ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY D.C. Civil No. 87-0870.
Gibbons, Chief Judge and Weis and Aldisert, Circuit Judges.
Zico Investment Holdings Inc. (Zico) appeals from orders of the district court which granted a preliminary injunction against its tender offer for shares of Bancroft Convertible Fund, Inc. (Bancroft) and which denied its motion to vacate that injunction. Bancroft is a closed-end investment company. The district court granted the preliminary injunction after concluding that Bancroft was likely to succeed in establishing that completion of the tender offer by Zico would result in a violation of section 12(d)(1)(A) of the Investment Company Act of 1940, 15 U.S.C. § 80a-12(d)(1)(A) (1982) (the Act). Section 12(d)(1)(A) prohibits an investment company from acquiring more than three (3) percent of the outstanding voting stock of another investment company. Zico contends that the preliminary injunction should be reversed because (1) there is no private cause of action for enforcement of the prohibition in section 12(d)(1)(A) of the Act; (2) the court erred in concluding Bancroft is likely to succeed in proving that Zico is an investment company; and (3) Bancroft made an inadequate showing of irreparable harm. We affirm.
Implied Private Cause of Action
Relying on Judge Hastie's opinion in Taussig v. Wellington Fund, Inc., 313 F.2d 472, 476 (3d Cir.), cert. denied, 374 U.S. 806, 83 S. Ct. 1693, 10 L. Ed. 2d 1031 (1963), the district court concluded that Bancroft's complaint states a claim upon which a private party can seek enforcement of the prohibition in section 12(d)(1)(A) of the Act. In Taussig, this court held that a complaint seeking private enforcement of the prohibition against use of deceptive investment company names, section 35(d) of the Act, 15 U.S.C. § 80a-34(d), stated a claim arising under the laws of the United States, and was sufficient to support pendent jurisdiction over a common-law unfair competition claim. Zico maintains that the district court's reliance on Taussig was misplaced for several reasons.
Zico's first objection is that, unlike the case at bar which involves private enforcement of section 12(d)(1)(A), Taussig involved private enforcement of section 35(d). Admittedly, there is no reported case in this court or any other which deals specifically with private enforcement of the anti-pyramiding prohibition in section 12(d)(1)(A). Zico makes no persuasive argument, however, which suggests congressional intention to treat the prohibition against investment company pyramiding differently, for purposes of private enforcement, than are the various other prohibitions in the Act which are also intended to protect investors.
Next, Zico argues that, assuming a private cause of action for enforcement of the Investment Company Act may be implied, Bancroft's management should not have standing to assert it in a tender offer situation. Not only is there no supporting authority to sustain it, but this argument also ignores the realities of tender offer litigation which demonstrate that such a standing rule would be toothless. It is virtually certain that an objecting shareholder would intervene in tender offer litigation. More fundamentally, however, we note that section 10 of the Investment Company Act, 15 U.S.C. § 80a-10 (1982), which governs membership on boards of directors of investment companies, indicates that those directors are uniquely qualified to assert private causes of action in the interest of the security holders to whom they owe fiduciary obligations.
Finally, Zico urges that Taussig, and the many other cases in other courts,*fn1 which have recognized the availability of private enforcement of the Investment Company Act have been overruled by the line of Supreme Court cases that followed Cort v. Ash, 422 U.S. 66, 45 L. Ed. 2d 26, 95 S. Ct. 2080 (1975). See, e.g., Touche Ross & Co. v. Redington, 442 U.S. 560, 572, 61 L. Ed. 2d 82, 99 S. Ct. 2479 (1979); Transamerica Mortgage Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11, 62 L. Ed. 2d 146, 100 S. Ct. 242 (1979); Cannon v. University of Chicago, 441 U.S. 677, 742, 60 L. Ed. 2d 560, 99 S. Ct. 1946 (1979). Those cases suggest that, in determining whether a private cause of action may be implied from a federal regulatory statute, the starting point is congressional intention.
