As filed with the Securities and Exchange Commission on October 30, 2020
Securities Act File No. 333-241481
Investment Company Act File No. 811-08081
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
☒ Pre-Effective Amendment No. 1
☐ Post-Effective Amendment No.
(Check appropriate box or boxes)
BLACKROCK MUNIHOLDINGS FUND, INC.
(Exact Name of Registrant as Specified in Charter)
100 Bellevue Parkway
Wilmington, Delaware 19809
(Address of Principal Executive Offices: Number, Street, City, State, Zip Code)
(800) 882-0052
(Area Code and Telephone Number)
John M. Perlowski
President and Chief Executive Officer
BlackRock MuniHoldings Fund, Inc.
55 East 52nd Street
New York, New York 10055
(Name and Address of Agent for Service)
With copies to:
Margery K. Neale, Esq. Elliot J. Gluck, Esq. Willkie Farr & Gallagher LLP 787 Seventh Avenue New York, New York 10019-6099 |
Janey Ahn, Esq. BlackRock Advisors, LLC 55 East 52nd Street New York, New York 10055 |
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
(Approximate Date of Proposed Public Offering)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
|
||||||||
Title of Securities Being Registered |
Amount Being Registered(1) |
Proposed Maximum Offering Price Per Unit(2) |
Proposed Maximum Aggregate Offering Price(1) |
Amount of Registration Fee(3) |
||||
Common stock $0.10 par value |
43,249,476 | $16.53 | $714,913,841 | $78,017.80 | ||||
|
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|
(1) |
Estimated solely for the purpose of calculating the filing registration fee, pursuant to Rule 457(o) under the Securities Act of 1933. |
(2) |
Net asset value per common share on October 28, 2020. |
(3) |
$129.80 previously paid in connection with the registration of $1,000,000 worth of common shares on August 6, 2020. |
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
EXPLANATORY NOTE
This Registration Statement is organized as follows:
a. |
Letter to Common Shareholders of BlackRock Municipal Income Investment Quality Trust (BAF), BlackRock Municipal Bond Trust (BBK), BlackRock MuniHoldings Fund II, Inc. (MUH), BlackRock MuniHoldings Quality Fund, Inc. (MUS) and BlackRock MuniHoldings Fund, Inc. (MHD). |
b. |
Questions & Answers for Common Shareholders of BAF, BBK, MUH, MUS and MHD. |
c. |
Notice of Joint Special Meeting of Shareholders of BAF, BBK, MUH, MUS and MHD. |
d. |
Joint Proxy Statement/Prospectus regarding the proposed reorganizations of BAF, BBK, MUH and MUS into MHD. |
e. |
Statement of Additional Information regarding the proposed reorganizations of BAF, BBK, MUH and MUS into MHD. |
f. |
Part C: Other Information. |
g. |
Exhibits. |
BLACKROCK MUNICIPAL INCOME INVESTMENT QUALITY TRUST
BLACKROCK MUNICIPAL BOND TRUST
BLACKROCK MUNIHOLDINGS FUND II, INC.
BLACKROCK MUNIHOLDINGS QUALITY FUND, INC.
BLACKROCK MUNIHOLDINGS FUND, INC.
100 Bellevue Parkway
Wilmington, Delaware 19809
(800) 882-0052
[●], 2020
Dear Common Shareholder:
You are cordially invited to attend a joint special shareholder meeting (the Special Meeting) of BlackRock Municipal Income Investment Quality Trust (BAF), BlackRock Municipal Bond Trust (BBK), BlackRock MuniHoldings Fund II, Inc. (MUH), BlackRock MuniHoldings Quality Fund, Inc. (MUS) and BlackRock MuniHoldings Fund, Inc. (MHD or the Acquiring Fund and collectively with BAF, BBK, MUH and MUS, the Funds, and each, a Fund), to be held on December 15, 2020 at 11:00 a.m. (Eastern time). Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Special Meeting will be held in a virtual meeting format only. Shareholders will not have to travel to attend the Special Meeting, but will be able to view the Special Meeting live and cast their votes by accessing a web link. Before the Special Meeting, I would like to provide you with additional background information and ask for your vote on important proposals affecting the Funds.
Common Shareholders of BAF: You and the preferred shareholders of BAF are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between BAF and the Acquiring Fund (the BAF Reorganization Agreement) and the transactions contemplated therein, including the termination of BAFs registration under the Investment Company Act of 1940, as amended (the 1940 Act), and the dissolution of BAF under Delaware law (the BAF Reorganization). The Acquiring Fund has a similar investment objective and similar investment strategies, policies and restrictions as BAF, although there are some differences. Preferred shareholders of BAF are also being asked to vote as a separate class on a proposal to approve the BAF Reorganization Agreement and the BAF Reorganization.
Common Shareholders of BBK: You and the preferred shareholders of BBK are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between BBK and the Acquiring Fund (the BBK Reorganization Agreement) and the transactions contemplated therein, including the termination of BBKs registration under the 1940 Act and the dissolution of BBK under Delaware law (the BBK Reorganization). The Acquiring Fund has a substantially similar (but not identical) investment objective and similar investment strategies, policies and restrictions as BBK, although there are some differences. Preferred shareholders of BBK are also being asked to vote as a separate class on a proposal to approve the BBK Reorganization Agreement and the BBK Reorganization.
Common Shareholders of MUH: You and the preferred shareholders of MUH are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between MUH and the Acquiring Fund (the MUH Reorganization Agreement) and the transactions contemplated therein, including the termination of MUHs registration under the 1940 Act and the dissolution of MUH under Maryland law (the MUH Reorganization). The Acquiring Fund has an identical investment objective and similar investment strategies, policies and restrictions as MUH, although there are some differences. Preferred shareholders of MUH are also being asked to vote as a separate class on a proposal to approve the MUH Reorganization Agreement and the MUH Reorganization.
Common Shareholders of MUS: You and the preferred shareholders of MUS are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between MUS and the Acquiring Fund (the MUS Reorganization Agreement and collectively with the BAF Reorganization Agreement, the BBK Reorganization Agreement and the MUH Reorganization Agreement, the Reorganization Agreements) and the transactions contemplated therein, including the termination of MUSs registration under the 1940 Act and the dissolution of MUS under Maryland law (the MUS Reorganization). The Acquiring Fund has an identical investment objective and
similar investment strategies, policies and restrictions as MUS, although there are some differences. Preferred shareholders of MUS are also being asked to vote as a separate class on a proposal to approve the MUS Reorganization Agreement and the MUS Reorganization.
Common Shareholders of the Acquiring Fund: You and the preferred shareholders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with the BAF Reorganization, the BBK Reorganization, the MUH Reorganization and the MUS Reorganization (each, a Reorganization). Preferred shareholders of the Acquiring Fund are also being asked to vote as a separate class on a proposal to approve each Reorganization Agreement and the transactions contemplated therein.
The enclosed Joint Proxy Statement/Prospectus is only being delivered to the Funds common shareholders. The preferred shareholders of each Fund are also being asked to attend the Special Meeting and to vote as a separate class with respect to the proposals described above. Each Fund is delivering to its preferred shareholders a separate proxy statement with respect to the proposals described above.
The Board of Trustees or Board of Directors, as applicable, of each Fund believes that the proposal that the common shareholders of its Fund are being asked to vote upon is in the best interests of its respective Fund and its shareholders and unanimously recommends that you vote FOR such proposal.
Your vote is important. Attendance at the Special Meeting will be limited to each Funds shareholders as of October 16, 2020, the record date for the Special Meeting.
If your shares in a Fund are registered in your name, you may attend and participate in the Special Meeting at www.meetingcenter.io/295614271 by entering the control number found in the shaded box on your proxy card and password BLK 2020 on the date and time of the Special Meeting. You may vote during the Special Meeting by following the instructions that will be available on the Special Meeting website during the Special Meeting.
If you are a beneficial shareholder of a Fund (that is if you hold your shares of a Fund through a bank, broker, financial intermediary or other nominee) and want to attend the Special Meeting you must register in advance of the Special Meeting. To register, you must submit proof of your proxy power (legal proxy), which you can obtain from your financial intermediary or other nominee, reflecting your Fund holdings along with your name and email address to Georgeson LLC, each Funds tabulator. You may email an image of your legal proxy to shareholdermeetings@computershare.com. Requests for registration must be received no later than 5:00 p.m. (Eastern time) three business days prior to the Special Meeting date. You will receive a confirmation email from Georgeson LLC of your registration and a control number and security code that will allow you to vote at the Special Meeting.
Even if you plan to attend the Special Meeting, please promptly follow the enclosed instructions to submit voting instructions by telephone or via the Internet. Alternatively, you may submit voting instructions by signing and dating each proxy card or voting instruction form you receive, and if received by mail, returning it in the accompanying postage-paid return envelope.
We encourage you to carefully review the enclosed materials, which explain the proposals in more detail. As a shareholder, your vote is important, and we hope that you will respond today to ensure that your shares will be represented at the meeting. You may vote using one of the methods below by following the instructions on your proxy card or voting instruction form(s):
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By touch-tone phone; |
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By internet; |
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By signing, dating and returning the enclosed proxy card or voting instruction form(s) in the postage-paid envelope; or |
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By participating at the Special Meeting as described above. |
- 2 -
If you do not vote using one of the methods described above, you may be called by Georgeson LLC, the Funds proxy solicitor, to vote your shares.
If you have any questions about the proposals to be voted on or the virtual Special Meeting, please call Georgeson LLC, the firm assisting us in the solicitation of proxies, toll free at 1-866-767-8867.
As always, we appreciate your support.
Sincerely,
JOHN M. PERLOWSKI
President and Chief Executive Officer of the Funds
Please vote now. Your vote is important.
To avoid the wasteful and unnecessary expense of further solicitation(s), we urge you to indicate your voting instructions on the enclosed proxy card, date and sign it and return it promptly in the postage-paid envelope provided, or record your voting instructions by telephone or via the internet, no matter how large or small your holdings may be. If you submit a properly executed proxy but do not indicate how you wish your common shares to be voted, your common shares will be voted FOR the proposal. If your common shares are held through a broker, you must provide voting instructions to your broker about how to vote your common shares in order for your broker to vote your common shares as you instruct at the Special Meeting.
- 3 -
[●], 2020
IMPORTANT NOTICE
TO COMMON SHAREHOLDERS OF
BLACKROCK MUNICIPAL INCOME INVESTMENT QUALITY TRUST
BLACKROCK MUNICIPAL BOND TRUST
BLACKROCK MUNIHOLDINGS FUND II, INC.
BLACKROCK MUNIHOLDINGS QUALITY FUND, INC.
BLACKROCK MUNIHOLDINGS FUND, INC.
QUESTIONS & ANSWERS
Although we urge you to read the entire Joint Proxy Statement/Prospectus, we have provided for your convenience a brief overview of some of the important questions concerning the joint special shareholder meeting (the Special Meeting) of BlackRock Municipal Income Investment Quality Trust (BAF), BlackRock Municipal Bond Trust (BBK), BlackRock MuniHoldings Fund II, Inc. (MUH), BlackRock MuniHoldings Quality Fund, Inc. (MUS and collectively with BAF, BBK and MUH, the Target Funds) and BlackRock MuniHoldings Fund, Inc. (MHD or the Acquiring Fund and collectively with BAF, BBK, MUH and MUS, the Funds, and each, a Fund) and the proposals to be voted on. It is expected that the effective dates (collectively, the Closing Date) of the Reorganizations will be sometime during the first quarter of 2021, but they may be at a different time as described in the Joint Proxy Statement/Prospectus.
The enclosed Joint Proxy Statement/Prospectus is being sent only to the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund. Each Fund is separately soliciting the votes of its holders of Variable Rate Muni Term Preferred Shares (VMTP Shares and the holders thereof, VMTP Holders, and together with the common shares of each Fund, the Shares) through a separate proxy statement.
Q: |
Why is a shareholder meeting being held? |
A: |
Common Shareholders of BlackRock Municipal Income Investment Quality Trust (NYSE Ticker: BAF): You and the VMTP Holders of BAF are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between BAF and the Acquiring Fund (the BAF Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of BAFs assets and the assumption by the Acquiring Fund of substantially all of BAFs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of BAF, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by BAF of its registration under the Investment Company Act of 1940, as amended (the 1940 Act), and the liquidation, dissolution and termination of BAF in accordance with its Agreement and Declaration of Trust and Delaware law (the BAF Reorganization). |
BAF VMTP Holders are also being asked to vote as a separate class on a proposal to approve the BAF Reorganization Agreement and the BAF Reorganization through a separate proxy statement.
Common Shareholders of BlackRock Municipal Bond Trust (NYSE Ticker: BBK): You and the VMTP Holders of BBK are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between BBK and the Acquiring Fund (the BBK Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of BBKs assets and the assumption by the Acquiring Fund of substantially all of BBKs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of BBK, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by BBK of its registration under the 1940 Act, and the liquidation, dissolution and termination of BBK in accordance with its Agreement and Declaration of Trust and Delaware law (the BBK Reorganization).
i
BBK VMTP Holders are also being asked to vote as a separate class on a proposal to approve the BBK Reorganization Agreement and the BBK Reorganization through a separate proxy statement.
Common Shareholders of BlackRock MuniHoldings Fund II, Inc. (NYSE Ticker: MUH): You and the VMTP Holders of MUH are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between MUH and the Acquiring Fund (the MUH Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of MUHs assets and the assumption by the Acquiring Fund of substantially all of MUHs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of MUH, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by MUH of its registration under the 1940 Act, and the liquidation, dissolution and termination of MUH in accordance with its charter and Maryland law (the MUH Reorganization).
MUH VMTP Holders are also being asked to vote as a separate class on a proposal to approve the MUH Reorganization Agreement and the MUH Reorganization through a separate proxy statement.
Common Shareholders of BlackRock MuniHoldings Quality Fund, Inc. (NYSE Ticker: MUS): You and the VMTP Holders of MUS are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between MUS and the Acquiring Fund (the MUS Reorganization Agreement and collectively with the BAF Reorganization Agreement, the BBK Reorganization Agreement and the MUH Reorganization Agreement, the Reorganization Agreements) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of MUSs assets and the assumption by the Acquiring Fund of substantially all of MUSs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of MUS, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by MUS of its registration under the 1940 Act, and the liquidation, dissolution and termination of MUS in accordance with its charter and Maryland law (the MUS Reorganization and collectively with the BAF Reorganization, the BBK Reorganization and the MUH Reorganization, the Reorganizations).
MUS VMTP Holders are also being asked to vote as a separate class on a proposal to approve the MUS Reorganization Agreement and the MUS Reorganization through a separate proxy statement.
Common Shareholders of BlackRock MuniHoldings Fund, Inc. (NYSE Ticker: MHD): You and the Acquiring Fund VMTP Holders are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with each Reorganization Agreement (each, an Issuance and collectively, the Issuances).
Acquiring Fund VMTP Holders are also being asked to vote as a separate class on a proposal to approve each Reorganization Agreement and the transactions contemplated therein, including amendments to the Articles Supplementary Establishing and Fixing the Rights and Preferences of Variable Rate Muni Term Preferred Shares of the Acquiring Fund (the MHD Articles Supplementary) in connection with the issuance of additional Acquiring Fund VMTP Shares, through a separate proxy statement.
The term Combined Fund refers to the Acquiring Fund as the surviving Fund after the consummation of each of the Reorganizations.
ii
No Reorganization is contingent upon the approval of any other Reorganization. If a Reorganization is not consummated, then the Fund for which such Reorganization(s) was not consummated would continue to exist and operate on a standalone basis.
Q: |
Why has each Funds Board recommended these proposals? |
A: |
The Board of Trustees or Board of Directors, as applicable (each, a Board and each member thereof, a Board Member), of each Fund has determined that its Reorganization(s) is in the best interests of its Fund and that the interests of existing common shareholders and preferred shareholders of its Fund will not be diluted with respect to net asset value (NAV) and liquidation preference, respectively, as a result of the Reorganization. The Reorganizations seek to achieve certain economies of scale and other operational efficiencies by combining five funds that have identical, substantially similar or similar investment objectives and similar investment strategies, policies and restrictions and are managed by the same investment adviser, BlackRock Advisors, LLC (the Investment Advisor). |
In light of these similarities, the Reorganizations are intended to reduce fund redundancies and create a single, larger fund that may benefit from anticipated operating efficiencies and economies of scale. The Reorganizations are intended to result in the following potential benefits to common shareholders:
(i) |
lower net total expenses per Common Share for common shareholders of each Fund (as common shareholders of the Combined Fund following the Reorganizations) due to economies of scale resulting from the larger size of the Combined Fund; |
(ii) |
improved or the same net earnings yield on NAV for common shareholders of each Fund after giving effect to the Combined Fund Contractual Waiver (as defined below); |
(iii) |
improved secondary market trading of the common shares of the Combined Fund; and |
(iv) |
operating and administrative efficiencies for the Combined Fund, including the potential for the following: |
(a) |
greater investment flexibility and investment options; |
(b) |
greater diversification of portfolio investments; |
(c) |
the ability to trade portfolio securities in larger positions and more favorable transaction terms; |
(d) |
additional sources of leverage or more competitive leverage terms and more favorable transaction terms; |
(e) |
benefits from having fewer closed-end funds offering similar products in the market, including an increased focus by investors on the remaining funds in the market (including the Combined Fund) and additional research coverage; and |
(f) |
benefits from having fewer similar funds in the same fund complex, including a simplified operational model and a reduction in risk of operational, legal and financial errors. |
The Board of each Fund, including Board Members thereof who are not interested persons (as defined in the 1940 Act), approved its Reorganization Agreement(s) and the Issuances, as applicable, concluding that the Reorganization(s) is in the best interests of its Fund and that the interests of existing common shareholders and preferred shareholders of its Fund will not be diluted with respect to NAV and liquidation preference, respectively, as a result of the Reorganization(s). As a result of the Reorganizations, however, common and preferred shareholders of each Fund may hold a reduced percentage of ownership in the larger Combined Fund than they did in any of the individual Funds before the Reorganizations. Each Boards conclusion was based on each Board Members business judgment after consideration of all relevant factors taken as a whole with respect to its Fund and the Funds common and preferred shareholders, although individual Board Members may have placed different weight on various factors and assigned different degrees of materiality to various factors.
iii
Because the shareholders of each Fund will vote separately on the Funds respective Reorganization(s) or Issuances, as applicable, there are multiple potential combinations of Reorganizations. To the extent that one or more of the Reorganizations is not completed, any expected expense savings by the Combined Fund, or other potential benefits resulting from the Reorganizations, may be reduced.
If a Reorganization is not consummated, then the Investment Advisor may, in connection with ongoing management of the Fund for which such Reorganization(s) was not consummated and its product line, recommend alternative proposals to the Board of that Fund.
Q: |
How will the Reorganizations affect the fees and expenses of the Funds? |
A: |
For the 12-month period ended August 31, 2020, the Total Expense Ratios of BAF and BBK were 2.34% and 2.34%, respectively. For the fiscal year ended April 30, 2020, the Total Expense Ratios of the Acquiring Fund, MUH and MUS were 2.16%, 2.31% and 2.42%, respectively. Total Expenses means a Funds total annual operating expenses (including interest expense). Total Expense Ratio means a Funds Total Expenses expressed as a percentage of its average net assets attributable to its common shares. |
Each Fund and the Investment Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement), pursuant to which the Investment Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees each Fund pays to the Investment Advisor indirectly through its investment in money market funds managed by the Investment Advisor or its affiliates, through June 30, 2022 (the Affiliated Money Market Fund Fee Waiver). Prior to December 1, 2019, the Affiliated Money Market Fund Fee Waiver was voluntary. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Funds (upon the vote of a majority of the Board Members who are not interested persons of the Fund (as defined in the 1940 Act) or a majority of the outstanding voting securities of each Fund, upon 90 days written notice by the Fund to the Investment Advisor.
With respect to BBK, the Investment Advisor voluntarily agreed to waive a portion of the investment advisory fees or other expenses of BBK equal to an annual rate of 0.075% of BBKs average weekly managed assets (as defined below) (the BBK Voluntary Waiver). With respect to MUS, the Investment Advisor voluntarily agreed to waive its investment advisory fee on the proceeds of the VMTP Shares and tender option bond (TOB) trusts that exceed 35% of total assets minus the sum of its accrued liabilities (which does not include liabilities represented by TOB trusts and the liquidation preference of any outstanding VMTP Shares) (the MUS Voluntary Waiver and together with the BBK Voluntary Waiver, the Voluntary Waivers). The Voluntary Waivers may be reduced or discontinued at any time without notice.
If any of the Reorganizations are consummated, the Investment Advisor has contractually agreed to waive a portion of its investment management fee equal to an annual rate of 0.01% of the average daily net assets (as defined below) of the Combined Fund through June 30, 2022 (the Combined Fund Contractual Waiver). The Combined Fund Contractual Waiver may be terminated prior to June 30, 2022 only by action of a majority of the Board Members who are not interested persons of the Combined Fund (as defined in the 1940 Act) or by a vote of the Combined Funds outstanding voting securities.
In the Investment Advisors view, the most likely combination is the Reorganizations of all of the Funds, which is also expected to result in the lowest Total Expense Ratio for the Combined Fund. If the only Reorganization discussed in the Joint Proxy Statement/Prospectus that is completed is the Reorganization of BAF into the Acquiring Fund, the Combined Fund would be expected to have a higher Total Expense Ratio than if any other combination of Reorganizations were completed. Any combination of Reorganizations is expected to result in a Total Expense Ratio for the Combined Fund that is lower than the Total Expense Ratio of each of BAF, BBK, MUH and MUS.
As of April 30, 2020 for the MUH, MUS, the Acquiring Fund and the Combined Fund, and as of August 31, 2020 for BAF and BBK, the historical and pro forma Total Expense Ratios (after giving effect to the Combined Fund Contractual Waiver) applicable to the Reorganizations are as follows:
With Voluntary Waivers and Affiliated Money Market Fund Fee Waiver
BAF |
BBK |
MUH |
MUS |
Acquiring Fund (MHD) |
Pro forma Combined Fund (BAF into MHD) |
Pro forma Combined Fund (BAF, BBK, MUH and MUS into MHD) |
||||||
2.34% |
2.21% | 2.31% | 2.36% | 2.15% | 2.13% | 2.11% |
iv
Without Voluntary Waivers or Affiliated Money Market Fund Fee Waiver
BAF |
BBK |
MUH |
MUS |
Acquiring Fund (MHD) |
Pro forma Combined Fund (BAF into MHD) |
Pro forma Combined Fund (BAF, BBK, MUH and MUS into MHD) |
||||||
2.34% |
2.34% | 2.31% | 2.42% | 2.16% | 2.13% | 2.11% |
The Funds estimate that the completion of all of the Reorganizations would result in a Total Expense Ratio (including interest expense and after giving effect to the Combined Fund Contractual Waiver) for the Combined Fund of 2.11% on a historical and pro forma basis for the 12-month period ended April 30, 2020, representing a reduction in the net Total Expense Ratio (including interest expense and after giving effect to the Voluntary Waivers and, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund by 0.23%, 0.10%, 0.20%, 0.25% and 0.04%, respectively. Without giving effect to the Voluntary Waivers (which may be reduced or discontinued at any time without notice) or, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver, the gross Total Expense Ratio (including interest expense and after giving effect to the Combined Fund Contractual Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund is expected to decrease by 0.23%, 0.23%, 0.20%, 0.31% and 0.05%, respectively.
Each Funds Total Expenses include interest expense associated with such Funds VMTP Shares. For the fiscal year ended April 30, 2020, the Total Expense Ratios (excluding interest expense and after giving effect to the MUS Voluntary Waiver and, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) of the Acquiring Fund, MUH and MUS were 0.97%, 1.03% and 0.99%, respectively, and the Total Expense Ratios (excluding interest expense and without giving effect to the MUS Voluntary Waiver or, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) of the Acquiring Fund, MUH and MUS were 0.98%, 1.03% and 1.05%, respectively. For the 12-month period ended August 31, 2020, the Total Expense Ratios (excluding interest expense and after giving effect to the BBK Voluntary Waiver) of BAF and BBK were 1.17% and 1.14%, respectively, and the Total Expense Ratios (excluding interest expense and without giving effect to the BBK Voluntary Waiver) of BAF and BBK were 1.17% and 1.27%, respectively.
BAF and BBKs Total Expenses include Reorganization-related expenses which will not be incurred in the Combined Fund. For 12-month period ended August 31, 2020, the Total Expense Ratios (excluding interest expense and Reorganization-related expenses and after giving effect to the BBK Voluntary Waiver) of BAF and BBK were 1.11% and 1.09%, respectively.
The Funds estimate that the completion of all of the Reorganizations would result in a Total Expense Ratio (excluding interest expense and after giving effect to the Combined Fund Contractual Waiver) for the Combined Fund of 0.93% on a historical and pro forma basis for the 12-month period ended April 30, 2020, representing a reduction in the Total Expense Ratio (excluding interest expense and, if applicable, Reorganization-related expenses and after giving effect to the Voluntary Waivers and, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) for
v
the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund by 0.18%, 0.16%, 0.10%, 0.06% and 0.04%, respectively. Without giving effect to the Voluntary Waivers (which may be reduced or discontinued at any time without notice) or, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver, the gross Total Expense Ratio (excluding interest expense and, if applicable, Reorganization-related expenses and after giving effect to the Combined Fund Contractual Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund is expected to decrease by 0.18%, 0.29%, 0.10%, 0.12% and 0.05%, respectively.
BAF currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average weekly managed assets. BBK currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.65% of its average weekly managed assets. For purposes of calculating these fees, managed assets means the total assets of the relevant Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of its accrued liabilities (other than money borrowed for investment purposes, including liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares). Each of MUH, MUS and the Acquiring Fund currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average daily net assets. For purposes of calculating these fees, net assets means the Acquiring Funds total assets minus the sum of the Acquiring Funds accrued liabilities (which does not include liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares).
