claims of breaches of fiduciary duty on this ground
alone), there are serious questions as to the practical independence of
trustees who serve on multiple boards of funds in the Putnam complex
managed by the same investment advisor and receive substantial
remuneration from their service on these boards. See, e.g., Strougo v.
Scudder, Stevens & Clark, Inc., 964 F. Supp. 783, 794-95 (S.D.N.Y.
1997). Despite the strong appearance of self-dealing that the above
facts create, the Trustees did nothing to introduce truly unbiased,
independent advice into their decision-making process, thereby tainting
their final decision and, in the process, breaching their fiduciary
duties.
Finally, and perhaps most convincingly, there is support in
Delaware for the proposition that some defensive tactics are so
detrimental to the corporation and its shareholders that they justify a
strong inference that the directors were acting primarily to perpetuate
themselves. Thus, directors implementing such tactics face a nearly
insurmountable burden in proving that they acted in good faith and that
the tactic was fair and reasonable. Included among such defensive
tactics are so-called "retrospective measures," which are measures
taken after effective control of the corporation has already taken
place. As stated by the Delaware Supreme Court:
Page 61 of 71
Although the directors generally act under the protection of the
business judgment rule both in prospective measures and in reactive
measures seeking to ward off a threatened hostile takeover, corporate
action which seeks to undo a takeover bid after control has already
passed to another group is not protected by the business judgment rule
. [and] constitute[s] inequitable conduct.
Frantz Manufacturing Co. v. EAC Industries, 501 A.2d 401, 408 (Del.
1985) (citations omitted). The Frantz court then distinguished these
egregious "retrospective measures" which presumptively constitute
breaches of fiduciary duty with the typical defensive measure analyzed
under Unocal:
In Unocal, this Court did not address the issue of
whether a board of directors could take retrospective defensive
measures against a majority stockholder by divesting the majority
stockholder of his statutory right of control. Unocal dealt with
the duty of care owned by directors in addressing a possible or a
pending takeover of a corporation, not an accomplished takeover.
Here, [the board members'] activities after [the plaintiff had
gained 51% of the voting stock] were attempts to defeat the
accomplished takeover.
Id. Here, the Trustees' plan of liquidation was put into effect after
CGI had already acquired over 50% of the Fund's shares, and thus had
obtained effective control of the Fund. (Compl. 25). Based on
Frantz, the Trustees' retrospective defensive measures are entitled to
no deference whatsoever, and in fact are presumptive breaches of the
Trustees' fiduciary duties. The Trustees cannot possibly meet the
nearly insurmountable burden of proving they acted in good faith or
that the plan of liquidation is fair and reasonable.
Up to this point, the discussion has centered on the breach of the
duty of care, which is most applicable to this case. As mentioned
above, a director's fiduciary duties also include a duty of loyalty,
which requires that directors not take advantage of their office to
enter into transactions for their own personal profit at the expense of
the corporation or the shareholders. This duty of loyalty is
heightened for trustees, who must maintain an undivided loyalty to the
beneficiaries whom they serve, including beneficiaries holding a
majority interest in the trust. Furthermore, this duty of loyalty
requires that trustees not discriminate among beneficiaries. See
Fogelin v. Nordblom, 420 Mass. 218, 222 (1988). Here, the
Page 62 of 71
Trustees have chosen a course of action that harms all of the
beneficiaries to the Trustees' ultimate benefit, and at the same time
discriminates between majority and minority shareholders by failing to
offer CGI the same opportunity to exchange their shares for shares in
other Putnam-managed funds as was offered to all other Fund
shareholders. (Compl. 48, 67-70, 80-85) As a result, the Trustees
have breached their strict duty of loyalty to the Fund and the Fund's
shareholders, including CGI.
At heart, the Trustees' self-interested and self-preserving
actions bespeak of a fundamental inability to recognize CGI as a both a
beneficiary to whom they owe significant fiduciary duties, and the
majority shareholder and owner of the Fund who has the right to select
its own trustees and the clear ability and sophistication to wisely
make such selections. Instead, such actions indicate that the Trustees
improperly and inappropriately see CGI as nothing more than a potential
competitor. Clear and consistent fiduciary duty jurisprudence,
however, does not allow them the luxury of acting on such base
motivations. Based on the overwhelming weight of such law, as
described in detail above, CGI is likely to prevail on the merits of
its claims that the Trustees have breached numerous fiduciary duties to
CGI, the shareholders, and the Fund.
