September 12, 2013
How long is a year? That was the essence of the question the Supreme Judicial Court (SJC) answered on September 11 when it issued its decision in Brigade Leveraged Capital Structures, Inc. v. Pimco Income Strategy Fund, holding that the phrase “on at least an annual basis” means 395 days. Not as odd as it sounds, the decision represents a win for shareholder democracy and provides a reminder to attorneys who draft corporate bylaws to choose their words very carefully.
The dispute revolved around a bid to increase shareholder power. Pimco, the defendant investment management firm, managed two funds in which Brigade, the plaintiff, held shares. Brigade decided to nominate one of its partners to serve as a trustee on the boards of the two funds. Shareholders were set to elect the trustees at the funds’ next annual meeting. When it learned of the nomination, Pimco rescheduled the annual meeting from October 11, 2011, to July 31, 2012.
Brigade went to Superior Court asking for an order to make Pimco hold the 2011 shareholder meeting sooner. Pimco contended that under the terms of the bylaws it was entitled to reschedule the meeting even though the new date of July 31, 2012, was 19 months after the last shareholder meeting. In dispute was a provision in the trust’s bylaws which requires that regular meetings of shareholders “shall be held, so long as Common Shares are listed on the New York Stock Exchange, on at least an annual basis.” But what did that phrase — “on at least an annual basis” — mean?
Pimco said it could mean at any time during a fiscal year. With this approach, the management could conceivably hold one meeting in January 2013, but then not convene another one until December 2014, almost two years after the previous meeting. Rejecting Pimco’s interpretation, and siding with the shareholders, the SJC held that the phrase meant “no later than one year and thirty days (395 days) after the last annual shareholders meeting.” How and why did the court reach this conclusion?
Treating the bylaws the way it would a contract, the court construed the ambiguous provision against the party that drafted the document, namely Pimco. In addition, it read the words in the context of another section of the bylaws that referred to an “annual period,” which ended 30 days after the anniversary of the last annual meeting. But there was also an important principle at stake: the shareholders’ right to meaningful corporate democracy. “Delay in holding a shareholder election diminishes electoral rights by allowing [the] trustees to become more deeply entrenched and to continue to harm the interests of shareholders.”
What makes this case important rather than simply intriguing? The fact that other trusts and corporations in Massachusetts have bylaws that contain the same terms as the bylaws at the center of Brigade v. Pimco, such as the “annual period” provision and the requirement for shareholder meetings “on at least an annual basis.” This is not because of lazy lawyering and a fondness for copy-and-paste. Even the most diligent, detail-oriented attorneys rely on previous examples because familiarity and predictability are valuable assets in corporate governance and law, and because those older bylaws have stood the test of time. Of course, at the heart of the Brigade v Pimco case was the very meaning of time.
So what should small business owners do? First, it is worth checking their company’s bylaws to learn whether they require shareholder meetings “on at least an annual basis.” Then they should decide whether the annual-meeting provisions, as a court would likely interpret them, will work in practice. If the bylaws need changing, they can amend them by following the steps laid out in the bylaws. Without question, this involves time and other valuable resources that owners would prefer to devote to growing the business. On the other hand, it can stop misunderstandings before they start, and (no matter what your attorney charges per hour) it will prove much less expensive than litigation.
Attorney Peter Vickery practices in Amherst, Western Massachusetts.