If any of the Reorganizations are consummated, the annual contractual investment management fee rate of the Acquiring Fund will be the annual contractual investment management fee rate of the Combined Fund, which will be 0.55% of the average daily net assets of the Combined Fund. The annual contractual investment management fee rate of the Combined Fund represents a 10 basis point reduction in the annual contractual investment management fee rate for BBK and no change in the annual contractual investment management fee rates for BAF, MUH and MUS. Additionally, if any of the Reorganizations are consummated, the Investment Advisor has agreed to the Combined Fund Contractual Waiver through June 30, 2022, resulting in an actual investment management fee rate of 0.54% of the average daily net assets of the Combined Fund. Please see Expense Table For Common Shareholders in the Joint Proxy Statement/Prospectus for additional information.
Based on a pro forma Broadridge peer expense universe for the Combined Fund, the estimated total annual fund expense ratio (excluding investment-related expenses and taxes) is expected to be in the second quartile and contractual investment management fee rate and actual investment management fee rate over total assets are each expected to be in the first quartile.
The level of expense savings (or increases) will vary depending on the combination of the Funds in the Reorganizations, and furthermore, there can be no assurance that future expenses will not increase or that any expense savings for any Fund will be realized as a result of any Reorganization.
Q: |
How will the Reorganizations affect the earnings, distributions and undistributed net income of the Funds? |
A: |
The Combined Funds net earnings yield on NAV for common shareholders following the Reorganizations (after giving effect to the Combined Fund Contractual Waiver) is expected to be potentially higher than the current net earnings yield on NAV for each of BAF, BBK, MUH and MUS and the same as the current net earnings yield on NAV for the Acquiring Fund. The distribution level of any fund is subject to change based upon a number of factors, including the current and projected level of the funds earnings, and may fluctuate over time; thus, subject to a number of other factors, including the funds distribution policy, a higher net earnings profile may potentially have a positive impact on such funds distribution level over time. The Combined Funds earnings and distribution rate on NAV will change over time, and depending on market conditions, may be higher or lower than each Funds earnings and distribution rate on NAV prior to the Reorganizations. A Funds earnings and net investment income are variables which depend on many factors, including its asset mix, portfolio turnover level, the amount of leverage utilized by the Fund, the costs of such leverage, the performance of its investments, the movement of interest rates and general market conditions. In addition, the Combined Funds future earnings will vary depending upon the combination of completed Reorganizations. There can be no assurance that the future earnings of a Fund, including the Combined Fund after the Reorganizations, will remain constant. |
vi
If the Reorganizations are approved by shareholders, then the greater of (1) substantially all of the undistributed net investment income (UNII), if any, or (2) the monthly distribution of each Fund is expected to be declared to such Funds common shareholders prior to the Closing Date (the Pre-Reorganization Declared UNII Distributions). The declaration date, ex-dividend date (the Ex-Dividend Date) and record date of the Pre-Reorganization Declared UNII Distributions will occur prior to the Closing Date. However, all or a significant portion of the Pre-Reorganization Declared UNII Distributions may be paid in one or more distributions to common shareholders of the Funds entitled to such Pre-Reorganization Declared UNII Distributions after the Closing Date. Former BAF, BBK, MUH and MUS shareholders entitled to such Pre-Reorganization Declared UNII Distributions paid after the Closing Date will receive such distributions in cash.
Persons who purchase common shares of any of the Funds on or after the Ex-Dividend Date for the Pre-Reorganization Declared UNII Distributions should not expect to receive any distributions from any Fund until distributions, if any, are declared by the Board of the Combined Fund and paid to shareholders entitled to any such distributions. No such distributions are expected to be paid by the Combined Fund until at least approximately one month following the Closing Date.
Additionally, the Acquiring Fund, in order to seek to provide its common shareholders with distribution rate stability, may include in its Pre-Reorganization Declared UNII Distribution amounts in excess of its undistributed net investment income and net investment income accrued through the Closing Date; any such excess amounts are not expected to constitute a return of capital. This would result in the Acquiring Fund issuing incrementally more common shares in the Reorganizations since its NAV as of the valuation time for the Reorganizations would be lower relative to a scenario where such excess amounts were not included in the Acquiring Funds Pre-Reorganization Declared UNII Distribution.
The Combined Fund is anticipated to retain a lower UNII balance after the Reorganizations than BAF, BBK, MUH, and MUS prior to the Reorganizations. The lower anticipated UNII balance for the Combined Fund relative to the UNII balance of each of BAF, BBK, MUH and MUS poses risks for shareholders of the Combined Fund. UNII balances, in part, support the level of a funds regular distributions and provide a cushion in the event a funds net earnings for a particular distribution period are insufficient to support the level of its regular distribution for that period. If the Combined Funds net earnings are below the level of its current distribution rate, the Combined Funds UNII balance could be more likely to contribute to a determination to decrease the Combined Funds distribution rate, or could make it more likely that the Combined Fund will make distributions consisting in part of a return of capital to maintain the level of its regular distributions. See Dividends and Distributions. Moreover, because a funds UNII balance, in part, supports the level of a funds regular distributions, the UNII balance of the Combined Fund could impact the trading market for the Combined Funds common shares and the magnitude of the trading discount to NAV of the Combined Funds common shares. However, the Combined Fund is anticipated to benefit from a lower expense ratio (compared to BAF, BBK, MUH and MUS), a potentially higher net earnings profile and other anticipated benefits of economies of scale as discussed herein. Each Fund, including the Combined Fund, reserves the right to change its distribution policy with respect to common share distributions and the basis for establishing the rate of its distributions for the common shares at any time and may do so without prior notice to common shareholders. The payment of any distributions by any Fund, including the Combined Fund, is subject to, and will only be made when, as, and if, declared by the Board of such Fund. There is no assurance the Board of any Fund, including the Combined Fund, will declare any distributions for such Fund.
To the extent any Pre-Reorganization Declared UNII Distribution is not an exempt interest dividend (as defined in the Internal Revenue Code of 1986, as amended (the Code)), the distribution may be taxable to shareholders for U.S. federal income tax purposes.
vii
Q: |
Have common shares of each Fund historically traded at a premium or discount? |
A: |
The common shares of each Fund have historically traded at both a premium and a discount. The table below sets forth the market price, NAV, and the premium/discount to NAV of each Fund as of August 31, 2020. |
Fund |
Market
Price |
NAV |
Premium/
(Discount) to NAV |
|||||||||
BAF |
$ | 14.39 | $ | 15.26 | (5.70 | )% | ||||||
BBK |
$ | 15.39 | $ | 16.42 | (6.27 | )% | ||||||
MUH |
$ | 14.81 | $ | 15.65 | (5.37 | )% | ||||||
MUS |
$ | 12.71 | $ | 13.90 | (8.56 | )% | ||||||
Acquiring Fund (MHD) |
$ | 15.53 | $ | 16.80 | (7.56 | )% |
To the extent BAFs, BBKs, MUHs or MUSs common shares are trading at a wider discount (or a narrower premium) than the Acquiring Fund at the time of its Reorganization, BAFs, BBKs, MUHs or MUSs common shareholders would have the potential for an economic benefit by the narrowing of the discount or widening of the premium. To the extent BAFs, BBKs, MUHs or MUSs common shares are trading at a narrower discount (or wider premium) than the Acquiring Fund at the time of its Reorganization, BAFs, BBKs, MUHs or MUSs common shareholders may be negatively impacted if its Reorganization is consummated. Acquiring Fund common shareholders would only benefit from a premium/discount perspective to the extent the post-Reorganization discount (or premium) of the Acquiring Fund common shares improves.
There can be no assurance that, after the Reorganizations, common shares of the Combined Fund will trade at a narrower discount to NAV or wider premium to NAV than the common shares of any individual Fund prior to the Reorganizations. Upon consummation of the Reorganizations, the Combined Fund common shares may trade at a price that is less than the current market price of Acquiring Fund common shares. In the Reorganizations, common shareholders of BAF, BBK, MUH and MUS will receive Acquiring Fund common shares based on the relative NAVs (not the market values) of the respective Funds common shares. The market value of the common shares of the Combined Fund may be less than the market value of the common shares of each respective Fund prior to the Reorganizations.
Q: |
How will holders of preferred shares be affected by the Reorganizations? |
A: |
As of the date of the enclosed Joint Proxy Statement/Prospectus, each Fund has VMTP Shares outstanding. As of August 31, 2020, BAF had 422 Series W-7 VMTP Shares outstanding, BBK had 799 Series W-7 VMTP Shares outstanding, MUH had 550 Series W-7 VMTP Shares outstanding, MUS had 870 Series W-7 VMTP Shares outstanding and the Acquiring Fund had 837 Series W-7 VMTP Shares outstanding. In connection with the Reorganizations, the Acquiring Fund expects to issue 422 additional VMTP Shares to BAF VMTP Holders, 799 additional VMTP Shares to BBK VMTP Holders, 550 additional VMTP Shares to MUH VMTP Holders and 870 additional VMTP Shares to MUS VMTP Holders. Following the completion of the Reorganizations, the Combined Fund is expected to have 3,478 VMTP Shares outstanding. |
Assuming all of the Reorganizations are approved by shareholders, upon the Closing Date of the Reorganizations, BAF, BBK, MUH and MUS VMTP Holders will receive on a one-for-one basis one newly issued Acquiring Fund VMTP Share, par value $0.10 per share and with a liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on the BAF, BBK, MUH or MUS VMTP Shares up to and including the day immediately preceding the Closing Date of the Reorganizations if such dividends have not been paid prior to the Closing Date), in exchange for each BAF, BBK, MUH or MUS VMTP Share held by the BAF, BBK, MUH or MUS VMTP Holders immediately prior to the Closing Date. The newly issued Acquiring Fund VMTP Shares may be of the same series as the Acquiring Funds Series W-7 VMTP Shares or a substantially identical series. No fractional Acquiring Fund VMTP Shares will be issued. The terms of the Acquiring Fund VMTP Shares to be issued in connection with the Reorganizations will be substantially identical to the terms of the Acquiring Funds outstanding VMTP Shares and will rank on parity with the Acquiring Funds outstanding VMTP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The Reorganizations will not result in any changes to the terms of the Acquiring Funds VMTP Shares currently outstanding. The terms of the Acquiring Funds VMTP Shares may change from time to time, subject to Board approval.
The newly issued Acquiring Fund VMTP Shares will have terms that are substantially identical to the terms of the outstanding BAF, BBK, MUH and MUS VMTP Shares, including the same term redemption date of July 2, 2021.
viii
None of the expenses of the Reorganizations are expected to be borne by the VMTP Holders of the Funds.
Following the Reorganizations, the VMTP Holders of each Fund will be VMTP Holders of the larger Combined Fund that will have a larger asset base and more VMTP Shares outstanding than any Fund individually before the Reorganizations. With respect to matters requiring all preferred shareholders to vote separately or common and preferred shareholders to vote together as a single class, following the Reorganizations, VMTP Holders of the Combined Fund may hold a smaller percentage of the outstanding preferred shares of the Combined Fund as compared to their percentage holdings of outstanding preferred shares of their respective Fund prior to the Reorganizations.
Q: |
How similar are the Funds? |
A: |
The Funds have the same investment adviser, officers and trustees/directors. BAF and BBK are each formed as a Delaware statutory trust and MUH, MUS and Acquiring Fund are each organized as a Maryland corporation. Because the Acquiring Fund is organized as a Maryland corporation, shareholders of BAF and BBK will become shareholders of a Maryland corporation rather than shareholders of a Delaware statutory trust if the Reorganizations are completed. A more detailed description of the differences between Delaware statutory trust law and Maryland corporate law is contained in the Joint Proxy Statement/Prospectus under the heading Governing Law. |
Each Fund has its common shares listed on the NYSE and has privately placed VMTP Shares outstanding. BAF is managed by a team of investment professionals led by Michael Perilli, CFA, Theodore Jaeckel, CFA, and Phillip Soccio. BBK is managed by a team of investment professionals led by Theodore Jaeckel, CFA, Walter OConnor, CFA, Christian Romaglino and Kevin Maloney. MUH is managed by a team of investment professionals led by Theodore Jaeckel, CFA, Walter OConnor, CFA and Christian Romaglino. MUS is managed by a team of investment professionals led by Phillip Soccio, Theodore Jaeckel, CFA, and Christian Romaglino. The Acquiring Fund is managed by a team of investment professionals led by Theodore Jaeckel, CFA and Walter OConnor, CFA. The Combined Fund will be managed by a team of investment professions led by Theodore Jaeckel, CFA and Walter OConnor, CFA.
The investment objective, significant investment strategies and operating policies, and investment restrictions of the Combined Fund will be those of the Acquiring Fund, which are similar (or, in the case of BBKs investment objective, substantially similar, and, in the case of each of MUHs and MUSs investment objectives, identical) to those of BAF, BBK, MUH and MUS, although there are some differences.
Investment Objective:
BAF |
BBK |
MUH |
MUS |
Acquiring Fund (MHD) |
||||
The Funds investment objective is to provide current income exempt from federal income taxes, including the alternative minimum tax, and Florida intangible property tax.* | The Funds investment objective is to provide current income exempt from regular federal income taxes. | Same as the Acquiring Fund. | Same as the Acquiring Fund. | The Funds investment objective is to provide stockholders with current income exempt from federal income taxes. |
* |
The State of Florida repealed the Florida Intangible Tax as of January 2007. As a result, on September 12, 2008, the Board of Trustees of BAF voted unanimously to approve BAF investing in Municipal Bonds (as defined below) regardless of geographic location. If Florida were to reinstate the Florida Intangible Tax or adopt a state income tax, however, BAF would be required to realign its portfolio such that substantially all of its assets would be invested in Florida Municipal Bonds or obtain shareholder approval to amend BAFs fundamental investment objective to remove references to the Florida Intangible Tax. See The Target Funds Investment Objectives and PoliciesBAFs Investment Objective and Policies. |
ix
Municipal Bonds: Below is a comparison of each Funds 80% investment policy with respect to municipal obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities (Municipal Bonds), the interest of which is exempt from federal income tax.
BAF |
BBK |
MUH |
MUS |
Acquiring Fund (MHD) |
||||
The Funds investment policies provide that, under normal circumstances, the Fund as a fundamental policy will invest at least 80% of its managed assets in Municipal Bonds that pay interest that is exempt from federal income tax, including the alternative minimum tax, and Florida intangible property tax. | As a fundamental policy, under normal market conditions, the Fund will invest at least 80% of its managed assets in Municipal Bonds, the interest of which is exempt from regular federal income tax. | The Funds investment policies provide that, at all times, except during temporary defensive periods, the Fund will invest at least 80% of its total assets in a portfolio of Municipal Bonds paying interest that, in the opinion of bond counsel to the issuer, is exempt from federal income taxes. | The Funds investment policies provide that, at all times, except during temporary defensive periods, it will invest at least 80% of its total assets in a portfolio of Municipal Bonds paying interest that, in the opinion of bond counsel to the issuer, is exempt from federal income taxes. | The Funds investment policies provide that, the Fund seeks to achieve its investment objective by investing, as a fundamental policy at least 80% of an aggregate of the Funds net assets (including proceeds from the issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in a portfolio of Municipal Bonds, each of which pays interest that, in the opinion of bond counsel to the issuer, is excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum tax). |
Investment Grade Securities: Below is a comparison of each Funds policy with respect to investment in investment grade quality securities. Investment grade quality means that such bonds are rated, at the time of investment, within the four highest grades (Baa or BBB or better by Moodys Investor Service, Inc., S&P Global Ratings or Fitch Ratings) or are unrated but judged to be of comparable quality by the Investment Advisor.
BAF |
BBK |
MUH |
MUS |
Acquiring Fund (MHD) |
||||
The Fund invests primarily in municipal bonds that are investment grade quality at the time of investment. | The Funds investment policies provide that, under normal market conditions, the Fund will invest at least 80% of its managed assets in investment grade quality Municipal Bonds. | Same as the Acquiring Fund. | The Funds investment policies provide that it will invest primarily in a portfolio of long-term, investment grade municipal obligations, the interest on which, in the opinion of bond counsel to the issuer, is exempt from federal income taxes. | The Funds investment policies provide that, the Fund will invest at least 75% of its total assets in a portfolio of Municipal Bonds that are commonly referred to as investment grade. |
x
Bond Maturity: Below is a comparison of each Funds policy with respect to bond maturity.
BAF |
BBK |
MUH |
MUS |
Acquiring Fund (MHD) |
||||
The average maturity of the Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. The Funds portfolio at any given time may include both long-term and intermediate-term Municipal Bonds. | The average maturity of the Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. The Funds portfolio at any given time may include both long-term and intermediate-term Municipal Bonds. | Same as the Acquiring Fund. | The Funds investment policies provide that, under normal market conditions, the Fund invests at least 80% of its assets in Municipal Bonds with remaining maturities of one year or more at the time of investment. The average maturity of the Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. The Funds portfolio at any given time may include both long-term, intermediate-term and short-term Municipal Bonds. | The average maturity of the Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. The Funds portfolio at any given time may include both long-term, intermediate-term and short-term Municipal Bonds. |
xi
Leverage: Each Fund utilizes leverage through the issuance of VMTP Shares and TOBs. See The Acquiring Funds InvestmentsLeverage; General Risks of Investing in the Acquiring FundLeverage Risk; and General Risks of Investing in the Acquiring FundTender Option Bond Risk. The Acquiring Fund is expected to continue to leverage its assets through the use of VMTP Shares and TOBs after the Closing Date of the Reorganizations. After the consummation of the Reorganizations, common shareholders of the Acquiring Fund, including former Target Fund common shareholders, will bear the leverage costs associated with the Acquiring Fund VMTP Shares and will be subject to the terms of the Acquiring Fund VMTP Shares, including that the Acquiring Fund VMTP Shares will be senior in priority to the Acquiring Fund common shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. Please see Information about the Preferred Shares of the Funds in the Joint Proxy Statement/Prospectus for additional information about the preferred shares of each Fund.
The annualized dividend rates for the preferred shares for each Funds most recent fiscal year end were as follows:
Fund |
Preferred
Shares |
Rate | ||||||
BAF |
VMTP Shares | 1.67 | % | |||||
BBK |
VMTP Shares | 1.67 | % | |||||
MUH |
VMTP Shares | 2.18 | % | |||||
MUS |
VMTP Shares | 2.18 | % | |||||
Acquiring Fund (MHD) |
VMTP Shares | 2.18 | % |
Please see below a comparison of certain important ratios related to (i) each Funds use of leverage as of August 31, 2020, (ii) the Combined Funds estimated use of leverage, assuming only the Reorganization of MUS into the Acquiring Fund had taken place as of August 31, 2020, which represents the combination of completed Reorganizations presented in this Joint Proxy Statement/Prospectus that would result in the lowest asset coverage ratio for the Combined Fund, and (iii) the Combined Funds estimated use of leverage, assuming only the Reorganization of MUH into the Acquiring Fund had taken place as of August 31, 2020, which represents, in the Investment Advisors view, the combination of completed Reorganizations that would result in the highest asset coverage ratio for the Combined Fund.
Ratios |
BAF | BBK | MUH | MUS |
Acquiring
Fund
(MHD) |
Pro forma
Combined Fund (MUS into MHD) |
Pro forma
Combined Fund (MUH into MHD) |
|||||||||||||||||||||
Asset Coverage Ratio |
416.4 | % | 316.3 | % | 422.6 | % | 308.1 | % | 385.2 | % | 345.9 | % | 359.8 | % | ||||||||||||||
Regulatory Leverage Ratio(1) |
24.0 | % | 31.6 | % | 23.7 | % | 32.5 | % | 26.0 | % | 28.9 | % | 27.8 | % | ||||||||||||||
Effective Leverage Ratio(2) |
41.8 | % | 40.0 | % | 37.3 | % | 39.2 | % | 36.3 | % | 37.6 | % | 38.5 | % |
(1) |
Regulatory leverage consists of preferred shares issued by the Fund, which is a part of the Funds capital structure. Regulatory leverage is sometimes referred to as 1940 Act Leverage and is subject to asset coverage limits set forth in the 1940 Act. |
(2) |
Effective leverage is a Funds effective economic leverage, and includes both regulatory leverage and the leverage effects of certain derivative investments in the Funds portfolio. Currently, the leverage effects of TOB inverse floater holdings, in addition to any regulatory leverage, are included in effective leverage ratios. |
xii
Q: |
How will the Reorganizations be effected? |
A: |
Assuming each Reorganization receives the requisite shareholder approvals, as well as any consents, confirmations and/or waivers from various third parties, the Acquiring Fund will acquire substantially all of BAFs, BBKs, MUHs and MUSs assets and assume substantially all of BAFs, BBKs, MUHs and MUSs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the shareholders of BAF, BBK, MUH and MUS (although cash may be distributed in lieu of fractional common shares). BAF, BBK, MUH and MUS will then terminate their registration under the 1940 Act, liquidate, dissolve and terminate in accordance with, in the case of BAF and BBK, their respective Agreement and Declaration of Trust and Delaware law and, in the case of MUS and MUH, their respective charter and Maryland law. |
Shareholders of BAF, BBK, MUH and MUS will become shareholders of the Acquiring Fund. Common shareholders of BAF, BBK, MUH and MUS will receive newly issued common shares of the Acquiring Fund, par value $0.10 per share, the aggregate NAV (not the market value) of which will equal the aggregate NAV (not the market value) of the common shares of BAF, BBK, MUH and MUS such shareholders held immediately prior to the Closing Date (although common shareholders of BAF, BBK, MUH and MUS may receive cash for fractional common shares). The aggregate NAV of each Fund immediately prior to the applicable Reorganization will reflect accrued expenses associated with such Reorganization. The NAV of BAF, BBK, MUH and MUS common shares will not be diluted as a result of the Reorganizations. The common shareholders of each Fund have substantially similar voting rights and rights with respect to the payment of dividends and distribution of assets upon liquidation of their respective Fund and have no preemptive, conversion or exchange rights.
On the Closing Date of the Reorganizations, BAF, BBK, MUH and MUS VMTP Holders will receive on a one-for-one basis one newly issued Acquiring Fund VMTP Share, par value $0.10 per share and with a liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on the BAF, BBK, MUH or MUS VMTP Shares up to and including the day immediately preceding the Closing Date of the Reorganizations if such dividends have not been paid prior to the Closing Date), in exchange for each BAF, BBK, MUH or MUS VMTP Share held by the BAF, BBK, MUH or MUS VMTP Holders immediately prior to the Closing Date. The newly issued Acquiring Fund VMTP Shares may be of the same series as the Acquiring Funds Series W-7 VMTP Shares or a substantially identical series. No fractional Acquiring Fund VMTP Shares will be issued.
The terms of the Acquiring Fund VMTP Shares to be issued in connection with the Reorganizations will be substantially identical to the terms of the Acquiring Funds outstanding VMTP Shares and will rank on parity with the Acquiring Funds outstanding VMTP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The Reorganizations will not result in any changes to the terms of the Acquiring Funds VMTP Shares currently outstanding. The terms of the Acquiring Funds VMTP Shares may change from time to time, subject to Board approval.
The newly issued Acquiring Fund VMTP Shares will have terms that are substantially identical to the outstanding BAF, BBK, MUH and MUS VMTP Shares, including the same term redemption date of July 2, 2021.
Shareholders of the Acquiring Fund will remain shareholders of the Acquiring Fund, which will have additional common shares and VMTP Shares outstanding after the Reorganizations.
Q: |
Will I have to pay any U.S. federal income taxes as a result of the Reorganizations? |
A: |
Each Reorganization is intended to qualify as a reorganization within the meaning of Section 368(a) of the Code. If a Reorganization so qualifies, in general, common shareholders of BAF, BBK, MUH and MUS will recognize no gain or loss for U.S. federal income tax purposes upon the exchange of their common shares for Acquiring Fund Shares pursuant to their Reorganization (except with respect to cash received in lieu of fractional common shares). Additionally, each of BAF, BBK, MUH and MUS will recognize no gain or loss for U.S. federal income tax purposes by reason of its Reorganization. Neither the Acquiring Fund nor its shareholders will recognize any gain or loss for U.S. federal income tax purposes pursuant to the Reorganizations. |
As discussed above, shareholders of each Fund may receive distributions prior to, or after, the consummation of the Reorganizations, including distributions attributable to their proportionate share of each Funds undistributed net investment income declared prior to the consummation of the Reorganizations or the Combined Fund built-in gains, if any, recognized after the Reorganizations, when such income and gains are eventually distributed by the Combined Fund. To the extent that such a distribution is not an exempt interest dividend (as defined in the Code), the distribution may be taxable to shareholders for U.S. federal income tax purposes.
xiii
The Funds shareholders should consult their own tax advisers regarding the U.S. federal income tax consequences of the Reorganizations, as well as the effects of state, local and non-U.S. tax laws, including possible changes in tax laws.
Q: |
Will I have to pay any sales load, commission or other similar fees in connection with the Reorganizations? |
A: |
You will pay no sales loads or commissions in connection with the Reorganizations. Regardless of whether the Reorganizations are completed, however, the costs associated with the Reorganizations, including the costs associated with the Special Meeting, will be borne directly by each of the respective Funds incurring the expense. |
Common shareholders of the Acquiring Fund, BAF, BBK, MUH and MUS will indirectly bear all or a portion of the costs of the Reorganizations. Because of the expected expense savings and other anticipated benefits for each of the BAF, BBK and MUH, the Investment Advisor recommended and the Board of each such Fund has approved that its respective Fund be responsible for its own reorganization expenses. The expenses of the applicable Reorganizations are estimated to be approximately $223,500 for BAF, $242,000 for BBK and $229,900 for MUH. For MUS and the Acquiring Fund, the expenses of the applicable Reorganization(s) are estimated to be approximately $228,000 and $253,400, of which the Investment Advisor will bear approximately $63,000 and $124,000, respectively. The actual costs associated with the Reorganizations may be more or less than the estimated costs discussed herein.
VMTP Holders are not expected to bear any costs of the Reorganizations.
Neither the Funds nor the Investment Advisor will pay any direct expenses of shareholders arising out of or in connection with the Reorganizations (e.g., expenses incurred by the shareholder as a result of attending the Special Meeting, voting on the Reorganizations or other action taken by the shareholder in connection with the Reorganizations).
