SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Amendment No. ______________)
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary proxy statement
/ / Confidential, for use of the Commission only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12
TEMPLETON DRAGON FUND, INC.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing party:
(4) Date filed:
[LOGO]
FRANKLIN TEMPLETON
INVESTMENTS
TEMPLETON DRAGON FUND, INC.
IMPORTANT SHAREHOLDER INFORMATION
These materials are for the Annual Meeting of Shareholders scheduled for May 3,
2002 at 10:00 a.m. Eastern time. The enclosed materials discuss four proposals
(the "Proposals") to be voted on at the meeting, and contain your Proxy
Statement and proxy card. A proxy card is, in essence, a ballot. When you vote
your proxy, it tells us how you wish to vote on important issues relating to
Templeton Dragon Fund, Inc. (the "Fund"). If you specify a vote for all 4
Proposals, your proxy will be voted as you indicate. If you specify a vote for
only certain Proposals, your proxy will be voted as specified, and the
Proposal(s) for which no vote is specified will be voted FOR each such
Proposal. If you simply sign and date the proxy card, but do not specify a vote
for any Proposal, your proxy will be voted FOR all Proposals.
We urge you to spend a few minutes reviewing the Proposals in the Proxy
Statement. Then, please fill out the proxy card and return it to us so that we
know how you would like to vote. When shareholders return their proxies
promptly, the Fund may be able to save money by not having to conduct
additional mailings.
We welcome your comments. If you have any questions, call Fund Information at
1-800/DIAL BEN(R) (1-800-342-5236).
TELEPHONE AND INTERNET VOTING
For your convenience, you may be able to vote by telephone or through the
Internet, 24 hours a day. If your account is eligible, a control number and
separate instructions are enclosed.
[LOGO]
FRANKLIN TEMPLETON
INVESTMENTS
TEMPLETON DRAGON FUND, INC.
NOTICE OF 2002 ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders (the "Meeting") of Templeton Dragon Fund,
Inc. (the "Fund") will be held at the Fund's offices, 500 East Broward
Boulevard, 12th Floor, Ft. Lauderdale, Florida 33394-3091 on May 3, 2002 at
10:00 a.m. Eastern time.
During the Meeting, shareholders of the Fund will vote on four Proposals:
1.To elect five Directors of the Fund to hold office for the terms specified.
2.To approve an Agreement and Plan of Reorganization that provides for the
reorganization of the Fund from a Maryland corporation to a Delaware business
trust.
3.To approve amendments to certain of the Fund's fundamental investment
restrictions (includes three (3) Sub-Proposals):
(a)To amend the Fund's fundamental investment restriction regarding industry
concentration.
(b)To amend the Fund's fundamental investment restriction regarding borrowing
and issuing senior securities.
(c)To amend the Fund's fundamental investment restriction regarding
investments in commodities.
4.To approve the elimination of certain of the Fund's fundamental investment
restrictions.
By Order of the Board of Directors,
Barbara J. Green
Secretary
April 5, 2002
Please sign and promptly return each proxy card in the enclosed
self-addressed envelope regardless of the number of shares you own. Japanese
shareholders should be aware that the Japan Securities Clearing Corporation
may exercise a vote on the Proposals on your behalf if you do not return a
proxy card.
TABLE OF CONTENTS
Page
----
PROXY STATEMENT
Information About Voting............................................................... 1
Proposal 1: To Elect Five Directors of the Fund to Hold Office for the Terms Specified. 2
Proposal 2: To Approve an Agreement and Plan of Reorganization that Provides for the
Reorganization of the Fund from a Maryland Corporation to a Delaware
Business Trust............................................................. 11
Proposal 3: To Approve Amendments to Certain of the Fund's Fundamental Investment
Restrictions (this Proposal involves separate votes on Sub-Proposals 3a-3c) 18
Sub-Proposal 3a: To amend the Fund's fundamental investment restriction
regarding industry concentration....................... 18
Sub-Proposal 3b: To amend the Fund's fundamental investment restriction
regarding borrowing and issuing senior securities...... 19
Sub-Proposal 3c: To amend the Fund's fundamental investment restriction
regarding investments in commodities................... 22
Proposal 4: To Approve the Elimination of Certain of the Fund's Fundamental Investment
Restrictions............................................................... 24
Information About the Fund............................................................. 27
Further Information About Voting and the Meeting....................................... 30
EXHIBITS
Exhibit A: Form of Agreement and Plan of Reorganization between Templeton Dragon
Fund, Inc. (a Maryland corporation) and Templeton Dragon Fund (a Delaware
business trust)............................................................ A-1
Exhibit B: A Comparison of Governing Documents and State Law.......................... B-1
Exhibit C: Fundamental Investment Restrictions Proposed to be Amended or Eliminated... C-1
TEMPLETON DRAGON FUND, INC.
PROXY STATEMENT
.. INFORMATION ABOUT VOTING
Who is eligible to vote?
Shareholders of record at the close of business on February 22, 2002 are
entitled to be present and to vote at the Meeting or any adjourned Meeting.
Each share of record is entitled to one vote on each matter presented at the
Meeting. The Notice of Meeting, the proxy card, and the Proxy Statement were
first mailed to shareholders of record on or about April 5, 2002.
On what issues am I being asked to vote?
You are being asked to vote on four Proposals:
1. To elect five Directors of the Fund to hold office for the terms specified;
2. To approve an Agreement and Plan of Reorganization that provides for the
reorganization of the Fund from a Maryland corporation to a Delaware
business trust;
3. To approve amendments to certain of the Fund's fundamental investment
restrictions (includes three (3) Sub-Proposals); and
4. To approve the elimination of certain of the Fund's fundamental investment
restrictions.
How do the Fund's Directors recommend that I vote?
The Directors unanimously recommend that you vote:
1. FOR the election of five Directors of the Fund to hold office for the terms
specified;
2. FOR the approval of an Agreement and Plan of Reorganization that provides
for the reorganization of the Fund from a Maryland corporation to a
Delaware business trust;
3. FOR the approval of each of the proposed amendments to certain of the
Fund's fundamental investment restrictions; and
4. FOR the approval of the elimination of certain of the Fund's fundamental
investment restrictions.
How do I ensure that my vote is recorded accurately?
You may attend the Meeting and vote in person or you may complete and return
the enclosed proxy card. If you are eligible to vote by telephone or through
the Internet, a control number and separate instructions are enclosed.
1
Proxy cards that are properly signed, dated and received at or prior to the
Meeting will be voted as specified. If you specify a vote for Proposals 1
through 4, your proxy will be voted as you indicate. If you specify a vote for
only certain Proposals, your proxy will be voted as specified, and the
Proposal(s) for which no vote is specified will be voted FOR that Proposal. If
you simply sign and date the proxy card, but do not specify a vote for any of
Proposals 1 through 4, your shares will be voted FOR the nominees for Director
(Proposal 1); FOR an Agreement and Plan of Reorganization that provides for the
reorganization of the Fund from a Maryland corporation to a Delaware business
trust (Proposal 2); FOR amending certain of the Fund's fundamental investment
restrictions (Sub-Proposals 3a-3c); and FOR eliminating certain of the Fund's
fundamental investment restrictions (Proposal 4).
May I revoke my proxy?
You may revoke your proxy at any time before it is voted by forwarding a
written revocation or a later-dated proxy to the Fund that is received at or
prior to the Meeting, or by attending the Meeting and voting in person.
.. THE PROPOSALS
PROPOSAL 1: TO ELECT FIVE DIRECTORS OF THE FUND TO HOLD OFFICE FOR THE TERMS
SPECIFIED
How are nominees selected?
The Board of Directors of the Fund (the "Board" or the "Directors") has a
Nominating and Compensation Committee (the "Committee") consisting of Frank J.
Crothers, Andrew H. Hines, Jr., Edith E. Holiday and Gordon S. Macklin, none of
whom is an "interested person" as defined by the Investment Company Act of
1940, as amended (the "1940 Act"). Directors who are not interested persons of
the Fund are referred to as the "Independent Directors." The Committee is
responsible for the selection and nomination of candidates to serve as
Directors of the Fund. The Committee will review shareholders' nominations to
fill vacancies on the Board if these nominations are submitted in writing and
addressed to the Committee at the Fund's offices. However, the Committee
expects to be able to identify from its own resources an ample number of
qualified candidates.
Who are the nominees and current members of the Board of Directors?
The Board is divided into three classes. Each class has a term of three years.
Each year the term of office of one class expires. This year, the terms of five
Directors expire. Harris J. Ashton, Nicholas F. Brady, Frank J. Crothers, S.
Joseph Fortunato and Constantine D. Tseretopoulos have been nominated for
three-year terms, set to expire at the 2005 Annual Meeting of Shareholders.
These terms continue, however, until successors are duly elected and qualified.
Among these Directors, only Nicholas F. Brady is deemed to be an "interested
person" for purposes of the 1940 Act. Directors who are "interested persons"
are referred to as the "Interested Directors." All of the nominees are
currently members of the Board. In addition, all of the current nominees and
Directors are also directors or trustees of other Franklin(R) funds and/or
Templeton(R) funds (collectively, the "Franklin Templeton funds").
2
Certain Directors of the Fund hold director and/or officer positions with
Franklin Resources, Inc. ("Resources") and its affiliates. Resources is a
publicly owned holding company, the principal shareholders of which are Charles
B. Johnson and Rupert H. Johnson, Jr., who own approximately 17.3% and 14.5%,
respectively, of its outstanding shares. Resources, a global investment
organization operating as Franklin Templeton Investments, is primarily engaged,
through various subsidiaries, in providing investment management, share
distribution, transfer agent and administrative services to a family of
investment companies. Resources is a New York Stock Exchange, Inc. ("NYSE")
listed holding company (NYSE: BEN). Charles E. Johnson, Vice President of the
Fund, is the son and nephew, respectively, of brothers Charles B. Johnson,
Chairman of the Board, Director and Vice President of the Fund, and Rupert H.
Johnson, Jr., Vice President of the Fund. There are no family relationships
among any of the Directors or nominees for Director.
Each nominee currently is available and has consented to serve if elected. If
any of the nominees should become unavailable, the designated proxy holders
will vote in their discretion for another person or persons who may be
nominated as Directors.
Listed below, for each nominee and Director, are their name, age and address,
as well as their position and length of service with the Fund, principal
occupation during the past five years, the number of portfolios in the Franklin
Templeton fund complex that they oversee, and any other directorships held by
the Director.
Nominees for Independent Director to serve until 2005 Annual Meeting of
Shareholders:
Number of
Portfolios in
Fund Complex
Length of Overseen by
Name, Age and Address Position Time Served Director* Other Directorships Held
--------------------- -------- ----------- ------------- ------------------------
-------------------------------------------------------------------------------------------------------------
Harris J. Ashton (69) Director Since 1994 139 Director, RBC Holdings,
500 East Broward Blvd. Inc. (bank holding
Suite 1200 company) and Bar-S Foods
Fort Lauderdale, FL 33394-3091 (meat packing company).
Principal Occupation During Past 5 Years:
Director of various companies; and formerly, President, Chief Executive Officer and Chairman of the Board,
General Host Corporation (nursery and craft centers) (until 1998).
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Frank J. Crothers (57) Director Since 1998 20 None
500 East Broward Blvd.
Suite 1200
Fort Lauderdale, FL 33394-3091
Principal Occupation During Past 5 Years:
Chairman, Caribbean Electric Utility Services Corporation and Atlantic Equipment & Power Ltd.; Vice
Chairman, Caribbean Utilities Co., Ltd.; and Director and President, Provo Power Company Ltd.; and director of
various other business and nonprofit organizations.
---------------------------------------------------------------------------------------------------------------
3
Number of
Portfolios in
Fund Complex
Length of Overseen by
Name, Age and Address Position Time Served Director* Other Directorships Held
--------------------- -------- ----------- ------------- ------------------------
------------------------------------------------------------------------------------------
S. Joseph Fortunato (69) Director Since 140 None
500 East Broward Blvd. 1994
Suite 1200
Fort Lauderdale, FL 33394-3091
Principal Occupation During Past 5 Years:
Member of the law firm of Pitney, Hardin, Kipp & Szuch.
------------------------------------------------------------------------------------------------------------------
Constantine D. Tseretopoulos (47) Director Since 21 None
500 East Broward Blvd. 1998
Suite 1200
Fort Lauderdale, FL 33394-3091
Principal Occupation During Past 5 Years:
Physician, Lyford Cay Hospital (1987-present); and director of various nonprofit organizations; and formerly,
Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore
Medical Center (1982-1985).
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Nominee for Interested Director to serve until 2005 Annual Meeting of Shareholders:
**Nicholas F. Brady (71) Director Since 66 Director, Amerada Hess
500 East Broward Blvd. 1994 Corporation (exploration
Suite 1200 and refining of oil and
Fort Lauderdale, FL 33394-3091 gas); C2, Inc. (operating
and investment business);
and H.J. Heinz Company
(processed foods and allied
products).
Principal Occupation During Past 5 Years:
Chairman, Templeton Emerging Markets Investment Trust PLC, Darby Overseas Investments, Ltd. and Darby
Emerging Markets Investments LDC (investment firms) (1994-present); Director, Templeton Capital Advisors
Ltd., and Franklin Templeton Investment Fund; and formerly, Secretary of the United States Department of the
Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment banking) (until 1988); and
U.S. Senator, New Jersey (April 1982-December 1982).
-------------------------------------------------------------------------------------------------------------------
Independent Directors serving until 2004 Annual Meeting of Shareholders:
Andrew H. Hines, Jr. (79) Director Since 31 None
500 East Broward Blvd. 1994
Suite 1200
Fort Lauderdale, FL 33394-3091
Principal Occupation During Past 5 Years:
Consultant, Triangle Consulting Group; and Executive-in-Residence, Eckerd College (1991-present); and formerly,
Chairman and Director, Precise Power Corporation (1990-1997); Director, Checkers Drive-In Restaurant, Inc. (1994-
1997); and Chairman of the Board and Chief Executive Officer, Florida Progress Corporation (holding company in the
energy area) (1982-1990); and director of various of its subsidiaries.
-------------------------------------------------------------------------------------------------------------------
4
Number of
Portfolios in
Fund Complex
Length of Overseen by
Name, Age and Address Position Time Served Director* Other Directorships Held
-----------------------------------------------------------------------------------------------------------------
Edith E. Holiday (50) Director Since 85 Director, Amerada Hess
500 East Broward Blvd. 1996 Corporation (exploration
Suite 1200 and refining of oil and
Fort Lauderdale, FL 33394-3091 gas); Hercules
Incorporated (chemicals,
fibers and resins); Beverly
Enterprises, Inc. (health
care); H.J. Heinz Company
(processed foods and allied
products); RTI
International Metals, Inc.
(manufacture and
distribution of titanium);
Digex Incorporated (web
hosting provider); and
Canadian National
Railway (railroad).
Principal Occupation During Past 5 Years:
Director of various companies; and formerly, Assistant to the President of the United States and Secretary of the
Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to
the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department
(1988-1989).
------------------------------------------------------------------------------------------------------------------
Interested Directors serving until 2004 Annual Meeting of Shareholders:
**Martin L. Flanagan (41) Director Since 7 None
One Franklin Parkway and Vice 1994
San Mateo, CA 94403-1906 President
Principal Occupation During Past 5 Years:
President, Member - Office of the President, Chief Financial Officer and Chief Operating Officer, Franklin
Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive
Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and
Chief Operating Officer, Templeton Investment Counsel, LLC; Executive Vice President and Director, Franklin
Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton
Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin
Templeton Services, LLC; and officer and/or director of some of the other subsidiaries of Franklin Resources,
Inc.
------------------------------------------------------------------------------------------------------------------
5
Number of
Portfolios in
Fund Complex
Length of Overseen by
Name, Age and Address Position Time Served Director* Other Directorships Held
---------------------------------------------------------------------------------------------------------------
**Charles B. Johnson (69) Chairman Chairman 139 None
One Franklin Parkway of the of the
San Mateo, CA 94403-1906 Board, Board
Director since
and Vice 1995 and
President Director
and Vice
President
since
1994
Principal Occupation During Past 5 Years:
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company
International; and officer and/or director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc.
----------------------------------------------------------------------------------------------------------------
Independent Directors serving until 2003 Annual Meeting of Shareholders:
Betty P. Krahmer (72) Director Since 25 None
500 East Broward Blvd. 1994
Suite 1200
Fort Lauderdale, FL 33394-3091
Principal Occupation During Past 5 Years:
Director or trustee of various civic associations; and formerly, Economic Analyst, U.S. government.
----------------------------------------------------------------------------------------------------------------
Gordon S. Macklin (73) Director Since 139 Director, White Mountains
500 East Broward Blvd. 1994 Insurance Group, Ltd.;
Suite 1200 Martek Biosciences
Fort Lauderdale, FL 33394-3091 Corporation; WorldCom,
Inc. (communications
services); MedImmune,
Inc. (biotechnology);
Overstock.com (Internet
services); and Spacehab,
Inc. (aerospace services).
Principal Occupation During Past 5 Years:
Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and formerly, Chairman, White
River Corporation (financial services) (until 1998) and Hambrecht & Quist Group (investment banking) (until
1992); and President, National Association of Securities Dealers, Inc. (until 1987).