B. CGI will suffer irreparable harm if Trustees are not enjoined
By this motion, CGI is simply requesting that the Court maintain
the status quo, since it will be irreparably harmed if the Trustees are
allowed to proceed with the liquidation of the Fund. "Irreparable
harm" is an injury involving a "loss of rights that cannot be
vindicated should [the moving party] prevail after a full hearing on
the merits." Packaging Industries, 380 Mass. at 616. In this case,
CGI's irreparable harm is, at the very least, twofold: (1) the loss of
the opportunity to obtain control of a unique business; and (2) the
inability of CGI to exercise its basic shareholder voting rights.
In its 13D filing with the SEC, CGI described the possibility of
its purchasing additional shares and proposing changes in operations or
governance of the Fund. (Compl. 23-24). CGI recently obtained a
50.1% interest in the Fund, and shortly thereafter approached the
Fund's current management to discuss the Fund's overall direction.
(Id. at 25, 27). However, before CGI was even able to meet with the
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Fund's independent trustees, the Trustees hastily instituted an ill-
advised and illegal liquidation plan which, if allowed to proceed, will
bring the Fund to an end.
Numerous courts have acknowledged the inherent uniqueness of a
company sought to be acquired, and the irreparable harm that results
once the party attempting to acquire the company loses the opportunity
to own or control that business. See San Francisco Real Estate
Investors v. Real Estate Inv. Trust of America, 701 F.2d 1000, 1003
(1st Cir. 1983) ("[T]he fact is that loss of a best opportunity to
seize control of a major corporation could be crucial.") (citations
omitted); Beztak Co. v. Bank One Columbus, N.A., 811 F. Supp. 274, 284
(E.D. Mich. 1992) ("A controlling interest in a corporation is also an
important and unique interest. [and] the plaintiff's inability to gain
a controlling interest in the sought-after company constitute[s]
irreparable harm."); see also Peabody Holding Co, Inc. v. Costain Group
PLC, 813 F. Supp. 1402, 1421 (E.D. Mo. 1993), and cases cited. Once
the Fund is liquidated, CGI's opportunity to own and control this
unique ongoing business trust will be gone forever.
The Fund offers CGI a unique type of business opportunity that
would be impossible to replace. The Fund has a 12-year investment
history and has gained a reputation among consumers and investors
during that time. (Compl. 6, 82). As a closed-end fund, it is
listed on the New York Stock Exchange, and provides its directors with
important leverage capabilities. (Id. at 6, 17-19). Also, the
securities in the Fund's portfolio are worth much more to the Fund as a
unified investment block than they could ever be if sold separately and
in a piecemeal fashion. (Id. at 21). As the trustees themselves
have acknowledged, closed-end funds such as this have a number of
additional unique benefits, including (1) the ability to obtain long-
term, higher-yielding investments, (2) the existence of lower expenses
and transaction costs, (3) the value of being listed on the New York
Stock Exchange, (4) the absence of cash flow problems, and (5) the
presence of a number of tax benefits. (Id. at 20-21, 70-79).
Finally, the Fund has over $10 million in loss carry-forwards that will
be forfeited if the Fund is liquidated. (Id. at 81). Indeed, the
loss of this type of built-in tax benefit has in and of itself
supported an independent finding of irreparable harm. See A.W.
Chesterton Co., Inc. v. Chesterton, 128 F.3d 1, 8 (1st Cir. 1997) ("The
loss of advantageous tax
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status can form the basis for a finding of irreparable harm."); San
Francisco Real Estate Investors, 701 F.2d at 1007 (relying on the loss
of advantageous tax status and other findings to support a preliminary
injunction).
In addition to losing the opportunity to control a unique
business, CGI will also be irreparably harmed in the absence of a
preliminary injunction due to its disenfranchisement by the Trustees.
(Compl. 84). By unilaterally forcing a liquidation of the Fund
without first obtaining a shareholder vote on such a draconian and
fundamental action, the Trustees have stripped CGI of its ability to
exercise its basic shareholder voting rights. As mentioned above, the
right to vote is one of the most sacred and widely recognized
shareholder rights. As such, numerous courts have held that actions by
corporate directors which deprive shareholders of their right to vote
would lead to irreparable harm if not enjoined. See ER Holdings, Inc.
v. Norton Co., 735 F. Supp. 1094, 1100-02 (D. Mass. 1990) (holding that
actions "resulting in disenfranchisement may constitute irreparable
harm"); International Banknote Co., Inc. v. Muller, 713 F. Supp. 612,
623 (S.D.N.Y. 1989) ("Courts have consistently found that corporate
management subjects shareholders to irreparable harm by denying them
the right to vote their shares or unnecessarily frustrating them in
their attempt to obtain representation on the board of directors.");
Ocilla Industries, Inc. v. Katz, 677 F. Supp. 1291, 1301 (E.D.N.Y.