Q: |
What shareholder approvals are required to complete the Reorganizations? |
A: |
The BAF Reorganization is contingent upon the following approvals: |
1. |
The approval of the BAF Reorganization Agreement and the transactions contemplated therein, including the termination of BAFs registration under the 1940 Act and the dissolution of BAF under Delaware law, by BAFs common shareholders and VMTP Holders voting as a single class; |
2. |
The approval of the BAF Reorganization Agreement and the transactions contemplated therein, including the termination of BAFs registration under the 1940 Act and the dissolution of BAF under Delaware law, by BAFs VMTP Holders voting as a separate class; |
3. |
The approval of the BAF Reorganization Agreement and the transactions contemplated therein, including amendments to the MHD Articles Supplementary in connection with the issuance of additional Acquiring Fund VMTP Shares, by Acquiring Fund VMTP Holders voting as a separate class; and |
4. |
The approval of the Issuance with respect to the BAF Reorganization by the Acquiring Funds common shareholders and Acquiring Fund VMTP Holders voting as a single class. |
The BBK Reorganization is contingent upon the following approvals:
1. |
The approval of the BBK Reorganization Agreement and the transactions contemplated therein, including the termination of BBKs registration under the 1940 Act and the dissolution of BBK under Delaware law, by BBKs common shareholders and VMTP Holders voting as a single class; |
xiv
2. |
The approval of the BBK Reorganization Agreement and the transactions contemplated therein, including the termination of BBKs registration under the 1940 Act and the dissolution of BBK under Delaware law, by BBKs VMTP Holders voting as a separate class; |
3. |
The approval of the BBK Reorganization Agreement and the transactions contemplated therein, including amendments to the MHD Articles Supplementary in connection with the issuance of additional Acquiring Fund VMTP Shares, by Acquiring Fund VMTP Holders voting as a separate class; and |
4. |
The approval of the Issuance with respect to the BBK Reorganization by the Acquiring Funds common shareholders and Acquiring Fund VMTP Holders voting as a single class. |
The MUH Reorganization is contingent upon the following approvals:
1. |
The approval of the MUH Reorganization Agreement and the transactions contemplated therein, including the termination of MUHs registration under the 1940 Act and the dissolution of MUH under Maryland law, by MUHs common shareholders and VMTP Holders voting as a single class; |
2. |
The approval of the MUH Reorganization Agreement and the transactions contemplated therein, including the termination of MUHs registration under the 1940 Act and the dissolution of MUH under Maryland law, by MUHs VMTP Holders voting as a separate class; |
3. |
The approval of the MUH Reorganization Agreement and the transactions contemplated therein, including amendments to the MHD Articles Supplementary in connection with the issuance of additional Acquiring Fund VMTP Shares, by Acquiring Fund VMTP Holders voting as a separate class; and |
4. |
The approval of the Issuance with respect to the MUH Reorganization by the Acquiring Funds common shareholders and Acquiring Fund VMTP Holders voting as a single class. |
The MUS Reorganization is contingent upon the following approvals:
1. |
The approval of the MUS Reorganization Agreement and the transactions contemplated therein, including the termination of MUSs registration under the 1940 Act and the dissolution of MUS under Maryland law, by MUSs common shareholders and VMTP Holders voting as a single class; |
2. |
The approval of the MUS Reorganization Agreement and the transactions contemplated therein, including the termination of MUSs registration under the 1940 Act and the dissolution of MUS under Maryland law, by MUSs VMTP Holders voting as a separate class; |
3. |
The approval of the MUS Reorganization Agreement and the transactions contemplated therein, including amendments to the MHD Articles Supplementary in connection with the issuance of additional Acquiring Fund VMTP Shares, by Acquiring Fund VMTP Holders voting as a separate class; and |
4. |
The approval of the Issuance with respect to the MUS Reorganization by the Acquiring Funds common shareholders and Acquiring Fund VMTP Holders voting as a single class. |
No Reorganization is contingent upon the approval of any other Reorganization. If a Reorganization is not consummated, then the Fund for which such Reorganization(s) was not consummated would continue to exist and operate on a standalone basis.
If the requisite shareholder approvals for a Reorganization are not obtained, or a Reorganization is not otherwise consummated, the Board of the Fund for which such Reorganization(s) were not consummated may take such actions as it deems in the best interests of the Fund, including conducting additional solicitations with respect to the Reorganization(s) or continuing to operate the Fund as a standalone Delaware statutory trust or Maryland corporation, as applicable, registered under the 1940 Act as a closed-end management investment company advised by the Investment Advisor. The Investment Advisor may, in connection with the ongoing management of the Fund and its product line, recommend alternative proposals to the Board of the Fund.
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In order for the Reorganizations to occur, each Fund must obtain all requisite shareholder approvals with respect to the Reorganizations, as well as any consents, confirmations and/or waivers from various third parties. Because the closing of each Reorganization is contingent upon the applicable Fund and the Acquiring Fund obtaining the requisite shareholder approvals and any third-party consents and satisfying (or obtaining the waiver of) other closing conditions, it is possible that a Reorganization will not occur, or that only one of BAF, BBK, MUH or MUS will be reorganized into the Acquiring Fund, even if shareholders of a Fund entitled to vote on the Reorganization approve the Reorganization and such Fund satisfies all of its closing conditions, if the other Fund does not obtain its requisite shareholder approvals or satisfy its closing conditions.
The preferred shares were issued on a private placement basis to one or a small number of institutional holders. Please see Information about the Preferred Shares of the Funds for additional information. To the extent that one or more preferred shareholder(s) of BAF, BBK, MUH, MUS or the Acquiring Fund owns, holds or controls, individually or in the aggregate, all or a significant portion of such Funds outstanding preferred shares, the preferred shareholder approval required for a Reorganization may turn on the exercise of voting rights by such particular preferred shareholder(s) and its (or their) determination as to the favorability of the Reorganization with respect to its (or their) interests. The Funds exercise no influence or control over the determinations of such preferred shareholder(s) with respect to the Reorganizations; there is no guarantee that such preferred shareholder(s) will approve the Reorganizations, over which it (or they) may exercise effective disposition power.
Q: |
Why is the vote of shareholders of the Acquiring Fund being solicited in connection with the Reorganizations? |
A: |
The rules of the New York Stock Exchange (on which the Acquiring Fund common shares are listed) require the Acquiring Funds shareholders to approve each Issuance with respect to a Reorganization. If the Issuance with respect to a Reorganization is not approved, then the corresponding Reorganization will not occur. |
We are also seeking the approval of each Reorganization Agreement and the transactions contemplated therein, including the issuance of additional Acquiring Fund VMTP Shares, by the Acquiring Fund VMTP Holders voting as a separate class pursuant to the governing document of the Acquiring Fund VMTP Shares. If Acquiring Fund VMTP Holders do not approve a Reorganization Agreement as a separate class, then the corresponding Reorganization will not occur.
Q: |
How does the Board of my Fund suggest that I vote? |
A: |
After careful consideration, the Board of your Fund unanimously recommends that you vote FOR the proposal(s) relating to your Fund. |
Q: |
When and where will the Special Meeting be held? |
A: |
The Special Meeting will be held on December 15, 2020, at 11:00 a.m. (Eastern Time). Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Special Meeting will be held in virtual meeting format only. Shareholders will not have to travel to attend the Special Meeting, but will be able to view the Special Meeting live and cast their votes by accessing a web link. |
Q: |
How do I vote my proxy? |
A: |
Shareholders of record of each Fund as of the close of business on October 16, 2020 (the Record Date) are entitled to notice of and to vote at the Special Meeting or any adjournment or postponement thereof. You may cast your vote by mail, phone, internet or by participating at the Special Meeting as described below. |
To vote by mail, please mark your vote on the enclosed proxy card and sign, date and return the card in the postage-paid envelope provided.
xvi
If you choose to vote by phone or internet, please refer to the instructions found on the proxy card accompanying the Joint Proxy Statement/Prospectus. To vote by phone or internet, you will need the control number that appears on the proxy card. In addition, we ask that you please note the following:
If your shares in a Fund are registered in your name, you may attend and participate in the Special Meeting at www.meetingcenter.io/295614271 by entering the control number found in the shaded box in your proxy card and password BLK 2020 on the date and timing of the Special Meeting. You may vote during the Special Meeting by following the instructions that will be available on the Special Meeting website during the Special Meeting.
Also, if you are a beneficial shareholder of a Fund, you will not be able to vote at the virtual Special Meeting unless you have registered in advance to attend the Special Meeting. To register, you must submit proof of your proxy power (legal proxy), which you can obtain from your financial intermediary or other nominee, reflecting your Fund holdings along with your name and email address to Georgeson LLC (Georgeson), each Funds tabulator. You may email an image of your legal proxy to shareholdermeetings@computershare.com. Requests for registration must be received no later than 5:00 p.m. (Eastern time) three business days prior to the Special Meeting date. You will receive a confirmation email from Georgeson of your registration and a control number and security code that will allow you to vote at the Special Meeting.
Even if you plan to attend the Special Meeting, please promptly follow the enclosed instructions to submit voting instructions by telephone or via the Internet. Alternatively, you may submit voting instructions by signing and dating each proxy card you receive, and if received by mail, returning it in the accompanying postage-paid return envelope.
Q: |
Whom do I contact for further information? |
A: |
You may contact your financial advisor for further information. You may also call Georgeson, the Funds proxy solicitor, at 1-866-767-8867. |
Q: |
Will anyone contact me? |
A: |
You may receive a call from Georgeson, the proxy solicitor hired by the Funds, to verify that you received your proxy materials, to answer any questions you may have about the proposals and to encourage you to vote your proxy. |
We recognize the inconvenience of the proxy solicitation process and would not impose on you if we did not believe that the matters being proposed were important. Once your vote has been registered with the proxy solicitor, your name will be removed from the solicitors follow-up contact list.
Your vote is very important. We encourage you as a shareholder to participate by returning your vote as soon as possible. If enough shareholders fail to cast their votes, a Fund may not be able to hold the Special Meeting or the vote on the applicable proposals, and will be required to incur additional solicitation costs in order to obtain sufficient shareholder participation.
Important additional information about the Reorganizations is set forth
in the accompanying Proxy Statement/Prospectus.
Please read it carefully.
xvii
BLACKROCK MUNICIPAL INCOME INVESTMENT QUALITY TRUST
BLACKROCK MUNICIPAL BOND TRUST
BLACKROCK MUNIHOLDINGS FUND II, INC.
BLACKROCK MUNIHOLDINGS QUALITY FUND, INC.
BLACKROCK MUNIHOLDINGS FUND, INC.
100 Bellevue Parkway
Wilmington, Delaware 19809
(800) 882-0052
NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 15, 2020
Notice is hereby given that a joint special meeting of shareholders (the Special Meeting) of BlackRock Municipal Income Investment Quality Trust (NYSE Ticker: BAF) (BAF), BlackRock Municipal Bond Trust (NYSE Ticker: BBK) (BBK), BlackRock MuniHoldings Fund II, Inc. (NYSE Ticker: MUH) (MUH), BlackRock MuniHoldings Quality Fund, Inc. (NYSE Ticker: MUS) (MUS) and BlackRock MuniHoldings Fund, Inc. (NYSE Ticker: MHD) (MHD or the Acquiring Fund, and collectively with BAF, BBK, MUH and MUS, the Funds, and each, a Fund) will be held on December 15, 2020 at 11:00 a.m. (Eastern time) for the following purposes:
Proposal 1: The Reorganizations of the Funds
For Shareholders of BAF:
Proposal 1(A): The common shareholders and holders of Variable Rate Muni Term Preferred Shares (VMTP Shares and the holders thereof, VMTP Holders) of BAF are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between BAF and the Acquiring Fund (the BAF Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of BAFs assets and the assumption by the Acquiring Fund of substantially all of BAFs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of BAF, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by BAF of its registration under the Investment Company Act of 1940, as amended (the 1940 Act), and the liquidation, dissolution and termination of BAF in accordance with its Agreement and Declaration of Trust and Delaware law (the BAF Reorganization).
Proposal 1(B): The VMTP Holders of BAF are being asked to vote as a separate class on a proposal to approve the BAF Reorganization Agreement and the BAF Reorganization.
For Shareholders of BBK:
Proposal 1(C): The common shareholders and VMTP Holders of BBK are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between BBK and the Acquiring Fund (the BBK Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of BBKs assets and the assumption by the Acquiring Fund of substantially all of BBKs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of BBK, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by BBK of its registration under the 1940 Act, and the liquidation, dissolution and termination of BBK in accordance with its Agreement and Declaration of Trust and Delaware law (the BBK Reorganization).
i
Proposal 1(D): The VMTP Holders of BBK are being asked to vote as a separate class on a proposal to approve the BBK Reorganization Agreement and the BBK Reorganization.
For Shareholders of MUH:
Proposal 1(E): The common shareholders and VMTP Holders of MUH are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between MUH and the Acquiring Fund (the MUH Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of MUHs assets and the assumption by the Acquiring Fund of substantially all of MUHs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of MUH, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by MUH of its registration under the 1940 Act, and the liquidation, dissolution and termination of MUH in accordance with its charter and Maryland law (the MUH Reorganization).
Proposal 1(F): The VMTP Holders of MUH are being asked to vote as a separate class on a proposal to approve the MUH Reorganization Agreement and the MUH Reorganization.
For Shareholders of MUS:
Proposal 1(G): The common shareholders and VMTP Holders of MUS are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between MUS and the Acquiring Fund (the MUS Reorganization Agreement and collectively with the BAF Reorganization Agreement, the BBK Reorganization Agreement and the MUH Reorganization Agreement, the Reorganization Agreements) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of MUSs assets and the assumption by the Acquiring Fund of substantially all of MUSs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of MUS, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by MUS of its registration under the 1940 Act, and the liquidation, dissolution and termination of MUS in accordance with its charter and Maryland law (the MUS Reorganization and collectively with the BAF Reorganization, the BBK Reorganization and the MUH Reorganization, the Reorganizations).
Proposal 1(H): The VMTP Holders of MUS are being asked to vote as a separate class on a proposal to approve the MUS Reorganization Agreement and the MUS Reorganization.
For Shareholders of the Acquiring Fund:
Proposal 1(I): The VMTP Holders of the Acquiring Fund are being asked to vote as a separate class on a proposal to approve the BAF Reorganization Agreement and the transactions contemplated therein, including amendments to the Articles Supplementary Establishing and Fixing the Rights and Preferences of Variable Rate Muni Term Preferred Shares of the Acquiring Fund (the MHD Articles Supplementary) in connection with the issuance of additional Acquiring Fund VMTP Shares.
Proposal 1(J): The VMTP Holders of the Acquiring Fund are being asked to vote as a separate class on a proposal to approve the BBK Reorganization Agreement and the transactions contemplated therein, including amendments to the MHD Articles Supplementary in connection with the issuance of additional Acquiring Fund VMTP Shares.
Proposal 1(K): The VMTP Holders of the Acquiring Fund are being asked to vote as a separate class on a proposal to approve the MUH Reorganization Agreement and the transactions contemplated therein, including amendments to the MHD Articles Supplementary in connection with the issuance of additional Acquiring Fund VMTP Shares.
ii
Proposal 1(L): The VMTP Holders of the Acquiring Fund are being asked to vote as a separate class on a proposal to approve the MUS Reorganization Agreement and the transactions contemplated therein, including amendments to the MHD Articles Supplementary in connection with the issuance of additional Acquiring Fund VMTP Shares.
Proposal 2: The Issuance of Additional Acquiring Fund Common Shares
Proposal 2(A): The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with the BAF Reorganization Agreement (the BAF Issuance).
Proposal 2(B): The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with the BBK Reorganization Agreement (the BBK Issuance).
Proposal 2(C): The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with the MUH Reorganization Agreement (the MUH Issuance).
Proposal 2(D): The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with the MUS Reorganization Agreement (the MUS Issuance and collectively with the BAF Issuance, BBK Issuance and MUH Issuance, the Issuances).
No Reorganization is contingent upon the approval of any other Reorganization. If a Reorganization is not consummated, then the Fund for which such Reorganization(s) was not consummated would continue to exist and operate on a standalone basis.
Shareholders of record of each Fund as of the close of business on October 16, 2020 are entitled to notice of and to vote at the Special Meeting or any adjournment or postponement thereof.
The Funds are soliciting the vote of their common shareholders on Proposal 1(A), Proposal 1(C), Proposal 1(E), Proposal 1(G), Proposal 2(A), Proposal 2(B), Proposal 2(C) and Proposals 2(D) through the joint proxy statement/prospectus.
Each Fund is separately soliciting the votes of its respective preferred shareholders on each proposal through a separate proxy statement and not through the joint proxy statement/prospectus.
Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Special Meeting will be held in a virtual meeting format only. Shareholders will not have to travel to attend the Special Meeting but will be able to view the meeting live and cast their votes by accessing a web link.
All shareholders are cordially invited to attend the Special Meeting. In order to avoid delay and additional expense for the Funds and to assure that your shares are represented, please vote as promptly as possible, regardless of whether or not you plan to attend the Special Meeting. You may vote by mail, by telephone or over the Internet. To vote by mail, please mark, sign, date and mail the enclosed proxy card or voting instruction form. No postage is required if mailed in the United States. To vote by telephone, please call the toll-free number located on your proxy card or voting instruction form and follow the recorded instructions. To vote over the Internet, go to the Internet address provided on your proxy card or voting instruction form and follow the instructions.
If your shares in a Fund are registered in your name, you may attend and participate in the Special Meeting at www.meetingcenter.io/295614271 by entering the control number found in the shaded box on your proxy card and password BLK 2020 on the date and time of the Special Meeting. You may vote during the Special Meeting by following the instructions that will be available on the Special Meeting website during the Special Meeting.
iii
If you are a beneficial shareholder of a Fund (that is if you hold your Fund shares through a bank, broker, financial intermediary or other nominee) and want to attend the Special Meeting you must register in advance of the Special Meeting. To register, you must submit proof of your proxy power (legal proxy), which you can obtain from your financial intermediary or other nominee, reflecting your Fund holdings along with your name and email address to Georgeson LLC, each Funds tabulator. You may email an image of your legal proxy to shareholdermeetings@computershare.com. Requests for registration must be received no later than 5:00 p.m. (Eastern time) three business days prior to the Special Meeting date. You will receive a confirmation email from Georgeson LLC of your registration and a control number and security code that will allow you to vote at the Special Meeting.
Even if you plan to attend the Special Meeting, please promptly follow the enclosed instructions to submit voting instructions by telephone or via the Internet. Alternatively, you may submit voting instructions by signing and dating each proxy card or voting instruction form you receive, and if received by mail, returning it in the accompanying postage-paid return envelope.
The officers, directors or trustees of each Fund named as proxies by shareholders may participate in the Special Meeting by remote communications, including, without limitation, by means of a conference telephone or similar communications equipment by means of which all persons participating in the Special Meeting can hear and be heard by each other, and the participation of such officers, directors or trustees in the Special Meeting pursuant to any such communications system shall constitute presence at the Special Meeting.
THE BOARD OF TRUSTEES OR THE BOARD OF DIRECTORS (EACH, A BOARD), AS APPLICABLE, OF EACH OF THE FUNDS RECOMMENDS THAT YOU VOTE YOUR SHARES BY INDICATING YOUR VOTING INSTRUCTIONS ON THE ENCLOSED PROXY CARD, DATING AND SIGNING SUCH PROXY CARD AND RETURNING IT IN THE ENVELOPE PROVIDED, WHICH IS ADDRESSED FOR YOUR CONVENIENCE AND NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES, OR BY RECORDING YOUR VOTING INSTRUCTIONS BY TELEPHONE OR VIA THE INTERNET.
THE BOARD OF EACH FUND UNANIMOUSLY RECOMMENDS THAT YOU CAST YOUR VOTE FOR THE APPLICABLE REORGANIZATION AGREEMENT AND FOR THE ISSUANCE OF ADDITIONAL COMMON SHARES OF THE ACQUIRING FUND, AS APPLICABLE, IN EACH CASE, AS DESCRIBED IN THE JOINT PROXY STATEMENT/PROSPECTUS FOR COMMON SHAREHOLDERS OR THE PROXY STATEMENT FOR PREFERRED SHAREHOLDERS, AS APPLICABLE.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK THAT YOU MAIL YOUR PROXY CARD OR RECORD YOUR VOTING INSTRUCTIONS BY TELEPHONE OR VIA THE INTERNET PROMPTLY.
For the Board of each Fund,
JOHN M. PERLOWSKI
President and Chief Executive Officer of the Funds
[●], 2020
YOUR VOTE IS IMPORTANT.
PLEASE VOTE PROMPTLY BY SIGNING AND RETURNING THE ENCLOSED PROXY CARD OR BY RECORDING YOUR VOTING INSTRUCTIONS BY TELEPHONE OR VIA THE INTERNET, NO MATTER HOW MANY SHARES YOU OWN.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE JOINT SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON DECEMBER 15, 2020.
THE PROXY STATEMENT/PROSPECTUS FOR THIS MEETING IS AVAILABLE AT:
HTTPS://WWW.PROXY-DIRECT.COM/BLK-31540
iv
The information in this Joint Proxy Statement/Prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Joint Proxy Statement/Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 30, 2020
JOINT PROXY STATEMENT/PROSPECTUS
Dated [●], 2020
BLACKROCK MUNICIPAL INCOME INVESTMENT QUALITY TRUST
BLACKROCK MUNICIPAL BOND TRUST
BLACKROCK MUNIHOLDINGS FUND II, INC.
BLACKROCK MUNIHOLDINGS QUALITY FUND, INC.
BLACKROCK MUNIHOLDINGS FUND, INC.
100 Bellevue Parkway
Wilmington, Delaware 19809
(800) 882-0052
This Joint Proxy Statement/Prospectus is furnished to you as a common shareholder of BlackRock Municipal Income Investment Quality Trust (NYSE Ticker: BAF) (BAF), BlackRock Municipal Bond Trust (NYSE Ticker: BBK) (BBK), BlackRock MuniHoldings Fund II, Inc. (NYSE Ticker: MUH) (MUH), BlackRock MuniHoldings Quality Fund, Inc. (NYSE Ticker: MUS) (MUS) and BlackRock MuniHoldings Fund, Inc. (NYSE Ticker: MHD) (MHD or the Acquiring Fund and collectively with BAF, BBK, MUH and MUS, the Funds, and each, a Fund) in connection with the solicitation of proxies by each Funds Board of Directors or Board of Trustees, as applicable (the Board, the members of which are referred to as Board Members). Each of BAF, BBK, MUH and MUS may be referred to herein individually as a Target Fund or collectively as the Target Funds. The proxies will be voted at the joint special meeting of the shareholders of each Fund and at any and all adjournments, postponements and delays thereof (the Special Meeting). The Special Meeting will be held on December 15, 2020 at 11:00 a.m. (Eastern time) to consider the proposals set forth below and discussed in greater detail elsewhere in this Joint Proxy Statement/Prospectus. Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Special Meeting will be held in a virtual meeting format only. Shareholders will not have to travel to attend the Special Meeting, but will be able to view the meeting live and cast their votes by accessing a web link. If you are unable to attend the Special Meeting or any adjournment or postponement thereof, the Board of your Fund recommends that you vote your common shares, by completing and returning the enclosed proxy card or by recording your voting instructions by telephone or via the internet. The approximate mailing date of this Joint Proxy Statement/Prospectus and accompanying form of proxy is [●], 2020.
The purposes of the Special Meeting are:
Proposal 1: The Reorganizations of the Funds
For Shareholders of BAF:
Proposal 1(A): The common shareholders and holders of Variable Rate Muni Term Preferred Shares (VMTP Shares and the holders thereof, VMTP Holders) of BAF are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between BAF and the Acquiring Fund (the BAF Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of BAFs assets and the assumption by the Acquiring Fund of substantially all of BAFs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to BAFs common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of BAF, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders
i
in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by BAF of its registration under the Investment Company Act of 1940, as amended (the 1940 Act), and the liquidation, dissolution and termination of BAF in accordance with its Agreement and Declaration of Trust and Delaware law (the BAF Reorganization).
Proposal 1(B): The VMTP Holders of BAF are being asked to vote as a separate class on a proposal to approve the BAF Reorganization Agreement and the BAF Reorganization.
For Shareholders of BBK:
Proposal 1(C): The common shareholders and VMTP Holders of BBK are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between BBK and the Acquiring Fund (the BBK Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of BBKs assets and the assumption by the Acquiring Fund of substantially all of BBKs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to BBKs common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of BBK, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by BBK of its registration under the 1940 Act, and the liquidation, dissolution and termination of BBK in accordance with its Agreement and Declaration of Trust and Delaware law (the BBK Reorganization).
Proposal 1(D): The VMTP Holders of BBK are being asked to vote as a separate class on a proposal to approve the BBK Reorganization Agreement and the BBK Reorganization.
For Shareholders of MUH:
Proposal 1(E): The common shareholders and VMTP Holders of MUH are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between MUH and the Acquiring Fund (the MUH Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of MUHs assets and the assumption by the Acquiring Fund of substantially all of MUHs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to MUHs common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of MUH, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by MUH of its registration under the 1940 Act, and the liquidation, dissolution and termination of MUH in accordance with its charter and Maryland law (the MUH Reorganization).
Proposal 1(F): The VMTP Holders of MUH are being asked to vote as a separate class on a proposal to approve the MUH Reorganization Agreement and the MUH Reorganization.
For Shareholders of MUS:
Proposal 1(G): The common shareholders and VMTP Holders of MUS are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between MUS and the Acquiring Fund (the MUS Reorganization Agreement and collectively with the BAF Reorganization Agreement, the BBK Reorganization Agreement and the MUH Reorganization Agreement, the Reorganization Agreements) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of MUSs assets and the assumption by the Acquiring Fund of substantially all of MUSs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to MUSs common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of MUS, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by MUS of its registration under the 1940 Act, and the liquidation, dissolution and termination of MUS in accordance with its charter and Maryland law (the MUS Reorganization and collectively with the BAF Reorganization, the BBK Reorganization and the MUH Reorganization, the Reorganizations).
ii
Proposal 1(H): The VMTP Holders of MUS are being asked to vote as a separate class on a proposal to approve the MUS Reorganization Agreement and the MUS Reorganization.
