Vedder Price

Vedder Thinking | Articles SEC Staff Reverses Position on State Control Share Statutes for Closed-End Funds


Reader View

On May 27, 2020, the staff of the SEC’s Division of Investment Management withdrew previously issued guidance addressing the intersection between state control share acquisition statutes (control share statutes) and the voting requirements under Section 18(i) of the Investment Company Act of 1940. Under its new no-action position, the SEC staff stated that it would not recommend enforcement action against a closed-end fund for opting into and triggering a control share statute if the boards decision to do so was taken with reasonable care on a basis consistent with other applicable duties and laws.

Generally, control share statutes provide that when a shareholder acquires a certain percentage of voting power of a company equal to a “control share,” that shareholder will have no or limited voting rights with respect to those shares. The percentage of voting power equal to a control share is specified in the statue (e.g., one-third but less than a majority). Voting rights can typically be restored to control shares only by a vote of the other shareholders. Control share statutes provide companies with the ability to prevent certain changes of control and protect from shareholder activism. Control share statutes, like other state corporation statutes, require companies to opt-in or opt-out of compliance with the statute’s provisions.

The new guidance is a reversal from the SEC staff’s previous position on control share statutes taken in a 2010 no-action letter, in which the staff concluded that opting-in to control share statutes would be inconsistent with provisions of the Investment Company Act requiring that every share issued by an investment company have equal voting rights. As part of the SEC’s undertaking to review prior staff guidance, announced by SEC Chairman Jay Clayton in 2018, the staff reviewed its previous guidance on control share statutes in light of “market developments” and “recent feedback from affected market participants” and determined to withdraw its prior guidance. In taking the new no-action position, the staff noted its expectation that a board’s decision to opt-in to and trigger a control share statute take into account (1) the board’s fiduciary duties to the fund, (2) applicable provisions of federal and state law and (3) the particular facts and circumstances surrounding the board’s action. The staff also requests industry feedback to determine whether additional SEC action on this topic is warranted.

The SEC staff’s guidance is available here.


John S. Marten


Nathaniel Segal


Jacob C. Tiedt