7
Opportunity Partners L.P., 60 Heritage Drive, Pleasantville, NY
10570
(914) 747-5262 // Fax: (914) 747-5258//oplp@optonline.net
May 25, 2005
John Grzeskiwicz
Senior Counsel
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0506
The New Germany Fund, Inc. (the "Fund"); File No. 811-5983
Dear Mr. Grzeskiwicz:
This is in response to your letter dated May 20, 2005 relating to
my proxy solicitation materials for the Fund. I have taken the
liberty of filing it publicly because of its importance to
shareholders of the Fund and of other closed-end funds.
As I told you, my preference would be to simply attend the annual
meeting and vote my proxies as instructed. Unfortunately, the
board has not agreed to allow that. In fact, it has not
disclosed what it will do with my proxies should I attempt to
vote them, which is a very serious material omission that I have
urged you to address.1 If the board assures me that it will
allow me to vote my proxies as instructed, I will do so.
You ask me why I believe it is a "reasonable" condition as that
term is used in rule 14a-4(e) to say that I will vote my proxies
only if the Fund assures me that I will be permitted to vote
them. I am not sure how to answer that. It is the board that is
refusing to allow my proxies to be voted as instructed. I am the
victim of the board's attempt to steal the election. Why are you
asking the victim why he is defending himself?
The reason I said I may not attend the meeting is that I did not
want to preclude reaching a settlement with the board, e.g., if
the board agrees to have an independent inspector of elections
hold all the proxies but not certify the results until a court
determines whether they should be counted, I would submit them at
the meeting. Do you want me to deliver the proxies even if the
board uses them to obtain a quorum but does not allow them to be
voted? If the staff has any suggestions to insure that my
proxies will be voted as instructed, instead of used just to
obtain a quorum, I would certainly consider them.
In an amicus curiae brief2 submitted on December 15, 2004 to the
United States Court of Appeals for the Seventh Circuit for
Edelson v. Ch'ien et al., the Commission stated: "A shareholder's
interest in corporate suffrage is not limited to his or her own
vote. The right of a shareholder to contest an election for
directors certainly is a fundamental part of corporate suffrage."
Does the staff agree? I have seen little evidence of that.
The issue is whether the Fund's board of directors can enforce a
bylaw that effectively precludes shareholders from electing the
directors of their choice. I believe the bylaw in question
violates sections 16(a) and 36(a) of the Investment Company Act
of 1940 (the "Act"). It was adopted by the Fund's board of
directors without shareholder approval and purports to establish
onerous qualifications for any nominee for director who is not an
incumbent director or an officer of the Fund's investment
adviser. In relevant part, it reads:
Qualifications. Directors need not be stockholders. Each
Director shall hold office until the earlier of: (a) the
expiration of his term and his or her successor shall have
been elected and qualifies, (b) his or her death, (c) his or
her resignation, (d) December 31 of the year in which he or
she shall have reached 70 years of age, or (e) his or her
removal; provided that clause (d) shall not apply to any
person who was a Director on October 15, 1999 or to any
person who the Nominating Committee (or in the absence of
such a Committee, the Board of Directors) determines to
except from that clause on the basis that the person's prior
public or government service or other broad-based activities
in the business community make it essential that the
Corporation continue to receive the benefit of the person's
services as a Director. The determination described in the
previous sentence shall be made on or before July 31 of the
year in which the Director in question reaches the age
specified in clause (d). To be eligible for nomination as a
director a person must, at the time of such person's
nomination, have Relevant Experience and Country Knowledge
(as defined below) and must not have any Conflict of
Interest (as defined below). Whether a proposed nominee
satisfies the foregoing qualifications shall be determined
by the Nominating Committee or, in the absence of such a
Committee, by the Board of Directors, each in its sole
discretion.
