diversified management investment companies registered under the Investment Company Act in the State of Minnesota. Id. PP 10-11. Prior to the offerings in issue, the NUV fund, a $ 1.8 billion closed-end fund that invests in tax-exempt municipal bonds, had 166 million shares of common stock outstanding. Id. PP 1, 10. Prior to the offerings, the NPI fund, a $ 1.2 billion leveraged, closed-end fund that invests in tax-exempt municipal bonds, had 53 million shares of common and 3,500 shares of preferred stock outstanding. Id. PP 1, 11.
Nuveen's closed-end municipal bond funds account for at least 78 percent of Nuveen's business. Id. P 35. Nuveen profits on the closed-end municipal bond funds in two ways: (1) underwriting fees for new funds and (2) management fees based on a percentage of the assets managed by Nuveen Advisory, its wholly-owned subsidiary. Id. The management fees generated by Nuveen Advisory constitute approximately 75 percent of Nuveen's total revenues. Id.
Plaintiffs claim that Nuveen's future growth through the creation of new closed-end municipal bond funds has been threatened by market saturation, declining investor interest, and high bond prices. Id. PP 39-45. Plaintiffs contend that by the fall of 1993, Nuveen's performance had stagnated along with the closed-end bond fund market. Id. PP 46-49. Earnings have been below analysts' projections, Nuveen's stock has been downgraded, and industry publications have noted the slowdown. Id. PP 48-54. Defendants began to feel the impact of the downturn and pressure to take action to turn the situation around. Id. PP 55-58. Thus, plaintiffs allege that defendants resorted to raising capital from the shareholders of its existing Nuveen funds through coercive rights offerings. Id. PP 59-64.
On November 8, 1993, defendants announced that the Nuveen funds would offer rights to new shares enabling Nuveen funds' shareholders to purchase additional shares. Id. P 60. Specifically, the offerings allowed each NUV or NPI fund shareholder to purchase one additional share for every three shares already owned. Id. P 66. Under the offerings, the NUV fund could have issued up to 55 million new shares, increasing its outstanding shares by 33 percent; the NPI fund could have issued up to 17.7 million new shares, increasing its outstanding shares by 33 percent. Id. PP 3-4. In fact, only about half of the offered new shares were purchased. Approximately 28.3 percent of the NUV fund's shareholders exercised their rights, subscribing to 26.3 million new shares or 47.9 percent of the new shares offered. Id. P 89. Similarly, approximately 32.4 percent of the NPI fund's shareholders exercised their rights, subscribing to 10 million shares or 57.2 percent of the new shares offered. Id.
Plaintiffs allege that defendants' November 8, 1993 announcement stemmed from pressure for growth and that the offerings were instituted for Nuveen's benefit rather than for the benefit of the Nuveen funds' shareholders. Id. PP 59-60. Specifically, plaintiffs claim Nuveen directly benefited from the offerings by receiving substantial underwriting fees and indirectly benefited from the offerings because Nuveen Advisory, Nuveen's wholly-owned subsidiary, will receive significantly greater management fees due to the Nuveen funds' increased assets under Nuveen Advisory's management. Id. P 16.
Plaintiffs assert that the offerings harmed the Nuveen funds' shareholders. The price for the new shares was set at:
the lesser of (A) the net asset value per common share as of the date of the expiration of the offering (the "pricing date") or (B) 95% of the average of the last reported sale prices of a common share on the New York Stock Exchange on the pricing date and the four (4) preceding business days.