Brigade Leveraged Capital Structures Fund Ltd. v. Pimco Income Strategy Fund

466 Mass. 368

995 N.E.2d 64

BRIGADE LEVERAGED CAPITAL STRUCTURES FUND LTD. & another ¹

v.PIMCO INCOME STRATEGY FUND & another.²

SJC–11289.

Supreme Judicial Court of Massachusetts, Suffolk.

Submitted May 6, 2013.

Decided Sept. 11, 2013.

John C. Ertman, of New York (C. Thomas Brown with him) for the defendants.

Joseph S. Allerhand, of New York (Patrick J. O'Toole, Jr., Boston, with him) for the plaintiffs.

The following submitted briefs for amici curiae:

Peter H. Mixon, of California, for California Public Employees' Retirement System.

Jeff Mahoney, of the District of Columbia, for Council of Institutional Investors.

Jesse M. Fried, pro se.

Present: IRELAND, C.J., SPINA, CORDY, BOTSFORD, GANTS, DUFFLY, & LENK, JJ.

GANTS, J.

Under Section 10.2 of the bylaws of the defendants, PIMCO Income Strategy Fund and PIMCO Income Strategy Fund II (collectively, “Funds” or “defendants”), “regular meetings of the Shareholders for the election of Trustees ... shall be held, so long as Common Shares are listed for trading on the New York Stock Exchange, on at least an annual basis.” The issue on appeal is the meaning of “on at least an annual basis.” The plaintiffs, Brigade Leveraged Capital Structures Fund Ltd. and Brigade Capital Management, LLC (collectively, “Brigade” or “plaintiffs”), contend that the bylaws require that an annual meeting of shareholders of each of the Funds be held in or within twelve months of the last annual shareholder meeting. The defendants contend that the bylaws require only that one annual shareholders' meeting be held each fiscal year for each of the Funds. We conclude that “on at least an annual basis” means that an annual shareholders' meeting for each of the Funds must be held no later than one year and thirty days (395 days) after the last annual shareholders' meeting.³

Background. The defendant Funds are closed-end investment companies registered under the Investment Company Act of 1940, as amended, 15 U.S.C. § 80a–5(a)(1)(2) (2006), that are organized as Massachusetts business trusts under G.L. c. 182.⁴The plaintiffs are the second-largest beneficial owners of preferred shares of each of the Funds.

Each of the Funds is governed by its Amended and Restated Agreement and Declaration of Trust (declaration of trust), dated August 14, 2003, and October 4, 2004, respectively. These declarations of trust are identical in all respects relevant to this case. Article IV, § 1, of each declaration of trust requires the Funds to hold an annual meeting:

“An initial annual meeting of Shareholders or special meeting in lieu thereof shall be called to be held not more than fifteen months after Shares are first sold pursuant to a public offering; subsequent annual meetings of Shareholders or special meetings in lieu thereof (each an ‘annual meeting’) shall be held as specified in the Bylaws.”

Section 10.2 of each of the Funds' bylaws ⁵ states, in pertinent part:

“Except as provided in the next sentence, regular meetings of the Shareholders for the election of Trustees ... shall be held, so long as Common Shares are listed for trading on the New York Stock Exchange, on at least an annual basis, on such day and at such place as shall be designated by the Trustees. In the event that such a meeting is not held in any annual period if so required, whether the omission be by oversight or otherwise, a subsequent special meeting may be called by the Trustees and held in lieu of such meeting with the same effect as if held within such annual period.” (Emphasis added.)

In addition to these provisions in the declarations of trust and bylaws regarding an annual meeting, because the Funds' shares are listed for trading on the New York Stock Exchange, they must also comply with § 302.00 of the New York Stock Exchange Listed Company Manual (NYSE manual), which requires them “to hold an annual shareholders' meeting during each fiscal year.” ⁶

The PIMCO Income Strategy Fund held its first annual meeting on November 16, 2004. In subsequent fiscal years, both Funds held joint annual meetings on December 15, 2005; ⁷ December 14, 2006; December 18, 2007; December 16, 2008; December 16, 2009; and December 14, 2010. The Funds' proxy statement issued on November 12, 2010, stated that “[i]t is currently anticipated that each Fund's next annual meeting of Shareholders after the [December 14, 2010] Meeting ... will be held in December[,] 2011.”