For Shareholders of the Acquiring Fund:
Proposal 1(I): The VMTP Holders of the Acquiring Fund are being asked to vote as a separate class on a proposal to approve the BAF Reorganization Agreement and the transactions contemplated therein, including amendments to the Articles Supplementary Establishing and Fixing the Rights and Preferences of Variable Rate Muni Term Preferred Shares of the Acquiring Fund (the MHD Articles Supplementary) in connection with issuance of additional Acquiring Fund VMTP Shares.
Proposal 1(J): The VMTP Holders of the Acquiring Fund are being asked to vote as a separate class on a proposal to approve the BBK Reorganization Agreement and the transactions contemplated therein, including amendments to the MHD Articles Supplementary in connection with the issuance of additional Acquiring Fund VMTP Shares.
Proposal 1(K): The VMTP Holders of the Acquiring Fund are being asked to vote as a separate class on a proposal to approve the MUH Reorganization Agreement and the transactions contemplated therein, including amendments to the MHD Articles Supplementary in connection with the issuance of additional Acquiring Fund VMTP Shares.
Proposal 1(L): The VMTP Holders of the Acquiring Fund are being asked to vote as a separate class on a proposal to approve the MUS Reorganization Agreement and the transactions contemplated therein, including amendments to the MHD Articles Supplementary in connection with the issuance of additional Acquiring Fund VMTP Shares.
Proposal 2: The Issuance of Additional Acquiring Fund Common Shares
Proposal 2(A): The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with the BAF Reorganization Agreement (the BAF Issuance).
Proposal 2(B): The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with the BBK Reorganization Agreement (the BBK Issuance).
Proposal 2(C): The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with the MUH Reorganization Agreement (the MUH Issuance).
Proposal 2(D): The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with the MUS Reorganization Agreement (the MUS Issuance and collectively with the BAF Issuance, BBK Issuance and MUH Issuance, the Issuances).
It is expected that the effective dates (collectively, the Closing Date) of the Reorganizations will be sometime during the first quarter of 2021, but they may be at a different time as described herein. The term Combined Fund refers to the Acquiring Fund as the surviving Fund after the consummation of each of the Reorganizations.
No Reorganization is contingent upon the approval of any other Reorganization. If a Reorganization is not consummated, then the Fund for which such Reorganization(s) was not consummated would continue to exist and operate on a standalone basis.
iii
The Board of each Fund has determined that including these proposals applicable to common shareholders of the Funds in one Joint Proxy Statement/Prospectus will reduce costs and is in the best interest of each Funds shareholders.
Distribution to the shareholders of this Joint Proxy Statement/Prospectus and the accompanying materials will commence on or about [●], 2020.
Shareholders of record of each Fund as of the close of business on October 16, 2020 (the Record Date) are entitled to notice of and to vote at the Special Meeting or any adjournment or postponement thereof.
Shareholders of each Fund are entitled to one vote for each common share or VMTP Share, as applicable (each, a Share), held, with no Shares having cumulative voting rights. Preferred shareholders of each Fund will have equal voting rights with the common shareholders of such Fund with respect to the proposals that require the vote of the Funds VMTP Shares and common shares as a single class. The quorum and voting requirements for each Fund are described in the section herein entitled Voting Information and Requirements.
This Joint Proxy Statement/Prospectus is only being delivered to the common shareholders of each Fund. Each Fund is separately soliciting the votes of its respective preferred shareholders on each of the foregoing proposals that require the vote of preferred shareholders through a separate proxy statement and not through this Joint Proxy Statement/Prospectus.
BAF and BBK are each formed as a Delaware statutory trust. MUH, MUS and the Acquiring Fund are each organized as a Maryland corporation. Each of BAF, BBK, MUH, MUS and the Acquiring Fund is a diversified, closed-end management investment company registered under the 1940 Act. The Reorganizations seek to achieve certain economies of scale and other operational efficiencies by combining five funds that have identical, substantially similar or similar investment objectives and similar investment strategies, policies and restrictions.
Assuming each of the Reorganizations receives the necessary approvals, the Acquiring Fund will acquire substantially all of the assets and assume substantially all of the liabilities of BAF, BBK, MUH and MUS in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund in the form of book-entry interests. The Acquiring Fund will list the newly issued common shares on the New York Stock Exchange (NYSE). Such newly issued Acquiring Fund Shares will be distributed to BAF, BBK, MUH and MUS shareholders (although cash may be distributed in lieu of fractional common shares) and each of BAF, BBK, MUH and MUS will terminate its registration under the 1940 Act. Each of BAF and BBK will liquidate, dissolve and terminate in accordance with its respective Agreement and Declaration of Trust and Delaware law. Each of MUH and MUS will liquidate, dissolve and terminate in accordance with its respective charter and Maryland law. The Acquiring Fund will continue to operate after the Reorganizations as a registered, diversified, closed-end management investment company with the investment objective, investment strategies, investment policies and investment restrictions described in this Joint Proxy Statement/Prospectus.
The Fund(s) in which you owned Shares on the Record Date is named on the proxy card. If you owned Shares in more than one Fund on the Record Date, you may receive more than one proxy card. Even if you plan to attend the Special Meeting, please sign, date and return EACH proxy card you receive or, if you provide voting instructions by telephone or via the Internet, please vote on each proposal affecting EACH Fund you own. If you vote by telephone or via the Internet, you will be asked to enter a unique code that has been assigned to you, which is printed on your proxy card(s). This code is designed to confirm your identity, provide access into the voting website and confirm that your voting instructions are properly recorded.
All properly executed proxies received prior to the Special Meeting will be voted in accordance with the instructions marked thereon or otherwise as provided therein. On any matter coming before the Special Meeting as to which a shareholder has specified a choice on that shareholders proxy, the Shares will be voted accordingly. If a proxy card is properly executed and returned and no choice is specified with respect to a proposal, the Shares will be voted FOR the proposal. Shareholders who execute proxies or provide voting instructions by telephone or via the Internet may revoke them with respect to a proposal at any time before a vote is taken on the proposal by filing with the applicable Fund a written notice of revocation (addressed to the Secretary of the Fund at the principal executive offices of the Fund at the New York address provided herein), by delivering a duly executed proxy bearing a later date or by attending the Special Meeting and voting by ballot, in all cases prior to the exercise of the authority granted in the
iv
proxy card. Merely attending the Special Meeting, however, will not revoke any previously executed proxy. If you hold Shares through a bank or other intermediary, please consult your bank or intermediary regarding your ability to revoke voting instructions after such instructions have been provided.
If your shares in a Fund are registered in your name, you may attend and participate in the Special Meeting at www.meetingcenter.io/295614271 by entering the control number found in the shaded box on your proxy card and password BLK 2020 on the date and time of the Special Meeting. You may vote during the Special Meeting by following the instructions that will be available on the Special Meeting website during the Special Meeting.
If you are a beneficial shareholder of a Fund (that is if you hold your Fund shares through a bank, broker, financial intermediary or other nominee) and want to attend the Special Meeting you must register in advance of the Special Meeting. To register, you must submit proof of your proxy power (legal proxy), which you can obtain from your financial intermediary or other nominee, reflecting your Fund holdings along with your name and email address to Georgeson LLC, each Funds tabulator. You may email an image of your legal proxy to shareholdermeetings@computershare.com. Requests for registration must be received no later than 5:00 p.m. (Eastern time) three business days prior to the Special Meeting date. You will receive a confirmation email from Georgeson LLC of your registration and a control number and security code that will allow you to vote at the Special Meeting.
Even if you plan to attend the Special Meeting, please promptly follow the enclosed instructions to submit voting instructions by telephone or via the Internet. Alternatively, you may submit voting instructions by signing and dating each proxy card you receive, and if received by mail, returning it in the accompanying postage-paid return envelope.
For information regarding how to access the Special Meeting, please contact Georgeson LLC, the firm assisting us in the solicitation of proxies, toll free at 1-866-767-8867.
This Joint Proxy Statement/Prospectus sets forth concisely the information that common shareholders of each Fund should know before voting on the proposals set forth herein. Please read it carefully and retain it for future reference. A Statement of Additional Information, dated [●], 2020, relating to this Joint Proxy Statement/Prospectus (the Statement of Additional Information) has been filed with the United States Securities and Exchange Commission (the SEC) and is incorporated herein by reference. Copies of each Funds most recent annual report and semi-annual report can be obtained on a website maintained by BlackRock, Inc. (BlackRock) at www.blackrock.com. In addition, each Fund will furnish, without charge, a copy of the Statement of Additional Information, or its most recent annual report or semi-annual report to any shareholder upon request. Any such request should be directed to BlackRock by calling (800) 882-0052 or by writing to the respective Fund at 100 Bellevue Parkway, Wilmington, Delaware 19809. The Statement of Additional Information and the annual and semi-annual reports of each Fund are available on the EDGAR Database on the SECs website at www.sec.gov. The address of the principal executive offices of the Funds is 100 Bellevue Parkway, Wilmington, Delaware 19809, and the telephone number is (800) 882-0052.
Each Fund is subject to the informational requirements of the Securities Exchange Act of 1934 (the Exchange Act) and the 1940 Act and, in accordance therewith, file reports, proxy statements, proxy materials and other information with the SEC. Materials filed with the SEC can be downloaded from the SECs website at www.sec.gov. You may also request copies of these materials, upon payment at the prescribed rates of a duplicating fee, by electronic request to the SECs e-mail address (publicinfo@sec.gov). Reports, proxy statements and other information concerning the Funds may also be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
BlackRock updates performance information and certain other data for the Funds on a monthly basis on its website in the Closed-End Funds section of www.blackrock.com as well as certain other material information as necessary from time to time. Investors and others are advised to check the website for updated performance information and the release of other material information about the Funds. References to BlackRocks website are intended to allow investors public access to information regarding the Funds and do not, and are not intended to, incorporate BlackRocks website in this Joint Proxy Statement/Prospectus.
v
Please note that only one copy of shareholder documents, including annual or semi-annual reports and proxy materials, may be delivered to two or more shareholders of the Funds who share an address, unless the Funds have received instructions to the contrary. This practice is commonly called householding and it is intended to reduce expenses and eliminate duplicate mailings of shareholder documents. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. To request a separate copy of any shareholder document or for instructions as to how to request a separate copy of these documents or as to how to request a single copy if multiple copies of these documents are received, shareholders should contact the respective Fund at the address and phone number set forth above.
The common shares of BlackRock MuniHoldings Fund, Inc. are listed on the NYSE under the ticker symbol MHD and will continue to be so listed after the completion of the Reorganizations. The common shares of BlackRock Municipal Income Investment Quality Trust are listed on the NYSE under the ticker symbol BAF, the common shares of BlackRock Municipal Bond Trust are listed on the NYSE under the ticker symbol BBK, the common shares of BlackRock MuniHoldings Fund II, Inc. are listed on the NYSE under the ticker symbol MUH and the common shares of BlackRock MuniHoldings Quality Fund, Inc. are listed on the NYSE under the ticker symbol MUS.
This Joint Proxy Statement/Prospectus serves as a prospectus of the Acquiring Fund in connection with each Issuance. No person has been authorized to give any information or make any representation not contained in this Joint Proxy Statement/Prospectus and, if so given or made, such information or representation must not be relied upon as having been authorized. This Joint Proxy Statement/Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which, or to any person to whom, it is unlawful to make such offer or solicitation.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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1 | ||||
15 | ||||
18 | ||||
18 | ||||
18 | ||||
23 | ||||
46 | ||||
46 | ||||
47 | ||||
49 | ||||
58 | ||||
60 | ||||
Description of Common Shares to Be Issued by the Acquiring Fund |
60 | |||
Description of VMTP Shares to Be Issued by the Acquiring Fund |
60 | |||
62 | ||||
63 | ||||
77 | ||||
81 | ||||
83 | ||||
119 | ||||
119 | ||||
119 | ||||
120 | ||||
121 | ||||
121 | ||||
122 | ||||
122 | ||||
122 | ||||
122 | ||||
123 | ||||
123 | ||||
123 | ||||
123 | ||||
125 | ||||
127 | ||||
128 | ||||
130 | ||||
140 | ||||
140 | ||||
140 | ||||
141 | ||||
141 | ||||
143 | ||||
CERTAIN PROVISIONS OF THE DECLARATIONS OF TRUST, CHARTER AND BYLAWS |
145 | |||
147 | ||||
148 | ||||
149 | ||||
151 | ||||
151 | ||||
152 | ||||
155 | ||||
155 | ||||
155 | ||||
Voting Requirement for Proposal 1: The Reorganizations of the Funds |
157 |
Voting Requirement for Proposal 2: The Issuance of Acquiring Fund Common Shares |
158 | |||
159 | ||||
159 | ||||
160 | ||||
160 | ||||
160 | ||||
160 | ||||
160 | ||||
161 | ||||
161 | ||||
A-1 | ||||
APPENDIX B FUNDAMENTAL AND NON-FUNDAMENTAL INVESTMENT RESTRICTIONS |
B-1 |
The following is a summary of certain information contained elsewhere in this Joint Proxy Statement/Prospectus and in the Statement of Additional Information and is qualified in its entirety by reference to the more complete information contained in this Joint Proxy Statement/Prospectus and in the Statement of Additional Information. Shareholders should read the entire Joint Proxy Statement/Prospectus carefully.
The Reorganizations |
Assuming all of the Reorganizations receive the requisite shareholder approvals, as well as any consents, confirmations and/or waivers from various third parties, the Acquiring Fund will acquire substantially all of the assets and assume substantially all of the liabilities of BAF, BBK, MUH and MUS in exchange solely for newly issued Acquiring Fund Shares in the form of book-entry interests. The Acquiring Fund will list the newly issued common shares on the NYSE. Such newly issued Acquiring Fund Shares will be distributed to of BAF, BBK, MUH and MUS shareholders (although cash may be distributed in lieu of fractional common shares) and each of BAF, BBK, MUH and MUS will terminate its registration under the 1940 Act and liquidate, dissolve and terminate in accordance with, in the case of BAF and BBK, its respective Agreement and Declaration of Trust and Delaware law and, in the case of MUH and MUS, its respective charter and Maryland law. The Acquiring Fund will continue to operate after the Reorganizations as a registered, diversified, closed-end management investment company with the investment objective, investment strategies, investment policies and investment restrictions described in this Joint Proxy Statement/Prospectus. |
As a result of the Reorganizations, each common shareholder of BAF, BBK, MUH and MUS will own Acquiring Fund common shares that (except for cash payments received in lieu of fractional common shares) will have an aggregate NAV (not the market value) immediately after the Closing Date equal to the aggregate NAV (not the market value) of that shareholders BAF, BBK, MUH or MUS common shares immediately prior to the Closing Date. The aggregate NAV of each Fund immediately prior to the applicable Reorganization will reflect accrued expenses associated with such Reorganization. The value of each Funds net assets will be calculated net of the liquidation preference (including accumulated and unpaid dividends) of all outstanding VMTP Shares of such Fund.
On the Closing Date of the Reorganizations, each outstanding VMTP Share of BAF, BBK, MUH and MUS will, without any action on the part of the holder thereof, be exchanged for one newly issued VMTP Share of the Acquiring Fund. The terms of the Acquiring Fund VMTP Shares to be issued in connection with the Reorganizations will be substantially identical to the terms of the Acquiring Funds outstanding VMTP Shares and will rank on parity with the Acquiring Funds outstanding VMTP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The Reorganizations will not result in any changes to the terms of the Acquiring Funds VMTP Shares currently outstanding. The terms of the Acquiring Funds VMTP Shares may change from time to time, subject to Board approval.
The newly issued Acquiring Fund VMTP Shares will have terms that are substantially identical to the terms of the outstanding BAF, BBK, MUH and MUS VMTP Shares, including the same term redemption date of July 2, 2021.
Subject to the requisite approval of the shareholders of each Fund with respect to its respective Reorganization, as well as any consents, confirmations and/or waivers from various third parties, it is expected that the Closing Date of the Reorganizations will be sometime during the first quarter of 2021, but it may be at a different time as described herein.
1
Each Reorganization is not contingent upon the approval of the other Reorganization. If the requisite shareholder approvals for a Reorganization are not obtained, or a Reorganization is not otherwise consummated, the Board of the Fund for which such Reorganization(s) was not consummated may take such actions as it deems in the best interests of the Fund, including conducting additional solicitations with respect to the Reorganization(s) or continuing to operate the Fund as a standalone Delaware statutory trust or Maryland corporation, as applicable, registered under the 1940 Act as a closed-end management investment company advised by BlackRock Advisors, LLC (the Investment Advisor). The Investment Advisor may, in connection with the ongoing management of such Fund and its product line, recommend alternative proposals to the Board of such Fund.
Background and Reasons for the Reorganizations |
The proposed Reorganizations seek to achieve certain economies of scale and other operational efficiencies by combining five funds that have identical, substantially similar or similar investment objectives and similar investment strategies, policies and restrictions and are managed by the same investment adviser. |
The proposed Reorganizations are intended to result in the following potential benefits to common shareholders: (i) lower net total expenses per Common Share for common shareholders of each Fund (as common shareholders of the Combined Fund following the Reorganizations) due to economies of scale resulting from the larger size of the Combined Fund; (ii) improved or the same net earnings yield on NAV for common shareholders of each Fund after giving effect to the Combined Fund Contractual Waiver (as defined below); (iii) improved secondary market trading of the common shares of the Combined Fund; and (iv) operating and administrative efficiencies for the Combined Fund, including the potential for the following: (a) greater investment flexibility and investment options; (b) greater diversification of portfolio investments; (c) the ability to trade in larger positions and more favorable transaction terms; (d) additional sources of leverage or more competitive leverage terms and more favorable transaction terms; (e) benefits from having fewer closed-end funds offering similar products in the market, including an increased focus by investors on the remaining funds in the market (including the Combined Fund) and additional research coverage; and (f) benefits from having fewer similar funds in the same fund complex, including a simplified operational model and a reduction in risk of operational, legal and financial errors.
The Board of each Fund, including the Board Members who are not interested persons of each Fund (as defined in the 1940 Act) (Independent Board Members), has unanimously approved the Reorganizations, concluding that the Reorganizations are in the best interests of its Fund and that the interests of existing common shareholders and preferred shareholders of its Fund will not be diluted with respect to NAV and liquidation preference, respectively, as a result of the Reorganizations. As a result of the Reorganizations, however, common and preferred shareholders of each Fund may hold a reduced percentage of ownership in the larger Combined Fund than they did in any of the individual Funds before the Reorganizations. Each Boards conclusion was based on each Board Members business judgment after consideration of all relevant factors taken as a whole with respect to its Fund and the Funds common and preferred shareholders, although individual Board Members may have placed different weight on various factors and assigned different degrees of materiality to various factors. Please see Reasons for the Reorganizations for additional information about the factors considered by each Board.
Because the shareholders of each Fund will vote separately on the Funds respective Reorganization(s) or Issuances, as applicable, there are multiple potential combinations of Reorganizations. To the extent that one or more Reorganizations is not completed, any expected expense savings by the Combined Fund, or other potential benefits resulting from the Reorganizations, may be reduced.
2
Net and Managed Assets |
As of August 31, 2020, BAF had approximately $133.5 million in net assets and approximately $225.3 million in managed assets, BBK had approximately $172.8 million in net assets and approximately $287.4 million in managed assets, MUH had approximately $177.4 million in net assets and approximately $282.8 million in managed assets, MUS had approximately $181.0 million in net assets and approximately $297.4 million in managed assets and the Acquiring Fund had approximately $238.7 million in net assets and approximately $374.0 million in managed assets. |
Total Expenses and Management Fees |
For the 12-month period ended August 31, 2020, the Total Expense Ratios of BAF and BBK were 2.34% and 2.34%, respectively. For the fiscal year ended April 30, 2020, the Total Expense Ratios of the Acquiring Fund, MUH and MUS were 2.16%, 2.31% and 2.42%, respectively. Total Expenses means a Funds total annual operating expenses (including interest expense). Total Expense Ratio means a Funds Total Expenses expressed as a percentage of its average net assets attributable to its common shares. |
Each Fund and the Investment Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement), pursuant to which the Investment Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees each Fund pays to the Investment Advisor indirectly through its investment in money market funds managed by the Investment Advisor or its affiliates, through June 30, 2022 (the Affiliated Money Market Fund Fee Waiver). Prior to December 1, 2019, the Affiliated Money Market Fund Fee Waiver was voluntary. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Funds (upon the vote of a majority of the Board Members who are not interested persons of the Fund (as defined in the 1940 Act) or a majority of the outstanding voting securities of each Fund, upon 90 days written notice by the Fund to the Investment Advisor.
With respect to BBK, the Investment Advisor voluntarily agreed to waive a portion of the investment advisory fees or other expenses of BBK equal to an annual rate of 0.075% of BBKs average weekly managed assets (as defined below) (the BBK Voluntary Waiver). With respect to MUS, the Investment Advisor voluntarily agreed to waive its investment advisory fee on the proceeds of the VMTP Shares and tender option bond (TOB) trusts that exceed 35% of total assets minus the sum of its accrued liabilities (which does not include liabilities represented by TOB trusts and the liquidation preference of any outstanding VMTP Shares) (the MUS Voluntary Waiver and together with the BBK Voluntary Waiver, the Voluntary Waivers). The Voluntary Waivers may be reduced or discontinued at any time without notice.
If any of the Reorganizations are consummated, the Investment Advisor has contractually agreed to waive a portion of its investment management fee equal to an annual rate of 0.01% of the average daily net assets (as defined below) of the Combined Fund through June 30, 2022 (the Combined Fund Contractual Waiver). The Combined Fund Contractual Waiver may be terminated prior to June 30, 2022 only by action of a majority of the Independent Board Members or by a vote of the Combined Funds outstanding voting securities.
In the Investment Advisors view, the most likely combination is the Reorganizations of all of the Funds, which is also expected to result in the lowest Total Expense Ratio for the Combined Fund. If the only Reorganization discussed in this Joint Proxy Statement/Prospectus that is completed is the Reorganization of BAF into the Acquiring Fund, the Combined Fund would be expected to have a higher Total Expense Ratio than if any other combination of Reorganizations were completed. Any combination of Reorganizations is expected to result in a Total Expense Ratio for the Combined Fund that is lower than the Total Expense Ratio of each Target Fund.
3
As of April 30, 2020 for MUH, MUS, the Acquiring Fund and the Combined Fund, and as of August 31, 2020 for BAF and BBK, the historical and pro forma Total Expense Ratios (after giving effect to the Combined Fund Contractual Waiver) applicable to the Reorganizations are as follows:
With Voluntary Waivers and Affiliated Money Market Fund Fee Waiver
BAF |
BBK | MUH | MUS |
Acquiring
Fund (MHD) |
Pro forma
Combined Fund (BAF into MHD) |
Pro forma
Combined Fund (BAF, BBK, MUH and MUS into MHD) |
||||||
2.34% |
2.21% | 2.31% | 2.36% | 2.15% | 2.13% | 2.11% |
Without Voluntary Waivers or Affiliated Money Market Fund Fee Waiver
BAF |
BBK | MUH | MUS |
Acquiring
Fund (MHD) |
Pro forma
Combined Fund (BAF into MHD) |
Pro forma
Combined Fund (BAF, BBK, MUH and MUS into MHD) |
||||||
2.34% |
2.34% | 2.31% | 2.42% | 2.16% | 2.13% | 2.11% |
The Funds estimate that the completion of all of the Reorganizations would result in a Total Expense Ratio (including interest expense and after giving effect to the Combined Fund Contractual Waiver) for the Combined Fund of 2.11% on a historical and pro forma basis for the 12-month period ended April 30, 2020, representing a reduction in the net Total Expense Ratio (including interest expense and after giving effect to the Voluntary Waivers and, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund by 0.23%, 0.10%, 0.20%, 0.25% and 0.04%, respectively. Without giving effect to the Voluntary Waivers (which may be reduced or discontinued at any time without notice) or, with respect to the Acquiring Fund, the Affilaited Money Market Fund Fee Waiver, the gross Total Expense Ratio (including interest expense and after giving effect to the Combined Fund Contractual Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund is expected to decrease by 0.23%, 0.23%, 0.20%, 0.31% and 0.05%, respectively.
Each Funds Total Expenses include interest expense associated with such Funds VMTP Shares. For the fiscal year ended April 30, 2020, the Total Expense Ratios (excluding interest expense and after giving effect to the MUS Voluntary Waiver and, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) of the Acquiring Fund, MUH and MUS were 0.97%, 1.03% and 0.99%, respectively, and the Total Expense Ratios (excluding interest expense and without giving effect to the MUS Voluntary Waiver or, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) of the Acquiring Fund, MUH and MUS were 0.98%, 1.03% and 1.05%, respectively. For the 12-month period ended August 31, 2020, the Total Expense Ratios (excluding interest expense and after giving effect to the BBK Voluntary Waiver) of BAF and BBK were 1.17% and 1.14%, respectively, and the Total Expense Ratios (excluding interest expense and without giving effect to the BBK Voluntary Waiver) of BAF and BBK were 1.17% and 1.27%, respectively.
BAF and BBKs Total Expenses include Reorganization-related expenses which will not be incurred in the Combined Fund. For 12-month period ended August 31, 2020, the Total Expense Ratios (excluding interest expense and Reorganization-related expenses and after giving effect to the BBK Voluntary Waiver) of BAF and BBK were 1.11% and 1.09%, respectively.
4
The Funds estimate that the completion of all of the Reorganizations would result in a Total Expense Ratio (excluding interest expense and after giving effect to the Combined Fund Contractual Waiver) for the Combined Fund of 0.93% on a historical and pro forma basis for the 12-month period ended April 30, 2020, representing a reduction in the Total Expense Ratio (excluding interest expense and, if applicable, Reorganization-related expenses and after giving effect to the Voluntary Waivers and, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund by 0.18%, 0.16%, 0.10%, 0.06% and 0.04%, respectively. Without giving effect to the Voluntary Waivers (which may be reduced or discontinued at any time without notice) or, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver, the gross Total Expense Ratio (excluding interest expense and, if applicable, Reorganization-related expenses and after giving effect to the Combined Fund Contractual Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund is expected to decrease by 0.18%, 0.29%, 0.10%, 0.12% and 0.05%, respectively.
