Refining Williams Act Group Liability and Proxy Misrepresentation Standards in Closed-End Mutual Fund Contests

Introduction

Tax-Free Fixed Income Fund for Puerto Rico Residents, Inc. and eight affiliated closed-end mutual funds (“the Funds”) sued Ocean Capital LLC and a roster of individuals and affiliated firms (collectively, “Defendants-Appellees”) in the First Circuit. The Funds alleged that the Defendants-Appellees had violated Sections 13(d), 14(a) and 20(a) of the Securities Exchange Act of 1934 by (1) failing to disclose a so-called coalition of investors in Schedule 13D filings and (2) issuing misleading proxy solicitations at nine annual meetings. The district court granted motions to dismiss and for judgment on the pleadings; this appeal follows.

Key Issues:

Whether the Funds pled facts sufficient to show an undisclosed “group” under § 13(d).
Whether Section 13(d) or 14(a) remedies require injunctive relief in light of subsequent “curative” disclosures.
The scope of Rule 9(b) and PSLRA pleading requirements in Schedule 13D and proxy-solicitation suits.

Parties:

Plaintiffs–Appellants: Nine Puerto Rico–focused closed-end mutual funds.
Defendants–Appellees: Ocean Capital LLC; certain principals (including William Hawk); several nominee directors; affiliated investment managers; and signatories to what the Funds called the “Stockholder Group.”

Summary of the Judgment

The First Circuit affirmed dismissal of all claims:

Section 13(d): The Funds failed to plead with particularity an undisclosed group acting “for the purpose of acquiring, holding, or disposing” of fund shares, and they could not show irreparable harm to justify injunctive relief.
Section 14(a): The proxy statements’ use of “coalition,” their statements about the nominees’ objectives (including liquidation as one among several options), and the assertion of “aligned” interests were not materially misleading as a matter of law.
Section 20(a): Control‐person liability falls with the underlying §§ 13(d) and 14(a) claims.

The court thus rejected challenges to both initial disclosures and subsequent “Supplemental Disclosures” filed before the contested votes.

Analysis

Precedents Cited

Rondeau v. Mosinee Paper Corp., 422 U.S. 49 (1975) – Williams Act informational purpose; injunctive relief demands a showing of irreparable harm.
Gen. Aircraft Corp. v. Lampert, 556 F.2d 90 (1st Cir. 1977) – Section 13(d) is about information, not a takeover weapon; courts should avoid intracorporate factional disputes.
Hibernia Sav. Bank v. Ballarino, 891 F.2d 370 (1st Cir. 1989) – Irreparable harm requirement for private § 13(d) injunctions.
New England Anti-Vivisection Soc., Inc. v. U.S. Surgical Corp., 889 F.2d 1198 (1st Cir. 1989) – Proxy statements must “fully and fairly” present material facts.
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) – Materiality standard for proxy misstatements/omissions.
Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991) – Dominant purpose test; omission of corporate intent must be shown materially misleading, not mere undisclosed beliefs.
Viqueira v. First Bank, 140 F.3d 12 (1st Cir. 1998) – Liberal construction of pleadings at motion-to-dismiss stage.
Rule 9(b) & PSLRA – Heightened pleading rules for securities fraud claims.

Legal Reasoning

1. Section 13(d) “Group” and Disclosure Failures
Courts define a “group” as “two or more persons acting . . . for the purpose of acquiring, holding, or disposing of securities” (15 U.S.C. § 78m(d)(3)). To plead such a group, the Funds needed to allege an agreement among Shark Capital, Hawk, the nominee directors, and other signatories to the “Stockholder Group” or “CCI” aimed at voting or trading fund shares. Under Rule 9(b) and the PSLRA, such allegations must identify the who, what, when, where, and how of each agreement. The Funds relied on (a) a letter to one fund’s board; (b) use of the term “coalition” in proxy solicitations; and (c) overlapping use of a broker. None supplied plausible, particularized facts of a voting-or-trading agreement. Accordingly, the pleading failed to cross the Twombly/Iqbal threshold for facial plausibility.

2. Irreparable Harm & Injunctive Relief
Even assuming a disclosure defect, the Supreme Court has emphasized that private plaintiffs under § 13(d) must show traditional equitable irreparable injury before an injunction issues (Rondeau; Hibernia). The Funds did not move for preliminary relief or demonstrate that a technical disclosure violation caused injury that money damages could not remedy.

3. Section 14(a) Misrepresentations & Omissions
Rule 14a-9 bans proxy solicitations containing false or misleading statements or omissions of material facts. Materiality demands a “substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote” (TSC Indus.). The Funds objected to:

Describing a two-member slate and Ocean Capital as a “coalition” (no “bandwagon effect” because there were no statements of widespread support or precise voting numbers).
Stating nominees would consider “all avenues” including liquidation (no proof liquidation was the sole objective).
Asserting Ocean Capital’s interests were “aligned” with shareholders (the filings disclosed Act 20/22 tax status clearly enough).

None of these statements, taken in context with subsequent “Supplemental Disclosures,” were so misleading as to require rescission or injunction.

Impact on Future Litigation

• Heightened Pleading Standards – Plaintiffs must supply particularized facts showing any coalition or voting group agreement, not just generalized references to “members.”
• Irreparable Harm Requirement – Private Williams Act suits seeking injunctive relief must show timely, urgent harm beyond a mere technical omission.
• Materiality in Proxy Contests – Vague or aspirational statements about “alignment” or “coalitions” will not alone trigger § 14(a) liability absent concrete assertions of broad support or undisclosed objectives.
• Limiting Factional Litigation – Courts will continue to refrain from policing intracorporate policy disputes under the guise of disclosure suits, so long as adequate information reaches all shareholders.

Complex Concepts Simplified

“Group” under § 13(d): Two or more persons must agree to act together about buying, holding, or selling a company’s shares. Mere common interests or overlapping advisers do not suffice.
Rule 9(b) & PSLRA Pleading: Securities claims based on fraud or omission must spell out with particularity the who, what, when, where, and why of any alleged misstatement or agreement.
Irreparable Harm: To get an injunction under § 13(d), you must show that the lack of information will cause harm that cannot be fixed by money damages (e.g., no preliminary relief sought).
Materiality in Proxies: A fact is material if a reasonable shareholder would consider it important when voting. Vague labels (“coalition,” “aligned”) rarely meet that threshold by themselves.
“Bandwagon Effect”: A proxy statement might mislead if it wrongly suggests overwhelming shareholder support, deterring others from voting. But you must assert specific numbers or statements of majority backing.

Conclusion

This decision confirms that Section 13(d) and Section 14(a) liability for activist slates in closed-end fund proxy fights requires rigorous, fact-specific pleadings and a demonstrable threat of irreparable harm to support injunctive relief. Vague coalition rhetoric and aspirational voting objectives—even if disappointing to incumbent management—do not alone trigger securities-law violations. By reaffirming the high bar for both coalition disclosures and proxy misstatement claims, the First Circuit has sharpened the legal contours of Williams Act group liability and Section 14(a) materiality in the context of fund governance contests.