----------------------------------------------------------------------------------------------------------------
6
Number of
Portfolios in
Fund Complex
Length of Overseen by
Name, Age and Address Position Time Served Director* Other Directorships Held
------------------------------------------------------------------------------------------
Fred R. Millsaps (72) Director Since 31 None
500 East Broward Blvd. 1994
Suite 1200
Fort Lauderdale, FL 33394-3091
Principal Occupation During Past 5 Years:
Director of various business and nonprofit organizations; and manager of personal investments
(1978-present); and formerly, Chairman and Chief Executive Officer, Landmark Banking
Corporation (1969-1978); Financial Vice President, Florida Power and Light (1965-1969); and Vice
President, Federal Reserve Bank of Atlanta (1958-1965).
-------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the
registered investment companies comprising the Franklin Templeton
Investments fund complex. These portfolios have a common investment
adviser or affiliated investment advisers, and may also share a common
underwriter.
** Nicholas F. Brady, Martin L. Flanagan, and Charles B. Johnson, each an
Interested Director, are "interested persons" of the Fund as defined by
the 1940 Act. The 1940 Act limits the percentage of interested persons
that can comprise a fund's board of directors. Mr. Johnson is considered
an interested person of the Fund due to his position as an officer and
director and major shareholder of Resources and his position with the
Fund. Mr. Flanagan's status as an interested person results from his
position as an officer of Resources and his position with the Fund. Mr.
Brady's status as an interested person results from his business
affiliations with Resources and Templeton Global Advisors Limited. Mr.
Brady and Resources are both limited partners of Darby Overseas Partners,
L.P. ("Darby Overseas"). Mr. Brady is Chairman and shareholder of Darby
Overseas Investments, Ltd., which is the corporate general partner of
Darby Overseas. In addition, Darby Overseas and Templeton Global Advisors
Limited are limited partners of Darby Emerging Markets Fund, L.P.
("DEMF"). Mr. Brady serves as Chairman of the corporate general partner
of DEMF, and Darby Overseas and its general partner own 100% of the stock
of the general partner of DEMF. Mr. Brady is also a director of Templeton
Capital Advisors Ltd. ("TCAL"), which serves as investment manager to
certain unregistered funds. TCAL and Templeton Global Advisors Limited
are both indirect subsidiaries of Resources. The remaining nominees and
Directors of the Fund are Independent Directors.
Note: As discussed previously, Charles B. Johnson, Chairman of the Board,
Director, and Vice President, and Rupert H. Johnson, Jr., Vice President
of the Fund, are brothers and the father and uncle, respectively, of
Charles E. Johnson, Vice President of the Fund.
The following tables provide the equity securities of Franklin Templeton funds
beneficially owned by the Fund's Directors.
Independent Directors
Aggregate Dollar Range of Equity
Securities in all Funds Overseen by the
Director in the Franklin Templeton
Name of Director Dollar Range of Equity Securities in the Fund/1/ Investments Fund Complex/1/
---------------------------- ----------------------------------------------- ---------------------------------------
Harris J Ashton $1 - $10,000 Over $100,000
Frank J. Crothers None Over $100,000
S. Joseph Fortunato $1 - $10,000 Over $100,000
Andrew H. Hines, Jr. None Over $100,000
Edith E. Holiday $1 - $10,000 Over $100,000
Betty P. Krahmer $50,001 - $100,000 Over $100,000
Gordon S. Macklin $10,001 - $50,000 Over $100,000
Fred R. Millsaps None Over $100,000
Constantine D. Tseretopoulos None Over $100,000
Interested Directors
Aggregate Dollar Range of Equity
Securities in all Funds Overseen by the
Director in the Franklin Templeton
Name of Director Dollar Range of Equity Securities in the Fund/1/ Investments Fund Complex/1/
------------------ ----------------------------------------------- ---------------------------------------
Nicholas F. Brady $1 - $10,000 Over $100,000
Martin L. Flanagan $10,001 - $50,000 Over $100,000
Charles B. Johnson Over $100,000 Over $100,000
-------------------------
/1 /For the calendar year ended December 31, 2001.
7
How often do the Directors meet and what are they paid?
The role of the Directors is to provide general oversight of the Fund's
business and to ensure that the Fund is operated for the benefit of
shareholders. The Directors anticipate meeting at least five times during the
current fiscal year to review the operations of the Fund and the Fund's
investment performance. The Directors also oversee the services furnished to
the Fund by Templeton Asset Management Ltd. - Hong Kong branch, the Fund's
investment manager (the "Investment Manager"), and various other service
providers. The Fund currently pays the Independent Directors and Mr. Brady an
annual retainer of $2,000 and a fee of $400 per Board meeting attended.
Directors serving on the Audit Committee of the Fund and other investment
companies in Franklin Templeton Investments receive a flat fee of $2,000 per
Audit Committee meeting attended, a portion of which is allocated to the Fund.
Members of a committee are not compensated for any committee meeting held on
the day of a Board meeting.
During the fiscal year ended December 31, 2001, there were five meetings of the
Board, three meetings of the Audit Committee, and three meetings of the
Nominating and Compensation Committee. Each Director then in office attended at
least 75% of the aggregate number of meetings of the Board and of the
committee(s) on which he or she participated.
Certain Directors and officers of the Fund are shareholders of Resources and
may receive indirect remuneration due to their participation in management fees
and other fees received by the Investment Manager and its affiliates from
Franklin Templeton funds. The Investment Manager or its affiliates pay the
salaries and expenses of the officers. No pension or retirement benefits are
accrued as part of Fund expenses.
Aggregate Compensation Total Compensation
Name of Director from the Fund* from Franklin Templeton funds**
---------------- ---------------------- -------------------------------
Harris J. Ashton $4,000 $353,221
Nicholas F. Brady $4,000 134,500
Frank J. Crothers $4,077 92,000
S. Joseph Fortunato $4,000 352,380
Andrew H. Hines, Jr. $4,065 203,500
Edith E. Holiday $4,000 254,670
Betty P. Krahmer $4,000 134,500
Gordon S. Macklin $4,000 353,221
Fred R. Millsaps $4,065 201,500
Constantine D. Tseretopoulos $4,119 94,500
-------------------------
* Compensation received for the fiscal year ended December 31, 2001.
** For the calendar year ended December 31, 2001.
The table above indicates the total fees paid to Directors by the Fund
individually, and by all of the Franklin Templeton funds. These Directors also
serve as directors or trustees of other investment companies that are part of
Franklin Templeton Investments, many of which hold meetings at different dates
and times. The Directors and the Fund's management believe that having the same
individuals serving on the boards of many of the Franklin Templeton funds
enhances the ability of each fund to obtain, at a relatively modest cost to
each separate fund, the services of high caliber, experienced and knowledgeable
Independent Directors who can more effectively oversee the management of the
funds.
8
Board members historically have followed a policy of having substantial
investments in one or more of the Franklin Templeton funds, as is consistent
with their individual financial goals. In February 1998, this policy was
formalized through adoption of a requirement that each board member invest
one-third of the fees received for serving as a director or trustee of a
Templeton fund in shares of one or more Templeton funds and one-third of the
fees received for serving as a director or trustee of a Franklin fund in shares
of one or more Franklin funds, until the value of such investments equals or
exceeds five times the annual fees paid to such board member. Investments in
the name of family members or entities controlled by a board member constitute
fund holdings of such board member for purposes of this policy, and a three
year phase-in period applies to such investment requirements for newly elected
board members. In implementing such policy, a board member's fund holdings
existing on February 27, 1998, were valued as of such date with subsequent
investments valued at cost.
Who are the Executive Officers of the Fund?
Officers of the Fund are appointed by the Directors and serve at the pleasure
of the Board. Listed below for each Executive Officer are their name, age and
address, as well as their position and length of service with the Fund, and
principal occupation during the past five years. In addition to their service
on the Board, Charles B. Johnson serves as Chairman of the Board and Vice
President to the Fund, and Martin L. Flanagan serves as Vice President to the
Fund. Please refer to the table "Interested Directors serving until 2004 Annual
Meeting of Shareholders" for information regarding Messrs. Johnson and Flanagan.
Name, Age and Address Position Length of Time Served
---------------------------------------- ---------------------------- ---------------------------------------
Mark Mobius (65)........................ President Since 1994
Two Exchange Square
39th Floor
Suite 3905-08
Hong Kong
Principal Occupation During Past 5 Years:
Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management
Ltd.; Executive Vice President and Director, Templeton Global Advisors Limited; officer of eight of the
investment companies in Franklin Templeton Investments; officer and/or director as the case may be of some of
the subsidiaries of Franklin Resources, Inc.; and formerly, President, International Investment Trust Company
Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong
(1983-1986).
---------------------------------------- ---------------------------- ---------------------------------------
9
Name, Age and Address Position Length of Time Served
---------------------------------------------- -------------------------------- -------------------------------------
Rupert H. Johnson, Jr. (61)................... Vice President Since 1996
One Franklin Parkway
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and
Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment
Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or
trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc. and of 51 of the
investment companies in Franklin Templeton Investments.
--------------------------------------------------------------------------------
Harmon E. Burns (56).......................... Vice President Since 1996
One Franklin Parkway
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and
Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director,
Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of most of
the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton
Investments.
--------------------------------------------------------------------------------
Charles E. Johnson (45) Vice President Since 1996
One Franklin Parkway
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
President, Member - Office of the President and Director, Franklin Resources, Inc.; Senior Vice President,
Franklin Templeton Distributors, Inc.; President and Director, Templeton Worldwide, Inc. and Franklin
Advisers, Inc.; Chairman of the Board, President and Director, Franklin Investment Advisory Services, Inc.;
officer and/or director of some of the other subsidiaries of Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 34 of the investment companies in Franklin Templeton Investments.
--------------------------------------------------------------------------------
Jeffrey A. Everett (38) Vice President Since 2001
P.O. Box N-7759
Lyford Cay, Nassau
Bahamas
Principal Occupation During Past 5 Years:
President and Director, Templeton Global Advisors Limited; officer of 18 of the investment companies in
Franklin Templeton Investments; and formerly, Investment Officer, First Pennsylvania Investment Research
(until 1989).
--------------------------------------------------------------------------------
John R. Kay (61) Vice President Since 1994
500 East Broward Blvd.
Suite 1200
Fort Lauderdale, FL
33394-3091
Principal Occupation During Past 5 Years:
Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.;
Senior Vice President, Franklin Templeton Services, LLC; officer of 23 of the investment companies in Franklin
Templeton Investments; and formerly, Vice President and Controller, Keystone Group, Inc.
---------------------------------------------- -------------------------------- -------------------------------------
10
Name, Age and Address Position Length of Time Served
-------------------------------------------------------------------------------------------------------------------------------
Murray L. Simpson (64) Vice President and Assistant Secretary Since 2000
One Franklin Parkway
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director of some of the
subsidiaries of Franklin Resources, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments;
and formerly, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited
(until 2000); and Director, Templeton Asset Management Ltd. (until 1999).
--------------------------------------------------------------------------------------------------------------------------------
Barbara J. Green (54) Vice President and Secretary Vice President since 2000 and
One Franklin Parkway Secretary since 1996
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
Vice President and Deputy General Counsel, Franklin Resources, Inc.; and Senior Vice President, Templeton Worldwide,
Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; and formerly, Deputy Director,
Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman,
Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells
(until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979).
--------------------------------------------------------------------------------------------------------------------------------
David P. Goss (54) Vice President and Assistant Secretary Since 2000
One Franklin Parkway
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
Associate General Counsel, Franklin Resources, Inc.; President, Chief Executive Officer and Director, Property
Resources, Inc. and Franklin Properties, Inc.; officer and/or director of some of the other subsidiaries of Franklin
Resources, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; and formerly, President,
Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust
(until 2000).
--------------------------------------------------------------------------------------------------------------------------------
Bruce S. Rosenberg (40) Treasurer Since 2000
500 East Broward Blvd.
Suite 1200
Fort Lauderdale, FL
33394-3091
Principal Occupation During Past 5 Years:
Vice President, Franklin Templeton Services, LLC; and officer of 19 of the investment companies in Franklin Templeton
Investments.
--------------------------------------------------------------------------------------------------------------------------------
PROPOSAL 2: TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION THAT PROVIDES
FOR THE REORGANIZATION OF THE FUND FROM A MARYLAND CORPORATION
TO A DELAWARE BUSINESS TRUST
The Directors unanimously recommend that you approve an Agreement and Plan of
Reorganization (the "DBT Plan"), substantially in the form attached to this
Proxy Statement as Exhibit A, that would change the state and form of
organization of the Fund. This proposed change calls for the reorganization of
the Fund from a Maryland corporation into a newly formed Delaware business
trust.
11
This proposed reorganization will be referred to throughout this Proxy
Statement as the "DBT Reorganization." To implement the DBT Reorganization, the
Directors have approved the DBT Plan, which contemplates the continuation of
the current business of the Fund in the form of a new Delaware business trust
named "Templeton Dragon Fund" (the "Trust").
What will the DBT Reorganization mean for the Fund and its shareholders?
If the DBT Plan is approved by shareholders and the DBT Reorganization is
implemented, the Trust would have the same investment objective, policies and
restrictions as the Fund (including, if approved by shareholders at the
Meeting, any amended or eliminated fundamental investment restrictions
described in Proposals 3 and 4 in this Proxy Statement). The Board, including
any persons elected under Proposal 1, and officers of the Trust would be the
same as those of the Fund, and would operate the Trust in essentially the same
manner as they previously operated the Fund. Thus, on the date the DBT
Reorganization is effected, you would hold an interest in the Trust that is
equivalent to your then interest in the Fund. For all practical purposes, a
shareholder's investment in the Fund would not change.
Why are the Directors recommending approval of the DBT Plan and the DBT
Reorganization?
The Directors have determined that investment companies formed as Delaware
business trusts have certain advantages over investment companies organized as
Maryland corporations. Under Delaware law, investment companies are able to
simplify their operations by reducing administrative burdens.
For example, Delaware law allows greater flexibility in drafting and amending
an investment company's governing documents, which can result in greater
efficiencies of operation and savings for an investment company and its
shareholders. Delaware law also provides favorable state tax treatment. Most
significantly, an investment company formed as a Delaware business trust,
unlike one formed as a Maryland corporation, need not pay an organization and
capitalization tax on the aggregate par value of shares it issues to
shareholders. Furthermore, there is a well-established body of legal precedent
in the area of corporate law that may be relevant in deciding issues pertaining
to the Trust. This could benefit the Trust and its shareholders by, for
example, making litigation involving the interpretation of provisions in the
Trust's governing documents less likely or, if litigation should be initiated,
less burdensome or expensive. Accordingly, the Directors believe that it is in
the best interests of the shareholders to approve the DBT Plan.
How do the Maryland corporate law, and the Fund's governing documents, compare
to the Delaware business trust law, and the Trust's governing documents?
Reorganizing the Fund from a Maryland corporation to a Delaware business trust
is expected to provide many benefits to the Fund and its shareholders. As a
Delaware business trust formed under the Delaware business trust law, with its
operations governed by a Declaration of Trust and By-Laws (that streamline many
of the provisions in the Fund's Articles of Incorporation and By-Laws), the
Trust
12
should lead to enhanced flexibility in management and administration as
compared to its current operation as a Maryland corporation. It should be able
to adapt more quickly and cost effectively to new developments in the fund
industry and the financial markets. Moreover, to the extent provisions in the
Trust's Declaration of Trust and By-Laws are addressed by rules and principles
established under Delaware corporation law and the laws governing other
Delaware business entities (such as limited partnerships and limited liability
companies), the Delaware courts may look to such other laws to help interpret
provisions of the Trust's Declaration of Trust and By-Laws. Applying this body
of law to the operation of the Trust should prove beneficial because these laws
are extensively developed and business-oriented. In addition, Delaware's
Chancery Court is dedicated to business law matters, which means that the
judges tend to be more specialized and better versed in the nuances of the law
that will be applied to the Trust. These legal advantages make more certain the
resolution of legal controversies and help to reduce legal costs resulting from
uncertainty in the law.
A comparison of the Delaware business trust law and the Maryland General
Corporation law, and a comparison of the relevant provisions of the governing
documents of the Trust and the Fund, are included in Exhibit B to this Proxy
Statement, which is entitled, "A Comparison of Governing Documents and State
Law." In this connection, we note that the By-Laws which will govern the
operation of the Trust if this Proposal 2 is approved by shareholders and the
Reorganization is completed, contain a provision which requires that notice be
given to the Trust by a shareholder in advance of a shareholder meeting to
enable a shareholder to present a proposal at any such meeting. Failure to
satisfy the requirements of this advance notice provision will mean that a
shareholder may not be able to present a proposal at a meeting. The details of
that new advance notice provision are included in Exhibit B and its operation
is described under "Further Information About Voting and the
Meeting--Shareholder Proposals" below.
What are the consequences and procedures of the DBT Reorganization?
As noted above, upon completion of the DBT Reorganization, the Trust will
continue the business of the Fund with the same investment objective, policies
and investment restrictions as exist on the date of the DBT Reorganization, and
will hold the same portfolio of securities then held by the Fund. The Trust
will operate under substantially identical overall management, investment
management, and administrative arrangements as those of the Fund.