BAF currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average weekly managed assets. BBK currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.65% of its average weekly managed assets. For purposes of calculating these fees, managed assets means the total assets of the relevant Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of its accrued liabilities (other than money borrowed for investment purposes, including liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares). Each of MUH, MUS and the Acquiring Fund currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average daily net assets. For purposes of calculating these fees, net assets means the Acquiring Funds total assets minus the sum of the Acquiring Funds accrued liabilities (which does not include liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares).
If any of the Reorganizations are consummated, the annual contractual investment management fee rate of the Acquiring Fund will be the annual contractual investment management fee rate of the Combined Fund, which will be 0.55% of the average daily net assets of the Combined Fund. The annual contractual investment management fee rate of the Combined Fund represents a 10 basis point reduction in the annual contractual investment management fee rate for BBK and no change in the annual contractual investment management fee rates for BAF, MUH and MUS. Additionally, if any of the Reorganizations are consummated, the Investment Advisor has agreed to the Combined Fund Contractual Waiver through June 30, 2022, resulting in an actual investment management fee rate of 0.54% of the average daily net assets of the Combined Fund. Please see Expense Table For Common Shareholders in the Joint Proxy Statement/Prospectus for additional information.
Based on a pro forma Broadridge peer expense universe for the Combined Fund, the estimated total annual fund expense ratio (excluding investment-related expenses and taxes) is expected to be in the second quartile and contractual investment management fee rate and actual investment management fee rate over total assets are each expected to be in the first quartile.
The level of expense savings (or increases) will vary depending on the combination of the Funds in the Reorganizations, and furthermore, there can be no assurance that future expenses will not increase or that any expense savings for any Fund will be realized as a result of any Reorganization.
5
Earnings, Distributions and Undistributed Net Investment Income |
Earnings and Distribution Rate: The Combined Funds net earnings yield on NAV for common shareholders following the Reorganizations (after giving effect to the Combined Fund Contractual Waiver) is expected to be potentially higher than the current net earnings yield on NAV for each of BAF, BBK, MUH and MUS and the same as the current net earnings yield on NAV for the Acquiring Fund. The distribution level of any fund is subject to change based upon a number of factors, including the current and projected level of the funds earnings, and may fluctuate over time; thus, subject to a number of other factors, including the funds distribution policy, a higher net earnings profile may potentially have a positive impact on such funds distribution level over time. The Combined Funds earnings and distribution rate on NAV will change over time, and depending on market conditions, may be higher or lower than each Funds earnings and distribution rate on NAV prior to the Reorganizations. A Funds earnings and net investment income are variables which depend on many factors, including its asset mix, portfolio turnover level, the amount of leverage utilized by the Fund, the costs of such leverage, the performance of its investments, the movement of interest rates and general market conditions. In addition, the Combined Funds future earnings will vary depending upon the combination of completed Reorganizations. There can be no assurance that the future earnings of a Fund, including the Combined Fund after the Reorganizations, will remain constant. |
Distribution Policy: Each Fund intends to make regular monthly cash distributions of all or a portion of its net investment income to holders of such Funds common shares, except as described below under Undistributed Net Investment Income. Each Fund intends to pay any capital gains distributions at least annually. A Funds net investment income or net realized capital gains may not be sufficient to support the level of distributions paid. To the extent that distributions exceed a Funds current and accumulated earnings and profits in the current fiscal year, the excess may be treated as a return of capital. A return of capital distribution may involve a return of the common shareholders original investment. Though not currently taxable, such a distribution may lower a common shareholders basis in such Fund, thus potentially subjecting the common shareholder to future tax consequences in connection with the sale of Fund common shares, even if sold at a loss to the common shareholders original investment. See Dividends and DistributionsTax Treatment of Distributions. When total distributions exceed total return performance for the period, the difference will reduce a Funds total assets and NAV and, therefore, could have the effect of increasing the Funds expense ratio and reducing the amount of assets the Fund has available for long-term investment.
Automatic Dividend Reinvestment: Common shareholders of each Fund will automatically have all dividends and distributions reinvested in common shares of such Fund in accordance with such Funds dividend reinvestment plan, unless an election is made to receive cash by contacting the Reinvestment Plan Agent (as defined below), at (800) 699-1236. See Automatic Dividend Reinvestment Plan.
Undistributed Net Investment Income: If the Reorganizations are approved by shareholders, then the greater of (1) substantially all of the undistributed net investment income (UNII), if any, or (2) the monthly distribution of each Fund is expected to be declared to such Funds common shareholders prior to the Closing Date (the Pre-Reorganization Declared UNII Distributions). The declaration date, ex-dividend date (the Ex-Dividend Date) and record date of the Pre-Reorganization Declared UNII Distributions will occur prior to the Closing Date. However, all or a significant portion of the Pre-Reorganization Declared UNII Distributions may be paid in one or more distributions to common shareholders of the Funds entitled to such Pre-Reorganization Declared UNII Distributions after the Closing Date. Former BAF, BBK, MUH and MUS shareholders entitled to such Pre-Reorganization Declared UNII Distributions paid after the Closing Date will receive such distributions in cash.
6
Persons who purchase common shares of any of the Funds on or after the Ex-Dividend Date for the Pre-Reorganization Declared UNII Distributions should not expect to receive any distributions from any Fund until distributions, if any, are declared by the Board of the Combined Fund and paid to shareholders entitled to any such distributions. No such distributions are expected to be paid by the Combined Fund until at least approximately one month following the Closing Date.
Additionally, the Acquiring Fund, in order to seek to provide its common shareholders with distribution rate stability, may include in its Pre-Reorganization Declared UNII Distribution amounts in excess of its undistributed net investment income and net investment income accrued through the Closing Date; any such excess amounts are not expected to constitute a return of capital. This would result in the Acquiring Fund issuing incrementally more common shares in the Reorganizations since its NAV as of the business day prior to the Closing Date of the Reorganizations (the Valuation Time) would be lower relative to a scenario where such excess amounts were not included in the Acquiring Funds Pre-Reorganization Declared UNII Distribution.
The Combined Fund is anticipated to retain a lower UNII balance after the Reorganizations than BAF, BBK, MUH and MUS prior to the Reorganizations. The lower anticipated UNII balance for the Combined Fund relative to the UNII balance of each of BAF, BBK, MUH and MUS poses risks for shareholders of the Combined Fund. UNII balances, in part, support the level of a funds regular distributions and provide a cushion in the event a funds net earnings for a particular distribution period are insufficient to support the level of its regular distribution for that period. If the Combined Funds net earnings are below the level of its current distribution rate, the Combined Funds UNII balance could be more likely to contribute to a determination to decrease the Combined Funds distribution rate, or could make it more likely that the Combined Fund will make distributions consisting in part of a return of capital to maintain the level of its regular distributions. See Dividends and Distributions. Moreover, because a funds UNII balance, in part, supports the level of a funds regular distributions, the UNII balance of the Combined Fund could impact the trading market for the Combined Funds common shares and the magnitude of the trading discount to NAV of the Combined Funds common shares. However, the Combined Fund is anticipated to benefit from a lower expense ratio (compared to BAF, BBK, MUH and MUS), a potentially higher net earnings profile and other anticipated benefits of economies of scale as discussed herein. Each Fund, including the Combined Fund, reserves the right to change its distribution policy with respect to common share distributions and the basis for establishing the rate of its distributions for the common shares at any time and may do so without prior notice to common shareholders. The payment of any distributions by any Fund, including the Combined Fund, is subject to, and will only be made when, as, and if, declared by the Board of such Fund. There is no assurance the Board of any Fund, including the Combined Fund, will declare any distributions for such Fund.
To the extent any Pre-Reorganization Declared UNII Distribution is not an exempt interest dividend (as defined in the Internal Revenue Code of 1986, as amended (the (Code)), the distribution may be taxable to shareholders for U.S. federal income tax purposes.
Premium/Discount to NAV of Common Shares |
The common shares of each Fund have historically traded at both a premium and a discount. The table below sets forth the market price, NAV, and the premium/discount to NAV of each Fund as of August 31, 2020. |
Fund |
Market Price | NAV |
Premium/
(Discount) to NAV |
|||||||||
BAF |
$ | 14.39 | $ | 15.26 | (5.70 | )% | ||||||
BBK |
$ | 15.39 | $ | 16.42 | (6.27 | )% | ||||||
MUH |
$ | 14.81 | $ | 15.65 | (5.37 | )% | ||||||
MUS |
$ | 12.71 | $ | 13.90 | (8.56 | )% | ||||||
Acquiring Fund (MHD) |
$ | 15.53 | $ | 16.80 | (7.56 | )% |
7
To the extent BAFs, BBKs, MUHs or MUSs common shares are trading at a wider discount (or a narrower premium) than the Acquiring Fund at the time of its Reorganization, BAFs, BBKs, MUHs or MUSs common shareholders would have the potential for an economic benefit by the narrowing of the discount or widening of the premium. To the extent BAFs, BBKs, MUHs or MUSs common shares are trading at a narrower discount (or wider premium) than the Acquiring Fund at the time of its Reorganization, BAFs, BBKs, MUHs or MUSs common shareholders may be negatively impacted if its Reorganization is consummated. Acquiring Fund common shareholders would only benefit from a premium/discount perspective to the extent the post-Reorganization discount (or premium) of the Acquiring Fund common shares improves.
There can be no assurance that, after the Reorganizations, common shares of the Combined Fund will trade at a narrower discount to NAV or wider premium to NAV than the common shares of any individual Fund prior to the Reorganizations. Upon consummation of the Reorganizations, the Combined Fund common shares may trade at a price that is less than the current market price of Acquiring Fund common shares. In the Reorganizations, common shareholders of BAF, BBK, MUH and MUS will receive Acquiring Fund common shares based on the relative NAVs (not the market values) of the respective Funds common shares. The market value of the common shares of the Combined Fund may be less than the market value of the common shares of each respective Fund prior to the Reorganizations.
Preferred Shares |
As of August 31, 2020, BAF had 422 Series W-7 VMTP Shares outstanding, BBK had 799 Series W-7 VMTP Shares outstanding, MUH had 550 Series W-7 VMTP Shares outstanding, MUS had 870 Series W-7 VMTP Shares outstanding and the Acquiring Fund had 837 Series W-7 VMTP Shares outstanding. |
For the fiscal year ended April 30, 2020, the annualized dividend rates for the VMTP Shares of the Acquiring Fund, MUH and MUS were 2.18%, 2.18% and 2.18%, respectively. For the fiscal year ended August 31, 2020, the annualized dividend rates for the VMTP Shares of BAF and BBK were 1.67% and 1.67%, respectively.
In connection with the Reorganizations, the Acquiring Fund expects to issue 422 additional VMTP Shares to BAF VMTP Holders, 799 additional VMTP Shares to BBK VMTP Holders, 550 additional VMTP Shares to MUH VMTP Holders and 870 additional VMTP Shares to MUS VMTP Holders. Following the completion of the Reorganizations, the Combined Fund is expected to have 3,478 VMTP Shares outstanding.
Assuming all of the Reorganizations are approved by shareholders, upon the Closing Date of the Reorganizations, BAF, BBK, MUH and MUS VMTP Holders will receive on a one-for-one basis one newly issued Acquiring Fund VMTP Share, par value $0.10 per share and with a liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on the BAF, BBK, MUH and MUS VMTP Shares up to and including the day immediately preceding the Closing Date if such dividends have not been paid prior to the Closing Date), in exchange for each BAF, BBK, MUH and MUS VMTP Share held by the BAF, BBK, MUH or MUS VMTP Holders immediately prior to the Closing Date. The newly issued Acquiring Fund VMTP Shares may be of the same series as the Acquiring Funds Series W-7 VMTP Shares or a substantially identical series. No fractional Acquiring Fund VMTP Shares will be issued. The terms of the Acquiring Fund VMTP Shares to be issued in connection with the Reorganizations will be substantially identical to the terms of the Acquiring Funds outstanding VMTP Shares and will rank on parity with the Acquiring Funds outstanding VMTP Shares as to the payment of dividends
8
and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The Reorganizations will not result in any changes to the terms of the Acquiring Funds VMTP Shares currently outstanding. The terms of the Acquiring Funds VMTP Shares may change from time to time, subject to Board approval.
The newly issued Acquiring Fund VMTP Shares will have terms that are substantially identical to the outstanding BAF, BBK, MUH, MUS VMTP Shares, including the same term redemption date of July 2, 2021.
None of the expenses of the Reorganizations are expected to be borne by the VMTP Holders of the Funds. See SummaryExpenses of the Reorganizations for additional information.
Following the Reorganizations, the VMTP Holders of each Fund will be VMTP Holders of the larger Combined Fund that will have a larger asset base and more VMTP Shares outstanding than any Fund individually before the Reorganizations. With respect to matters requiring all preferred shareholders to vote separately or common and preferred shareholders to vote together as a single class, following the Reorganizations, VMTP Holders of the Combined Fund may hold a smaller percentage of the outstanding preferred shares of the Combined Fund as compared to their percentage holdings of outstanding preferred shares of their respective Fund prior to the Reorganizations.
Please see Information about the Preferred Shares of the Funds for additional information.
Expenses of the Reorganizations |
Common shareholders of the Acquiring Fund, BAF, BBK, MUH and MUS will indirectly bear all or a portion of the costs of the Reorganizations. Because of the expected expense savings and other anticipated benefits for each of BAF, BBK and MUH, the Investment Advisor recommended and the Board of each such Fund has approved that its respective Fund be responsible for its own reorganization expenses. The expenses of the applicable Reorganizations are estimated to be approximately $223,500 for BAF, $242,000 for BBK and $229,900 for MUH. For MUS and the Acquiring Fund, the expenses of the applicable Reorganization(s) are estimated to be approximately $228,000 and $253,400, of which the Investment Advisor will bear approximately $63,000 and $124,000, respectively. The actual costs associated with the Reorganizations may be more or less than the estimated costs discussed herein. |
Appraisal Rights |
Common shareholders of BAF and BBK do not have appraisal rights for their respective common or preferred shares because each Fund is formed as a Delaware statutory trust and each Funds respective Agreement and Declaration of Trust states that the shareholders are not entitled to appraisal rights. Under Maryland law, stockholders are not entitled to demand the fair value of their shares in connection with a reorganization if any shares of the class or series of their stock are listed on a national securities exchange, such as common shares of MUH, MUS and the Acquiring Fund, on the Record Date. |
U.S. Federal Income Tax Consequences of the Reorganizations |
Each Reorganization is intended to qualify as a reorganization within the meaning of Section 368(a) of the Code. If a Reorganization so qualifies, in general, common shareholders of BAF, BBK, MUH and MUS will recognize no gain or loss for U.S. federal income tax purposes upon the exchange of their common shares for Acquiring Fund Shares pursuant to their Reorganization (except with respect to cash received in lieu of fractional common shares). Additionally, each of BAF, BBK, MUH and MUS will recognize no gain or loss for U.S. federal income tax purposes by reason of its Reorganization. Neither the Acquiring Fund nor its shareholders will recognize any gain or loss for U.S. federal income tax purposes pursuant to the Reorganizations. |
9
As discussed above, shareholders of each Fund may receive distributions prior to, or after, the consummation of the Reorganizations, including distributions attributable to their proportionate share of each Funds undistributed net investment income declared prior to the consummation of the Reorganizations or the Combined Fund built-in gains, if any, recognized after the Reorganizations, when such income and gains are eventually distributed by the Combined Fund. To the extent that such a distribution is not an exempt interest dividend (as defined in the Code), the distribution may be taxable to shareholders for U.S. federal income tax purposes.
The Funds shareholders should consult their own tax advisers regarding the U.S. federal income tax consequences of the Reorganizations, as well as the effects of state, local and non-U.S. tax laws, including possible changes in tax laws.
General Information and History |
BAF and BBK are each formed as a statutory trust under the laws of the State of Delaware. MUH, MUS and the Acquiring Fund are each organized as a Maryland corporation. Each Fund is a diversified, closed-end management investment company registered under the 1940 Act. |
Each Funds principal office is located at 100 Bellevue Parkway, Wilmington, Delaware 19809, and its telephone number is (800) 882-0052.
Each of the Acquiring Fund, MUH and MUS has an April 30 fiscal year end. Each of BAF and BBK has an August 31 fiscal year end. |
The Acquiring Fund common shares are listed on the NYSE as MHD. |
BAF common shares are listed on the NYSE as BAF.
BBK common shares are listed on the NYSE as BBK.
MUH common shares are listed on the NYSE as MUH.
MUS common shares are listed on the NYSE as MUS.
Each of BAF, BBK, MUH, MUS and the Acquiring Fund has VMTP Shares outstanding. Each Funds VMTP Shares are not listed on a national stock exchange and have not been registered under the Securities Act of 1933, as amended (the Securities Act), or any state securities laws, and unless so registered, may not be offered, sold, assigned, transferred, pledged, encumbered or otherwise disposed of except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws.
Investment Objective and Policies |
The investment objective, significant investment strategies and operating policies, and investment restrictions of the Combined Fund will be those of the Acquiring Fund, which are similar (or in the case of BBKs investment objective, substantially similar, and in the case of each of MUHs and MUSs investment objectives, identical) to those of BAF, BBK, MUH and MUS, although there are some differences. |
10
Investment Objective:
BAFs investment objective is to provide current income exempt from federal income taxes, including the alternative minimum tax, and Florida intangible property tax.1
BBKs investment objective is to provide current income exempt from regular federal income taxes.
The investment objective of each of MUH, MUS and the Acquiring Fund is to provide stockholders with current income exempt from federal income taxes.
The investment objective of each Fund is fundamental and may not be changed without a vote of a majority of outstanding voting securities, as defined in the 1940 Act.
Municipal Bonds:
For BAF, the Funds investment policies provide that, under normal circumstances, the Fund as a fundamental policy will invest at least 80% of its managed assets in Municipal Bonds (as defined below) that pay interest that is exempt from federal income tax, including the alternative minimum tax, and Florida intangible property tax.
For BBK, as a fundamental policy, under normal market conditions, the Fund will invest at least 80% of its managed assets in Municipal Bonds, the interest of which is exempt from regular federal income tax.
For MUH and MUS, the Funds investment policies provide that, at all times, except during temporary defensive periods, the Fund will invest at least 80% of its total assets in a portfolio of Municipal Bonds paying interest that, in the opinion of bond counsel to the issuer, is exempt from federal income taxes. For the Acquiring Fund, the Funds investment policies provide that, the Fund seeks to achieve its investment objective by investing, as a fundamental policy at least 80% of an aggregate of the Funds net assets (including proceeds from the issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in a portfolio of municipal obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities, each of which pays interest that, in the opinion of bond counsel to the issuer, is excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum tax) (Municipal Bonds).
Please see below a comparison of the approximate amount invested in Municipal Bonds as a percentage of total assets for (i) each Fund as of August 31, 2020, (ii) the Combined Fund, assuming only the Reorganization of BAF into the Acquiring Fund was consummated as of August 31, 2020, which represents the combination of completed Reorganizations presented in this Joint Proxy Statement/Prospectus that would result in the lowest amount invested in Municipal Bonds, and (iii) the Combined Fund, assuming all of the Reorganizations were consummated as of August 31, 2020, which represents, in the Investment Advisors view, the most likely combination of the Reorganizations and the combination of completed Reorganizations that would result in the highest amount invested in Municipal Bonds for the Combined Fund.
1 |
The State of Florida repealed the Florida Intangible Tax as of January 2007. As a result, on September 12, 2008, the Board of Trustees of BAF voted unanimously to approve BAF investing in Municipal Bonds (as defined below) regardless of geographic location. If Florida were to reinstate the Florida Intangible Tax or adopt a state income tax, however, BAF would be required to realign its portfolio such that substantially all of its assets would be invested in Florida Municipal Bonds or obtain shareholder approval to amend BAFs fundamental investment objective to remove references to the Florida Intangible Tax. See The Target Funds Investment Objectives and PoliciesBAFs Investment Objective and Policies. |
11
BAF |
BBK | MUH | MUS |
Acquiring
Fund (MHD) |
Pro
Forma Combined Fund (BAF into MHD) |
Pro
Forma Combined Fund (BAF, BBK, MUH and MUS into MHD) |
||||||||||||||||||
99% |
99 | % | 99 | % | 99 | % | 99 | % | 99 | % | 99 | % |
Investment Grade Securities:
For BAF, the Fund invests primarily in municipal bonds that are investment grade quality at the time of investment.
For BBK, the Funds investment policies provide that, under normal market conditions, the Fund will invest at least 80% of its managed assets in investment grade quality Municipal Bonds.
For each of MUH and the Acquiring Fund, the Funds investment policies provide that, it will invest at least 75% of its total assets in a portfolio of Municipal Bonds that are commonly referred to as investment grade securities.
For MUS, the Funds investment policies provide that, it will invest primarily in a portfolio of long-term, investment grade municipal obligations, the interest on which, in the opinion of bond counsel to the issuer, is exempt from federal income taxes.
Investment grade quality means that such bonds are rated, at the time of investment, within the four highest grades (Baa or BBB or better by Moodys Investor Service, Inc. (Moodys), S&P Global Ratings (S&P) or Fitch Ratings (Fitch)) or are unrated but judged to be of comparable quality by the Investment Advisor.
Bond Maturity:
For each of BAF and BBK, the average maturity of the Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. Each Funds portfolio at any given time may include both long-term and intermediate-term Municipal Bonds.
For each of MUH and the Acquiring Fund, the average maturity of the Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. The Funds portfolio at any given time may include long-term, intermediate-term and short-term Municipal Bonds.
For MUS, the Funds investment policies provide that, under normal market conditions, the Fund invests at least 80% of its assets in municipal bonds with remaining maturities of one year or more at the time of investment. The average maturity of the Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. The Funds portfolio at any given time may include long-term, intermediate-term and short-term Municipal Bonds.
12
Leverage:
Each Fund utilizes leverage through the issuance of VMTP Shares and TOBs. See The Acquiring Funds InvestmentsLeverage; General Risks of Investing in the Acquiring FundLeverage Risk; and General Risks of Investing in the Acquiring FundTender Option Bond Risk. The Acquiring Fund is expected to continue to leverage its assets through the use of VMTP Shares and TOBs after the Closing Date of the Reorganizations. After the consummation of the Reorganizations, common shareholders of the Acquiring Fund, including former Target Fund common shareholders, will bear the leverage costs associated with the Acquiring Fund VMTP Shares and will be subject to the terms of the Acquiring Fund VMTP Shares, including that the Acquiring Fund VMTP Shares will be senior in priority to the Acquiring Fund common shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. Please see Information about the Preferred Shares of the Funds for additional information about the preferred shares of each Fund.
The annualized dividend rates for the preferred shares for each Funds most recent fiscal year end were as follows:
Fund |
Preferred Shares | Rate | ||||||
BAF |
VMTP Shares | 1.67 | % | |||||
BBK |
VMTP Shares | 1.67 | % | |||||
MUH |
VMTP Shares | 2.18 | % | |||||
MUS |
VMTP Shares | 2.18 | % | |||||
Acquiring Fund (MHD) |
VMTP Shares | 2.18 | % |
Please see below a comparison of certain important ratios related to (i) each Funds use of leverage as of April 30, 2020, (ii) the Combined Funds estimated use of leverage, assuming only the Reorganization of MUS into the Acquiring Fund had taken place as of April 30, 2020, which represents the combination of completed Reorganizations presented in this Joint Proxy Statement/Prospectus that would result in the lowest asset coverage ratio for the Combined Fund, and (iii) the Combined Funds estimated use of leverage, assuming only the Reorganization of MUH into the Acquiring Fund had taken place as of April 30, 2020, which represents, in the Investment Advisors view, the combination of completed Reorganizations that would result in the highest asset coverage ratio for the Combined Fund.
Ratios |
BAF | BBK | MUH | MUS |
Acquiring
Fund (MHD) |
Pro
forma
Combined Fund (MUS into MHD) |
Pro
forma
Combined Fund (MUH into MHD) |
|||||||||||||||||||||
Asset Coverage Ratio |
416.4 | % | 316.3 | % | 422.6 | % | 308.1 | % | 385.2 | % | 345.9 | % | 359.8 | % | ||||||||||||||
Regulatory Leverage Ratio(1) |
24.0 | % | 31.6 | % | 23.7 | % | 32.5 | % | 26.0 | % | 28.9 | % | 27.8 | % | ||||||||||||||
Effective Leverage Ratio(2) |
41.8 | % | 40.0 | % | 37.3 | % | 39.2 | % | 36.3 | % | 37.6 | % | 38.5 | % |
(1) |
Regulatory leverage consists of preferred shares issued by the Fund, which is a part of the Funds capital structure. Regulatory leverage is sometimes referred to as 1940 Act Leverage and is subject to asset coverage limits set forth in the 1940 Act. |
13
(2) |
Effective leverage is a Funds effective economic leverage, and includes both regulatory leverage and the leverage effects of certain derivative investments in the Funds portfolio. Currently, the leverage effects of TOB inverse floater holdings, in addition to any regulatory leverage, are included in effective leverage ratios. |
Fund Management |
The Board of each Fund is responsible for the overall supervision of the operations of its respective Fund and performs the various duties imposed on the trustees of investment companies by the 1940 Act and under applicable state law. Each Fund has the same Board Members and officers. |
Investment Advisor |
BlackRock Advisors, LLC serves as the investment adviser for each Fund and is expected to continue to serve as investment adviser for the Combined Fund. |
Portfolio Management Team |
BAF is managed by a team of investment professionals led by Michael Perilli, CFA, Theodore Jaeckel, CFA, and Phillip Soccio. BBK is managed by a team of investment professionals led by Theodore Jaeckel, CFA, Walter OConnor, CFA, Christian Romaglino and Kevin Maloney. MUH is managed by a team of investment professionals led by Theodore Jaeckel, CFA, Walter OConnor, CFA, and Christian Romaglino. MUS is managed by a team of investment professionals led by Phillip Soccio, Theodore Jaeckel, CFA and Christian Romaglino. The Acquiring Fund is managed by a team of investment professionals led by Theodore Jaeckel, CFA and Walter OConnor, CFA Following the Reorganizations, it is expected that the Combined Fund will be managed by a team of investment professionals led by Theodore Jaeckel, CFA and Walter OConnor, CFA. |
Other Service Providers |
The other professional service providers for the Funds are or will be as follows: |
Service |
Service Providers to the Funds |
|
Accounting Agent | State Street Bank and Trust Company | |
Custodian | State Street Bank and Trust Company | |
Transfer Agent, Dividend Disbursing Agent and Registrar | Computershare Trust Company, N.A. | |
Redemption and Paying Agent to VMTP Shares | The Bank of New York Mellon | |
Independent Registered Public Accounting Firm | Deloitte & Touche LLP | |
Fund Counsel | Willkie Farr & Gallagher LLP | |
Counsel to the Independent Board Members | Debevoise & Plimpton LLP |
14
EXPENSE TABLE FOR COMMON SHAREHOLDERS
The purpose of the comparative fee table below is to assist shareholders of each Fund in understanding the various costs and expenses of investing in common shares of each Fund and Combined Fund. The information in the table reflects (i) the fees and expenses incurred by BAF and BBK during the 12-month period ended August 31, 2020 (audited) and the fees and expenses incurred by MUH, MUS and the Acquiring Fund during the 12-month period ended August 31, 2020 (unaudited); (ii) the pro forma expenses of the Combined Fund for the 12-month period ended August 31, 2020 assuming only the Reorganization of BAF into the Acquiring Fund had taken place on September 1, 2019, which represents the combination of completed Reorganizations presented in this Joint Proxy Statement/Prospectus that would result in the highest Total Expense Ratio for the Combined Fund; and (iii) the pro forma expenses of the Combined Fund for the 12-month period ended August 31, 2020, for the Combined Fund, assuming all of the Reorganizations had taken place on September 1, 2019, which represents, in the Investment Advisors view, the most likely combination of the Reorganizations and the combination of completed Reorganizations that would result in the lowest Total Expense Ratio for the Combined Fund.