1987) ("The disenfranchisement of shareholders poses a serious risk of
irreparable harm that cannot be measured in money damages."); Danaher
Corp. v. Chicago Pneumatic Tool Co., 1986 WL 7001, at *14 (S.D.N.Y.
June 19, 1986) ("It is well settled in law that corporate management
subjects shareholders to irreparable harm by denying them the right to
vote their shares and to exercise their rightful control over the
corporation.").
C. The balance of equities favors issuance of the requested relief
The balancing of the potential harm to both sides further
supports granting CGI injunctive relief. The potential harm to CGI if
the Trustees are allowed to proceed with the liquidation of the Fund
would be serious and irreparable, as described above. On the other
hand, the only conceivable "harm" to the Trustees would be the delay of
their precipitous liquidation scheme in order to allow for shareholder
consideration of more reasonable alternatives. A possible result of
such a vote is the disentrenchment of
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current trustees, a prospect so distasteful to the Trustees that they
selfishly set the current liquidation plan into motion without
consideration of the interests of the shareholders. Of course, such
potential personal misfortune does not factor into the balancing of
harms here, and there is therefore no real harm in enjoining the
liquidation of the Fund. Furthermore, since the Trustees have
indicated a willingness (indeed, a burning desire) to liquidate and
terminate the Fund, they have obviously concluded that they will not be
harmed if the Fund is no longer included in their management portfolio.
As a result, the Trustees cannot plausibly argue that they will suffer
any harm if, instead of being liquidated, the Fund continued to exist
but without the involvement of Putnam's management or trustees. The
relief requested by CGI is narrowly tailored to protect its rights and
prevent the Trustees from benefiting from their breach of fiduciary
duty at CGI's expense, and should therefore be allowed.
Page 66 of 71
III. CONCLUSION
For all the foregoing reasons, CGI respectfully requests that the
Court enter a preliminary injunction against the Defendants, ordering
that the defendants be enjoined from effectuating the plan of
liquidation of the Fund, including, but not limited to, selling any
portion of the Fund's portfolio securities or otherwise liquidating any
assets of the Fund, and staying or extending indefinitely the election
deadline for CGI and all other shareholders of the Fund, now scheduled
for May 8, 2001.
Respectfully submitted,
THE COMMERCE GROUP, INC.
By its attorneys,
_________________________________
James A. Ermilio (BBO #550697) Lisa C. Wood (BBO #543811)
General Counsel Elizabeth M. Harvey (BBO #633916)
The Commerce Group, Inc. Erik P. Bartenhagen (BBO #640003)
211 Main Street Nutter, McClennen & Fish, LLP
Webster, MA 01570 One International Place
(508) 949-4554 Boston, MA 02116
(617) 439-2000
Dated: April 30, 2001
Page 67 of 71
APPENDIX B
April 11, 2001
Via Facsimile and Overnight Mail
Mr. John A. Hill
Chairman of the Trustees
Putnam Dividend Income Fund
One Post Office Square
Boston, Massachusetts 02109
Dear Mr. Hill:
We are writing to request that you and the independent Trustees meet
with representatives of The Commerce Group, Inc. ("Commerce") to
discuss the interests of shareholders of the Putnam Dividend Income
Fund. The purpose of our meeting would be to discuss how Fund
shareholders would be better served by the Trustees' considering an
alternative to the complete liquidation of the Fund announced on
Friday.
The context of our request is important to review. As you know, for
several years Commerce, with its affiliates, has held 30% or more of
the outstanding shares of Putnam Dividend Income Fund. Like other
shareholders, Commerce chose to invest in the Fund as a tax-efficient
pooled investment vehicle, and an alternative to redeemable open-end
funds. In fact, Putnam long advocated the closed-end structure as
providing long-term value beyond the day-to-day market price of its
investments.
Over the past several weeks we have asked, but were not given the
opportunity, to meet with one or more Trustees of the Fund to discuss
means of furthering the interests of all shareholders. We have met
with the Fund's advisor. Over this time, we have become convinced that
there remains untapped value in the Fund, and that there are changes in
structure and strategy that would enhance that value. We strongly
believe that the announced plan of complete liquidation is not the best
means to accomplish that goal.
Instead, we are hereby proposing that the Fund continue in operation,
with shareholders (other than Commerce) being given the choice to (i)
receive a distribution of net asset value, in cash or in kind, or (ii)
retain their ownership in the Fund.
We believe that this alternative satisfies the goals announced on
Friday by the Trustees, yet offers both large and small shareholders
the opportunity to maintain their chosen long-term strategy in a tax
efficient manner. Rather than a forced redemption of all shareholders
in what may be an inopportune market, and an unplanned taxable event to
shareholders, our proposal would offer shareholders the opportunity to
continue having their assets managed by Putnam Investment Management,
or a successor. Further, it allows current Trustees to offer an exit
for those that choose liquidity, rather than continue with potentially
new trustees or fund management.