The Trust was formed solely for the purpose of becoming the successor
organization to, and carrying on the business of, the Fund. As the successor to
the Fund's operations, the Trust will adopt the Fund's notification of
registration under the 1940 Act. To accomplish the DBT Reorganization, the DBT
Plan provides that the Fund will transfer all of its portfolio securities and
any other assets, subject to its liabilities, to the Trust. In exchange for
these assets and liabilities, the Trust will issue shares of beneficial
interest in the Trust to the Fund, which, in turn, will distribute those shares
pro rata to you. Through this procedure, you will receive exactly the same
number and dollar amount of shares of the Trust as shares of the Fund ("Fund
Shares") owned by you immediately prior to the effectiveness of
13
the DBT Reorganization, and the net asset value of each share of the Trust will
be the same as that of the Fund. In addition, you will retain the right to any
declared but undistributed dividends or other distributions payable on Fund
Shares that you may have had on the effective date of the DBT Reorganization.
As soon as practicable after the effective date of the DBT Reorganization, the
Fund will be dissolved and cease its corporate existence.
The Directors may terminate the DBT Plan and abandon the DBT Reorganization at
any time prior to the effective date of the DBT Reorganization if they
determine that such actions are in the best interests of the Fund's
shareholders. If the DBT Plan is not approved by shareholders or the Directors
abandon the DBT Reorganization, the Fund will continue to operate as a
corporation under the laws of the State of Maryland.
What effect will the DBT Reorganization have on the current investment
management agreement?
In connection with the implementation of the DBT Reorganization, the Trust will
enter into an investment management agreement with Templeton Asset Management
Ltd. - Hong Kong branch, the Trust's investment manager (the "Investment
Manager"). This investment management agreement will be substantially identical
to the current investment management agreement between the Investment Manager
and the Fund. Thus, it is anticipated that, other than a change in contracting
party and the date of the agreement, there will be no material change in the
essential terms of the investment management agreement because of the DBT
Reorganization.
What effect will the DBT Reorganization have on the current shareholder
servicing agreements?
The Trust will enter into an agreement for administration services with
Franklin Templeton Services, LLC ("FT Services") that is substantially
identical to the Fund Administration Agreement currently in place between the
Fund and FT Services. The Fund will assign to the Trust the Fund's (i) service
and transfer agency agreements with Mellon Investor Services, LLC (which
provide for certain financial, administrative, transfer agency and fund
accounting services); and (ii) shareholder servicing and administrative
services agreement with FT Services and Nomura Asset Management U.S.A.
(formerly, Nomura Capital Management, Inc.). Consequently, shareholders of the
Trust should receive the same quality of services they have received as
shareholders of the Fund.
What is the effect of shareholder approval of the DBT Plan?
Under the 1940 Act, the shareholders of an investment company are entitled to
vote on the election of directors or trustees and the initial approval of the
investment management agreement for the investment company. Thus, if the DBT
Plan is approved, shareholders of the Trust would need to elect Trustees/1/ and
approve an investment management agreement or the Trust would not be in
compliance with the 1940 Act. For investment companies that have already
commenced operations and
-------------------------
/1/ The members of the board of a Delaware business trust are referred to as
Trustees.
14
have public shareholders, these matters typically must be submitted to
shareholders for their consideration at a meeting specially called for that
purpose. In the case of a reorganization, such as that contemplated by this
Proposal 2, a meeting could not be called until after the completion of the
transaction, because only then would there exist public shareholders of the
Trust who could vote. Such a procedure would be both impractical and expensive.
Therefore, in accordance with standard practice and announced positions of the
staff of the U.S. Securities and Exchange Commission ("SEC"), the Directors
have determined that it is in the best interests of the shareholders to avoid
the considerable expense of a shareholder meeting to obtain these approvals
following completion of the DBT Reorganization. Thus, the Directors have
determined that shareholder approval of the DBT Plan substantially in the form
contained in Exhibit A would, for purposes of the 1940 Act, constitute
shareholder approval of: (1) the election, as Trustees of the Trust, of the
Directors of the Fund who are in office at the time of the DBT Reorganization,
including those Directors elected at this Meeting pursuant to Proposal 1; and
(2) the new investment management agreement between the Trust and the
Investment Manager, which is substantially identical to the investment
management agreement currently in effect between the Fund and the Investment
Manager. Mechanically, this will be accomplished, prior to the effectiveness of
the DBT Reorganization, by issuing a single share of beneficial interest in the
Trust to the Fund, and having the Fund vote on these matters as sole
shareholder of the Trust.
In summary, to implement the special voting procedures described above, prior
to the completion of the DBT Reorganization, the officers will cause the Fund,
which will have the status of initial sole shareholder of the Trust, to vote
its share of the Trust FOR the election of the Trustees of the
Trust and approval of the investment management agreement as specified above.
This action will enable the Trust to satisfy the requirements of the 1940 Act
without involving the time and expense of a shareholder meeting. If approved by
shareholders of the Fund and not abandoned by the Directors, the DBT
Reorganization will be completed as soon as reasonably practicable after the
Meeting.
What is the capitalization and structure of the Trust?
The Trust was formed as a business trust on February 28, 2002 pursuant to
Delaware law. The Trust has authorized an unlimited number of shares of
beneficial interest without par value. As of the effective time of the DBT
Reorganization, outstanding shares of the Trust will have the same dividend
rights as those of the Fund immediately prior to the effective time of the DBT
Reorganization and will be fully paid, nonassessable, freely transferable, and
have no preemptive or subscription rights. Shares of the Trust and the Fund
have the same voting and liquidation rights and have one vote per full share.
Both the Trust and Fund provide for noncumulative voting in the election of
their Trustees/Directors and provide for a classified board consisting of three
classes of Trustees/Directors, with staggered terms. Each class of
Trustees/Directors remains in office for three years and until their successors
are elected and qualify with the term of office of one class expiring each
year. The Trust also has the same fiscal year as the Fund.
15
Are there any tax consequences for shareholders?
The DBT Reorganization is designed to be tax-free for federal income tax
purposes so that you will not experience a taxable gain or loss when the DBT
Reorganization is completed. The basis and holding period of your shares in the
Trust will be the same as the basis and holding period of your shares in the
Fund. Consummation of the DBT Reorganization is subject to receipt of a legal
opinion from the law firm of Stradley, Ronon, Stevens & Young, LLP that, under
the Internal Revenue Code of 1986, as amended, the exchange of assets of the
Fund for the shares of the Trust, the transfer of such shares to the holders of
Fund Shares, and the liquidation and dissolution of the Fund pursuant to the
DBT Plan, will not give rise to the recognition of a gain or loss for federal
income tax purposes to the Fund, the Trust, or shareholders of either the Fund
or the Trust.
What if I choose to sell my shares at any time?
You may continue to trade your Fund Shares on the NYSE or Osaka Securities
Exchange ("OSE") until the close of trading on the business day before the
effective date of the DBT Reorganization. The shares of the Trust will be
listed on the NYSE and the OSE just as Fund Shares historically have been
listed. Consequently, upon the effectiveness of the DBT Reorganization you may
trade, on the NYSE or the OSE, the shares of the Trust you receive in the DBT
Reorganization. The value of your shares will not be affected by the DBT
Reorganization except to the extent that market forces effect the value of the
shares, as currently occurs.
What is the effect of my voting "FOR" the DBT Plan?
By voting "FOR" the DBT Plan, you will be agreeing to become a shareholder of
an investment company that has been formed as a Delaware business trust, with
the Trustees, investment management, and other service arrangements that are
substantially identical to those in place for the Fund.
THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL 2
16
INTRODUCTION TO PROPOSALS 3 AND 4
Why is the Board recommending the amendment or elimination of certain of the
Fund's fundamental investment restrictions?
The Fund is subject to certain "fundamental" investment restrictions that
govern the Fund's investment activities. Under the 1940 Act, "fundamental"
investment restrictions may be changed or eliminated only if shareholders
approve such action. The Board is recommending that shareholders approve the
amendment or elimination of certain of the Fund's fundamental investment
restrictions principally because such fundamental investment restrictions are
more restrictive than is required under the federal securities laws and their
amendment or elimination would provide the Fund with greater investment
flexibility to meet its investment objective. The proposed restrictions not
only satisfy current federal regulatory requirements, but generally are
formulated to provide the Fund with the flexibility to respond to future legal,
regulatory, market or technical changes. The proposed changes would not affect
the Fund's investment objective.
After the Fund was organized as a Maryland corporation in 1994, certain legal
and regulatory requirements applicable to investment companies changed. For
example, certain restrictions imposed by state laws and regulations were
preempted by the National Securities Markets Improvement Act of 1996 ("NSMIA")
and, therefore, are no longer applicable to investment companies. As a result,
the Fund currently is subject to certain fundamental investment restrictions
that are either more restrictive than required under current law or which are
no longer required at all. For this reason, the Board is recommending that the
Fund's shareholders approve the amendment or elimination of certain of the
Fund's current fundamental investment restrictions in order to provide the Fund
with a more modernized list of restrictions that will enable the Fund to
operate more efficiently, and to more easily monitor compliance with its
investment restrictions.
The Board does not anticipate that the proposed amendments to, or the
elimination of, certain of the Fund's restrictions, individually or in the
aggregate, will materially affect the way the Fund is managed or will result in
a material change in the level of investment risk associated with an investment
in the Fund. Should the Board determine at a later date that a material
modification to an investment policy that would be permitted under the changed
restrictions is appropriate for the Fund, notice of any such change would be
provided to shareholders. However, the Board believes that the proposed changes
are in the best interests of the Fund and its shareholders as they will
modernize the subject investment restrictions and should enhance the Fund's
ability to achieve its investment objective.
17
PROPOSAL 3: TO APPROVE AMENDMENTS TO CERTAIN OF THE FUND'S FUNDAMENTAL
INVESTMENT RESTRICTIONS (this Proposal involves separate votes on
Sub-Proposals 3a - 3c)
The Fund's current investment restrictions that are the subject of this
Proposal 3, together with the recommended changes to those restrictions, are
detailed in Exhibit C, which is entitled, "Fundamental Investment Restrictions
Proposed to be Amended or Eliminated." Shareholders are requested to vote on
each Sub-Proposal in Proposal 3 separately.
Sub-Proposal 3a: To amend the Fund's fundamental investment restriction
regarding industry concentration.
Under the 1940 Act, an investment company's policy regarding concentration of
investments in the securities of companies in any particular industry or group
of industries must be fundamental. The staff of the SEC has clarified that an
investment company "concentrates" its investments if it invests more than 25%
of its "net" assets (exclusive of certain items such as cash, U.S. government
securities, securities of other investment companies, and tax-exempt
securities) in any particular industry or group of industries. An investment
company is not permitted to concentrate its investments in any particular
industry or group of industries unless it discloses its intention to do so.
What effect will amending the current restriction regarding industry
concentration have on the Fund?
The proposed concentration policy set forth in Exhibit C to this Proxy
Statement is substantially the same as the Fund's current policy, except that
it (i) modifies the Fund's asset measure (from "total assets" to "net assets")
by which concentration is assessed; (ii) slightly increases (from "25% or more"
to "more than 25%") the numerical limit on permissible investments; and (iii)
expressly references, in a manner consistent with current SEC staff policy, the
categories of investments that are excepted from coverage of the restriction.
The proposed restriction reflects a more modernized approach to industry
concentration, and provides the Fund with investment flexibility that
ultimately is expected to help the Fund respond to future legal, regulatory,
market or technical changes.
The proposed restriction would expressly exempt from the 25% limitation, those
securities issued or guaranteed by the U.S. government or any of its agencies
or instrumentalities, and the securities of other investment companies,
consistent with SEC staff policy. The proposed restriction thus clarifies the
types of U.S. government securities in which the Fund may invest. In addition,
although the Fund has always been permitted to invest in other investment
companies in accordance with the terms of its Prospectus, the proposed
restriction now makes explicit that such investments are exempted from the
Fund's concentration policy. Even with this modified restriction, however, the
Fund would continue to remain subject to the limitations on investments in
other investment companies as set forth in the 1940 Act and its Prospectus. In
brief, absent special relief from the SEC, the 1940 Act would prohibit the Fund
from investing more than 5% of its total assets in any one investment company
and more than 10% of its total assets in other investment companies overall.
18
The Fund's restriction on industry concentration is not required to specify, as
it does currently, that a foreign government is deemed an "industry." However,
that view represents a long-standing SEC staff position, and would continue to
limit the Fund's ability to invest in securities issued by foreign governments
even without an express reference to that policy in the restriction.
The adoption of the proposed restriction is not expected to change materially
the way in which the Fund currently is managed. The Fund does not, under normal
market conditions, invest a significant proportion of its assets in U.S.
government securities or those issued by its agencies or instrumentalities.
Moreover, without SEC relief, the Fund would still be limited in its
investments in other investment companies and, without further shareholder
approval, could not invest more than 25% of its net assets in securities issued
by a foreign government.
Sub-Proposal 3b: To amend the Fund's fundamental investment restriction
regarding borrowing and issuing senior securities.
The 1940 Act imposes certain limits on investment companies with respect to
borrowing money or issuing senior securities, and a fund's policies concerning
the borrowing of money and the issuance of senior securities must be
fundamental. A "senior security" is, in essence, an obligation of the Fund with
respect to its earnings or assets that takes precedence over the claims of the
Fund's shareholders with respect to the same earnings or assets. The 1940 Act's
limitations are designed to protect shareholders and their investments by
restricting a fund's ability to subject its assets to the claims of creditors
or senior security holders who would be entitled to dividends or rights on
liquidation of the Fund that would have to be discharged before the claims of
shareholders. Consistent with that policy, the 1940 Act generally limits the
ability of a closed-end investment company, like the Fund, from leveraging its
assets by borrowing money or through the issuance of senior securities.
In summary, under the 1940 Act, a closed-end fund may leverage its assets by
borrowing or through the issuance of debt instruments or preferred stock. In
the case of a senior security that is in the form of a borrowing or the
issuance of debt, the Fund, among other requirements, must have assets equal to
at least 300% of the amount borrowed or the amount of the debt issue
immediately after the borrowing or issuance of debt. In determining whether it
meets the 300% asset coverage requirement, the Fund is permitted to include as
an asset the amount borrowed or the amount of the debt instrument. In the case
of a senior security that is in the form of an issue of preferred stock, among
other requirements, the asset coverage requirement is 200% of the amount of the
preferred stock issued. As in the case of a borrowing or debt issue, the amount
of the preferred stock issue is included as an asset for purposes of the asset
coverage requirement. So long as the borrowing continues or the debt issue or
preferred stock is outstanding, a fund may not pay dividends or make
distributions or repurchase its common stock if that action would reduce asset
coverage below the required amount.
In addition, in accordance with SEC staff interpretations under the 1940 Act,
closed-end funds may engage in a number of types of transactions that might be
considered to raise "senior security" or "leveraging" concerns, if the funds do
not meet certain collateral requirements designated by the SEC
19
staff. These collateral requirements are designed to protect shareholders by
ensuring that when an obligation from one of these "leverage-type transactions"
comes due, liquid assets of the fund sufficient to discharge the obligation are
readily available in a segregated account of the fund. The collateralization
requirement limits a fund's ability to engage in those types of transactions
and thereby limits a fund's exposure to risk associated with them. In very
general terms, an investment company is considered to be leveraging when it
enters into securities transactions without being required to make payment
until a later point in time. The leverage-type transactions identified by the
SEC staff as presenting senior security concerns include, among others, short
sales, certain options and futures transactions, and reverse repurchase
agreements. Among these, short sales are currently the subject of a fundamental
restriction that the Board is proposing to eliminate under Proposal 4 of this
Proxy Statement.
What effect will amending the current borrowing and senior securities
restriction have on the Fund?
The proposed borrowing and senior securities restriction set forth in Exhibit C
is intended to modernize the Fund's investment restriction, and to clarify that
the Fund may borrow money, issue senior securities or engage in the
"leverage-type transactions" noted above, in accordance with the limits
established under the 1940 Act, or any SEC order, rule, regulation or staff
interpretation thereof.
The proposed restriction is designed to reflect all current regulatory
requirements and is formulated to provide the Fund with enhanced flexibility to
respond to future legal, regulatory or market changes. This enhanced
flexibility would be achieved by eliminating certain operational limitations
set forth in the Fund's current fundamental restriction. That restriction
currently prohibits the Fund from borrowing money or issuing senior securities
except that (a) short-term credits necessary for settlement of securities
transactions are not considered borrowings or senior securities; (b) the Fund
may borrow no more than 5% of the value of the Fund's total assets, except for
emergency purposes; and (c) the Fund may borrow up to 33 1/3% of its total
assets in connection with a repurchase of its shares. Although the proposed
restriction does not specifically carve out these enumerated activities, the
Fund would continue to be permitted to engage in them, because these activities
are all permissible under the 1940 Act and interpretations of the SEC staff.
The proposed borrowing and senior securities restriction set forth in Exhibit C
would provide the Fund with greater borrowing and leveraging flexibility, and
would permit the Fund to engage in a broader range of the leverage-type
transactions. The Fund may therefore be subject to additional costs and risks
if it engages in practices that would be permissible under this modified policy.