"Relevant Experience and Country Knowledge" means experience
in business, investment, economic or political matters of
Germany or the United States through service for 10 of the
past 20 years (except where a shorter period is noted) in
one or more of the following principal occupations:
(1) senior executive officer or partner of a financial or
industrial business headquartered in Germany that has annual
revenues of at least the equivalent of US $500 million,
(2) senior executive officer or partner of a financial or
industrial business headquartered in the United States that
has annual revenues of at least the equivalent of US $500
million and whose management responsibilities include
supervision of European business operations,
(3) director (or the equivalent) for 5 of the past 10 years
of one or more investment businesses or vehicles (including
this Corporation) a principal focus of which is investment
in Germany and that have at least the equivalent of US $250
million in combined total assets of their own,
(4) senior executive officer or partner of an investment
management business having at least the equivalent of US
$500 million in securities of German companies or securities
principally traded in Germany under discretionary management
for others,
(5) senior executive officer or partner of a business
consulting, accounting or law firm having at least 100
professionals and (b) whose principal responsibility
involves or involved providing services involving European
matters for financial or industrial businesses, investment
businesses or vehicles or investment management businesses
as described in (1) - (4) above,
(6) senior official (including ambassador or minister) in
the national government, a government agency or the central
bank of Germany or the United States, in a major
supranational agency or organization of which Germany or the
United States is a member, or in a leading international
trade organization relating to Germany or the United States,
in each case in the area of finance, economics, trade or
foreign relations, or
(7) current director or senior officer (without regard to
years of service) of an investment manager or adviser of the
Corporation, or of any entity controlling or under common
control with an investment manager or adviser of the
Corporation.
The effect of this bylaw is to preclude virtually every public
shareholder, or virtually anyone in the United States, for that
matter, except the incumbent directors themselves from being
elected a director. Section 1(b) of the Act requires that every
provision of the Act be interpreted so as to prevent investment
companies from being operated in the interest of incumbent
directors rather than shareholders. Using that interpretive
guideline, it is impossible to reconcile section 16(a) with the
Fund's qualifications bylaw. In any election that is legitimate,
the question of qualifications is a matter to be determined by
the electorate, i.e., the shareholders, not the incumbent
directors who have an obvious conflict of interest. Otherwise,
section 16(a) would be meaningless.
It is indisputable that the qualifications bylaw benefits the
directors at the expense of shareholders by denying the latter
the opportunity to nominate and elect directors of their choice.
Moreover, courts have invariably found that the right to elect
directors is not only the right to vote for a candidate that
management has selected, but the right to nominate and vote for
directors of the shareholders' choosing. In Durkin v. The
National Bank of Olyphant, 772 F.2d 55, 59 (3rd Cir. 1985), the
Third Circuit Court eloquently expressed this principle:
We rest our holding as well on the common sense notion that
the unadorned right to cast a ballot in a contest for
office, a vehicle for participatory decisionmaking and the
exercise of choice, is meaningless without the right to
participate in selecting the contestants. As the nominating
process circumscribes the range of the choice to be made,
it is a fundamental and outcome-determinative step in the
election of officeholders. To allow for voting while
maintaining a closed candidate selection process thus
renders the former an empty exercise. This is as true in
the corporate suffrage context as it is in civic elections,
where federal law recognizes that access to the candidate
selection process is a component of constitutionally-
mandated voting rights. Banks do not exist for the purpose
of creating an aristocracy of directors and officers which
can continue in office indefinitely, immune from the wishes
of the shareholder-owners of the corporation. And there is
no more justification for precluding shareholders from
nominating candidates for their board of directors than
there would be for public officials to deny citizens the
right to vote because of their race, poverty or sex.
The Delaware Chancery Court in Linton v. Everett, 1997 WL 441189,
at 9 (Del. Ch. 1997) affirmed that principle, noting "[t]he right
of shareholders to participate in the voting process includes the
right to nominate an opposing slate. See also Hubbard v.
Hollywood Park Realty Enterprises, 1991 WL 3151, at 11 (Del. Ch.
1991) (recognizing the fundamental right of shareholders to vote
for and nominate candidates for the board of directors). Given
the fundamental nature of shareholders' right to nominate and
vote for directors, the Court concludes that the directors'
decision to preclude plaintiff's nominees was unfair as they
acted in the absence of any valid authority and thereby thwarted
plaintiff's exercise of his rights as a shareholder."
