Meyer v. Oppenheimer Management Corporation

895 F.2d 861 (2nd Cir. 1990)

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Nature of the Case

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Facts

Daily Cash Accumulation Fund, Inc. (Fund), is a money market mutual fund regulated by the 1940 Act. P is a shareholder in the Fund. The Fund's investment adviser was Centennial Capital Corporation (Centennial). Oppenheimer & Co. and its subsidiaries (Oppenheimer) owned over half of the voting shares and about 30 percent of the total equity of Centennial. The other 70 percent of Centennial's equity was owned by four stockbroker entities, A.G. Edwards & Sons, Inc., Thomson McKinnon Securities, Inc., Bateman Eichler, Hill, Richards, Inc., and J.C. Bradford & Co. (Brokers). The Fund is a vehicle for the Brokers to offer safe, liquid investments to their customers. The Brokers and their customers thus own over 90 percent of the outstanding shares of the Fund. Centennial, in exchange for a fee based on the Fund's total net assets, has provided investment advisory services to the Fund, including general management and supervision of the Fund's investment portfolio. The Brokers have promoted the sale of Fund shares and have served as the distribution link between their customers and the Fund. Rule 12b-1 permits an open-end investment company to use fund assets to cover sale and distribution expenses pursuant to a written plan approved by a majority of the fund's board of directors, including a majority of the disinterested directors, and a majority of the fund's outstanding voting shares. The Brokers told the Fund that several other funds had offered them payments under the new Rule 12b-1 to reimburse the distribution costs resulting from ownership of money market fund shares by their customers. They told the Fund that unless it adopted a similar Rule 12b-1 distribution plan, they would stop doing business. Centennial recommended to the directors of the Fund that they consider adopting a 12b-1 plan. The directors of the Fund issued a proxy statement concerning a proposed 12b-1 plan, and the shareholders approved the plan. After issuance of the proxy statement but before the shareholders' meeting, P instituted the present action. Without the knowledge of either the Centennial directors or the Fund directors, Oppenheimer & Co. decided to sell several of Oppenheimer's interests, including its share in Centennial. The directors of the Fund first learned of the proposed sale of Oppenheimer's interest in Centennial around the time of the June 1 public announcement. None of the Fund's independent directors had knowledge of the proposed Oppenheimer sale, therefore, when they approved the 12b-1 plan in February 1982. On June 7, 1982, pursuant to Section 15(f) the Fund's board of directors approved a new investment advisory agreement between the Fund and Centennial to reflect the change in ownership of Centennial. The board found that the sale to Mercantile would not impose an unfair burden on the Fund. On June 21, the board issued a proxy statement describing Oppenheimer's sale of its interest in Centennial and the new advisory agreement, and on July 2 P amended his complaint to seek to enjoin the sale or to require in the alternative that the profits of the sale accrue to the Fund and not to Oppenheimer. The shareholders approved the new agreement on July 29, 1982. P's action is a shareholder derivative suit alleging that the distribution plan proposed in the 12b-1 proxy statement violated a prior stipulation of settlement in a prior excessive fees suit and that the advisory and distribution fees were excessive. The district court dismissed the complaint. P appealed. The court reversed and remanded. After a trial on remand, the district court held that the proxy statements regarding the 12b-1 plan and the sale were not materially misleading. It held that Oppenheimer had no affirmative obligation to inform the Fund's directors of their plans to sell its interest in Centennial and that the sale did not impose an unfair burden on the Fund in violation of Section 15(f) of the Act, and that the 12b-1 plan did not violate the stipulation of settlement in Meyer I because that settlement dealt only with advisory fees and not with distribution or administrative fees, which were provided without charge by Centennial for the stipulated five years. The district court held that the 12b-1 and advisory fee payments were not excessive in violation of Section 36(b) of the Act. P appealed.