For example, the Fund could borrow money or issue senior securities, such as
preferred stock, for investment purposes when the Investment Manager believes
that it is appropriate to expand the Fund's investments beyond its existing
holdings. Because borrowing or the issuance of senior securities will subject
the Fund to additional costs, the Fund would only borrow or issue senior
securities when the Investment Manager believes that the cost of carrying the
assets to be acquired through leverage would
20
be lower than the Fund's expected return on its longer-term portfolio
investments. Should this differential narrow, the Fund would realize less of a
positive return, with the additional risk that, during periods of adverse
market conditions, the market value of the Fund's entire portfolio holdings
(including those acquired through leverage) may decline far in excess of
incremental returns the Fund may have achieved in the interim. Indeed, any such
leveraging tends to magnify market exposure and can result in higher than
expected losses to the Fund.
Because the investment risk associated with investment assets purchased with
borrowed funds would be borne solely by the holders of the Fund's shares,
adverse movements in the price of the Fund's portfolio holdings would have a
more severe effect on the Fund's net asset value than if the Fund were not
leveraged. Leverage creates risks for shareholders in the Fund, including the
likelihood of greater volatility of the Fund's net asset value and the market
price of its shares, and the risk that fluctuations in interest rates on
borrowings or in the dividend rates on any preferred stock may affect the
return to shareholders. If the income from the securities purchased with
borrowed funds is not sufficient to cover the cost of leverage, the net income
of the Fund would be less than if leverage had not been used, and therefore the
amount available for distribution to shareholders as dividends will be reduced.
In such an event, the Fund may nevertheless determine to maintain its leveraged
position in order to avoid capital losses on securities purchased with the
leverage.
Also, if the asset coverage for senior securities or other borrowings of the
Fund declines below the limits specified in the 1940 Act, the Fund may be
required to sell a portion of its investments when it may not be advantageous
to do so. In the extreme, sales of investments required to meet asset coverage
tests imposed by the 1940 Act could also cause the Fund to lose its status as a
regulated investment company. In addition, if the Fund were unable to make
adequate distributions to shareholders because of asset coverage or other
restrictions, it could fail to qualify as a regulated investment company for
federal income tax purposes and, even if it did not fail to so qualify, it
could become liable for income and excise tax on the portion of its earnings
which are not distributed on a timely basis in accordance with applicable
provisions of the Internal Revenue Code of 1986, as amended.
The Fund's willingness to borrow money and issue new securities for investment
purposes, and the amount it will borrow, will depend on many factors, the most
important of which are investment outlook, market conditions and interest
rates. Successful use of a leveraging strategy depends on the Investment
Manager's ability to predict correctly interest rates and market movements, and
there is no assurance that a leveraging strategy will be successful during any
period in which it is employed.
Among the "leverage-type transactions" in which the Fund would be authorized to
engage are transactions involving futures, options thereon and similar
derivative instruments. These instruments could be used in an attempt to
protect Fund assets, implement a cash or tax management strategy or enhance
Fund returns. With derivatives, the Investment Manager often would be
attempting to predict whether an underlying investment will increase or
decrease in value at some future time.
Derivatives and similar instruments generally involve costs, may be volatile
and may involve a small investment relative to the risk assumed. Their
successful use will depend on the Investment Manager's
21
ability to predict market movements. Risks include delivery failure, default by
the other party and the inability to close out a position because the trading
market becomes illiquid. Therefore, these instruments will be utilized only if
the Investment Manager determines that such investments are advisable.
The above notwithstanding, the Board does not anticipate that the Fund would be
exposed to any additional risk if the current restriction is amended, because
the Fund has no present intention of changing its current investment practices
with respect to borrowing money or issuing senior securities. In addition, even
if the Fund were to engage in these leverage-type transactions, the SEC staff's
collateralization requirements and other applicable regulatory limitations
should help to mitigate the investment risks attendant to them.
Sub-Proposal 3c: To amend the Fund's fundamental investment restriction
regarding investments in commodities.
Under the 1940 Act, a fund's policy as recited in its registration statement
regarding investments in commodities must be fundamental. The most common types
of commodities are physical commodities such as wheat, cotton, rice and corn.
Under the federal securities and commodities laws, certain futures contracts
and options thereon are considered to be commodity interests. Financial futures
contracts such as those related to currencies, stock indices or interest rates,
also may be considered to be commodity interests. If the Fund buys a financial
futures contract, it obtains the right to receive (or, if the Fund sells the
contract, the Fund is obligated to pay) the cash difference between the
contract price for an underlying asset or index and the future market price, if
the future market price is higher. If the future market price is lower, the
Fund is obligated to pay (or, if the Fund sold the contract, the Fund is
entitled to receive) the amount of the decrease. Funds typically seek to invest
in such financial futures contracts and options related to such contracts for
hedging or investment purposes.
What effect will amending the commodities restriction have on the Fund?
The Fund's current fundamental restriction states that the Fund may not
purchase or sell futures contracts and options thereon "except that the Fund
may engage in hedging transactions as described in [the Fund's] Prospectus." As
described in the Prospectus, the Fund may hedge against various market risks
through, among other practices, entering into forward currency exchange
contracts and various financial, index and currency futures contracts and
options on such futures contracts, as well as purchasing or writing put or call
options on securities, indices and foreign currencies, in U.S. or foreign
markets, to the extent available and deemed appropriate by the Investment
Manager. The Fund also is authorized to hedge against interest rate
fluctuations by entering into interest rate futures contracts and options
thereon.
The proposed commodities restriction set forth in Exhibit C states that the
prohibition on purchases and sales covers commodities, but does not prevent the
Fund from engaging in transactions involving futures contracts and options
thereon or investing in securities that are secured by physical
22
commodities. This makes clear that the Fund has the flexibility, consistent
with federal securities and commodities laws, to engage in transactions
involving futures contracts and related options. The proposed restriction also
would expand the Fund's authority to make investments in such transactions and
related options for investment purposes as well as hedging purposes. The
proposed restriction does not otherwise limit the types of financial agreements
and instruments used in hedging transactions. Thus, the proposed restriction
will continue to enable the Fund to engage, consistent with its investment
objective, in hedging transactions as described in the Fund's Prospectus.
The terms of the modified restriction clarify that the Fund is permitted to
engage in transactions involving various financial agreements and instruments,
including forward foreign currency contracts, options on foreign currencies,
futures contracts and options on futures for hedging or investment purposes.
Among these are foreign currency exchange transactions which the Fund may
conduct either on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market, or through entering into forward contracts to
purchase or sell foreign currencies. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date,
which is individually negotiated and privately traded by currency traders and
their customers. Although forward contracts will be used primarily to protect
the Fund from adverse currency movements, they also involve the risk of loss in
the event that anticipated currency movements are not accurately predicted.
Other transactions include the purchasing and writing of put and call options
on foreign currencies for the primary purpose of protecting against declines in
the U.S. dollar value of foreign currency-denominated portfolio securities and
against increases in the U.S. dollar cost of such securities to be acquired. As
in the case of other kinds of options, however, the writing of an option on a
foreign currency constitutes only a partial hedge, up to the amount of the
premium received, and the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchanges rates, thereby incurring losses. The
purchase of an option on a foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, it may forfeit the entire amount of the premium
plus related transaction costs.
The Fund also may buy and sell financial futures contracts, index futures
contracts, foreign currency futures contracts and options on any of the
foregoing. A financial futures contract is an agreement between two parties to
buy or sell a specified debt security at a set price on a future date. An index
futures contract is an agreement to take or make delivery of an amount of cash
based on the difference between the value of the index at the beginning and at
the end of the contract period. A futures contract on a foreign currency is an
agreement to buy or sell a specified amount of a currency for a set price on a
future date. These instruments can present significant investment risk to the
Fund if the Investment Manager does not accurately predict the fluctuations in,
as the case may be, interest rates, currency values or the market to which the
financial instrument is tied.
Using these financial agreements and similar instruments for hedging, and
particularly for investment purposes, can involve substantial risks, and they
will be utilized only if the Investment Manager determines that such
investments are advisable. The adoption of this restriction is not expected to
23
affect the way the Fund is currently managed, as disclosed in the Fund's
Prospectus and, therefore, it is not currently anticipated that the proposed
restriction will expose the Fund to any additional material risk.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" SUB-PROPOSALS 3a - 3c
PROPOSAL 4: TO APPROVE THE ELIMINATION OF CERTAIN OF THE
FUND'S FUNDAMENTAL INVESTMENT RESTRICTIONS
Why is the Board recommending that certain fundamental investment restrictions
be eliminated, and what effect will their elimination have on the Fund?
Some of the Fund's fundamental investment restrictions were originally adopted
to comply with state law and regulation. Due to the passage of NSMIA, and
changes in SEC staff positions, these fundamental restrictions are either no
longer required by law or are no longer relevant to the operation of the Fund.
Since NSMIA eliminated the states' ability to adopt or substantively regulate
investment companies, the Fund is no longer legally required to adopt or
maintain investment restrictions relating to diversification, purchasing
securities on margin, short sales, or control over management. The Board has
determined that eliminating these four restrictions (referred to in this
Proposal 4 as the "Restrictions") is consistent with the federal securities
laws. By reducing the total number of investment restrictions that can be
changed only by a shareholder vote, the Board believes that the Fund will be
able to reduce the costs and delays associated with holding future shareholder
meetings for the purpose of revising fundamental policies that become outdated
or inappropriate. The Board believes that the elimination of the Restrictions
is in the best interest of the Fund's shareholders as it will provide the Fund
with increased flexibility to pursue its investment objective.
Which four (4) Restrictions are the Board recommending that the Fund eliminate?
The Fund currently is subject to four Restrictions that are no longer required
by law and were adopted primarily in response to regulatory, business or
industry conditions that no longer exist. Accordingly, the Investment Manager
has recommended, and the Board has determined, that the Restrictions be
eliminated. Elimination of the Restrictions would enable the Fund to be managed
in accordance with the current requirements of the 1940 Act, without being
constrained by additional and unnecessary limitations. The Directors believe
that the Investment Manager's ability to manage the Fund's assets in a changing
investment environment will be enhanced, and that investment management
opportunities will be increased, by these changes. The exact language of the
Restrictions has been included in Exhibit C, which is entitled "Fundamental
Investment Restrictions Proposed to be Amended or Eliminated."
Diversification of Investments. The Fund's diversification restriction, which
prohibits the Fund from investing, with certain exceptions, more than 25% of
its total assets in the voting or non-voting securities of a single issuer, is
currently combined with a restriction on acquiring more than 25% of the
24
voting securities of another issuer (the "control restriction") in a single
fundamental restriction. Hereafter, the control restriction will be separated
from the diversification restriction, the latter of which would be eliminated
if this Proposal 4 is approved by shareholders. No change is being proposed to
the control restriction.
Investment companies, like the Fund, generally diversify their investments
among many different securities. They are, however, free to choose the extent
to which they will diversify their investments, provided they comply with
certain minimum limits set forth in the 1940 Act and/or the Internal Revenue
Code of 1986, as amended ("Code"). Generally, in order to be diversified under
the 1940 Act, a fund may not invest more than 5% of its total assets in a
single issuer (except U.S. government securities, as defined in the 1940 Act),
or purchase more than 10% of the outstanding securities of a single issuer, but
these limits apply only to 75% of the fund's total assets. As a result, any
fund that is diversified under the 1940 Act may invest up to 25% of its assets
in a single security. If a fund elects to be "non-diversified" under the 1940
Act, it must still operate within the diversification requirements of the Code,
which are similar to the 1940 Act diversification requirements, but apply only
to 50% of a fund's assets, rather than 75%. As to the remaining 50% of fund
assets, the Code permits a fund to buy as few as two separate securities, each
representing 25% of the value of the fund.
The Fund's Prospectus states that the Fund is classified as a non-diversified
fund for purposes of the 1940 Act. Having elected to be a non-diversified fund,
the Fund is not obligated to adhere to the 1940 Act's limits on the proportion
of its assets that may be invested in the securities of a single issuer that
apply to funds that elect to be diversified. As a non-diversified fund, the
Fund could invest a greater proportion of its assets in the securities of a
smaller number of issuers, thereby subjecting the Fund to greater risk of loss
with respect to its portfolio securities than could a diversified fund.
Despite the above, and although not required to do so, the Fund currently has a
fundamental investment restriction limiting the Fund's ability to invest more
than 25% of the total value of its assets in the securities of any one issuer.
In addition, the Fund has adopted a non-fundamental policy - one that may be
changed by the Board without shareholder approval - under which the Fund may
not invest more than 10% of its total assets in the securities of any one
issuer. Because the Fund would remain subject to this non-fundamental policy,
the elimination of this Restriction is not expected to affect the day-to-day
management of the Fund.
Though the Fund would continue to be limited by its non-fundamental policy
regarding investments in the securities of a single issuer, that policy could
be changed by the Board in the future without shareholder approval. In the
absence of the current fundamental policy, the Board could therefore increase
the proportion of assets allocable to a single issuer or eliminate the
non-fundamental policy altogether. Even if the Board were to do so, however,
the Fund would continue to be limited to investing no more than 25% of its net
assets in a single issuer under the limits of its fundamental investment
restriction regarding industry concentration (as discussed previously in
Sub-Proposal 3a) because investment in any one issuer would be deemed to be
investment in a single industry. Moreover, the Fund still would have to satisfy
the requirements of the diversification limits prescribed
25
by the Code or lose its status as a regulated investment company. Were the Fund
to lose that status, the Fund itself would become subject to tax, thereby
materially reducing the returns provided to shareholders. To preserve its value
as a viable investment vehicle for shareholders, the Fund intends to continue
to comply with the provisions of the Code.
Purchase Securities on Margin. The Fund's Prospectus contains a fundamental
policy that prohibits the Fund from purchasing securities on margin. However,
that policy expressly permits the Fund to engage in when-issued and delayed
delivery transactions and makes provision for the completion of those
transactions. This Restriction was originally adopted at the Fund's inception
because state law, to which the Fund was then subject, required investment
companies to expressly recite in their prospectuses that purchasing securities
on margin was prohibited. After the passage of NSMIA, the Fund is no longer
required to include in its Prospectus a fundamental policy expressly
prohibiting these types of investment activities.
Under the 1940 Act, however, the purchase of securities on margin is
specifically prohibited. As a general matter, therefore, elimination of this
Restriction should not have any impact on the day-to-day management of the
Fund. Its elimination would: (i) not change the Fund's current inability to
purchase securities on margin; (ii) continue to permit the Fund to engage in
the activities currently excepted from the Restriction; and (iii) permit the
Fund, going forward, to easily and efficiently respond to any future changes in
regulations or future interpretations of the 1940 Act.
Short Sales. The Fund's Prospectus currently prohibits the Fund from selling
securities short or maintaining a short position. A short sale is the sale of a
security that is later purchased or borrowed from a broker or other institution
to complete the sale. A short sale is "against the box" if the Fund owns, or
has the right to obtain, securities identical to those sold short.
Following the passage of NSMIA, applicable law no longer requires funds to
declare a fundamental policy concerning short selling. Under the 1940 Act, the
Fund may engage in short sales of securities provided it establishes a
segregated account that contains the same security that is the subject of the
short sale (the above-described short sale "against the box"), or other liquid
assets in an amount sufficient to discharge the liability created by the short
sale. If the Fund did not establish a segregated account with adequate
collateral, the short sale might be deemed to create a senior security, which
would be prohibited under the 1940 Act.
Eliminating this Restriction on short sales would provide the Fund with the
flexibility to enter into short sales in the limited instances that are
interpreted by the SEC staff as not constituting the issuance of senior
securities under the federal securities laws. The Fund's use of short sales
could pose certain risks, including potential losses if the market price of the
security sold short increases between the date when the Fund enters into the
short position and the date when the Fund closes the short position. However,
because the Fund does not currently intend to enter into short sales or
maintain short positions, eliminating this Restriction is not expected to
affect the day-to-day management of the Fund.
26
Control over Management. The Fund's Prospectus currently prohibits the Fund
from investing in securities of issuers for the purpose of exercising control
over management of that issuer. If a fund acquires a large percentage of the
securities of a single issuer, it could be deemed to have invested in such
issuer for the purpose of exercising control of management. Former state law
required that funds expressly prohibit these practices to ensure that an
investment company would not be engaged in the business of managing another
company. Following the passage of NSMIA, applicable law no longer requires that
the Fund have such a restriction.
Eliminating this Restriction is not intended to have any impact on the
day-to-day management of the Fund because the Fund has no present intention of
investing in issuers for the purpose of exercising control over management.
What are the risks, if any, of eliminating the Restrictions?
The Board does not anticipate that eliminating the Restrictions will result in
additional material risk to the Fund. Although the Restrictions, as drafted,
are no longer legally required, the Fund's ability to engage in these practices
will continue to be subject to the limitations of the 1940 Act, any rule, SEC
staff interpretation, and any exemptive orders granted under the 1940 Act.
Moreover, the Fund does not currently intend to change its present investment
practices following the elimination of the Restrictions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" PROPOSAL 4
.. INFORMATION ABOUT THE FUND
The Investment Manager. The Investment Manager of the Fund is Templeton Asset
Management Ltd. - Hong Kong Branch, a Singapore company with a branch office at
Two Exchange Square, Hong Kong. Pursuant to an investment management agreement,
the Investment Manager manages the investment and reinvestment of Fund assets.
The Investment Manager is an indirect, wholly owned subsidiary of Resources.