The standard for a fair corporate election was set forth in
Aprahamian v. HBO & Co., 531 A.2d 1204, 1206-07 (Del. Ch. 1987):
The corporate election process, if it is to have any
validity, must be conducted with scrupulous fairness and
without any advantage being conferred or denied to any
candidate or slate of candidates. In the interests of
corporate democracy, those in charge of the election
machinery of a corporation must be held to the highest
standards in providing for and conducting corporate
elections.
Is the Fund's qualifications bylaw consistent with sections 16(a)
and 36(a) of the Act? Under Delaware law, an action by a board
is invalid if "its sole or primary purpose [is] thwarting a
shareholder vote" unless the board has a "compelling
justification."3 In a recent opinion in Maryland, the Fund's
state of incorporation, in a case in which I was a plaintiff
Judge Albert J. Matriccianni, Jr. of the Circuit Court for
Baltimore City stated: "This Court believes that Maryland law
provides the same protection to shareholder voting rights that
obtains in Delaware, in similar factual contexts, such as the
present one involving a proxy fight over control of the board." 4
We believe that sections 16(a) and 36(a) require that
shareholders of the Fund have at least the degree of protection
of their voting rights as afforded them under state law. After
all, the Act was adopted in part to remedy what Congress
perceived to be inadequate protection of the shareholder
franchise by the states. Unfortunately, when we brought this
matter to the staff's attention a few years ago, its
disheartening response was that the Act is not necessarily
violated by preclusive qualifications bylaws because "the right
to vote is not totally meaningless when shareholders can reject
nominees but cannot influence nominations."5 The staff found
Durkin inapposite because, in its view, unlike a bank, nothing in
the Act bars the board of an investment company from adopting a
bylaw to prevent shareholders from nominating directors. Thus,
an investment company, if permitted to do so under state law, may
well "[create] an aristocracy of directors and officers which can
continue in office indefinitely, immune from the wishes of the
shareholder-owners of the corporation."6
We strongly disagree that any election that is "not totally
meaningless" conforms to sections 16(a) and 36(a) of the Act.
Could the board also adopt a bylaw that requires a nominee for
director to take an oath of allegiance to the German government
without violating the Act?
In the staff's letter, it assured me that "we continue to review
carefully the nominee qualifications that Boards have adopted, as
they come to our attention [and] if it becomes apparent to us
that fund directors are not acting consistent with their
fiduciary duties, or are not acting consistent with the
disclosure requirements of the federal securities laws, we will
consider taking appropriate actions." Unless that was just
boilerplate rhetoric, this is great time to put a stop to these
abuses of shareholder rights and save shareholders of the Fund
and other closed-end funds the costs of private litigation.
Should the staff do nothing, its perceived impotence in the face
of these sorts of violations of the Act will encourage more of
them just as the its failure to do anything about the market
timing of open-end funds contributed to its proliferation until
Eliot Spitzer blew the whistle on the practice. Is the staff
really not able to tell the good guys from the bad guys in this
proxy contest? What do shareholders have to do to get the SEC to
act?
As you requested, I will remove the sentence from my proxy card
that "the undersigned expressly (1) understands this condition as
set forth in the proxy statement . . . and (2) agrees that this
condition is reasonably specified" because it is not really
necessary, not because it violates rule 14a-4(a).
Very truly yours,
Phillip Goldstein
President
Kimball & Winthrop, Inc.
General Partner
_______________________________
1 You state that "the staff is not presently in a position to
verify" any other objections by the parties. It should not take
the staff more than a minute or two to determine that the failure
to fully disclose how the Fund will treat my proxies if I attempt
to vote them is a material omission. Frankly, it is inexplicable
to me that the staff has allowed the board to solicit proxies for
weeks without demanding corrective disclosure.
2 See http://www.sec.gov/litigation/briefs/edelson121504.pdf
3 Blasius Industries, Inc. v. Atlas Corp., 1564 A.2d 651 (Del.
Ch. 1988)
4 Shaker v. Foxby, 24-C-04-007
5 Letter dated March 12, 2002 to me from Douglas Scheidt,
Associate Director and Chief Counsel
6 Durkin v. The National Bank of Olyphant, 772 F.2d 55, 59 (3rd
Cir. 1985)