On September 21, 2011, Brigade delivered to the Funds a written notice stating Brigade's intent to nominate one of their partners for election as a preferred shares trustee of each fund at the 2011 annual meeting. On October 11, 2011, the Funds issued a press release stating that their joint annual meeting was being rescheduled to July 31, 2012, the last day of the Funds' 2012 fiscal year.⁸

On December 1, 2011, Brigade filed a verified complaint in the Superior Court alleging that the Funds intended to commit a breach of § 10.2 of the bylaws by postponing the annual meeting to a date that was nineteen months after the Funds' last annual meeting on December 14, 2010. The complaint sought, among other things, an injunction requiring the Funds “to hold the 2011 annual meeting ... as soon as practical,” and a declaration that § 10.2 of the Funds' bylaws requires “that a meeting of shareholders for the election of trustees ... is held at least once within any [twelve] month period.”

The plaintiffs filed a motion for expedited discovery to “understand the Funds' interpretation of the [b]ylaws and [to] uncover what reasons, if any, the Funds' trustees intend to advance as purported justification for the delay of the 2011 annual meeting.” A judge in the Superior Court denied the motion after hearing, concluding that the discovery that was requested did not “go to the issue of what the bylaws mean,” and that she did not think that the Funds had committed a breach of the bylaws by delaying the annual meeting based “on the plain language of the bylaws.”

The parties filed cross motions for summary judgment. On February 21, 2012, another judge in the Superior Court interpreted the bylaws differently and granted summary judgment to Brigade. This judge ruled that the Funds' postponement of their annual shareholder meeting to July 31, 2012, violated § 10.2 of the bylaws, and ordered the Funds to “hold the annual shareholder meeting for the year 2011 as soon as practicable after the date of this order.” The judge also declared that § 10.2 of the bylaws requires the Funds “to schedule future annual shareholder meetings in or within twelve months of their last annual shareholder meetings.” The judge noted that, “[i]f the [b]ylaws permitted the [F]unds to hold a meeting once every calendar year or every fiscal year, then the Funds could effectively disenfranchise [their] shareholders for extended periods by holding meetings [twenty-three] months apart,” for instance, by holding “shareholder meetings in December, 2012, then January, 2013 (after providing shareholders with at least seven days notice) and then [holding] their next meeting in December, 2014.” The judge reasoned that the requirement that annual shareholder meetings be held “on an annual basis” reflects “[s]ound corporate governance principles” that ensure that shareholders have a “timely and essential voice” where every twelve months they can “approve or disapprove the Funds' directions.”

Judgment entered on February 29, 2012, but on March 15, 2012, a single justice of the Appeals Court granted the defendants' motion for a stay of the judgment pursuant to Mass. R.A.P. 6(a), as appearing in 454 Mass. 1601 (2009). The single justice determined from “[r]eading the various provisions of the by-laws together, and viewing the by-laws in the background context set by the [New York Stock Exchange] rules, ... the only hard and fast, enforceable commitment that the [Funds] made was to hold an annual shareholders meeting once per fiscal year.” Therefore, he concluded that Brigade was “unlikely to be able to succeed in showing that [they] had a contractual right to require that the next shareholder meeting be held earlier than July 31, 2012.” As a result of the stay of the judgment pending appeal, the Funds' annual shareholders' meetings took place on July 31, 2012, rendering moot any appeal of the judge's order to hold an annual shareholders' meeting “as soon as practicable.” However, the appeal of that part of the judgment that declares that the Funds must schedule all future annual shareholder meetings “in or within twelve months” of their last annual shareholder meeting is not moot. We transferred the Fund's appeal to this court on our own motion.

Discussion. “We review a grant of summary judgment de novo to determine ‘whether, viewing the evidence in the light most favorable to the nonmoving party, ... the moving party is entitled to a judgment as a matter of law.’ ” Go–Best Assets Ltd. v. Citizens Bank of Mass., 463 Mass. 50, 54, 972 N.E.2d 426 (2012), quoting Augat Inc. v. Liberty Mut. Ins. Co., 410 Mass. 117, 120, 571 N.E.2d 357 (1991). See Mass. R. Civ. P. 56(c), as amended, 436 Mass. 1404 (2002); Kourouvacilis v. General Motors Corp., 410 Mass. 706, 711–712, 575 N.E.2d 734 (1991).

A corporation's articles of organization and its bylaws are a contract between the shareholders and the corporation. See Chokel v. Genzyme Corp., 449 Mass. 272, 275, 867 N.E.2d 325 (2007) (articles of organization); General Convention of the New Jerusalem in the United States of Am., Inc. v. MacKenzie, 449 Mass. 832, 835, 874 N.E.2d 1084 (2007)( MacKenzie ) (bylaws). So, too, a declaration of trust and a business trust's bylaws are a contract between the trustees of the trust and the shareholders that defines the rights of the trust's shareholders.⁹ See State St. Trust Co. v. Hall, 311 Mass. 299, 305–306, 41 N.E.2d 30 (1942). See generally Annot., 88 A.L.R.3d 704, 729–730 (1978) (declaration of trust is “determinative of the nature of the organization and of the...