The Administrator. The administrator of the Fund is Franklin Templeton
Services, LLC ("FT Services"), with offices at One Franklin Parkway, San Mateo,
California 94403-1906. FT Services is an indirect, wholly owned subsidiary of
Resources. Pursuant to an administration agreement, FT Services performs
certain administrative functions for the Fund. In addition, FT Services has
entered into a Japanese shareholder servicing and administration agreement with
Nomura Asset Management U.S.A. Inc. ("NAM-USA"), formerly Nomura Capital
Management, Inc., under which NAM-USA performs certain administrative functions
in Japan, subject to FT Services' supervision. NAM-USA is an affiliate of
Nomura International (Hong Kong) Limited, an initial underwriter of the Fund's
shares. NAM-USA has offices at 180 Maiden Lane, 26th Floor, New York, New York
10038.
The Transfer Agent. The transfer agent, registrar and dividend disbursement
agent for the Fund is Mellon Investor Services LLC, 85 Challenger Road,
Overpeck Centre, Ridgefield Park, New Jersey 07660.
27
The Custodian. The custodian for the Fund is JP Morgan Chase Bank, MetroTech
Center, Brooklyn, New York 11245.
Other Matters. The Fund's last audited financial statements and annual report,
dated December 31, 2001, are available free of charge. To obtain a copy, please
call 1-800/DIAL BEN(R) (1-800-342-5236) or forward a written request to
Franklin Templeton Investor Services, LLC, P.O. Box 33030, St. Petersburg,
Florida 33733-8030.
As of February 22, 2002, the Fund had 48,741,093 shares outstanding and total
net assets of $453,657,816. The Fund's shares are listed on the NYSE (Symbol:
TDF) and on the Osaka Securities Exchange (Symbol: 8683). From time to time,
the number of shares held in "street name" accounts of various securities
dealers for the benefit of their clients may exceed 5% of the total shares
outstanding. To the knowledge of the Fund's management, as of February 22,
2002, there were no other entities holding beneficially or of record more than
5% of the Fund's outstanding shares, except as shown in the following table:
Amount and Nature Percent of
Name and Address of Beneficial Owner Of Beneficial Ownership Outstanding Shares
------------------------------------ ----------------------- ------------------
President and Fellows of Harvard College 5,228,351/1/ 10.7%/2/
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, MA 02210
-------------------------
/1/ The nature of beneficial ownership is sole voting and dispositive power as
reported on Schedule 13G, filed with the U.S. Securities and Exchange
Commission on February 14, 2002.
/2/ As reported on Schedule 13G, dated and filed with the U.S. Securities and
Exchange Commission on February 14, 2002.
In addition, to the knowledge of the Fund's management, as of February 22,
2002, no nominee or Director of the Fund owned 1% or more of the outstanding
shares of the Fund, and the Directors and officers of the Fund owned, as a
group, less than 1% of the outstanding shares of the Fund.
.. AUDIT COMMITTEE
The Board has a standing Audit Committee consisting of Messrs. Millsaps
(Chairman), Crothers, Hines and Tseretopoulos, all of whom are Independent
Directors and also are considered to be "independent" as that term is defined
by the NYSE's listing standards. The Audit Committee reviews the maintenance of
the Fund's records and the safekeeping arrangements of the Fund's custodian,
reviews both the audit and non-audit work of the Fund's independent auditors,
and submits a recommendation to the Board as to the selection of independent
auditors.
Selection of Independent Auditors. Upon the recommendation of the Audit
Committee, the Board selected the firm of PricewaterhouseCoopers LLP ("PwC") as
independent auditors of the Fund for the current fiscal year. Representatives
of PwC are not expected to be present at the Meeting, but will have the
opportunity to make a statement if they wish, and will be available should any
matter arise requiring their presence.
Audit Fees. The aggregate fees paid to PwC in connection with the annual audit
of the Fund's financial statements for the fiscal year ended December 31, 2001
were $57,373.
28
Financial Information Systems Design and Implementation Fees. PwC did not
render any services with respect to financial information systems design and
implementation during the fiscal year ended December 31, 2001 to the Fund or
entities affiliated with the Fund that provide services to the Fund.
All Other Fees. The aggregate fees billed for all other non-audit services,
including fees for tax-related services, rendered by PwC to the Fund or
entities affiliated with the Fund that provide services to the Fund for the
fiscal year ended December 31, 2001 were $142,204. The Audit Committee of the
Fund has determined that provision of these non-audit services is compatible
with maintaining the independence of PwC.
Audit Committee Report. The Board has adopted and approved a formal written
charter for the Audit Committee, which sets forth the Audit Committee's
responsibilities. The charter was filed with the proxy statement for the Fund's
2001 Annual Meeting of Shareholders.
As required by the charter, the Audit Committee reviewed the Fund's audited
financial statements and met with management, as well as with PwC, the Fund's
independent auditors, to discuss the financial statements.
The Audit Committee received the written disclosures and the letter from PwC
required by Independence Standards Board No. 1. The Audit Committee also
received the report of PwC regarding the results of their audit. In connection
with its review of the financial statements and the auditors' report, the
members of the Audit Committee discussed with a representative of PwC, their
independence, as well as the following: the auditors' responsibilities in
accordance with generally accepted auditing standards; the auditors'
responsibilities for information prepared by management that accompanies the
Fund's audited financial statements and any procedures performed and the
results; the initial selection of, and whether there were any changes in,
significant accounting policies or their application; management's judgments
and accounting estimates; whether there were any significant audit adjustments;
whether there were any disagreements with management; whether there was any
consultation with other accountants; whether there were any major issues
discussed with management prior to the auditors' retention; whether the
auditors encountered any difficulties in dealing with management in performing
the audit; and the auditors' judgments about the quality of the company's
accounting principles.
Based on its discussions with management and the Fund's auditors, the Audit
Committee did not become aware of any material misstatements or omissions in
the financial statements. Accordingly, the Audit Committee recommended to the
Board that the audited financial statements be included in the Fund's Annual
Report to Shareholders for the fiscal year ended December 31, 2001 for filing
with the U.S. Securities and Exchange Commission.
AUDIT COMMITTEE
Fred R. Millsaps (Chairman)
Frank J. Crothers
Andrew H. Hines, Jr.
Constantine D. Tseretopoulos
29
.. FURTHER INFORMATION ABOUT VOTING AND THE MEETING
Solicitation of Proxies. Your vote is being solicited by the Board. The cost
of soliciting proxies, including the fees of a proxy soliciting agent, is borne
by the Fund. The Fund reimburses brokerage firms and others for their expenses
in forwarding proxy material to the beneficial owners and soliciting them to
execute proxies. The Fund has engaged Georgeson Shareholder Communications,
Inc. to solicit proxies from brokers, banks, other institutional holders and
individual shareholders at an anticipated cost of approximately $81,992,
including out-of-pocket expenses. The Fund expects that the solicitation would
be primarily by mail, but also may include telephone, telecopy or oral
solicitations. If the Fund does not receive your proxy by a certain time, you
may receive a telephone call from Georgeson Shareholder asking you to vote. The
Fund does not reimburse Directors and officers of the Fund or regular employees
and agents of the Investment Manager involved in the solicitation of proxies.
The Fund intends to pay all costs associated with the solicitation and the
Meeting.
Voting by Broker-Dealers. The Fund expects that, before the Meeting,
broker-dealer firms holding shares of the Fund in "street name" for their
customers, as well as the Japan Securities Clearing Corporation ("JSCC")
holding shares of the Fund for its beneficial owners, will request voting
instructions from their customers and beneficial owners. If these instructions
are not received by the date specified in the broker-dealer firms' or JSCC's
proxy solicitation materials, the Fund understands that NYSE Rules permit the
broker-dealers and JSCC to vote on Proposal 1 on behalf of their customers and
beneficial owners. Certain broker-dealers may exercise discretion over shares
held in their name for which no instructions are received by voting these
shares in the same proportion as they vote shares for which they received
instructions.
Quorum. A majority of the shares entitled to vote - present in person or
represented by proxy - constitutes a quorum at the Meeting. The shares over
which broker-dealers and JSCC have discretionary voting power, the shares that
represent "broker non-votes" (i.e., shares held by brokers or nominees as to
which (i) instructions have not been received from the beneficial owners or
persons entitled to vote and (ii) the broker or nominee does not have
discretionary voting power on a particular matter), and the shares whose
proxies reflect an abstention on any item will all be counted as shares present
and entitled to vote for purposes of determining whether the required quorum of
shares exists.
Methods of Tabulation. Proposal 1, the election of Directors, requires the
affirmative vote of the holders of a plurality of the Fund's shares present and
voting on the Proposal at the Meeting. Proposal 2, to approve an Agreement and
Plan of Reorganization that provides for the reorganization of the Fund from a
Maryland corporation to a Delaware business trust, requires the affirmative
vote of a majority of all the shares entitled to be cast on the matter (all of
the outstanding shares of the Fund are entitled to vote on Proposal 2).
Proposal 3, to approve amendments to certain of the Fund's fundamental
investment restrictions (includes three (3) Sub-Proposals), and Proposal 4, to
approve the elimination of certain of the Fund's fundamental investment
restrictions, require the affirmative vote of the lesser of: (i) more than 50%
of the outstanding voting securities of the Fund; or (ii) 67% or more of
30
the voting securities of the Fund present at the Meeting, if the holders of
more than 50% of the outstanding voting securities are present or represented
by proxy.
Abstentions and broker non-votes will be treated as votes present at the
Meeting, but will not be treated as votes cast. Abstentions and broker
non-votes, therefore, will have no effect on Proposal 1, which requires a
plurality of the Fund's shares present and voting, but will have the same
effect as a vote "against" Proposals 2, 3 and 4.
Adjournment. In the event that a quorum is not present at the Meeting or, in
the event that a quorum is present but sufficient votes have not been received
to approve a Proposal, the Meeting may be adjourned to permit further
solicitation of proxies. The presiding officer of the Fund for the Meeting, the
secretary of the Meeting, or the persons designated as proxies may adjourn the
Meeting to permit further solicitation of proxies or for other reasons
consistent with Maryland law and the Fund's Articles of Incorporation and
By-Laws. Unless otherwise instructed by a shareholder granting a proxy, the
persons designated as proxies may use their discretionary authority to vote as
instructed by management of the Fund on questions of adjournment.
Shareholder Proposals. The shareholder vote on Proposal 2, the matter
concerning the proposed reorganization of the Fund from a Maryland corporation
to a Delaware business trust, will dictate the requirements relating to
shareholder proposals for the 2003 Annual Meeting of Shareholders. This section
describes those requirements.
Submission of Shareholder Proposals to the Trust. If Proposal 2 is approved by
the shareholders, the Fund will be reorganized as the Trust, and the Trust's
By-Laws, in addition to the proxy rules under the federal securities laws, will
govern shareholder proposals. The Trust anticipates that the 2003 Annual
Meeting of Shareholders will be held on or before May 30, 2003. A shareholder
who wishes to submit a proposal for consideration for inclusion in the Trust's
proxy statement for the 2003 Annual Meeting of Shareholders must send such
written proposal to the Trust's offices, at 500 East Broward Boulevard, Ft.
Lauderdale, Florida 33394-3091, Attention: Secretary, no later than December 6,
2002 in order to be included in the Trust's proxy statement and proxy card
relating to that meeting and presented at the meeting.
A shareholder of the Trust who has not submitted a written proposal for
inclusion in the proxy statement by December 6, 2002 as set forth above, may
nonetheless present a proposal at the Trust's 2003 Annual Meeting of
Shareholders if such shareholder notifies the Trust, at the Trust's offices, of
such proposal not earlier than December 31, 2002 and not later than January 30,
2003. If a shareholder fails to give notice within these dates, then the matter
shall not be eligible for consideration at the shareholders' meeting. If,
notwithstanding the effect of the foregoing notice provisions, a shareholder
proposal is acted upon at the annual shareholders' meeting, the persons
designated as proxies for the meeting may exercise discretionary voting power
with respect to any shareholder proposal not received by the Trust at the
Trust's offices, by February 19, 2003. A shareholder proposal may be presented
at the 2003 Annual Meeting of Shareholders only if such proposal concerns a
matter that may be properly brought before the meeting under applicable federal
proxy rules and state law.
31
Submission of a proposal by a shareholder does not guarantee that the proposal
will be included in the Trust's proxy statement or presented at the meeting.
In addition to the requirements set forth above, a shareholder must comply with
the following:
I. A shareholder intending to present a proposal must (i) be entitled to vote
at the meeting; (ii) comply with the notice procedures set forth herein; and
(iii) have been a shareholder of record at the time the shareholder's notice
was received by the Trust.
II. Each notice regarding nominations for the election of Trustees shall set
forth (i) the name, age, business address and, if known, residence address of
each nominee proposed in such notice; (ii) the principal occupation or
employment of each such nominee; (iii) the number of outstanding shares of the
Trust which are beneficially owned by each such nominee; and (iv) all such
other information regarding each such nominee that would have been required to
be included in a proxy statement filed pursuant to the proxy rules of the SEC
had each such nominee been nominated by the Trustees of the Trust. In addition,
the shareholder making such nomination shall promptly provide any other
information reasonably requested by the Trust.
III. Each notice regarding business proposals shall set forth as to each
matter: (i) a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting; (ii)
the name and address, as they appear on the Trust's books, of the shareholder
proposing such business; (iii) the number of outstanding shares of the Trust
which are beneficially owned by the shareholder; (iv) any material interest of
the shareholder in such business; and (v) all such other information regarding
each such matter that would have been required to be included in a proxy
statement filed pursuant to the proxy rules of the SEC had each such matter
been proposed by the Trustees of the Trust.
Submission of Shareholder Proposals to the Fund. If Proposal 2 is not approved
by the shareholders, the Fund will remain a Maryland corporation, and the proxy
rules under the federal securities laws alone will continue to govern
shareholder proposals. The Fund anticipates that the 2003 Annual Meeting of
Shareholders will be held on or before May 30, 2003. A shareholder who wishes
to submit a proposal for consideration for inclusion in the Fund's proxy
statement for the 2003 Annual Meeting of Shareholders must send such written
proposal to the Fund's offices, at 500 East Broward Boulevard, Ft. Lauderdale,
Florida 33394-3091, Attention: Secretary, no later than December 6, 2002 in
order to be included in the Fund's proxy statement and proxy card relating to
that meeting and presented at the meeting.
A shareholder of the Fund who has not submitted a written proposal for
inclusion in the Fund's proxy statement by December 6, 2002, as described
above, may nonetheless present a proposal at the Fund's 2003 Annual Meeting of
Shareholders if such shareholder notifies the Fund, at the Fund's offices, of
such proposal by February 19, 2003. If a shareholder fails to give notice by
this date, then the persons designated as proxies for the 2003 Annual Meeting
of Shareholders may exercise discretionary voting power with respect to any
such proposal.
32
A shareholder proposal may be presented at the 2003 Annual Meeting of
Shareholders only if such proposal concerns a matter that may be properly
brought before the meeting under applicable federal proxy rules and state law.
Submission of a proposal by a shareholder does not guarantee that the proposal
will be included in the Fund's proxy statement or presented at the meeting.
By Order of the Board of Directors,
Barbara J. Green
Secretary
April 5, 2002
33
EXHIBIT A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN TEMPLETON DRAGON FUND, INC.
AND TEMPLETON DRAGON FUND
This Agreement and Plan of Reorganization ("Agreement") is made as of this
day of , 2002 by and between Templeton Dragon Fund, a Delaware
business trust ("Trust"), and Templeton Dragon Fund, Inc., a Maryland
corporation ("Fund") (the Trust and the Fund are hereinafter collectively
referred to as the "parties").
In consideration of the mutual promises contained herein, and intending to be
legally bound, the parties hereto agree as follows:
1. Plan of Reorganization.
(a) Upon satisfaction of the conditions precedent described in Section 3
hereof, the Fund will convey, transfer and deliver to the Trust at the closing
provided for in Section 2 (hereinafter referred to as the "Closing") all of the
Fund's then-existing assets. In consideration thereof, the Trust agrees at the
Closing (i) to assume and pay when due, to the extent that there exist Fund
obligations and liabilities on or after the Effective Date of the
Reorganization (as defined in Section 2 hereof), all of such obligations and
liabilities, whether absolute, accrued, contingent or otherwise, including all
fees and expenses in connection with the Agreement, which fees and expenses
shall, in turn, include, without limitation, costs of legal advice, accounting,
printing, mailing, proxy solicitation and transfer taxes, if any, such
obligations and liabilities of the Fund to become the obligations and
liabilities of the Trust; and (ii) to deliver, in accordance with paragraph (b)
of this Section 1, full and fractional shares of beneficial interest, without
par value, of the Trust, equal in number to the number of full and fractional
shares of common stock, $.01 par value per share, of the Fund outstanding
immediately prior to the Effective Date of the Reorganization. The
reorganization contemplated hereby is intended to qualify as a reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended ("Code"). The Fund shall distribute to its shareholders the shares of
the Trust in accordance with this Agreement and the resolutions of the Board of
Directors of the Fund authorizing the transactions contemplated by this
Agreement.
