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. 

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 SEC staff’s guidance is available here.