In Fogel v. Chestnutt, a characteristically thorough and analytical opinion, Judge Friendly considered and rejected the contention that the post-Cort v. Ash cases overruled the settled law on private causes of action under the Investment Company Act. See Fogel v. Chestnutt, 668 F.2d 100, 105-12 (2d Cir. 1981), cert. denied, 459 U.S. 828, 74 L. Ed. 2d 66, 103 S. Ct. 65 (1982). Pointing to the numerous decisions in courts of appeals which, from 1961 forward, upheld private causes of action under the Investment Company Act, Judge Friendly concluded that the issue should be resolved in the same manner as was the question of private causes of action under Rule 10b-5. See Fogel, 668 F.2d at 111, (citing Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 30 L. Ed. 2d 128, 92 S. Ct. 165 (1971)).
We need not repeat Judge Friendly's Fogel v. Chestnutt analysis here. We do note, however, that it is consistent with the analysis made a short time later by the Supreme Court in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 72 L. Ed. 2d 182, 102 S. Ct. 1825 (1982). In Curran, the Court considered whether there is an implied private right of action for enforcement of the Commodity Exchange Act (CEA). After many courts of appeals had so held, Congress amended the CEA in 1974 and 1978, but neither the original act nor the amendments addressed the subject of private judicial remedies. The Curran Court, stating that the crucial issue was whether Congress, in amending the CEA, intended to preserve pre-existing implied remedies, reasoned:
In determining whether a private cause of action is implicit in a federal statutory scheme when the statute by its terms is silent on that issue, the initial focus must be on the state of the law at the time the [amending] legislation was enacted. More precisely, we must examine Congress' perception of the law that it was shaping or reshaping. When Congress enacts new legislation, the question is whether Congress intended to create a private remedy as a supplement to the express enforcement provisions of the statute. When Congress acts in a statutory context in which an implied private remedy has already been recognized by the courts, however, the inquiry is logically different. Congress need not have intended to create a new remedy, since one already existed; the question is whether Congress intended to preserve the pre-existing remedy.
Id. at 378-79 (footnote omitted). Noting that prior to the amendments, federal courts routinely and consistently recognized an implied private cause of action under the CEA, the Curran Court concluded that an implied cause of action under the CEA was, therefore, part of the "contemporary legal context" in which Congress acted in amending the Act. See id. at 381. The Supreme Court found that:
In that context, the fact that a comprehensive reexamination and significant amendment of the CEA left intact the statutory provisions under which the federal courts had implied a cause of action is itself evidence that Congress affirmatively intended to preserve that remedy.
Id. at 381-82 (footnote omitted). Therefore, the Curran Court held, the prior law on implied causes of action for enforcement of the statute survived.
We find Fogel v. Chestnutt persuasive authority and Curran controlling. Thus, we turn to the facts presented in the instant appeal and apply the Curran Court's reasoning. In 1970, Congress comprehensively reexamined and significantly amended the Investment Company Act. See Investment Company Amendments Act of 1970, Pub. L. No. 91-547, 84 Stat. 1413. By then, courts of appeals had routinely recognized private causes of action under the statute.*fn2 As was the case with the Commodity Exchange Act amendments, the legislative history of the 1970 amendments to the Investment Company Act is silent with respect to congressional intent to preserve or deny pre-existing remedies. See S. Rep. No. 184, 91st Cong., 2d Sess. (1970); H.R. Conf. Rep. No. 1631, 91st Cong., 2d Sess. (1970), reprinted in 1970 U.S. Code Cong. & Admin. News 4897-4948. Zico points out that section 20 of the 1970 amendments did add one specific private cause of action for damages which permits a shareholder of an investment company to sue the investment company's investment adviser on the company's behalf for recovery of excessive fees. See 15 U.S.C. § 80a-35(b) (1982). That substantive change in the law authorizing shareholders to sue to enforce a new standard*fn3 was necessary to overcome the substantive effect, in the derivative suit context, of the business judgment rule because the fees of fund managers are agreed to by fund directors. Inclusion of such ...