(b) In order to effect the delivery of shares described in Section 1(a)(ii)
hereof, the Trust will establish an open account for each shareholder of the
Fund and, on the Effective Date of the Reorganization, will credit to such
account full and fractional shares of beneficial interest, without par value,
of the Trust equal to the number of full and fractional shares such shareholder
holds in the Fund at the close of regular trading on the New York Stock
Exchange, Inc. ("NYSE") on the business day immediately preceding the Effective
Date of the Reorganization; fractional shares of the Trust will be carried to
the fourth decimal place. At the start of regular trading on the NYSE on the
Effective Date of the Reorganization, the net asset value per share of shares
of the Trust shall be deemed to be the same as
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the net asset value per share of the common stock of the Fund at the close of
regular trading on the NYSE on the business day immediately preceding the
Effective Date of the Reorganization. On the Effective Date of the
Reorganization, each certificate representing shares of the Fund will be deemed
to represent the same number of shares of the Trust. Simultaneously with the
crediting of the shares of the Trust to the shareholders of record of the Fund,
the shares of common stock of the Fund held by such shareholder shall be
cancelled. Each shareholder of the Fund will have the right to deliver their
share certificates of the Fund in exchange for share certificates of the Trust.
However, a shareholder need not deliver such certificates to the Trust unless
the shareholder so desires.
(c) As soon as practicable after the Effective Date of the Reorganization, the
Fund shall take all necessary steps under Maryland law to effect a complete
dissolution of the Fund.
(d) The expenses of entering into and carrying out the Agreement will be borne
by the Fund.
2. Closing and Effective Date of the Reorganization.
The Closing shall consist of (i) the conveyance, transfer and delivery of the
Fund's assets to the Trust, in exchange for the assumption and payment, when
due, by the Trust of the Fund's obligations and liabilities; and (ii) the
issuance and delivery of the Trust's shares in accordance with Section 1(b),
together with related acts necessary to consummate such transactions. The
Closing shall occur either on (a) the business day immediately following the
later of the receipt of all necessary regulatory approvals and the final
adjournment of the meeting of shareholders of the Fund at which this Agreement
is considered and approved or (b) such later date as the parties may mutually
agree ("Effective Date of the Reorganization").
3. Conditions Precedent.
The obligations of the Fund and the Trust to effectuate the transactions
hereunder shall be subject to the satisfaction of each of the following
conditions:
(a) Such approvals from the NYSE and Osaka Securities Exchange as may be
necessary to permit the parties to carry out the transactions contemplated by
this Agreement shall have been received;
(b) (i) An amendment to the Fund's Notification of Registration on Form N-8A
("Form N-8A") filed pursuant to Section 8(a) of the Investment Company Act of
1940, as amended ("1940 Act"), containing such amendments to the Form N-8A as
are determined by the trustees of the Trust (each, a "Trustee") to be necessary
and appropriate as a result of the transactions contemplated by this Agreement,
shall have been filed with the U.S. Securities and Exchange Commission
("Commission"); (ii) the Trust shall have expressly adopted as its own such
Form N-8A, as so amended, for purposes of the 1940 Act; (iii) a registration
statement on Form 8-A ("8-A Registration Statement") under the Securities
Exchange Act of 1934, as amended, shall have been filed with the Commission and
the NYSE by the Trust; (iv) a Technical Original Listing Application shall have
been filed with the NYSE by the Trust;
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and (v) the 8-A Registration Statement filed with the Commission relating to
the Trust shall have become effective, and no stop-order suspending the
effectiveness of the 8-A Registration Statement shall have been issued, and no
proceeding for that purpose shall have been initiated or threatened by the
Commission (other than any such stop-order, proceeding or threatened proceeding
which shall have been withdrawn or terminated);
(c) Each party shall have received an opinion of Stradley, Ronon, Stevens &
Young, LLP, Philadelphia, Pennsylvania, to the effect that, assuming the
reorganization contemplated hereby is carried out in accordance with this
Agreement, the laws of the States of Delaware and Maryland, and in accordance
with customary representations provided by the parties in a certificate(s)
delivered to Stradley, Ronon, Stevens & Young, LLP, the reorganization
contemplated by this Agreement qualifies as a "reorganization" under Section
368 of the Code, and thus will not give rise to the recognition of income, gain
or loss for federal income tax purposes to the Fund, the Trust or the
shareholders of the Fund or the Trust;
(d) The Fund shall have received an opinion of Stradley, Ronon, Stevens &
Young, LLP, dated the Effective Date of the Reorganization, addressed to and in
form and substance reasonably satisfactory to the Fund, to the effect that (i)
the Trust is duly formed as a business trust under the laws of the State of
Delaware; (ii) this Agreement and the transactions contemplated thereby and the
execution and delivery of this Agreement have been duly authorized and approved
by all requisite action of the Trust and this Agreement has been duly executed
and delivered by the Trust and is a legal, valid and binding agreement of the
Trust in accordance with its terms; and (iii) the shares of the Trust to be
issued in the reorganization have been duly authorized and, upon issuance
thereof in accordance with this Agreement, will have been validly issued and
fully paid and will be nonassessable by the Trust;
(e) The Trust shall have received the opinion of Stradley, Ronon, Stevens &
Young, LLP, dated the Effective Date of the Reorganization, addressed to and in
form and substance reasonably satisfactory to the Trust, to the effect that:
(iv) the Fund is duly organized and validly existing under the laws of the
State of Maryland; (v) the Fund is a closed-end investment company of the
management type registered under the 1940 Act; and (vi) this Agreement and the
transactions contemplated hereby and the execution and delivery of this
Agreement have been duly authorized and approved by all requisite corporate
action of the Fund and this Agreement has been duly executed and delivered by
the Fund and is a legal, valid and binding agreement of the Fund in accordance
with its terms;
(f) The shares of the Trust are eligible for offering to the public in those
states of the United States and jurisdictions in which the shares of the Fund
are currently eligible for offering to the public so as to permit the issuance
and delivery by the Trust of the shares contemplated by this Agreement to be
consummated;
(g) This Agreement and the transactions contemplated hereby shall have been
duly adopted and approved by the appropriate action of the board of directors
of the Fund (the "Board of Directors") and the shareholders of the Fund;
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(h) The shareholders of the Fund shall have voted to direct the Fund to vote,
and the Fund shall have voted, as sole shareholder of the Trust, to:
(1) Elect as Trustees of the Trust the following individuals: Nominees to
serve as Trustees until the 2005 Annual Meeting of Shareholders--Messrs.
Harris J. Ashton, Nicholas F. Brady, Frank J. Crothers, S. Joseph Fortunato
and Constantine D. Tseretopoulos; Nominees to serve as Trustees until the
2004 Annual Meeting of Shareholders--Messrs. Martin L. Flanagan, Andrew H.
Hines, Jr., and Charles B. Johnson and Ms. Edith E. Holiday; and Nominees
to serve as Trustees until the 2003 Annual Meeting of Shareholders--Messrs.
Gordon S. Macklin and Fred R. Millsaps and Ms. Betty P. Krahmer; and
(2) Approve an Investment Management Agreement between Templeton Asset
Management Ltd. ("TAML") and the Trust, which is substantially identical to
the then-current Investment Management Agreement between TAML and the Fund;
(i) The Trustees of the Trust shall have duly adopted and approved this
Agreement and the transactions contemplated hereby and shall have taken the
following actions at a meeting duly called for such purposes:
(1) Approval of the Investment Management Agreement described in paragraph
(h)(2) of this Section 3 hereof for the Trust;
(2) Approval of the assignment to the Trust of the Fund's Custody Agreement
dated August 30, 1994 (the "Custody Agreement"), with The Chase Manhattan
Bank, N.A. (now JP Morgan Chase Bank), including the Amendment to the
Custody Agreement, dated March 2, 1998, Amendment No. 2 to the Custody
Agreement, dated July 23, 1998, and Amendment No. 3 to the Custody
Agreement, dated May 1, 2001;
(3) Selection of PricewaterhouseCoopers LLP as the Trust's independent
auditors for the fiscal year ending December 31, 2002;
(4) Approval of an Administration Agreement between the Trust and Franklin
Templeton Services, LLC;
(5) Approval of the assignment to the Trust of the Service Agreement
between the Fund and Mellon Securities Trust Co., dated September 20, 1994,
the Fund's Successor Stock Transfer Agent Agreement dated February 2, 1995
with Chemical Mellon Shareholder Services (now Mellon Investor Services
LLC); and the Fund's Plan Agent Agreement with Mellon Securities Trust
Company, dated March 15, 1998;
(6) Approval of the assignment to the Trust of the Japanese Shareholder
Servicing and Administration Agreement, dated September 28, 1994 (the
"Nomura Agreement"), by and among the Fund, Templeton Global Investors,
Inc. ("TGI") and Nomura Capital Management, Inc., as amended by the First
Amendment to the Nomura Agreement, dated October 1, 1996 (replacing TGI
with Franklin Templeton Services, Inc. ("FTSI")) and further amended
effective January 1, 2001 by the assumption by Franklin Templeton Services,
LLC of the rights and liabilities of FTSI under the Nomura Agreement;
A-4
(7) Approval of the assignment of the Paying Agreement, dated September 30,
1994, by and among the Fund, Japan Securities Clearing Corporation ("JSCC")
and Mitsui Trust and Banking Company, Limited ("Mitsui"); the Service
Agreement, dated September 30, 1994 (the "Service Agreement"), by and among
the Fund, JSCC and Mitsui; and the Agreement of Commissions Concerning
Entrustment of Services, dated September 30, 1994, by and between the Fund
and Mitsui, pursuant to Article 12 of the Service Agreement; and
(8) Authorization of the issuance by the Trust, prior to the Effective Date
of the Reorganization, of one share of beneficial interest of the Trust to
the Fund in consideration for the payment of $1.00 for the purpose of
enabling the Fund to vote on the matters referred to in paragraph (h) of
this Section 3 hereof;
(9) Submission of the matters referred to in paragraph (h) of this Section
3 to the Fund as sole shareholder of the Trust; and
(10) Authorization of the issuance and delivery by the Trust of its shares
on the Effective Date of the Reorganization and the assumption by the Trust
of the obligations and liabilities of the Fund in exchange for the assets
of the Fund pursuant to the terms and provisions of this Agreement.
At any time prior to the Closing, any of the foregoing conditions may be waived
or amended, or any additional terms and conditions may be fixed, by the Board
of Directors of the Fund, if, in the judgment of such Board, such waiver,
amendment, term or condition will not affect in a materially adverse way the
benefits intended to be accorded the shareholders of the Fund under this
Agreement.
4. Dissolution of the Fund.
Promptly following the consummation of the distribution of the Trust shares to
holders of TDF common stock under the Agreement, the officers of TDF shall take
all steps necessary under Maryland law to dissolve its corporate status,
including publication of any necessary notices to creditors, receipt of any
necessary pre-dissolution clearances from the State of Maryland, and filing for
record with the State Department of Assessments and Taxation of Maryland of
Articles of Dissolution.
5. Termination.
The Board of Directors may terminate this Agreement and abandon the
reorganization contemplated hereby, notwithstanding approval thereof by the
shareholders of the Fund, at any time prior to the Effective Date of the
Reorganization if, in the judgment of such Board, the facts and circumstances
make proceeding with this Agreement inadvisable.
6. Entire Agreement.
This Agreement embodies the entire agreement between the parties hereto and
there are no agreements, understandings, restrictions or warranties among the
parties hereto other than those set forth herein or herein provided for.
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7. Further Assurances.
The Fund and the Trust shall take such further action as may be necessary or
desirable and proper to consummate the transactions contemplated hereby.
8. Counterparts.
This Agreement may be executed simultaneously in two or more counterparts, each
of which shall be deemed an original, but all of which shall constitute one and
the same instrument.
9. Governing Law.
This Agreement and the transactions contemplated hereby shall be governed by
and construed and enforced in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the Trust and the Fund have each caused this Agreement and
Plan of Reorganization to be executed on its behalf by its Chairman, President
or a Vice President and attested by its Secretary or an Assistant Secretary,
all as of the day and year first-above written.
Templeton Dragon Fund, Inc.
(a Maryland corporation)
Attest:
By ________________________ By ________________________
Templeton Dragon Fund
(a Delaware business trust)
Attest:
By ________________________ By ________________________
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EXHIBIT B
A COMPARISON OF GOVERNING DOCUMENTS AND STATE LAW
A Comparison of:
The Law Governing Delaware Business Trusts and
The Charter Documents of Templeton Dragon Fund Under Such Law
With
The Law Governing Maryland Corporations and
The Charter Documents of Templeton Dragon Fund, Inc. Under Such Law
Delaware Business Trust Maryland Corporation
----------------------- --------------------
Governing A Delaware statutory business trust (a A Maryland corporation is created by filing
Documents/ "DBT") is formed by a governing instrument articles of incorporation with the Maryland
Governing Body and the filing of a certificate of trust with the State Department of Assessments and
Delaware Secretary of State ("Secretary of Taxation ("MSDAT"). The Maryland law
State"). The Delaware law governing a DBT governing corporations is referred to in this
is referred to in this analysis as the analysis as "Maryland Law."
"Delaware Act."
A DBT is an unincorporated association A corporation is incorporated under the
organized under the Delaware Act whose Maryland Law. A corporation's operations
operations are governed by its governing are governed by its charter and by-laws, and
instrument (which may consist of one or its business and affairs are managed by or
more instruments). Its business and affairs under the direction of a board of directors
are managed by or under the direction of one (the "board" or "board of directors" or
or more trustees. collectively, the "directors"). No public
filing of the by-laws is made.
The governing instrument for the DBT, Templeton Dragon Fund, Inc., a Maryland
Templeton Dragon Fund (the "Trust"), is corporation, is referred to in this analysis as
comprised of an agreement and declaration the "Corporation." The Corporation is
of trust ("Declaration") and by-laws ("By- governed by its charter ("Charter") and by-
Laws"). The Trust's governing body is a laws ("By-Laws") and the Corporation's
board of trustees (the "board" or "board of governing body is a board of directors.
trustees" or collectively, the "trustees").
Designation of Under the Delaware Act, the ownership Equity securities of a corporation are
Ownership interests in a DBT are denominated as generally denominated as shares of stock.
Shares or "beneficial interests" and are held by Record owners of shares of stock are
Interests "beneficial owners." However, there is stockholders. Generally, equity securities
flexibility as to how a governing instrument that have voting rights and are entitled to the
refers to "beneficial interests" and residual assets of the corporation, after
"beneficial owners" and the governing payment of liabilities, are referred to as
instrument may identify "beneficial "common stock."
interests" and "beneficial owners" as
"shares" and "shareholders," respectively.
The Trust's beneficial interests, without par The Corporation's equity securities are
value, are designated as "shares" and its shares of common stock, par value $0.01 per
beneficial owners are designated as share, and the owners of such stock are
"shareholders." This analysis will use the "stockholders."
"share" and "shareholder" terminology.
B-1
Delaware Business Trust Maryland Corporation
----------------------- --------------------
Amendments to Governing Instrument Charter
Governing The Delaware Act provides broad flexibility Under Maryland Law, with certain
Documents with respect to the provisions of the exceptions, amendments to the charter must
governing instrument of a DBT for be approved by the board and by the
amending and/or restating such governing affirmative vote of two-thirds of all votes
instrument. entitled to be cast (unless the charter permits
amendment by a higher or lesser proportion
Declaration of Trust of the voting stock, but not less than a
The Declaration provides that amendments majority of the shares outstanding).
and/or restatements of the Declaration may
generally be made at any time by the board The Charter provides that the Charter may be
of trustees, by a vote of a majority of the altered, repealed, or added to upon vote of
trustees present at a meeting at which a holders of a majority of the shares
quorum is present, without approval of the outstanding and entitled to vote thereon,
shareholders. Amendments or a repeal of except that amendment or repeal of
certain provisions, however, require approval provisions pertaining to the number of
of the board of trustees, as set forth above, directors, removal of directors, directors'
and the affirmative vote of holders of at least liability, indemnification, reorganizations,
two-thirds (66 2/3%) of the outstanding shares dissolution or conversion to open-end
entitled to vote, unless such action has company, and amendments to the Charter
previously been approved by the affirmative require the affirmative vote of the holders of
vote of two-thirds (66 2/3%) of the board of at least 66 2/3% of the outstanding shares
trustees, in which case the affirmative "vote entitled to vote, unless such action has
of a majority of the outstanding voting previously been approved by the affirmative
securities", as defined in the Investment vote of two-thirds of the board of directors.
Company Act of 1940 and the rules and Upon such a two-thirds vote by the board of
regulations thereunder, as amended (the directors, such provisions may be amended
"1940 Act"), of the Trust entitled to vote at a upon the vote of holders of a majority of the
meeting at which a quorum is present, shall shares outstanding and entitled to vote
be required. Such provisions include those thereon (the general vote needed to amend
pertaining to the number, classes, election, the other provisions of the Charter).
term, removal, resignation, quorum, powers,
required vote and action by written consent
of the board of trustees; shareholders' voting
power, quorum, required vote, action by
written consent and record dates; limitation
of liability and indemnification of agents of
the Trust; transactions such as the
dissolution, merger, consolidation,
conversion, reorganization and
reclassification of the Trust to an open-end
company and amendments of the
Declaration.