The level of expense savings (or increases) will vary depending upon the combination of the Funds in the Reorganizations and the resulting size of the Combined Fund, and furthermore, there can be no assurance that future expenses will not increase or that any expense savings for any Fund will be realized. Because each of the Reorganizations may occur whether or not the other Reorganization is approved, several combinations are possible, and the pro forma effects on operating expenses for all possible combinations are not illustrated in the table below. The scenarios presented below, however, capture the high and low range of possible pro forma outcomes for the Reorganizations presented in this Joint Proxy Statement/Prospectus.
BAF | BBK | MUH | MUS |
Acquiring Fund
(MHD) |
Combined Fund
(BAF into MHD) |
Combined Fund
(BAF, BBK, MUH and MUS into MHD) |
||||||||||||||||||||||
Shareholder Transaction Expenses |
|
|||||||||||||||||||||||||||
Maximum Sales Load (as a percentage of the offering price) imposed on purchases of common shares(1) |
None | None | None | None | None | None | None | |||||||||||||||||||||
Dividend Reinvestment Plan Fees(2) |
|
$0.02 per share
for open market purchases of common shares |
|
|
$0.02 per share
for open market purchases of common shares |
|
|
$0.02 per share
for open market purchases of common shares |
|
|
$0.02 per share
for open market purchases of common shares |
|
|
$0.02 per share
for open market purchases of common shares |
|
|
$0.02 per share
for open market purchases of common shares |
|
|
$0.02 per share
for open market purchases of common shares |
|
|||||||
Annual Total Expenses (as a percentage of average net assets attributable to common shares) |
|
|||||||||||||||||||||||||||
Investment Management Fees(3)(4) |
0.94 | % | 1.08 | % | 0.88 | % | 0.91 | % | 0.86 | % | 0.86 | %(5) | 0.86 | %(5) | ||||||||||||||
Other Expenses(6) |
0.23 | % | 0.19 | % | 0.19 | % | 0.18 | % | 0.14 | % | 0.08 | % | 0.05 | % | ||||||||||||||
Interest Expense(7) |
1.17 | % | 1.07 | % | 0.82 | % | 0.98 | % | 0.80 | % | 0.80 | % | 0.80 | % | ||||||||||||||
Total Annual Fund Operating Expenses(6)(7) |
2.34 | % | 2.34 | % | 1.89 | % | 2.07 | % | 1.80 | % | 1.74 | % | 1.71 | % | ||||||||||||||
Fee Waivers and/or Expense Reimburse-ments(4) |
| | | | (0.01 | )% | (0.02 | )%(5) | (0.02 | )%(5) | ||||||||||||||||||
Total Annual Fund Operating Expenses after Fee Waivers and/or Expense Reimbursements |
2.34 | % | 2.34 | % | 1.89 | % | 2.07 | % | 1.79 | % | 1.72 | % | 1.69 | % |
(1) |
No sales load will be charged in connection with the issuance of Acquiring Fund common shares as part of the Reorganizations. Common shares are not available for purchase from the Funds but may be purchased on the NYSE through a broker-dealer subject to individually negotiated commission rates. Common shares purchased in the secondary market may be subject to brokerage commissions or other charges. |
15
(2) |
The Reinvestment Plan Agents fees for the handling of the reinvestment of dividends will be paid by the Fund. However, you will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. For BBK and BAF, participants that request a sale of shares are subject to a $2.50 sales fee and a $0.15 per share sold brokerage commission fee. For MUH, MUS and the Acquiring Fund, participants that request a sale of shares are subject to a $0.02 per share sold brokerage commission. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to pay. See Automatic Dividend Reinvestment Plan for additional information. |
(3) |
BAF currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average weekly managed assets. BBK currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.65% of its average weekly managed assets. For purposes of calculating these fees, managed assets mean the total assets of the relevant Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of its accrued liabilities (other than money borrowed for investment purposes, including liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares). Each of MUH, MUS and the Acquiring Fund currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average daily net assets. For purposes of calculating these fees, net assets mean the Acquiring Funds total assets minus the sum of the Acquiring Funds accrued liabilities (which does not include liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares). If the Reorganizations are consummated, the annual contractual investment management fee rate of the Acquiring Fund will be the annual contractual investment management fee rate of the Combined Fund, which will be 0.55% of the average daily net assets of the Combined Fund. The annual contractual investment management fee rate of the Combined Fund represents a 10 basis point reduction in the annual contractual investment management fee rate for BBK and no change in the annual contractual investment management fee rates for BAF, MUH and MUS. |
(4) |
Each Fund and the Investment Advisor have entered into the Fee Waiver Agreement, pursuant to which the Investment Advisor has contractually agreed to waive the management fee with respect to any portion of each Funds assets attributable to investments in any equity and fixed-income mutual funds and exchange-traded funds managed by the Investment Advisor or its affiliates that have a contractual fee, through June 30, 2022. In addition, pursuant to the Fee Waiver Agreement, the Investment Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees each Fund pays to the Investment Advisor indirectly through its investment in money market funds managed by the Investment Advisor or its affiliates, through June 30, 2022. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Funds (upon the vote of a majority of the Independent Board Members or a majority of the outstanding voting securities of each Fund), upon 90 days written notice by each Fund to the Investment Advisor. |
(5) |
If any of the Reorganizations are consummated, the Investment Advisor has contractually agreed to waive a portion of its investment management fee equal to an annual rate of 0.01% of the average daily net assets (as defined above) of the Combined Fund through June 30, 2022. The Combined Fund Contractual Waiver may be terminated prior to June 30, 2022 only by action of a majority of the Independent Board Members or by a vote of the Combined Funds outstanding voting securities. |
(6) |
Includes Reorganization-related expenses accrued during the 12-month period ended August 31, 2020 for each Target Fund and the Acquiring Fund. The Total Annual Fund Operating Expenses After Fee Waivers and/or Expense Reimbursements (excluding interest expense, if applicable, and Reorganization-related expenses) for the Funds are presented below: |
BAF |
BBK | MUH | MUS |
Acquiring
Fund
(MHD) |
Pro
forma
Combined Fund (BAF into MHD) |
Pro forma Combined
Fund (BAF, BBK, MUH and MUS into MHD) |
||||||||||||||||||
1.11% | 1.22 | % | 1.02 | % | 1.05 | % | 0.97 | % | 0.92 | % | 0.89 | % |
(7) |
The total expense table includes interest expense associated with the Funds investments in TOBs (also known as inverse floaters). Although such interest expense is actually paid by special purpose vehicles in which the Funds invest, they are recorded on the Funds financial statements for accounting purposes. The total expense table also includes, in interest expense, dividends associated with the VMTP Shares because the VMTP Shares are considered debt of the Funds for financial reporting purposes. |
Each Fund uses leverage to seek to enhance its returns to common shareholders. This leverage generally takes two forms: the issuance of preferred shares and investment in TOBs. Both forms of leverage benefit common shareholders if the cost of the leverage is lower than the returns earned by a Fund when it invests the proceeds from the leverage. In order to help you better understand the costs associated with the Funds leverage strategy, the Total Annual Fund Operating Expenses After Fee Waivers and/or Expense Reimbursements (excluding interest expense) for the Funds are presented below:
BAF |
BBK | MUH | MUS |
Acquiring
Fund
(MHD) |
Pro forma
Combined Fund (BAF into MHD) |
Pro forma Combined
Fund (BAF, BBK, MUH and MUS into MHD) |
||||||||||||||||||
1.17% | 1.27 | % | 1.07 | % | 1.09 | % | 0.99 | % | 0.92 | % | 0.89 | % |
16
The following example is intended to help you compare the costs of investing in the common shares of the Combined Fund pro forma if (i) only the BAF Reorganization is completed and (ii) all of the Reorganizations are completed with the costs of investing in BAF, BBK, MUH, MUS and the Acquiring Fund without the Reorganizations. An investor in common shares would pay the following expenses on a $1,000 investment, assuming (1) the Total Annual Fund Operating Expenses for each Fund set forth in the total expenses table above and (2) a 5% annual return throughout the period:
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
BAF |
$ | 24 | $ | 73 | $ | 125 | $ | 268 | ||||||||
BBK |
$ | 24 | $ | 73 | $ | 125 | $ | 268 | ||||||||
MUH |
$ | 19 | $ | 59 | $ | 102 | $ | 221 | ||||||||
MUS |
$ | 21 | $ | 65 | $ | 111 | $ | 240 | ||||||||
Acquiring Fund (MHD) |
$ | 18 | $ | 57 | $ | 97 | $ | 212 | ||||||||
Pro forma Combined Fund (BAF into MHD) |
$ | 17 | $ | 55 | $ | 94 | $ | 205 | ||||||||
Pro forma Combined Fund (BAF, BBK, MUH and MUS into MHD) |
$ | 17 | $ | 54 | $ | 93 | $ | 202 |
The examples set forth above assume common shares of each Fund were owned as of the completion of the Reorganizations and the reinvestment of all dividends and distributions and uses a 5% annual rate of return as mandated by SEC regulations. The examples should not be considered a representation of past or future expenses or annual rates of return. Actual expenses or annual rates of return may be more or less than those assumed for purposes of the examples.
Common shareholders of the Acquiring Fund, BAF, BBK, MUH and MUS will indirectly bear all or a portion of the costs of the Reorganizations. Because of the expected expense savings and other anticipated benefits for each of BAF, BBK and MUH, the Investment Advisor recommended and the Board of each such Fund has approved that its respective Fund be responsible for its own reorganization expenses. The expenses of the applicable Reorganizations are estimated to be approximately $223,500 for BAF, $242,000 for BBK and $229,900 for MUH. For MUS and the Acquiring Fund, the expenses of the applicable Reorganization(s) are estimated to be approximately $228,000 and $253,400, of which the Investment Advisor will bear approximately $63,000 and $124,000, respectively. The actual costs associated with the Reorganizations may be more or less than the estimated costs discussed herein.
VMTP Holders are not expected to bear any costs of the Reorganizations.
17
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Combined Fund will be managed in accordance with the same investment objective and investment strategies and policies, and subject to the same risks, as the Acquiring Fund. The Funds have identical, substantially similar or similar investment objectives, and similar investment strategies, policies and restrictions and are subject to similar investment risks.
Each Fund utilizes leverage through the issuance of VMTP Shares and TOBs. See The Acquiring Funds InvestmentsLeverage; General Risks of Investing in the Acquiring FundLeverage Risk; and General Risks of Investing in the Acquiring FundTender Option Bond Risk. The Acquiring Fund is expected to continue to leverage its assets after the Closing Date of the Reorganizations through the use of VMTP Shares and TOBs. After the consummation of the Reorganizations, common shareholders of the Acquiring Fund, including former Target Fund common shareholders, will bear the leverage costs associated with the Acquiring Fund VMTP Shares and will be subject to the terms of the Acquiring Fund VMTP Shares, including that the Acquiring Fund VMTP Shares will be senior in priority to the Acquiring Fund common shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. Please see Information about the Preferred Shares of the Funds for additional information about the preferred shares of each Fund.
Risks that predominately affect the common shares of the Funds include risks associated with municipal obligations, including interest rate risk, credit risk and leverage risk. In addition, as exchange-traded closed-end funds, the Funds are subject to the risk that the Funds common shares may trade at a discount from the Funds NAV. Accordingly, the Funds are primarily designed for long-term investors and should not be considered a vehicle for trading purposes. In the normal course of business, each Fund invests in securities and enters into transactions where risks exist due to fluctuations in the market (market risk) or failure of the issuer of a security to meet all its obligations (issuer credit risk). The value of securities held by the Funds may decline in response to certain events, including those directly involving the issuers whose securities are owned by the Funds; conditions affecting the general economy; overall market changes; pandemics, epidemics and other global health events; local, regional or global political, social or economic instability; and currency and interest rate and price fluctuations. Similar to issuer credit risk, the Funds may be exposed to counterparty credit risk, or the risk that an entity with which the Funds have unsettled or open transactions may fail to or be unable to perform on its commitments.
Risk is inherent in all investing. An investment in the common shares of the Acquiring Fund should not be considered a complete investment program. Each shareholder should take into account the Acquiring Funds investment objective as well as the shareholders other investments when considering an investment in the Acquiring Fund. You may lose part or all of your investment in the Acquiring Fund or your investment may not perform as well as other similar investments.
Risks Related to the Reorganizations
Expenses
While the Funds currently estimate that the Reorganizations will result in reduced aggregate expenses of the Combined Fund by approximately $1,087,000 per year if all the Reorganizations are completed, the realization of these reduced expenses will not affect common shareholders of the Funds proportionately, and may take longer than expected to be realized or may not be realized at all.
For the 12-month period ended August 31, 2020, the Total Expense Ratios of BAF and BBK were 2.34% and 2.34%, respectively. For the fiscal year ended April 30, 2020, the Total Expense Ratios of the Acquiring Fund, MUH and MUS were 2.16%, 2.31% and 2.42%, respectively. Total Expenses means a Funds total annual operating expenses (including interest expense). Total Expense Ratio means a Funds Total Expenses expressed as a percentage of its average net assets attributable to its common shares. With respect to BBK, the Investment Advisor voluntarily agreed to waive a portion of the investment advisory fees or other expenses of BBK equal to an annual rate of 0.075% of BBKs average weekly managed assets (as defined below) (previously defined as the BBK Voluntary Waiver).
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Each Fund and the Investment Advisor have entered into the Fee Waiver Agreement, pursuant to which the Investment Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees each Fund pays to the Investment Advisor indirectly through its investment in money market funds managed by the Investment Advisor or its affiliates, through June 30, 2022 (previously defined as the Affiliated Money Market Fund Fee Waiver). Prior to December 1, 2019, the Affiliated Money Market Fund Fee Waiver was voluntary. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Funds (upon the vote of a majority of the Board Members who are not interested persons of the Fund (as defined in the 1940 Act) or a majority of the outstanding voting securities of each Fund, upon 90 days written notice by the Fund to the Investment Advisor.
With respect to MUS, the Investment Advisor voluntarily agreed to waive its investment advisory fee on the proceeds of the VMTP Shares and TOB trusts that exceed 35% of total assets minus the sum of its accrued liabilities (which does not include liabilities represented by TOB trusts and the liquidation preference of any outstanding VMTP Shares) (previously defined as the MUS Voluntary Waiver and together with the BBK Voluntary Waiver, the Voluntary Waivers). The Voluntary Waivers may be reduced or discontinued at any time without notice.
If any of the Reorganizations are consummated, the Investment Advisor has contractually agreed to waive a portion of its investment management fee equal to an annual rate of 0.01% of the average daily net assets (as defined above) of the Combined Fund through June 30, 2022 (the Combined Fund Contractual Waiver). The Combined Fund Contractual Waiver may be terminated prior to June 30, 2022 only by action of a majority of the Independent Board Members or by a vote of the Combined Funds outstanding voting securities.
In the Investment Advisors view, the most likely combination is the Reorganizations of all of the Funds, which is also expected to result in the lowest Total Expense Ratio for the Combined Fund. If the only Reorganization discussed in this Joint Proxy Statement/Prospectus that is completed is the Reorganization of BAF into the Acquiring Fund, the Combined Fund would be expected to have a higher Total Expense Ratio than if any other combination of Reorganizations were completed. Any combination of Reorganizations is expected to result in a Total Expense Ratio for the Combined Fund that is lower than the Total Expense Ratio of each Target Fund.
As of April 30, 2020 for, MUH, MUS, the Acquiring Fund and the Combined Fund, and as of August 31, 2020 for BAF and BBK, the historical and pro forma Total Expense Ratios (after giving effect to the Combined Fund Contractual Waiver) applicable to the Reorganizations are as follows:
With Voluntary Waivers and Affiliated Money Market Fund Fee Waiver
BAF |
BBK |
MUH |
MUS |
Acquiring Fund (MHD) |
Pro forma Combined Fund (BAF into MHD) |
Pro forma Combined Fund (BAF, BBK, MUH and MUS into MHD) |
||||||
2.34% |
2.21% | 2.31% | 2.36% | 2.15% | 2.13% | 2.11% |
Without Voluntary Waivers or Affiliated Money Market Fund Fee Waiver
BAF |
BBK |
MUH |
MUS |
Acquiring Fund (MHD) |
Pro forma Combined Fund (BAF into MHD) |
Pro forma Combined Fund (BAF, BBK, MUH and MUS into MHD) |
||||||
2.34% |
2.34% | 2.31% | 2.42% | 2.16% | 2.13% | 2.11% |
The Funds estimate that the completion of all of the Reorganizations would result in a Total Expense Ratio (including interest expense and after giving effect to the Combined Fund Contractual Waiver) for the Combined Fund of 2.11% on a historical and pro forma basis for the 12-month period ended April 30, 2020, representing a reduction in the net Total Expense Ratio (including interest expense and after giving effect to the Voluntary Waivers and, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund by 0.23%, 0.10%, 0.20%, 0.25% and 0.04%, respectively. Without giving effect to the Voluntary Waivers (which may be reduced or discontinued at any time without notice) or, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver, the gross Total Expense Ratio (including interest expense and after giving effect to the Combined Fund Contractual Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund is expected to decrease by 0.23%, 0.23%, 0.20%, 0.31% and 0.05%, respectively.
19
Each Funds Total Expenses include interest expense associated with such Funds VMTP Shares. For the fiscal year ended April 30, 2020, the Total Expense Ratios (excluding interest expense and after giving effect to the MUS Voluntary Waiver and, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) of the Acquiring Fund, MUH and MUS were 0.97%, 1.03% and 0.99%, respectively, and the Total Expense Ratios (excluding interest expense and without giving effect to the MUS Voluntary Waiver or, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) of the Acquiring Fund, MUH and MUS were 0.98%, 1.03% and 1.05%, respectively. For the 12-month period ended August 31, 2020, the Total Expense Ratios (excluding interest expense and after giving effect to the BBK Voluntary Waiver) of BAF and BBK were 1.17% and 1.14%, respectively, and the Total Expense Ratios (excluding interest expense and without giving effect to the BBK Voluntary Waiver) of BAF and BBK were 1.17% and 1.27%, respectively.
BAF and BBKs Total Expenses include Reorganization-related expenses which will not be incurred in the Combined Fund. For 12-month period ended August 31, 2020, the Total Expense Ratios (excluding interest expense and Reorganization-related expenses and after giving effect to the BBK Voluntary Waiver) of BAF and BBK were 1.11% and 1.09%, respectively.
The Funds estimate that the completion of all of the Reorganizations would result in a Total Expense Ratio (excluding interest expense and after giving effect to the Combined Fund Contractual Waiver) for the Combined Fund of 0.93% on a historical and pro forma basis for the 12-month period ended April 30, 2020, representing a reduction in the Total Expense Ratio (excluding interest expense and, if applicable, Reorganization-related expenses and after giving effect to the Voluntary Waivers and, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund by 0.18%, 0.16%, 0.10%, 0.06% and 0.04%, respectively. Without giving effect to the Voluntary Waivers (which may be reduced or discontinued at any time without notice) or, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver, the gross Total Expense Ratio (excluding interest expense and, if applicable, Reorganization-related expenses and after giving effect to the Combined Fund Contractual Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund is expected to decrease by 0.18%, 0.29%, 0.10%, 0.12% and 0.05%, respectively.
BAF currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average weekly managed assets. BBK currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.65% of its average weekly managed assets. For purposes of calculating these fees, managed assets means the total assets of the relevant Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of its accrued liabilities (other than money borrowed for investment purposes, including liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares). Each of MUH, MUS and the Acquiring Fund currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average daily net assets. For purposes of calculating these fees, net assets means the Acquiring Funds total assets minus the sum of the Acquiring Funds accrued liabilities (which does not include liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares).
If any of the Reorganizations are consummated, the annual contractual investment management fee rate of the Acquiring Fund will be the annual contractual investment management fee rate of the Combined Fund, which will be 0.55% of the average daily net assets of the Combined Fund. The annual contractual investment management fee rate of the Combined Fund represents a 10 basis point reduction in the annual contractual investment management fee rate for BBK and no change in the annual contractual investment management fee rates for BAF, MUH and MUS. Additionally, if any of the Reorganizations are consummated, the Investment Advisor has agreed to the Combined Fund Contractual Waiver through June 30, 2022, resulting in an actual investment management fee rate of 0.54% of the average daily net assets of the Combined Fund. Please see Expense Table for Common Shareholders in the Joint Proxy Statement/Prospectus for additional information.
Based on a pro forma Broadridge peer expense universe for the Combined Fund, the estimated total annual fund expense ratio (excluding investment-related expenses and taxes) is expected to be in the second quartile and contractual investment management fee rate and actual investment management fee rate over total assets are each expected to be in the first quartile.
20
The level of expense savings (or increases) will vary depending on the combination of the Funds in the Reorganizations, and furthermore, there can be no assurance that future expenses will not increase or that any expense savings for any Fund will be realized as a result of any Reorganization.
Please see the Expense Table for Common Shareholders for additional information about the Funds expenses.
Earnings and Distribution Rate
The Combined Funds net earnings yield on NAV for common shareholders following the Reorganizations (after giving effect to the Combined Fund Contractual Waiver) is expected to be potentially higher than the current net earnings yield on NAV for each of BAF, BBK, MUH and MUS and the same as the current net earnings yield on NAV for the Acquiring Fund. The distribution level of any fund is subject to change based upon a number of factors, including the current and projected level of the funds earnings, and may fluctuate over time; thus, subject to a number of other factors, including the funds distribution policy, a higher net earnings profile may potentially have a positive impact on such funds distribution level over time. The Combined Funds earnings and distribution rate on NAV will change over time, and depending on market conditions, may be higher or lower than each Funds earnings and distribution rate on NAV prior to the Reorganizations. A Funds earnings and net investment income are variables which depend on many factors, including its asset mix, portfolio turnover level, the amount of leverage utilized by the Fund, the costs of such leverage, the performance of its investments, the movement of interest rates and general market conditions. In addition, the Combined Funds future earnings will vary depending upon the combination of completed Reorganizations. There can be no assurance that the future earnings of a Fund, including the Combined Fund after the Reorganizations, will remain constant.
Undistributed Net Investment Income
If the Reorganizations are approved by shareholders, then the greater of (1) substantially all of the undistributed net investment income (previously defined as UNII), if any, or (2) the monthly distribution of each Fund is expected to be declared to such Funds common shareholders prior to the Closing Date (the Pre-Reorganization Declared UNII Distributions). The declaration date, ex-dividend date (the Ex-Dividend Date) and record date of the Pre-Reorganization Declared UNII Distributions will occur prior to the Closing Date. However, all or a significant portion of the Pre-Reorganization Declared UNII Distributions may be paid in one or more distributions to common shareholders of the Funds entitled to such Pre-Reorganization Declared UNII Distributions after the Closing Date. Former BAF, BBK, MUH and MUS shareholders entitled to such Pre-Reorganization Declared UNII Distributions paid after the Closing Date will receive such distributions in cash.
Persons who purchase common shares of any of the Funds on or after the Ex-Dividend Date for the Pre-Reorganization Declared UNII Distributions should not expect to receive any distributions from any Fund until distributions, if any, are declared by the Board of the Combined Fund and paid to shareholders entitled to any such distributions. No such distributions are expected to be paid by the Combined Fund until at least approximately one month following the Closing Date.
Additionally, the Acquiring Fund, in order to seek to provide its common shareholders with distribution rate stability, may include in its Pre-Reorganization Declared UNII Distribution amounts in excess of its undistributed net investment income and net investment income accrued through the Closing Date; any such excess amounts are not expected to constitute a return of capital. This would result in the Acquiring Fund issuing incrementally more common shares in the Reorganizations since its NAV as of the Valuation Time would be lower relative to a scenario where such excess amounts were not included in the Acquiring Funds Pre-Reorganization Declared UNII Distribution.