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It is imperative that this course of action be discussed before
irrevocable steps are taken that dissipate the value that is in the
Fund and in its portfolio. Please contact me immediately at (508) 949-
4113 to arrange for this meeting.
Sincerely,
Gerald Fels,
Executive Vice President and
Chief Financial Officer
cc: (via facsimile and overnight mail)
Jameson A. Baxter, Trustee
Hans H. Estin, Trustee
Ronald J. Jackson, Trustee
Paul L. Joskow, Trustee
Elizabeth T. Kennan, Trustee
Lawrence K. Lasser, Trustee
John H. Mullin, III, Trustee
Robert E. Patterson, Trustee
George Putnam, III, Trustee
A.J.C. Smith, Trustee
W. Thomas Stephens, Trustee
W. Nicholas Thorndike, Trustee
Page 69 of 71
[FN]
Footnote #1 Directors and officers of a corporation must
exercise the strictest good faith with respect to the corporation's
business, and must subordinate their own personal pecuniary interest to
those of the corporation. See Johnson v. Witkowski, 30 Mass. App. Ct.
697, 705 (1991) ("Directors' fiduciary duties require that they be
loyal to the corporation and not promote their own interests in a
manner injurious to the corporation."). There is a similar duty of
loyalty imposed on trustees. Trustees may not put themselves in a
position where their interests are in conflict with the interests of
the trust. See id.
Footnote #2 There is a difference in the obligations owed
by a director of a corporation to his company and its stockholders and
that owed by a trustee of a common-law trust to his cestui que trust
and the subject mater thereof. The relationship to the beneficiaries,
however, is of a more confidential character. See Petroleum Co. v. G.
Campbell-Kevin Synd., 242 P. 540, 542 (Mont. 1926). Because of the
more intimate relationship between a trustee and the beneficiary, this
fiduciary rule is applied most rigorously. See id. (holding that
neither trustee nor agent may take part in any transaction concerning
the trust in which he or any one for whom he acts as agent has an
interest adverse to that of his beneficiaries).
Footnote #3 The language referring to the disposition of
remaining assets is, in fact, consistent with shareholder-approved
plans of liquidation which may require retention of reserve amounts to
pay unknown or specified liabilities. Though substantial steps in the
liquidation may be taken currently, it may be years before these final
liabilities are resolved, at which point the Trustees would distribute
the remaining unused assets, and terminate the trust. By such time,
the shares would have already been cancelled, and only the Trustees
remain to take the final step of terminating the trust
Footnote #4 Common law trust principles, however, would not
give the Trustees the same benefit of the doubt that the deferential
business judgment rule does in the corporate context. See supra note
2.
Footnote #5 These same facts also show that the Trustees
have acted in willful malfeasance, bad faith, gross negligence and
reckless disregard of the duties involved in the conduct of their
offices, precluding the Trustees from gaining the liability protections
offered by Article IX, Section 2 of the Declaration of Trust. (Wood
Aff., Exh. A).
Footnote #6 The Unocal decision and the test it established
has been repeatedly and recently cited in Delaware. See, e.g.,
Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34 (Del.
1994); Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261 (Del.
1989); Mentor Graphics Corp. v. Quickturn Design Systems, Inc., 728
A.2d 25 (Del. Ch. 1998). It has also been adopted by courts in
numerous other states. See, e.g., Hilton Hotels Corp. v. ITT Corp.,
978 F. Supp. 1342 (D. Nev. 1997); Estate of Detwiler v. Offenbecher,
728 F. Supp. 103 (S.D.N.Y. 1989).
Page 70 of 71
Footnote #7 The Trustees in the press release cited as
reasons for the plan of liquidation that CGI "made clear its intention
to elect its own slate of nominees" and that, while CGI has not
identified its slate of nominees" nor "revealed its plans for the
management of the Fund," the Trustees were concerned that CGI "had
indicated interest in pursuing changes in the Fund's investment
strategy and operating arrangements." (Wood Aff., Exh. L; Compl.
33).
Footnote #8 As with Unocal, the Revlon decision has been
followed on numerous occasions. See, e.g., In re Santa Fe Pacific
Corp. Shareholder Litigation, 669 A.2d 59 (Del. 1995); In re Lukens,
Inc. Shareholder Litigation, 757 A.2d 720 (Del. Ch. 1999); Priddy v.
Edelman, 883 F.2d 438 (3d Cir. 1989); Air Line Pilots Ass'n, Int'l v.
UAL Corp., 717 F. Supp. 575 (N.D. Ill. 1989).
Page 71 of 71