By-Laws By-Laws
The By-Laws may be amended, restated or Under Maryland law, after the organizational
repealed or new by-laws may be adopted by meeting, the power to adopt, alter or repeal
the affirmative "vote of a majority of the the by-laws is vested in the stockholders,
outstanding voting securities" (as defined in except to the extent that the charter or by-
the 1940 Act) of the Trust. The By-Laws laws vest such power in the board.
may also be amended, restated or repealed or
new by-laws may be adopted by the board of The By-Laws may be adopted, amended or
trustees, by a vote of a majority of the repealed by "vote of the holders of a
trustees present at a meeting at which a majority of the [Corporation's] stock" (as
quorum is present. defined in the 1940 Act); except that
B-2
Delaware Business Trust Maryland Corporation
----------------------- --------------------
Pursuant to the Declaration, amendments provisions in the By-Laws regarding
and/or restatements of the certificate of trust increasing/decreasing number of directors
shall be made at any time by the board of and removal of directors may be amended
trustees, without approval of the only by the vote of the holders of 75% of the
shareholders, to correct any inaccuracy common stock, unless approved by the
contained therein. Any such amendments/ affirmative vote of two-thirds of the total
restatements of the Certificate of Trust must number of directors fixed by the By-Laws, in
be executed by at least one (1) trustee and which case the affirmative vote of a majority
filed with the Secretary of State in order to of the outstanding shares is required.
become effective. Directors may adopt, amend or repeal By-
Laws (not inconsistent with any By-Law
adopted, amended or repealed by
stockholders) by majority vote of all of
directors in office, subject to applicable law.
Preemptive Under the Delaware Act, a governing Under Maryland Law, the charter may
Rights and instrument may contain any provision provide shareholders with the preemptive
Repurchase of relating to the rights, duties and obligations right to subscribe to any or all additional
Shares of the shareholders. issues of stock or any securities of the
corporation convertible into additional issues
The Declaration provides that no shareholder of stock. The charter may also define or limit
shall have the preemptive or other right to the preemptive rights of stockholders to
subscribe for new or additional shares or acquire additional stock or securities in the
other securities issued by the Trust. corporation.
The Trust has the right at its option and at The Corporation does not provide
any time, subject to the 1940 Act and other shareholders with the preemptive right to
applicable law, to repurchase shares of any subscribe to additional issues of stock or
shareholder under certain circumstances at a other securities of the Corporation.
price that meets the requirements of Section
23 of the 1940 Act, and the rules and
regulations adopted thereunder, and that is in
accordance with the terms of the
Declaration, the By-Laws and other
applicable law.
Liquidation A DBT that has dissolved shall first pay or A corporation that has voluntarily dissolved
Rights upon make reasonable provision to pay all known shall pay, satisfy and discharge the existing
Dissolution claims and obligations, including those that debts and obligations of the corporation,
are contingent, conditional and unmatured, including necessary expenses of liquidation,
and all known claims and obligations for before distributing the remaining assets to
which the claimant is unknown. Any the stockholders.
remaining assets shall be distributed to the
shareholders or as otherwise provided in the
governing instrument.
The Declaration provides that any assets
remaining after payment or the reasonable
provision for payment of all claims and
obligations of the Trust shall be distributed
to the shareholders ratably according to the
number of outstanding shares held by the
several shareholders on the record date for
such dissolution distribution.
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Delaware Business Trust Maryland Corporation
----------------------- --------------------
Voting Rights, Under the Delaware Act, the governing
Meetings, instrument may set forth any provision
Notice, Quorum, relating to trustee and shareholder voting
Record Dates rights, including the withholding of such
and Proxies rights from certain trustees or shareholders.
If voting rights are granted, the governing
instrument may contain any provision
relating to meetings, notice requirements,
written consents, record dates, quorum
requirements, voting by proxy and any other
matter pertaining to the exercise of voting
rights. The governing instrument may also
provide for the establishment of record dates
for allocations and distributions by the DBT.
One Vote Per Share One Vote Per Share
The Declaration provides that each Unless a corporation's charter provides for a
outstanding share is entitled to one vote and greater or lesser number of votes per share,
each outstanding fractional share is entitled or limits or denies voting rights, each
to a fractional vote. outstanding share of stock is entitled to one
vote on each matter submitted to a vote at a
meeting of stockholders. A corporation may
issue fractional shares of stock.
The Charter provides that each outstanding
share of stock is entitled to one vote and
each outstanding fractional share of stock is
entitled to a fractional vote.
Shareholders' Meetings Stockholders' Meetings
Although the Delaware Act does not Under Maryland Law, every corporation
mandate annual shareholders' meetings, the must hold an annual stockholders' meeting
By-Laws require annual meetings for the to elect directors and transact other business,
election of trustees and the transaction of except that the charter or by-laws of a
other business. The By-Laws also authorize corporation registered under the 1940 Act
the calling of a special meeting (i) when may provide that an annual meeting is not
deemed necessary or desirable by the board required in any year in which the election of
of trustees or (ii) to the extent permitted by directors is not required by the 1940 Act.
the 1940 Act, by the chairperson of the Maryland Law authorizes, and permits the
board, or at the request of holders of 10% of charter and By-Laws to authorize, certain
the outstanding shares if such shareholders persons to call special meetings of
pay the reasonably estimated cost of stockholders.
preparing and mailing the notice thereof, for
the purpose of electing trustees or filling The By-Laws require annual meetings for
vacancies on the board. However, no special the election of directors and the transaction
meeting may be called at the request of of other business. The By-Laws also
shareholders to consider any matter that is authorize the calling of a special meeting,
substantially the same as a matter voted upon unless otherwise "prescribed" by statute or
at a shareholders' meeting held during the the Charter, by the board, upon the written
preceding twelve (12) months, unless request of a majority of the directors, or by
requested by holders of a majority of all the president, or at the written request of
outstanding shares entitled to vote at such stockholders owning 10% "in amount of the
meeting. entire capital stock" of the Corporation then
issued and outstanding, if the stockholders
Under the By-Laws, shareholder proposals requesting such meeting pay the reasonably
may be presented at an annual shareholders' estimated cost of preparing and mailing the
B-4
Delaware Business Trust Maryland Corporation
----------------------- --------------------
meeting if brought by a shareholder who (i) notice thereof. However, no special meeting
is entitled to vote at the meeting; (ii) will be called at the request of stockholders
complies with the notice procedures set forth to consider any matter that is substantially
in the By-Laws; and (iii) was a shareholder the same as a matter voted upon at a
of record at the time such notice is received stockholders' special meeting held during
by the secretary of the Trust. The the preceding 12 months, unless requested
shareholder's notice must be in writing and by holders of a majority of all outstanding
delivered to the Trust not less than one shares entitled to vote at such meeting.
hundred twenty (120) days nor more than
one hundred fifty (150) days prior to the date
of any such meeting. Each such notice given
by a shareholder must include certain
information set forth in the By-Laws and as
reasonably requested by the Trust. At the
annual meeting, the appropriate officer may,
if the facts warrant, determine and declare to
such meeting that a proposal was not made
in accordance with the procedure in the By-
Laws, and, if the officer should so determine,
shall so declare to the meeting, and the
defective proposal shall be disregarded and
laid over for action at the next succeeding
special or annual meeting of the shareholders
taking place thirty (30) days or more
thereafter.
Record Dates Record Dates
In order to determine the shareholders Under Maryland law, unless the by-laws
entitled to notice of, and to vote at, a otherwise provide, the board may set a
shareholders' meeting, the Declaration record date, which date must be set within
authorizes the board of trustees to fix a the parameters outlined by the Maryland
record date. The record date may not precede statute, for determining stockholders entitled
the date on which it is fixed by the board and to notice of a meeting, vote at a meeting,
it may not be more than one hundred twenty receive dividends or be allotted other rights.
(120) days, nor less than ten (10) days,
before the date of the shareholders' meeting. In order to determine the stockholders
The By-Laws provide that notice of a entitled to notice of, and to vote at, a
shareholders' meeting shall not be given to stockholders' meeting, the By-Laws
shareholders more than one hundred twenty authorize the board of directors to fix a
(120) days nor less than ten (10) days before record date not less than ten (10), nor more
the date of the meeting. than ninety (90), days prior to the date of the
meeting or prior to the last day on which the
To determine the shareholders entitled to consent or dissent of stockholders may be
vote on any action without a meeting, the effectively expressed for any purpose
Declaration authorizes the board of trustees without a meeting.
to fix a record date. The record date may not
precede the date on which it is fixed by the To determine the stockholders entitled to a
board nor may it be more than thirty (30) dividend, any other distribution, or delivery
days after the date on which it is fixed by the of evidences of rights or interests from the
board. Corporation, the By-Laws authorize the
board to fix a record date not exceeding
To determine the shareholders entitled to a ninety (90) days preceding the date fixed for
dividend or any other distribution from the the payment of the dividend or distribution
Trust, the Declaration authorizes the board or delivery of the evidences.
of trustees to fix a record date. The record
date may not precede the date on which it is If the board does not fix a record date, the
record date shall be the later of the close of
B-5
Delaware Business Trust Maryland Corporation
----------------------- --------------------
fixed by the board nor may it be more than business on the day on which notice of the
sixty (60) days before the date such dividend meeting is mailed or the 30th day before the
or distribution is to be paid. meeting, except if all stockholders waive
notice, the record date is the close of
Pursuant to the Declaration, if the board of business on the 10th day next preceding the
trustees does not fix a record date: day the meeting is held.
(a) the record date for determining
shareholders entitled to notice of, and to vote
at, a meeting will be the day before the date
on which notice is given or, if notice is
waived, on the day before the date of the
meeting; (b) the record date for determining
shareholders entitled to vote on any action
by consent in writing without a meeting, (i)
when no prior action by the board of trustees
has been taken, shall be the day on which the
first signed written consent is delivered to
the Trust, or (ii) when prior action of the
board of trustees has been taken, shall be the
day on which the board of trustees adopts the
resolution taking such prior action.
Quorum for Shareholders' Meeting Quorum for Stockholders' Meeting
To transact business at a meeting, the Under Maryland Law, unless the charter or
Declaration provides that a majority of the Maryland Law provides otherwise, in order
outstanding shares entitled to vote, which are to constitute a quorum for a meeting, there
present in person or represented by proxy, must be present in person or by proxy,
shall constitute a quorum at a shareholders' stockholders entitled to cast a majority of all
meeting, except when a larger quorum is the votes entitled to be cast at the meeting.
required by applicable law or any securities
exchange on which such shares are listed for To transact business at a meeting, the By-
trading, in which case such quorum shall Laws provide that a majority of the
comply with such requirements. outstanding shares entitled to vote, which are
present in person or represented by proxy,
shall constitute a quorum at a stockholders'
meeting.
Shareholder Vote Stockholder Vote
The Declaration provides that, subject to any Under Maryland law, for most stockholder
provision of the Declaration, the By-Laws or actions, unless the charter or Maryland Law
applicable law that requires a different vote: provides otherwise, a majority of all votes
(i) in all matters other than the election of cast at a meeting at which a quorum is
trustees, the affirmative "vote of a majority present is required to approve any matter.
of the outstanding voting securities" (as Actions such as (i) amendments to the
defined in the 1940 Act) of the Trust entitled corporation's charter, (ii) mergers, (iii)
to vote at a shareholders' meeting at which a consolidations, (iv) statutory share
quorum is present, shall be the act of the exchanges, (v) transfers of assets and (vi)
shareholders; and (ii) trustees shall be dissolutions require the affirmative vote of
elected by a plurality of the votes cast of the two-thirds of all votes entitled to be cast on
holders of outstanding shares entitled to vote the matter unless the charter provides for a
present in person or represented by proxy at lesser proportion which may not be less than
a shareholders' meeting at which a quorum a majority of all votes entitled to be cast on
is present. the matter. Unless the charter or by-laws
require a greater vote, a plurality of all votes
cast at a meeting at which a quorum is
present is required to elect a director.
B-6
Delaware Business Trust Maryland Corporation
----------------------- --------------------
Election of Directors. Under the Charter
and By-Laws, at a stockholders' meeting at
which a quorum is present, a plurality of the
votes cast of the holders of outstanding
shares entitled to vote, shall be required to
elect directors at the annual meeting, to fill
any vacancy resulting from an increase in the
number of directors on the board (adopted by
vote of the stockholders) or to fill any other
then existing vacancies on the board.
Other matters for which the vote is not
expressly designated otherwise. For all
other matters, other than any matter for
which the Charter expressly provides for a
different vote, the affirmative vote of the
holders of a majority of the total number of
shares outstanding and entitled to vote
thereon, at a stockholders' meeting at which
a quorum is present, shall be the act of the
stockholders.
Shareholder Vote on Certain Transactions Stockholder Vote on Certain Transactions
Under the Declaration, in order for the Trust Under the Charter, in order to consummate a
to consummate a dissolution, merger, merger, consolidation, sale of all or
consolidation, conversion, reorganization or substantially all of the assets, liquidation or
reclassification, such transaction shall be dissolution of the Corporation, or a
approved in the following manner: conversion from a closed-end company to an
open-end company (as defined in the 1940
The transaction must be approved by the Act), such transaction shall be approved in
board of trustees, by the vote of a majority of the following manner:
the trustees present at a meeting at which a
quorum is present, and the affirmative vote The transaction must be approved by the
of the holders of two-thirds (66 2/3%) of the favorable vote of at least 66 2/3% of the
outstanding shares entitled to vote, unless outstanding shares entitled to vote, unless
such action has been previously approved by such action has been previously approved by
the affirmative vote of two-thirds (66 2/3%) the affirmative vote of two-thirds of the total
of the board of trustees, in which case the number of directors fixed pursuant to the By-
affirmative "vote of a majority of the Laws, in which case the affirmative "vote of
outstanding voting securities" (as defined in a majority of the outstanding voting shares"
the 1940 Act) of the Trust entitled to vote at (as defined in the 1940 Act) of the
a shareholders' meeting at which a quorum Corporation shall be required, but not less
is present shall be required. than a majority of the outstanding voting
shares for purposes of Maryland Law.
Cumulative Voting Cumulative Voting
The Declaration provides that shareholders Maryland law provides that the charter may
are not entitled to cumulate their votes on authorize cumulative voting for the election
any matter. of the directors and if the charter does not so
provide, then the stockholders are not
entitled to cumulative voting rights.
The Charter and By-Laws do not have any
provisions as to whether stockholders are
entitled to cumulate their votes on any matter
and consequently, the stockholders are not
entitled to cumulate their votes on any
matter.
B-7
Delaware Business Trust Maryland Corporation
----------------------- --------------------
Proxies Proxies
The By-Laws authorize the Trust to accept Maryland Law permits a stockholder to
proxies by execution of a written instrument authorize another person to act as a proxy
or by electronic, telephonic, computerized, and sets forth acceptable methods of
telecommunications or another reasonable transmitting such authorization. Unless a
alternative to the execution of a written proxy provides otherwise, it is not valid
instrument. Unless a proxy provides more than 11 months after its date. The
otherwise, it is not valid more than 11 proxy is revocable unless certain statutory
months after its date. In addition, the By- requirements are met.
Laws provide that the revocability of a proxy
that states on its face that it is irrevocable
shall be governed by the provisions of the
general corporation law of the State of
Delaware.
Action by Written Consent Action by Written Consent
The Declaration also authorizes shareholders Maryland Law provides that any action
to take action without a meeting and without required or permitted to be taken at a
prior notice if written consents setting forth stockholders' meeting may be taken without
the action taken are signed by the holders of a meeting, if a unanimous written consent is
all outstanding shares entitled to vote on that signed by each stockholder entitled to vote
action. on the matter.
The Declaration also authorizes the board of The By-Laws authorize stockholders to take
trustees or any committee of the board of action without a meeting if all stockholders
trustees to take action without a meeting and entitled to vote consent in writing and all
without prior written notice if written stockholders entitled to notice of the
consents setting forth the action taken are meeting, but not entitled to vote, sign a
executed by trustees having the number of written waiver of any right to dissent.
votes necessary to take that action at a
meeting at which the entire board of trustees The By-Laws provide that the board or any
or any committee thereof, is present and committee of the board may act by written
voting. consent signed by all the members of the
board or committee, respectively.
Removal of The governing instrument of a DBT may Under Maryland Law, unless otherwise
Trustees/ contain any provision relating to the removal provided in the charter, a director may
Directors of trustees; provided however, that there generally be removed with or without cause
shall at all times be at least one trustee of the by the vote of a majority of all the votes
DBT. entitled to be cast generally for the election
of directors unless (i) such director is elected
Under the Declaration, any trustee may be by a certain class or series, (ii) the charter
removed, with or without cause, by the provides for cumulative voting or (iii) the
Shareholders, upon the vote of the holders of board is classified.
two-thirds (66 2/3%) of the outstanding shares
entitled to vote. Under the Charter, a director may be
removed with or without cause by holders of
66 2/3% of shares then entitled to vote in an
election of directors and a stockholders'
meeting may be called for such purpose if
requested in writing by not less than 10% of
outstanding shares of the Corporation.