The Combined Fund is anticipated to retain a lower UNII balance after the Reorganizations than BAF, BBK, MUH and MUS prior to the Reorganizations. The lower anticipated UNII balance for the Combined Fund relative to the UNII balance of each of BAF, BBK, MUH and MUS poses risks for shareholders of the Combined Fund. UNII balances, in part, support the level of a funds regular distributions and provide a cushion in the event a funds net
21
earnings for a particular distribution period are insufficient to support the level of its regular distribution for that period. If the Combined Funds net earnings are below the level of its current distribution rate, the Combined Funds UNII balance could be more likely to contribute to a determination to decrease the Combined Funds distribution rate, or could make it more likely that the Combined Fund will make distributions consisting in part of a return of capital to maintain the level of its regular distributions. See Dividends and Distributions. Moreover, because a funds UNII balance, in part, supports the level of a funds regular distributions, the UNII balance of the Combined Fund could impact the trading market for the Combined Funds common shares and the magnitude of the trading discount to NAV of the Combined Funds common shares. However, the Combined Fund is anticipated to benefit from a lower expense ratio (compared to BAF, BBK, MUH and MUS), a potentially higher net earnings profile and other anticipated benefits of economies of scale as discussed herein. Each Fund, including the Combined Fund, reserves the right to change its distribution policy with respect to common share distributions and the basis for establishing the rate of its distributions for the common shares at any time and may do so without prior notice to common shareholders. The payment of any distributions by any Fund, including the Combined Fund, is subject to, and will only be made when, as, and if, declared by the Board of such Fund. There is no assurance the Board of any Fund, including the Combined Fund, will declare any distributions for such Fund.
To the extent any Pre-Reorganization Declared UNII Distribution is not an exempt interest dividend (as defined in the Code), the distribution may be taxable to shareholders for U.S. federal income tax purposes.
Premium/Discount to NAV
As with any capital stock, the price of each Funds common shares will fluctuate based on market conditions and other factors. If common shares are sold, the price received may be more or less than the original investment. Each Funds common shares are designed for long-term investors and should not be treated as trading vehicles. Shares of closed-end management investment companies frequently trade at a discount from their NAV. This risk may be greater for investors who sell their common shares in a relatively short period of time after the completion of the Reorganizations.
The common shares of each Fund have historically traded at both a premium and a discount. The table below sets forth the market price, NAV, and the premium/discount to NAV of each Fund as of August 31, 2020.
Fund |
Market Price | NAV |
Premium/(Discount) to
NAV |
|||||||||
BAF |
$ | 14.39 | $ | 15.26 | (5.70 | )% | ||||||
BBK |
$ | 15.39 | $ | 16.42 | (6.27 | )% | ||||||
MUH |
$ | 14.81 | $ | 15.65 | (5.37 | )% | ||||||
MUS |
$ | 12.71 | $ | 13.90 | (8.56 | )% | ||||||
Acquiring Fund (MHD) |
$ | 15.53 | $ | 16.80 | (7.56 | )% |
To the extent BAFs, BBKs, MUHs or MUSs common shares are trading at a wider discount (or a narrower premium) than the Acquiring Fund at the time of its Reorganization, BAFs, BBKs, MUHs or MUSs common shareholders would have the potential for an economic benefit by the narrowing of the discount or widening of the premium. To the extent BAFs, BBKs, MUHs or MUSs common shares are trading at a narrower discount (or wider premium) than the Acquiring Fund at the time of its Reorganization, BAFs, BBKs, MUHs or MUSs common shareholders may be negatively impacted if its Reorganization is consummated. Acquiring Fund common shareholders would only benefit from a premium/discount perspective to the extent the post-Reorganization discount (or premium) of the Acquiring Fund common shares improves.
There can be no assurance that, after the Reorganizations, common shares of the Combined Fund will trade at a narrower discount to NAV or wider premium to NAV than the common shares of any individual Fund prior to the Reorganizations. Upon consummation of the Reorganizations, the Combined Fund common shares may trade at a price that is less than the current market price of Acquiring Fund common shares. In the Reorganizations, common shareholders of BAF, BBK, MUH and MUS will receive Acquiring Fund common shares based on the relative NAVs (not the market values) of the respective Funds common shares. The market value of the common shares of the Combined Fund may be less than the market value of the common shares of each respective Fund prior to the Reorganizations.
22
Tax Considerations
Each Reorganization is intended to qualify as a reorganization within the meaning of Section 368(a) of the Code. If a Reorganization so qualifies, in general, common shareholders of BAF, BBK, MUH and MUS will recognize no gain or loss for U.S. federal income tax purposes upon the exchange of their common shares for Acquiring Fund Shares pursuant to their Reorganization (except with respect to cash received in lieu of fractional common shares). Additionally, each of BAF, BBK, MUH and MUS will recognize no gain or loss for U.S. federal income tax purposes by reason of its Reorganization. Neither the Acquiring Fund nor its shareholders will recognize any gain or loss for U.S. federal income tax purposes pursuant to the Reorganizations.
As discussed above, shareholders of each Fund may receive distributions prior to, or after, the consummation of the Reorganizations, including distributions attributable to their proportionate share of each Funds undistributed net investment income declared prior to the consummation of the Reorganizations or the Combined Fund built-in gains, if any, recognized after the Reorganizations, when such income and gains are eventually distributed by the Combined Fund. To the extent that such a distribution is not an exempt interest dividend (as defined in the Code), the distribution may be taxable to shareholders for U.S. federal income tax purposes.
The Funds shareholders should consult their own tax advisers regarding the U.S. federal income tax consequences of the Reorganizations, as well as the effects of state, local and non-U.S. tax laws, including possible changes in tax laws.
See U.S. Federal Income Tax Consequences of the Reorganizations for a summary of U.S. federal income tax consequences generally applicable to the Reorganizations.
General Risks of Investing in the Acquiring Fund
Because of their identical, substantially similar or similar investment objectives and similar investment strategies, each Fund is subject to similar investment risks associated with an investment in common shares of the relevant Fund. With respect to the differences in risks, those risks of BAF, BBK, MUH and/or MUS that are not shared with the Acquiring Fund are generally a result of differences in the Funds principal investment strategies described above under SummaryInvestment Objective and Policies.
The Combined Fund will be managed in accordance with the same investment objective, investment strategies and investment policies, and subject to the same risks, as the Acquiring Fund. Risk is inherent in all investing. The value of your investment in the Acquiring Fund, as well as the amount of return you receive on your investment, may fluctuate significantly from day to day and over time. The Acquiring Fund is not meant to provide a vehicle for those who wish to exploit short-term swings in the stock market and is intended for long-term investors. An investment in common shares of the Acquiring Fund should not be considered a complete investment program. Each shareholder should take into account the Acquiring Funds investment objective as well as the shareholders other investments when considering an investment in the Acquiring Fund. You may lose part or all of your investment in the Acquiring Fund or your investment may not perform as well as other similar investments.
The risks that predominately affect common shares of the Acquiring Fund, and, therefore, the Combined Fund, include the following:
Investment and Market Discount Risk. An investment in the Acquiring Funds common shares is subject to investment risk, including the possible loss of the entire amount that you invest. As with any stock, the price of the Acquiring Funds common shares will fluctuate with market conditions and other factors. If shares are sold, the price received may be more or less than the original investment. The Acquiring Funds common shares are designed for long-term investors and the Acquiring Fund should not be treated as a trading vehicle. Shares of closed-end management investment companies frequently trade at a discount from their NAV. This risk is separate and distinct from the risk that the Acquiring Funds NAV could decrease as a result of its investment activities. At any point in time an investment in the Acquiring Funds common shares may be worth less than the original amount invested, even after
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taking into account distributions paid by the Acquiring Fund. This risk may be greater for investors who sell their common shares in a relatively short period of time after completion of the Reorganizations. During periods in which the Acquiring Fund may use leverage, the Acquiring Funds investment, market discount and certain other risks will be magnified.
Municipal Bond Market Risk. Economic exposure to the municipal securities market involves certain risks. The Acquiring Funds economic exposure to municipal securities includes municipal securities in the Acquiring Funds portfolio and municipal securities to which the Acquiring Fund is exposed through the ownership of residual interests in municipal TOBs (TOB Residuals). The municipal market is one in which dealer firms make markets in bonds on a principal basis using their proprietary capital, and during the financial crisis of 2007-2009 these firms capital was severely constrained. As a result, some firms were unwilling to commit their capital to purchase and to serve as a dealer for municipal securities. Certain municipal securities may not be registered with the SEC or any state securities commission and will not be listed on any national securities exchange. The amount of public information available about the municipal securities to which the Acquiring Fund is economically exposed is generally less than that for corporate equities or bonds, and the investment performance of the Acquiring Fund may therefore be more dependent on the analytical abilities of the Investment Advisor than would be a fund investing solely in stocks or taxable bonds. The secondary market for municipal securities, particularly the below investment grade securities to which the Acquiring Fund may be economically exposed, also tends to be less well-developed or liquid than many other securities markets, which may adversely affect the Acquiring Funds ability to sell such securities at attractive prices or at prices approximating those at which the Acquiring Fund currently values them.
In addition, many state and municipal governments that issue securities are under significant economic and financial stress and may not be able to satisfy their obligations. The ability of municipal issuers to make timely payments of interest and principal may be diminished during general economic downturns and as governmental cost burdens are reallocated among federal, state and local governments. The taxing power of any governmental entity may be limited by provisions of state constitutions or laws and an entitys credit will depend on many factors, including the entitys tax base, the extent to which the entity relies on federal or state aid, and other factors which are beyond the entitys control. In addition, laws enacted in the future by Congress or state legislatures or referenda could extend the time for payment of principal and/or interest, or impose other constraints on enforcement of such obligations or on the ability of municipalities to levy taxes. Issuers of municipal securities might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, holders of municipal securities could experience delays in collecting principal and interest and such holders may not, in all circumstances, be able to collect all principal and interest to which they are entitled. To enforce its rights in the event of a default in the payment of interest or repayment of principal, or both, the Acquiring Fund may take possession of and manage the assets securing the issuers obligations on such securities, which may increase the Acquiring Funds operating expenses. Any income derived from the Acquiring Funds ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for purposes of the income tests applicable to regulated investment companies (RICs).
Taxable Municipal Securities Risk. Build America Bonds involve similar risks as municipal bonds, including credit and market risk. In particular, should a Build America Bonds issuer fail to continue to meet the applicable requirements imposed on the bonds as provided by the American Recovery and Reinvestment Act (ARRA), it is possible that such issuer may not receive federal cash subsidy payments, impairing the issuers ability to make scheduled interest payments. The Build America Bond program expired on December 31, 2010 and no further issuance is permitted unless Congress renews the program. As a result, the number of available Build America Bonds is limited, which may negatively affect the value of the Build America Bonds. In addition, there can be no assurance that Build America Bonds will be actively traded. It is difficult to predict the extent to which a market for such bonds will continue, meaning that Build America Bonds may experience greater illiquidity than other municipal obligations. The Build America Bonds outstanding as of December 31, 2010 will continue to be eligible for the federal interest rate subsidy, which continues for the life of the Build America Bonds; however, no bonds issued following expiration of the Build America Bond program will be eligible for the U.S. federal tax subsidy.
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Municipal Securities Risks. Municipal securities risks include the ability of the issuer to repay the obligation, the relative lack of information about certain issuers of municipal securities, and the possibility of future legislative changes which could affect the market for and the value of municipal securities. These risks include:
General Obligation Bonds Risks. General obligation bonds are typically secured by the issuers pledge of its faith, credit and taxing power for the repayment of principal and the payment of interest. The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or laws, and an entitys creditworthiness will depend on many factors, including potential erosion of its tax base due to population declines, natural disasters, declines in the states industrial base or inability to attract new industries, economic limits on the ability to tax without eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on federal or state aid, access to capital markets or other factors beyond the states or entitys control. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due is affected by the issuers maintenance of its tax base.
Revenue Bonds Risks. Revenue or special obligation bonds are typically payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue sources such as payments from the user of the facility being financed. Accordingly, the timely payment of interest and the repayment of principal in accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such revenue source. Revenue bonds issued by state or local agencies to finance the development of low-income, multi-family housing involve special risks in addition to those associated with municipal securities generally, including that the underlying properties may not generate sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds.
Private Activity Bonds Risks. The Acquiring Fund may invest in certain tax-exempt securities classified as private activity bonds. These bonds may subject certain investors in the Acquiring Fund to the federal alternative minimum tax.
Moral Obligation Bonds Risks. Municipal bonds may also include moral obligation bonds, which are normally issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality in question.
Municipal Notes Risks. Municipal notes are shorter term municipal debt obligations. They may provide interim financing in anticipation of tax collection, bond sales or revenue receipts. If there is a shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be fully repaid, and the Acquiring Fund may lose money.
Municipal Lease Obligations Risks. Also included within the general category of municipal bonds are certificates of participation (COPs) issued by government authorities or entities to finance the acquisition or construction of equipment, land and/or facilities. COPs represent participations in a lease, an installment purchase contract or a conditional sales contract (hereinafter collectively called lease obligations) relating to such equipment, land or facilities. Municipal leases, like other municipal debt obligations, are subject to the risk of non-payment. Although lease obligations do not constitute general obligations of the issuer for which the issuers unlimited taxing power is pledged, a lease obligation is frequently backed by the issuers covenant to budget for, appropriate and make the payments due under the lease obligation. However, certain lease obligations contain non-appropriation clauses which provide that the issuer has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. Although non-appropriation lease obligations are secured by the leased property, disposition of the property in the event of foreclosure might prove difficult and the value of the property may be insufficient to issue lease obligations. Certain investments in lease obligations may be illiquid.
The ability of issuers of municipal leases to make timely lease payments may be adversely impacted in general economic downturns and as relative governmental cost burdens are allocated and reallocated among federal, state and local governmental units. Such non-payment would result in a reduction of income to the Acquiring Fund, and could result in a reduction in the value of the municipal lease experiencing non-payment and a potential decrease in the NAV
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of the Acquiring Fund. Issuers of municipal lease obligations might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, the Acquiring Fund could experience delays and limitations with respect to the collection of principal and interest on such municipal leases and the Acquiring Fund may not, in all circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in lease payments, the Acquiring Fund might take possession of and manage the assets securing the issuers obligations on such securities, which may increase the Acquiring Funds operating expenses and adversely affect the NAV of the Acquiring Fund. When the lease contains a non-appropriation clause, however, the failure to pay would not be a default and the Acquiring Fund would not have the right to take possession of the assets. Any income derived from the Acquiring Funds ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for purposes of the income tests applicable to regulated investment companies. In addition, the Acquiring Funds intention to qualify as a regulated investment company under the Code, may limit the extent to which the Acquiring Fund may exercise its rights by taking possession of such assets, because as a regulated investment company the Acquiring Fund is subject to certain limitations on its investments and on the nature of its income.
Liquidity of Investments. Certain municipal securities in which the Acquiring Fund invests may lack an established secondary trading market or are otherwise considered illiquid. Liquidity of a security relates to the ability to easily dispose of the security and the price to be obtained and does not generally relate to the credit risk or likelihood of receipt of cash at maturity. Illiquid securities may trade at a discount from comparable, more liquid investments.
The financial markets in general, and certain segments of the municipal securities markets in particular, have in recent years experienced periods of extreme secondary market supply and demand imbalance, resulting in a loss of liquidity during which market prices were suddenly and substantially below traditional measures of intrinsic value. During such periods some securities could be sold only at arbitrary prices and with substantial losses. Periods of such market dislocation may occur again at any time.
Tax-Exempt Status Risk. In making investments, the Acquiring Fund and the Investment Advisor will rely on the opinion of issuers bond counsel and, in the case of derivative securities, sponsors counsel, on the tax-exempt status of interest on municipal obligations and payments under tax-exempt derivative securities. Neither the Acquiring Fund nor the Investment Advisor will independently review the bases for those tax opinions. If any of those tax opinions are ultimately determined to be incorrect or if events occur after the security is acquired that impact the securitys tax-exempt status, the Acquiring Fund and its shareholders could be subject to substantial tax liabilities. An assertion by the Internal Revenue Service (the IRS) that a portfolio security is not exempt from U.S. federal income tax (contrary to indications from the issuer) could affect the Acquiring Funds and its shareholders income tax liability for the current or past years and could create liability for information reporting penalties. In addition, an IRS assertion of taxability may cause the Acquiring Fund to be ineligible to pay exempt-interest dividends or may impair the liquidity and the fair market value of the securities.
Taxability Risk. The Acquiring Fund intends to minimize the payment of taxable income to shareholders by investing in tax-exempt or municipal securities in reliance at the time of purchase on an opinion of bond counsel to the issuer that the interest paid on those securities will be excludable from gross income for U.S. federal income tax purposes. Such securities, however, may be determined to pay, or have paid, taxable income subsequent to the Acquiring Funds acquisition of the securities. In that event, the IRS may demand that the Acquiring Fund pay U.S. federal income taxes on the affected interest income, and, if the Acquiring Fund agrees to do so, the Acquiring Funds yield could be adversely affected. In addition, the treatment of dividends previously paid or to be paid by the Acquiring Fund as exempt interest dividends could be adversely affected, subjecting the Acquiring Funds shareholders to increased U.S. federal income tax liabilities. In addition, future laws, regulations, rulings or court decisions may cause interest on municipal securities to be subject, directly or indirectly, to U.S. federal income taxation or interest on state municipal securities to be subject to state or local income taxation, or the value of state municipal securities to be subject to state or local intangible personal property tax, or may otherwise prevent the Acquiring Fund from realizing the full current benefit of the tax-exempt status of such securities. Any such change could also affect the market price of such securities, and thus the value of an investment in the Acquiring Fund.
Alternative Minimum Tax Risk. The Acquiring Fund expects that a portion of the interest or income it produces will be includable in alternative minimum taxable income. Exempt interest dividends also are likely to be subject to state and local income taxes. Distributions of any capital gain or other taxable income will be taxable to shareholders. The Acquiring Fund may not be a suitable investment for investors who are subject to the federal alternative minimum tax
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or who would become subject to such tax by purchasing shares of the Acquiring Fund. The suitability of an investment in the Acquiring Fund will depend upon a comparison of the after tax yield likely to be provided from the Acquiring Fund with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investors tax position. Special considerations apply to corporate investors.
Nonpayment Risk. Municipal bonds, like other debt obligations, are subject to the risk of nonpayment. The ability of issuers of municipal securities to make timely payments of interest and principal may be adversely impacted in general economic downturns and as relative governmental cost burdens are allocated and reallocated among federal, state and local governmental units. Such nonpayment would result in a reduction of income to the Acquiring Fund and could result in a reduction in the value of the municipal security experiencing nonpayment and a potential decrease in the net asset value of the Acquiring Fund.
Fixed Income Securities Risks. Fixed income securities in which the Acquiring Fund may invest are generally subject to the following risks:
Interest Rate Risk. The market value of bonds and other fixed-income securities changes in response to interest rate changes and other factors. Interest rate risk is the risk that prices of bonds and other fixed-income securities will increase as interest rates fall and decrease as interest rates rise. The Acquiring Fund may be subject to a greater risk of rising interest rates due to the current period of historically low interest rates, including the Federal Reserves recent lowering of the target for the federal funds rate to a range of 0%-0.25% as part of its efforts to ease the economic effects of the coronavirus pandemic. The magnitude of these fluctuations in the market price of bonds and other fixed-income securities is generally greater for those securities with longer maturities. Fluctuations in the market price of the Acquiring Funds investments will not affect interest income derived from instruments already owned by the Acquiring Fund, but will be reflected in the Acquiring Funds NAV. The Acquiring Fund may lose money if short-term or long-term interest rates rise sharply in a manner not anticipated by the Acquiring Funds management. To the extent the Acquiring Fund invests in debt securities that may be prepaid at the option of the obligor (such as mortgage-related securities), the sensitivity of such securities to changes in interest rates may increase (to the detriment of the Acquiring Fund) when interest rates rise. Moreover, because rates on certain floating rate debt securities typically reset only periodically, changes in prevailing interest rates (and particularly sudden and significant changes) can be expected to cause some fluctuations in the NAV of the Acquiring Fund to the extent that it invests in floating rate debt securities. These basic principles of bond prices also apply to U.S. Government securities. A security backed by the full faith and credit of the U.S. Government is guaranteed only as to its stated interest rate and face value at maturity, not its current market price. Just like other fixed-income securities, government-guaranteed securities will fluctuate in value when interest rates change.
The Acquiring Funds use of leverage, as described below, will tend to increase the Acquiring Funds interest rate risk. The Acquiring Fund may utilize certain strategies, including taking positions in futures or interest rate swaps, for the purpose of reducing the interest rate sensitivity of fixed income securities held by the Acquiring Fund and decreasing the Acquiring Funds exposure to interest rate risk. The Acquiring Fund is not required to hedge its exposure to interest rate risk and may choose not to do so. In addition, there is no assurance that any attempts by the Acquiring Fund to reduce interest rate risk will be successful or that any hedges that the Acquiring Fund may establish will perfectly correlate with movements in interest rates.
The Acquiring Fund may invest in variable and floating rate debt instruments, which generally are less sensitive to interest rate changes than longer duration fixed rate instruments, but may decline in value in response to rising interest rates if, for example, the rates at which they pay interest do not rise as much, or as quickly, as market interest rates in general. Conversely, variable and floating rate instruments generally will not increase in value if interest rates decline. The Acquiring Fund also may invest in inverse floating rate debt securities, which may decrease in value if interest rates increase, and which also may exhibit greater price volatility than fixed rate debt obligations with similar credit quality. To the extent the Acquiring Fund holds variable or floating rate instruments, a decrease (or, in the case of inverse floating rate securities, an increase) in market interest rates will adversely affect the income received from such securities, which may adversely affect the NAV of the Acquiring Funds common shares.
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Issuer Risk. The value of fixed income securities may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage, reduced demand for the issuers goods and services, historical and prospective earnings of the issuer and the value of the assets of the issuer.
Credit Risk. Credit risk is the risk that one or more fixed income securities in the Acquiring Funds portfolio will decline in price or fail to pay interest or principal when due because the issuer of the security experiences a decline in its financial status. Credit risk is increased when a portfolio security is downgraded or the perceived creditworthiness of the issuer deteriorates. To the extent the Acquiring Fund invests in below investment grade securities, it will be exposed to a greater amount of credit risk than a fund which only invests in investment grade securities. In addition, to the extent the Acquiring Fund uses credit derivatives, such use will expose it to additional risk in the event that the bonds underlying the derivatives default. The degree of credit risk depends on the issuers financial condition and on the terms of the securities. If rating agencies lower their ratings of municipal securities in the Acquiring Funds portfolio, the value of those securities could decline, which could jeopardize rating agencies ratings of Acquiring Fund VRDP Shares. Because a significant source of income for the Acquiring Fund is the interest and principal payments on the municipal securities in which it invests, any default by an issuer of a municipal security could have a negative impact on the Acquiring Funds ability to pay dividends on common shares or any VRDP Shares then outstanding and could result in the redemption of some or all of any VRDP Shares then outstanding.
Prepayment Risk. During periods of declining interest rates, borrowers may exercise their option to prepay principal earlier than scheduled. For fixed rate securities, such payments often occur during periods of declining interest rates, forcing the Acquiring Fund to reinvest in lower yielding securities, resulting in a possible decline in the Acquiring Funds income and distributions to shareholders. This is known as prepayment or call risk. Below investment grade securities frequently have call features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified price (typically greater than par) only if certain prescribed conditions are met (call protection). For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Acquiring Fund, prepayment risk may be enhanced.
Reinvestment Risk. Reinvestment risk is the risk that income from the Acquiring Funds portfolio will decline if the Acquiring Fund invests the proceeds from matured, traded or called fixed income securities at market interest rates that are below the Acquiring Fund portfolios current earnings rate.
Duration and Maturity Risk. The Investment Advisor may seek to adjust the portfolios duration or maturity based on its assessment of current and projected market conditions and all factors that the Investment Advisor deems relevant. In comparison to maturity (which is the date on which the issuer of a debt instrument is obligated to repay the principal amount), duration is a measure of the price volatility of a debt instrument as a result in changes in market rates of interest, based on the weighted average timing of the instruments expected principal and interest payments. Specifically, duration measures the anticipated percentage change in NAV that is expected for every percentage point change in interest rates. The two have an inverse relationship. Duration can be a useful tool to estimate anticipated price changes to a fixed pool of income securities associated with changes in interest rates. For example, a duration of five years means that a 1% decrease in interest rates will increase the NAV of the portfolio by approximately 5%; if interest rates increase by 1%, the NAV will decrease by 5%. However, in a managed portfolio of fixed income securities having differing interest or dividend rates or payment schedules, maturities, redemption provisions, call or prepayment provisions and credit qualities, actual price changes in response to changes in interest rates may differ significantly from a duration-based estimate at any given time. Actual price movements experienced by a portfolio of fixed income securities will be affected by how interest rates move (i.e., changes in the relationship of long-term interest rates to short-term interest rates and in the relationship of interest rates for highly rated securities and rates for below investment grade securities), the magnitude of any move in interest rates, actual and anticipated prepayments of principal through call or redemption features, the extension of maturities through restructuring, the sale of securities for portfolio management purposes, the reinvestment of proceeds from prepayments on and from sales of securities, and credit quality-related considerations whether associated with financing costs to lower credit quality borrowers or otherwise, as well as other factors. Accordingly, while duration maybe a useful tool to estimate potential price movements in relation to changes in interest rates, investors are cautioned that duration alone will not predict actual changes in the net asset or market value of the Acquiring Funds shares and that actual price movements in the Acquiring Funds portfolio may differ significantly from duration-based estimates. Duration differs from maturity in that it takes into account a securitys yield, coupon payments and its principal payments in addition to the amount of time until the security finally matures. As the value of a security changes over time, so will its duration. Prices of
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securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations. In general, a portfolio of securities with a longer duration can be expected to be more sensitive to interest rate changes than a portfolio with a shorter duration. Any decisions as to the targeted duration or maturity of any particular category of investments or of the Acquiring Funds portfolio generally will be made based on all pertinent market factors at any given time. The Acquiring Fund may incur costs in seeking to adjust the portfolios average duration or maturity. There can be no assurances that the Investment Advisors assessment of current and projected market conditions will be correct or that any strategy to adjust the portfolios duration or maturity will be successful at any given time.