B-8
Delaware Business Trust Maryland Corporation
----------------------- --------------------
Vacancies on Vacancies in any class of trustees may be Under Maryland law stockholders may elect
Board of filled by a majority vote of the trustees then persons to fill vacancies that result from the
Trustees/ in office, regardless of the number and even removal of directors. Unless the charter or
Directors if less than a quorum, unless a special by-laws provide otherwise, a majority of the
meeting of shareholders is called for the directors in office, whether or not
purpose of filling such vacancies, in which comprising a quorum, may fill vacancies that
case, such vacancies shall be filled in the result from any cause except an increase in
same manner as an election of trustees. the number of directors. A majority of the
entire board of directors may fill vacancies
that result from an increase in the number of
directors.
Under the By-Laws, directors may increase
or decrease their number; if the number is
increased, the added directors may be elected
by a majority of directors in office. For other
vacancies, the directors then in office
(though less than quorum) may continue to
act and may by majority vote fill any
vacancy until the next meeting of
stockholders, subject to the 1940 Act.
The number of directors may also be
increased or decreased by vote of
stockholders at any meeting called for the
purpose and if the vote is to increase the
number, stockholders will vote by plurality
to elect the directors to fill the new vacancies
as well as any then existing vacancies.
Shareholder Under the Delaware Act, except to the extent The stockholders of a corporation are not
Liability otherwise provided in the governing liable for the obligations of the corporation.
instrument of a DBT, shareholders of a DBT
are entitled to the same limitation of personal
liability extended to shareholders of a private
corporation organized for profit under the
general corporation law of the State of
Delaware.
Under the Declaration, shareholders are
entitled to the same limitation of personal
liability as that extended to shareholders of a
private corporation organized for profit
under the general corporate law of the State
of Delaware. However, the board of trustees
may cause any shareholder to pay for
charges of the trust's custodian or transfer,
dividend disbursing, shareholder servicing or
similar agent for services provided to such
shareholder.
Trustee/Director Subject to the provisions in the governing Maryland Law requires a director to perform
Liability instrument, the Delaware Act provides that a his or her duties in good faith, in a manner
trustee or any other person managing the he or she reasonably believes to be in the
DBT, when acting in such capacity, will not best interests of the corporation and with the
be personally liable to any person other than care that an ordinarily prudent person in a
the DBT or a shareholder of the DBT for any like position would use under similar
B-9
Delaware Business Trust Maryland Corporation
----------------------- --------------------
act, omission or obligation of the DBT or circumstances. A director who performs his
any trustee. To the extent that at law or in or her duties in accordance with this standard
equity, a trustee has duties (including has no liability to the corporation, its
fiduciary duties) and liabilities to the DBT stockholders or to third persons by reason of
and its shareholders, such duties and being or having been a director. A
liabilities may be expanded or restricted by corporation may include in its charter a
the governing instrument. provision expanding or limiting the liability
of its directors and officers for money
The Declaration provides that any person damages to the corporation or its
who is or was a trustee, officer, employee or stockholders, provided however, that liability
other agent of the Trust or is or was serving may not be limited to the extent the person
at the request of the Trust as a trustee, has received an improper benefit or profit in
director, officer, employee or other agent of money, property or services or where such
another corporation, partnership, joint person has been actively and deliberately
venture, trust or other enterprise (an dishonest.
"Agent") will be liable to the Trust and to
any shareholder solely for such Agent's own The Charter expressly provides that no
willful misfeasance, bad faith, gross director or officer shall be protected from
negligence or reckless disregard of the duties liability to the Corporation and its
involved in the conduct of such Agent (such stockholders to which such person would
conduct referred to as "Disqualifying otherwise be subject by reason of willful
Conduct"). Subject to the preceding misfeasance, bad faith, gross negligence or
sentence, Agents will not be liable for any reckless disregard of the duties involved in
act or omission of any other Agent or any the conduct of such person's office.
investment adviser or principal underwriter
of the Trust. No Agent, when acting in such
capacity, shall be personally liable to any
person (other than the Trust or its
shareholders as described above) for any act,
omission or obligation of the Trust or any
trustee.
Indemnification Subject to such standards and restrictions Unless limited by its charter, Maryland Law
contained in the governing instrument of a requires a corporation to indemnify a
DBT, the Delaware Act authorizes a DBT to director or officer who has successfully
indemnify and hold harmless any trustee, defended a proceeding to which such person
shareholder or other person from and against was a party because of such person's service
any and all claims and demands. in such capacity, against reasonable expenses
incurred in connection with the proceeding.
Pursuant to the Declaration, the Trust will
indemnify any Agent who was or is a party Maryland Law permits a corporation to
or is threatened to be made a party to any indemnify a director, officer, employee or
proceeding by reason of such Agent's agent who is a party or threatened to be a
capacity, against attorneys' fees and other party, by reason of service in that capacity,
certain expenses, judgments, fines, to any threatened, pending or completed
settlements and other amounts incurred in action, suit or proceeding, against judgments,
connection with such proceeding if such penalties, fines, settlements and reasonable
Agent acted in good faith or in the case of a expenses unless it is established that (i) the
criminal proceeding, had no reasonable act or omission of such person was material
cause to believe such Agent's conduct was to the matter giving rise to the proceeding,
unlawful. However, there is no right to and was committed in bad faith or was the
indemnification for any liability arising from result of active and deliberate dishonesty; (ii)
the Agent's Disqualifying Conduct. As to such person actually received an improper
any matter for which such Agent is found to personal benefit; or (iii) such person had
be liable in the performance of such Agent's reasonable cause to believe that the act or
duty to the Trust or its shareholders omission was unlawful. This permissible
B-10
Delaware Business Trust Maryland Corporation
----------------------- --------------------
indemnification will be made only to the indemnification obligation may become
extent that the court in which that action was mandatory or may be prohibited through a
brought determines that in view of all the corporation's charter, by-laws, a board
circumstances of the case, the Agent was not resolution or another agreement. However, if
liable by reason of such Agent's the proceeding is a derivative suit, the
Disqualifying Conduct. corporation may not indemnify a person who
has been adjudged to be liable to the
Expenses incurred by an Agent in defending corporation. Corporations are authorized to
any proceeding may be advanced by the advance payment of reasonable expenses.
Trust before the final disposition of the
proceeding on receipt of an undertaking by The Charter provides that the Corporation
or on behalf of the Agent to repay the shall, to the full extent permitted by
amount of the advance if it is ultimately Maryland Law, indemnify all persons whom
determined that the Agent is not entitled to it may indemnify under Maryland Law.
indemnification by the Trust. However, no director or officer shall be
protected from liability to the Corporation or
its stockholders to which such person would
otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in
the conduct of his office.
The By-Laws provide that, to the fullest
extent permitted by Maryland Law, any
current or former director or officer seeking
indemnification shall be entitled to the
advancement of reasonable expenses from
the Corporation. The Corporation may
advance expenses to officers, employees and
agents.
Insurance The Delaware Act is silent as to the right of a A corporation may purchase insurance on
DBT to purchase insurance on behalf of its behalf of any person who is or was a
trustees or other persons. However, as the director, officer, employee or agent against
policy of the Delaware Act is to give any liability asserted against and incurred by
maximum effect to the principle of freedom such person in any such capacity whether or
of contract and to the enforceability of not the corporation would have the power to
governing instruments, the Declaration indemnify such person against such liability.
authorizes the board of trustees, to the fullest
extent permitted by applicable law, to The By-Laws authorize the Corporation to
purchase with Trust assets, insurance for purchase insurance on behalf of any person
liability and for all expenses of an Agent in who is or was a director, officer, employee
connection with any proceeding in which or agent against any liability asserted against
such Agent becomes involved by virtue of and incurred by such person in any such
such Agent's actions, or omissions to act, in capacity. However, no insurance may be
its capacity or former capacity with the purchased which would indemnify any
Trust, whether or not the Trust would have director or officer against any liability to the
the power to indemnify such Agent against Corporation or its stockholders to which
such liability. such person would otherwise be subject by
reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the
duties involved in the conduct of such
person's office.
B-11
Delaware Business Trust Maryland Corporation
----------------------- --------------------
Shareholder Under the Delaware Act, except to the extent Under Maryland Law, a stockholder may
Right of otherwise provided in the governing inspect, during usual business hours, the
Inspection instrument and subject to reasonable corporation's by-laws, stockholder
standards established by the trustees, each proceeding minutes, annual statements of
shareholder has the right, upon reasonable affairs, voting trust agreements and, if the
demand for any purpose reasonably related corporation is not an open-end investment
to the shareholder's interest as a shareholder, company, a statement showing all stock and
to obtain from the DBT certain information securities issued by the corporation for the
regarding the governance and affairs of the previous 12 months. In addition,
DBT. stockholders who have individually or
together been holders of at least 5% of the
Under the Declaration, a shareholder, upon outstanding stock of any class for at least 6
reasonable written demand to the Trust for months, may inspect the corporation's books
any purpose reasonably related to such of accounts, its stock ledger and its statement
shareholder's interest as a shareholder, may of affairs. Although not expressly required
inspect certain information as to the by the Maryland statute, Maryland courts
governance and affairs of the Trust during have engrafted a proper purpose requirement
regular business hours. However, reasonable upon this statutory right.
standards governing, without limitation, the
information and documents to be furnished The Charter grants stockholders inspection
and the time and location of furnishing the rights only to the extent provided by
same, will be established by the board or any Maryland Law. Such rights are subject to
officer to whom such power is delegated in reasonable regulations of the board of
the By-Laws. In addition, as permitted by the directors not contrary to Maryland Law.
Delaware Act, the By-Laws also authorize
the board or an officer to whom the board
delegates such powers to keep confidential
from shareholders for such period of time as
deemed reasonable any information that the
board or such officer in good faith believes
would not be in the best interest of the Trust
to disclose or that could damage the Trust or
that the Trust is required by law or by
agreement with a third party to keep
confidential.
Derivative Under the Delaware Act, a shareholder may Under Maryland Law, in order to bring a
Actions bring a derivative action if trustees with derivative action, a stockholder (or his
authority to do so have refused to bring the predecessor if he became a stockholder by
action or if a demand upon the trustees to operation of law) must be a stockholder (a)
bring the action is not likely to succeed. A at the time of the acts or omissions
shareholder may bring a derivative action complained about; (b) at the time the action
only if the shareholder is a shareholder at the is brought and (c) until the completion of the
time the action is brought and: (i) was a litigation. A derivative action may be
shareholder at the time of the transaction brought by a stockholder if (i) a demand
complained about or (ii) acquired the status upon the board of directors to bring the
of shareholder by operation of law or action is improperly refused or (ii) a request
pursuant to the governing instrument from a upon the board of directors would be futile.
person who was a shareholder at the time of
the transaction. A shareholder's right to Under Maryland Law, a director of an
bring a derivative action may be subject to investment company who "is not an
such additional standards and restrictions, if interested person, as defined by the
any, as are set forth in the governing Investment Company Act of 1940, shall be
instrument. deemed to be independent and disinterested
when making any determination or taking
any action as a director."
B-12
Delaware Business Trust Maryland Corporation
----------------------- --------------------
The Declaration provides that, subject to the
requirements set forth in the Delaware Act, a
shareholder may bring a derivative action on
behalf of the Trust only if the shareholder
first makes a pre-suit demand upon the board
of trustees to bring the subject action unless
an effort to cause the board of trustees to
bring such action is excused. A demand on
the board of trustees shall only be excused if
a majority of the board of trustees, or a
majority of any committee established to
consider the merits of such action, has a
material personal financial interest in the
action at issue. A trustee shall not be deemed
to have a material personal financial interest
in an action or otherwise be disqualified
from ruling on a shareholder demand by
virtue of the fact that such trustee receives
remuneration from his service on the board
of trustees of the Trust or on the boards of
one or more investment companies with the
same or an affiliated investment advisor or
underwriter.
B-13
EXHIBIT C
FUNDAMENTAL INVESTMENT RESTRICTIONS PROPOSED
TO BE AMENDED OR ELIMINATED
Current Fundamental Proposed Fundamental
Proposal Investment Investment Restriction Investment Restriction
or Sub- Restriction --------------------------------------------- -----------------------------------------------------
Proposal Category The Fund may not: The Fund may not:
-------- --------------- --------------------------------------------- -----------------------------------------------------
3a Industry (1)invest 25% or more of the total Invest more than 25% of its net assets in the
Concentration value of its assets in a particular securities of issuers in any one industry; provided
industry. For purposes of this that this limitation shall not apply with respect to
restriction, a foreign government securities issued or guaranteed by the U.S.
(but not the United States government or by its agencies or instrumentalities or
government) is deemed to be an securities of other investment companies.
"industry."
3b Borrowing and (4)issue senior securities or borrow Borrow money or issue senior securities, except as
Issuing Senior money, except that (a) short-term permitted by the 1940 Act or any rule, SEC
Securities credits necessary for settlement of interpretation thereof or any exemptions therefrom
securities transactions are not which may be granted by the SEC.
considered borrowings or senior
securities, and (b) the Fund may
borrow, on a temporary basis, up to
5% of its total assets (including the
amount borrowed) for emergency
purposes, except that borrowings in
connection with the repurchases of
its Shares or tender offers may be
made in an amount of up to 33 1/3%
of its total assets (including the
amount borrowed).
3c Commodities (5)purchase or sell commodities or Purchase or sell commodities as defined in the
commodity contracts, including Commodity Exchange Act, as amended, and the
futures contracts and options rules and regulations thereunder, unless acquired as
thereon, except that the Fund may a result of ownership of securities or other
engage in hedging transactions as instruments and provided that this restriction does
described in this Prospectus. not prevent the Fund from engaging in transactions
involving futures contracts and options thereon or
investing in securities that are secured by physical
commodities.
4 Diversification (2)invest more than 25% of the total Proposed to be eliminated.
of Investments value of its assets in the securities
of any one issuer, except securities
issued or guaranteed by the United
States government or any of its
agencies or instrumentalities....
4 Purchase (9)purchase securities on margin Proposed to be eliminated.
Securities on (except for delayed delivery or
Margin when-issued transactions or such
short term credits as are necessary
for the clearance of transactions).
4 Short Sales (10)make short sales of securities or Proposed to be eliminated.
maintain a short position.
4 Control over (11)invest for the purpose of exercising Proposed to be eliminated.
Management control over management of any
company.
C-1
TLTDF PROXY 04/02
TEMPLETON DRAGON FUND, INC.
ANNUAL MEETING OF SHAREHOLDERS - MAY 3, 2002
The undersigned hereby revokes all previous proxies for his/her shares and
appoints BARBARA J. GREEN, BRUCE S. ROSENBERG and LORI A. WEBER, and each of
them, proxies of the undersigned with full power of substitution to vote all
shares of Templeton Dragon Fund, Inc. (the "Fund") that the undersigned is
entitled to vote at the Fund's Annual Meeting of Shareholders (the "Meeting") to
be held at 500 East Broward Blvd., 12th Floor, Ft. Lauderdale, Florida 33394 at
10:00 a.m., Eastern time, on the 3rd day of May 2002, including any
postponements or adjournments thereof, upon matters set forth below and
instructs them to vote upon any matters that may properly be acted upon at the
Meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. IT WILL BE VOTED AS
SPECIFIED. IF NO SPECIFICATION IS MADE, THIS PROXY SHALL BE VOTED FOR PROPOSALS
1 (INCLUDING ALL NOMINEES FOR DIRECTORS), 2, 3 (INCLUDING 3 SUB-PROPOSALS) AND
4. IF ANY OTHER MATTERS PROPERLY COME BEFORE THE MEETING TO BE VOTED ON, THE
PROXY HOLDERS WILL VOTE, ACT AND CONSENT ON THOSE MATTERS IN ACCORDANCE WITH THE
VIEWS OF MANAGEMENT.
(CONTINUED, AND TO BE SIGNED ON THE OTHER SIDE)
FOLD AND DETACH HERE
Please mark your votes as
indicated in this example [x]
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSALS 1 THROUGH 4.
Proposal 1 - Election of Directors.
FOR all nominees WITHHOLD Nominees: 01 Harris J. Ashton, 02 Nicholas F. Brady,
listed (except as AUTHORITY 03 Frank J. Crothers, 04 S. Joseph Fortunato and
marked to the right) to vote for all 05 Constantine D. Tseretopoulos
nominees listed
[ ] [ ] To withhold authority to vote for any individual
nominee, write that nominee's name on the line below.
------------------------------------------------------------
Proposal 2 - To approve an Agreement and Plan of Reorganization that provides
for the reorganization of the Fund from a Maryland corporation to a Delaware
business trust.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Proposal 3 - To approve amendments to certain of the Fund's fundamental
investment restrictions (includes three (3) Sub-Proposals):
Proposal 3a - To amend the Fund's fundamental investment restriction regarding
industry concentration.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Proposal 3b - To amend the Fund's fundamental investment restriction regarding
borrowing and issuing senior securities.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Proposal 3c - To amend the Fund's fundamental investment restriction regarding
investments in commodities.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Proposal 4 - To approve the elimination of certain of the Fund's fundamental
investment restrictions.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
I PLAN TO ATTEND THE MEETING. YES NO
[ ] [ ]
SIGNATURE(S): DATED , 2002
-------------------------------------------- ---------
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ON THIS PROXY. IF SIGNING FOR ESTATES,
TRUSTS OR CORPORATIONS, TITLE OR CAPACITY SHOULD BE STATED. IF SHARES ARE HELD
JOINTLY, EACH HOLDER SHOULD SIGN.
FOLD AND DETACH HERE