Leverage Risk. The use of leverage creates an opportunity for increased common share net investment income dividends, but also creates risks for the common shareholders. The Acquiring Fund cannot assure you that the use of leverage, if employed, will result in a higher yield on the common shares. Any leveraging strategy the Acquiring Fund employs may not be successful. Leverage involves risks and special considerations for common shareholders, including:
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the likelihood of greater volatility of NAV, market price and dividend rate of the common shares than a comparable portfolio without leverage; |
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the risk that fluctuations in interest rates or dividend rates on any leverage that the Acquiring Fund must pay will reduce the return to the common shareholders; |
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the effect of leverage in a declining market, which is likely to cause a greater decline in the NAV of the common shares than if the Acquiring Fund were not leveraged, which may result in a greater decline in the market price of the common shares; |
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when the Acquiring Fund uses financial leverage, the investment advisory fee payable to the Investment Advisor will be higher than if the Acquiring Fund did not use leverage; and |
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leverage may increase operating costs, which may reduce total return. |
Any decline in the NAV of the Acquiring Funds investments will be borne entirely by the common shareholders. Therefore, if the market value of the Acquiring Funds portfolio declines, leverage will result in a greater decrease in NAV to the common shareholders than if the Acquiring Fund were not leveraged. This greater NAV decrease will also tend to cause a greater decline in the market price for the common shares. While the Acquiring Fund may from time to time consider reducing any outstanding leverage in response to actual or anticipated changes in interest rates in an effort to mitigate the increased volatility of current income and NAV associated with leverage, there can be no assurance that the Acquiring Fund will actually reduce any outstanding leverage in the future or that any reduction, if undertaken, will benefit the common shareholders. Changes in the future direction of interest rates are very difficult to predict accurately. If the Acquiring Fund were to reduce any outstanding leverage based on a prediction about future changes to interest rates, and that prediction turned out to be incorrect, the reduction in any outstanding leverage would likely operate to reduce the income and/or total returns to common shareholders relative to the circumstance where the Acquiring Fund had not reduced any of its outstanding leverage. The Acquiring Fund may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and share price if the prediction were to turn out to be correct, and determine not to reduce any of its outstanding leverage as described above.
The Acquiring Fund currently utilizes leverage through the issuance of VMTP Shares (see Information about the Preferred Shares of the Funds) and investments in TOB Residuals (see Tender Option Bond Risk). The use of TOB Residuals may require the Acquiring Fund to segregate or designate on its books and records assets to cover its obligations. While the segregated or earmarked assets may be invested in liquid assets, they may not be used for other operational purposes. Consequently, the use of leverage may limit the Acquiring Funds flexibility and may require that the Acquiring Fund sell other portfolio investments to pay Fund expenses, to maintain assets in an amount sufficient to cover the Acquiring Funds leveraged exposure or to meet other obligations at a time when it may be disadvantageous to sell such assets.
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Certain types of leverage used by the Acquiring Fund may result in the Acquiring Fund being subject to covenants relating to asset coverage and portfolio composition requirements. The Acquiring Fund may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which issue ratings for the VMTP Shares issued by the Acquiring Fund or the governing instrument for the Acquiring Fund VMTP Shares. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the 1940 Act. The Investment Advisor does not believe that these covenants or guidelines will impede it from managing the Acquiring Funds portfolio in accordance with the Acquiring Funds investment objective and policies.
While there are any preferred shares of the Acquiring Fund outstanding, the Acquiring Fund may not declare any cash dividend or other distribution on its common shares, unless at the time of such declaration, (i) all accrued preferred shares dividends have been paid and (ii) the value of the Acquiring Funds total assets (determined after deducting the amount of such dividend or other distribution), less all liabilities and indebtedness of the Acquiring Fund, is at least 200% (as required by the 1940 Act) of the liquidation preference of the outstanding preferred shares (expected to equal the aggregate original purchase price of the outstanding preferred shares plus any accrued and unpaid dividends thereon, whether or not earned or declared on a cumulative basis). This limitation on the Acquiring Funds ability to make distributions on its common shares could in certain circumstances impair the ability of the Acquiring Fund to maintain its qualification for taxation as a regulated investment company under the Code. The Acquiring Fund may, however, to the extent possible, purchase or redeem preferred shares from time to time to maintain compliance with such asset coverage requirements and may pay special dividends to the holders of the preferred shares in certain circumstances in connection with any such impairment of the Acquiring Funds status as a regulated investment company under the Code.
In addition to the foregoing, the use of leverage treated as indebtedness of the Acquiring Fund for U.S. federal income tax purposes may reduce the amount of Acquiring Fund dividends that are otherwise eligible for the dividends received deduction in the hands of corporate shareholders.
The Acquiring Fund may utilize leverage through investment derivatives. The use of certain derivatives will require the Acquiring to segregate assets to cover its obligations. While the segregated assets may be invested in liquid assets, they may not be used for other operational purposes. Consequently, the use of leverage may limit the Acquiring Funds flexibility and may require that the Acquiring Fund sell other portfolio investments to pay Acquiring Fund expenses, to maintain assets in an amount sufficient to cover the Acquiring Funds leveraged exposure or to meet other obligations at a time when it may be disadvantageous to sell such assets.
The Acquiring Fund may invest in the securities of other investment companies. Such investment companies may also be leveraged, and will therefore be subject to the leverage risks described above. This additional leverage may in certain market conditions reduce the NAV of the Acquiring Funds common shares and the returns to the common shareholders.
Tender Option Bond Risk. The Acquiring Fund currently leverages its assets through the use of TOB Residuals, which are derivative interests in municipal bonds. The TOB Residuals in which the Acquiring Fund may invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax. No independent investigation will be made to confirm the tax-exempt status of the interest or income paid by TOB Residuals held by the Acquiring Fund. There is no assurance that the Acquiring Funds strategy of using TOB Residuals to leverage its assets will be successful.
TOB Residuals represent beneficial interests in a special purpose trust formed for the purpose of holding municipal bonds contributed by one or more funds (a TOB Trust). A TOB Trust typically issues two classes of beneficial interests: short-term floating rate interests (TOB Floaters), which are sold to third-party investors, and TOB Residuals, which are generally issued to the fund(s) that transferred municipal bonds to the TOB Trust. TOB Floaters may have first priority on the cash flow from the municipal bonds held by the TOB Trust and are enhanced with a liquidity support arrangement provided by a third-party bank or other financial institution (the TOBs Liquidity Provider) which allows holders to tender their position at par (plus accrued interest). The Acquiring Fund, as a holder of TOB Residuals, is paid the residual cash flow from the TOB Trust. As result, distributions on TOB Residuals will bear an inverse relationship to short-term municipal bond interest rates. Distributions on the TOB Residuals paid to the Acquiring Fund will be reduced or, in the extreme, eliminated as short-term municipal interest rates rise and will increase when short-term municipal interest rates fall. The amount of such reduction or increase is a function, in part, of the amount of TOB Floaters sold by the TOB Trust relative to the amount of the TOB Residuals that it sells. The greater the amount of TOB Floaters sold relative to the TOB Residuals, the more volatile the distributions on the TOB Residuals will be. Short-term interest rates are at historic lows and may be more likely to rise in the current market environment.
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The municipal bonds transferred to a TOB Trust typically are high grade municipal bonds. In certain cases, when municipal bonds transferred are lower grade municipal bonds, the TOB Trust transaction includes a credit enhancement feature that provides for the timely payment of principal and interest on the bonds to the TOB Trust by a credit enhancement provider. The TOB Trust would be responsible for the payment of the credit enhancement fee and the Acquiring Fund, as a TOB Residual holder, would be responsible for reimbursement of any payments of principal and interest made by the credit enhancement provider.
Any economic leverage achieved through the Acquiring Funds investment in TOB Residuals will increase the possibility that common share long-term returns will be diminished if the cost of the TOB Floaters issued by a TOB Trust exceeds the return on the securities in the TOB Trust. If the income and gains earned on municipal securities owned by a TOB Trust that issues TOB Residuals to the Acquiring Fund are greater than the payments due on the TOB Floaters issued by the TOB Trust, the Acquiring Funds returns will be greater than if it had not invested in the TOB Residuals.
Although the Acquiring Fund generally would unwind a TOB transaction rather than try to sell a TOB Residual, if it did try to sell a TOB Residual, its ability to do so would depend on the liquidity of the TOB Residual. TOB Residuals have varying degrees of liquidity based, among other things, upon the liquidity of the underlying securities deposited in the TOB Trust. The market price of TOB Residuals is more volatile than the underlying municipal bonds due to leverage.
The leverage attributable to the Acquiring Funds use of TOB Residuals may be called away on relatively short notice and therefore may be less permanent than more traditional forms of leverage. The TOB Trust may be collapsed without the consent of the Acquiring Fund upon the occurrence of termination events, as defined in the TOB Trust agreements. Upon the occurrence of a termination event, a TOB Trust would be liquidated with the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the remarketing agent of the TOB Floaters and the TOBs Liquidity Provider. Upon certain termination events, the holders of the TOB Floaters would be paid before the TOB Residual holders (i.e., the Acquiring Fund) whereas in other termination events, the holders of TOB Floaters and the TOB Residual holders would be paid pro rata.
The Acquiring Fund may invest in a TOB Trust on either a non-recourse or recourse basis. If the Acquiring Fund invests in a TOB Trust on a recourse basis, it will typically enter into a reimbursement agreement with the TOBs Liquidity Provider pursuant to which the Acquiring Fund is required to reimburse the TOBs Liquidity Provider the balance, if any, of the amount owed under the liquidity facility over the liquidation proceeds (the Liquidation Shortfall). As a result, if the Acquiring Fund invests in a recourse TOB Trust, the Acquiring Fund will bear the risk of loss with respect to any Liquidation Shortfall.
The use of TOB Residuals will require the Acquiring Fund to earmark or segregate liquid assets in an amount equal to any TOB Floaters, plus any accrued but unpaid interest due on the TOB Floaters, issued by TOB Trusts sponsored by, or on behalf of, the Acquiring Fund that are not owned by the Acquiring Fund. The use of TOB Residuals may also require the Acquiring Fund to earmark or segregate liquid assets in an amount equal to loans provided by the TOBs Liquidity Provider to the TOB Trust to purchase tendered TOB Floaters. While the segregated assets may be invested in liquid securities, they may not be used for other operational purposes. Consequently, the use of leverage through TOB Residuals may limit the Acquiring Funds flexibility and may require that the Acquiring Fund sell other portfolio investments to pay the Acquiring Funds expenses, to maintain assets in an amount sufficient to cover the Acquiring Funds leveraged exposure or to meet other obligations at a time when it may be disadvantageous to sell such assets. Future regulatory requirements or SEC guidance may necessitate more onerous contractual or regulatory requirements, which may increase the costs or reduce the degree of potential economic benefits of TOB Trust transactions or limit the Acquiring Funds ability to enter into or manage TOB Trust transactions.
The Acquiring Fund structures and sponsors the TOB Trusts in which it holds TOB Residuals and has certain duties and responsibilities, which may give rise to certain additional risks including, but not limited to, compliance, securities law and operational risks.
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The SEC and various federal banking and housing agencies adopted credit risk retention rules for securitizations (the Risk Retention Rules). The Risk Retention Rules require the sponsor of a TOB Trust to retain at least 5% of the credit risk of the underlying assets supporting the TOB Trusts municipal bonds. The Risk Retention Rules may adversely affect the Acquiring Funds ability to engage in TOB Trust transactions or increase the costs of such transactions in certain circumstances.
TOB Trusts constitute an important component of the municipal bond market. Any modifications or changes to the rules governing TOB Trusts may adversely impact the municipal market and the Acquiring Fund, including through reduced demand for and liquidity of municipal bonds and increased financing costs for municipal issuers. The ultimate impact of any potential modifications on the TOB market and the overall municipal market is not yet certain.
Please see The Acquiring Funds InvestmentsLeverageTender Option Bonds for additional information.
Insurance Risk. With respect to an insured municipal security, insurance guarantees that interest payments on the municipal security will be made on time and that the principal will be repaid when the security matures. Insurance is expected to protect the Acquiring Fund against losses caused by a municipal security issuers failure to make interest and principal payments. However, insurance does not protect the Acquiring Fund or its shareholders against losses caused by declines in a municipal securitys value. Also, the Acquiring Fund cannot be certain that any insurance company will make the payments it guarantees. Certain significant providers of insurance for municipal securities incurred significant losses as a result of exposure to sub-prime mortgages and other lower credit quality investments that experienced defaults or otherwise suffered extreme credit deterioration during the financial crisis of 2007-2009. These losses have reduced the insurers capital and called into question their continued ability to perform their obligations under such insurance if they are called upon to do so in the future. While an insured municipal security will typically be deemed to have the rating of its insurer, if the insurer of a municipal security suffers a downgrade in its credit rating or the market discounts the value of the insurance provided by the insurer, the rating of the underlying municipal security will be more relevant and the value of the municipal security would more closely, if not entirely, reflect such rating. The Acquiring Fund may lose money on its investment if the insurance company does not make payments it guarantees. If a municipal securitys insurer fails to fulfill its obligations or loses its credit rating, the value of the security could drop.
Yield and Ratings Risk. The yields on debt obligations are dependent on a variety of factors, including general market conditions, conditions in the particular market for the obligation, the financial condition of the issuer, the size of the offering, the maturity of the obligation and the ratings of the issue. The ratings of Moodys, S&P and Fitch, which are described in Appendix A to the Statement of Additional Information, represent their respective opinions as to the quality of the obligations which they undertake to rate. Ratings, however, are general and are not absolute standards of quality. Consequently, obligations with the same rating, maturity and interest rate may have different market prices. Subsequent to its purchase by the Acquiring Fund, a rated security may cease to be rated. The Investment Advisor will consider such an event in determining whether the Acquiring Fund should continue to hold the security.
Ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of such obligations. Although these ratings may be an initial criterion for selection of portfolio investments, the Investment Advisor also will independently evaluate these securities and the ability of the issuers of such securities to pay interest and principal. To the extent that the Acquiring Fund invests in lower grade securities that have not been rated by a rating agency, the Acquiring Funds ability to achieve its investment objective will be more dependent on the Investment Advisors credit analysis than would be the case when the Acquiring Fund invests in rated securities.
High Yield Securities Risk. Subject to its investment policies, the Acquiring Fund may invest in securities rated, at the time of investment, below investment grade quality such as those rated Ba or below by Moodys, BB or below by S&P or Fitch, or securities comparably rated by other rating agencies or in unrated securities determined by the Investment Advisor to be of comparable quality. Such securities, sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve greater price volatility than securities in higher rating categories. Often the protection of interest and principal payments with respect to such securities may be very moderate and issuers of such securities face major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments.
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Lower grade securities, though high yielding, are characterized by high risk. They may be subject to certain risks with respect to the issuing entity and to greater market fluctuations than certain lower yielding, higher rated securities. The secondary market for lower grade securities may be less liquid than that of higher rated securities. Adverse conditions could make it difficult at times for the Acquiring Fund to sell certain securities or could result in lower prices than those used in calculating the Acquiring Funds NAV.
The prices of fixed-income securities generally are inversely related to interest rate changes; however, the price volatility caused by fluctuating interest rates of securities also is inversely related to the coupons of such securities. Accordingly, below investment grade securities may be relatively less sensitive to interest rate changes than higher quality securities of comparable maturity because of their higher coupon. The investor receives this higher coupon in return for bearing greater credit risk. The higher credit risk associated with below investment grade securities potentially can have a greater effect on the value of such securities than may be the case with higher quality issues of comparable maturity.
Lower grade securities may be particularly susceptible to economic downturns. It is likely that an economic recession could severely disrupt the market for such securities and may have an adverse impact on the value of such securities. In addition, it is likely that any such economic downturn could adversely affect the ability of the issuers of such securities to repay principal and pay interest thereon and increase the incidence of default for such securities. The ratings of Moodys, S&P, Fitch and other rating agencies represent their opinions as to the quality of the obligations which they undertake to rate. Ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of such obligations. Although these ratings may be an initial criterion for selection of portfolio investments, the Investment Advisor also will independently evaluate these securities and the ability of the issuers of such securities to pay interest and principal. To the extent that the Acquiring Fund invests in lower grade securities that have not been rated by a rating agency, the Acquiring Funds ability to achieve its investment objective will be more dependent on the Investment Advisors credit analysis than would be the case when the Acquiring Fund invests in rated securities.
Unrated Securities Risk. Because the Acquiring Fund may purchase securities that are not rated by any rating organization, the Investment Advisor may, after assessing their credit quality, internally assign ratings to certain of those securities in categories similar to those of rating organizations. Some unrated securities may not have an active trading market or may be difficult to value, which means the Acquiring Fund might have difficulty selling them promptly at an acceptable price. To the extent that the Acquiring Fund invests in unrated securities, the Acquiring Funds ability to achieve its investment objective will be more dependent on the Investment Advisors credit analysis than would be the case when the Acquiring Fund invests in rated securities.
Zero-Coupon Securities Risk. Municipal bonds may include zero-coupon bonds. Zero-coupon securities are bonds that are sold at a discount to par value and do not pay interest during the life of the security. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity at a rate of interest reflecting the market rate of the security at the time of issuance. Upon maturity, the holder of a zero-coupon security is entitled to receive the par value of the security.
While interest payments are not made on zero-coupon securities, holders of such securities are deemed to have received income (phantom income) annually, notwithstanding that cash may not be received currently. The effect of owning instruments that do not make current interest payments is that a fixed yield is earned not only on the original investment but also, in effect, on all discount accretion during the life of the obligations. This implicit reinvestment of earnings at a fixed rate eliminates the risk of being unable to invest distributions at a rate as high as the implicit yield on the zero-coupon bond, but at the same time eliminates the holders ability to reinvest at higher rates in the future. For this reason, some of these securities may be subject to substantially greater price fluctuations during periods of changing market interest rates than are comparable securities that pay interest currently. Longer term zero-coupon bonds are more exposed to interest rate risk than shorter term zero-coupon bonds. These investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of cash.
The Acquiring Fund accrues income with respect to these securities for U.S. federal income tax and accounting purposes prior to the receipt of cash payments. Zero-coupon securities may be subject to greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash interest at regular intervals.
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Further, to maintain its qualification for pass-through treatment under the federal tax laws, the Acquiring Fund is required to distribute income to its shareholders and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage itself by borrowing in order to generate the cash to satisfy these distributions. The required distributions may result in an increase in the Acquiring Funds exposure to zero-coupon securities.
In addition to the above-described risks, there are certain other risks related to investing in zero-coupon securities. During a period of severe market conditions, the market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, the Acquiring Funds investment exposure to these securities and their risks, including credit risk, will increase during the time these securities are held in the Acquiring Funds portfolio.
Variable Rate Demand Obligations Risk. Variable rate demand obligations (VRDOs) are floating rate securities that combine an interest in a long-term municipal bond with a right to demand payment before maturity from a bank or other financial institution. If the bank or financial institution is unable to pay, the Acquiring Fund may lose money.
Indexed and Inverse Securities Risk. Investments in inverse floaters, residual interest TOBs and similar instruments expose the Acquiring Fund to the same risks as investments in fixed income securities and derivatives, as well as other risks, including those associated with leverage and increased volatility. An investment in these securities typically will involve greater risk than an investment in a fixed rate security. Distributions on inverse floaters, residual interest TOBs and similar instruments will typically bear an inverse relationship to short-term interest rates and typically will be reduced or, potentially, eliminated as interest rates rise. Inverse floaters, residual interest TOBs and similar instruments will underperform the market for fixed rate securities in a rising interest rate environment. Inverse floaters may be considered to be leveraged to the extent that their interest rates vary by a magnitude that exceeds the magnitude of the change in a reference rate of interest (typically a short-term interest rate). The leverage inherent in inverse floaters is associated with greater volatility in their market values. Investments in inverse floaters, residual interest TOBs and similar instruments that have fixed income securities underlying them will expose the Acquiring Fund to the risks associated with those fixed income securities and the values of those investments may be especially sensitive to changes in prepayment rates on the underlying fixed income securities.
When-Issued, Forward Commitment and Delayed Delivery Transactions Risk. The Acquiring Fund may purchase securities on a when-issued basis (including on a forward commitment or TBA (to be announced) basis) and may purchase or sell those securities for delayed delivery. When-issued and delayed delivery transactions occur when securities are purchased or sold by the Acquiring Fund with payment and delivery taking place in the future to secure an advantageous yield or price. Securities purchased on a when-issued or delayed delivery basis may expose the Acquiring Fund to counterparty risk of default as well as the risk that securities may experience fluctuations in value prior to their actual delivery. The Acquiring Fund will not accrue income with respect to a when-issued or delayed delivery security prior to its stated delivery date. Purchasing securities on a when-issued or delayed delivery basis can involve the additional risk that the price or yield available in the market when the delivery takes place may not be as favorable as that obtained in the transaction itself.
Repurchase Agreements Risk. Repurchase agreements typically involve the acquisition by the Acquiring Fund of fixed income securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the Acquiring Fund will sell the securities back to the institution at a fixed time in the future. The Acquiring Fund does not bear the risk of a decline in the value of the underlying security unless the seller defaults under its repurchase obligation. In the event of the bankruptcy or other default of a seller of a repurchase agreement, the Acquiring Fund could experience both delays in liquidating the underlying securities and losses, including possible decline in the value of the underlying security during the period in which the Acquiring Fund seeks to enforce its rights thereto; possible lack of access to income on the underlying security during this period; and expenses of enforcing its rights. While repurchase agreements involve certain risks not associated with direct investments in fixed income securities, the Acquiring Fund follows procedures approved by the Board that are designed to minimize such risks. The value of the collateral underlying the repurchase agreement will be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default
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or bankruptcy by a selling financial institution, the Acquiring Fund generally will seek to liquidate such collateral. However, the exercise of the Acquiring Funds right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Acquiring Fund could suffer a loss.
Reverse Repurchase Agreements Risk. Reverse repurchase agreements involve the risks that the interest income earned on the investment of the proceeds will be less than the interest expense of the Acquiring Fund, that the market value of the securities sold by the Acquiring Fund may decline below the price at which the Acquiring Fund is obligated to repurchase the securities and that the securities may not be returned to the Acquiring Fund. There is no assurance that reverse repurchase agreements can be successfully employed.
Securities Lending Risk. The Acquiring Fund may lend securities to financial institutions. Securities lending involves exposure to certain risks, including operational risk (i.e., the risk of losses resulting from problems in the settlement and accounting process), gap risk (i.e., the risk of a mismatch between the return on cash collateral reinvestments and the fees the Acquiring Fund has agreed to pay a borrower), and credit, legal, counterparty and market risk. If a securities lending counterparty were to default, the Acquiring Fund would be subject to the risk of a possible delay in receiving collateral or in recovering the loaned securities, or to a possible loss of rights in the collateral. In the event a borrower does not return the Acquiring Funds securities as agreed, the Acquiring Fund may experience losses if the proceeds received from liquidating the collateral do not at least equal the value of the loaned security at the time the collateral is liquidated, plus the transaction costs incurred in purchasing replacement securities. This event could trigger adverse tax consequences for the Acquiring Fund. The Acquiring Fund could lose money if its short-term investment of the collateral declines in value over the period of the loan. Substitute payments for dividends received by the Acquiring Fund for securities loaned out by the Acquiring Fund will generally not be considered qualified dividend income. The securities lending agent will take the tax effects on shareholders of this difference into account in connection with the Acquiring Funds securities lending program. Substitute payments received on tax-exempt securities loaned out will generally not be tax-exempt income.
Restricted and Illiquid Securities Risk. The Acquiring Fund may invest in illiquid or less liquid investments or investments in which no secondary market is readily available or which are otherwise illiquid, including private placement securities. The Acquiring Fund may not be able to readily dispose of such investments at prices that approximate those at which the Acquiring Fund could sell such investments if they were more widely-traded and, as a result of such illiquidity, the Acquiring Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. Limited liquidity can also affect the market price of investments, thereby adversely affecting the Acquiring Funds NAV and ability to make dividend distributions. The financial markets in general, and certain segments of the mortgage related securities markets in particular, have in recent years experienced periods of extreme secondary market supply and demand imbalance, resulting in a loss of liquidity during which market prices were suddenly and substantially below traditional measures of intrinsic value. During such periods, some investments could be sold only at arbitrary prices and with substantial losses. Periods of such market dislocation may occur again at any time. Privately issued debt securities are often of below investment grade quality, frequently are unrated and present many of the same risks as investing in below investment grade public debt securities.
Restricted securities are securities that may not be sold to the public without an effective registration statement under the Securities Act, or that may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. For example, Rule 144A under the Securities Act provides an exemption from the registration requirements of the Securities Act for the resale of certain restricted securities to qualified institutional buyers, such as the Acquiring Fund. However, an insufficient number of qualified institutional buyers interested in purchasing the Rule 144A-eligible securities that the Acquiring Fund holds could affect adversely the marketability of certain Rule 144A securities, and the Acquiring Fund might be unable to dispose of such securities promptly or at reasonable prices. When registration is required to sell a security, the Acquiring Fund may be obligated to pay all or part of the registration expenses and considerable time may pass before the Acquiring Fund is permitted to sell a security under an effective registration statement. If adverse market conditions develop during this period, the Acquiring Fund might obtain a less favorable price than the price that prevailed when the Acquiring Fund decided to sell. The Acquiring Fund may be unable to sell restricted and other illiquid investments at opportune times or prices.
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Investment Companies Risk. Subject to the limitations set forth in the 1940 Act and the Acquiring Funds governing documents or as otherwise permitted by the SEC, the Acquiring Fund may acquire shares in other affiliated and unaffiliated investment companies, including exchange-traded funds (ETFs) and business development companies (BDCs). The market value of the shares of other investment companies may differ from their NAV. As an investor in investment companies, including ETFs or BDCs, the Acquiring Fund would bear its ratable share of that entitys expenses, including its investment advisory and administration fees, while continuing to pay its own advisory and administration fees and other expenses. As a result, shareholders will be absorbing duplicate levels of fees with respect to investments in other investment companies, including ETFs or BDCs.
The securities of other investment companies, including ETFs or BDCs, in which the Acquiring Fund may invest may be leveraged. As a result, the Acquiring Fund may be indirectly exposed to leverage through an investment in such securities. An investment in securities of other investment companies, including ETFs or BDCs, that use leverage may expose the Acquiring Fund to higher volatility in the market value of such securities and the possibility that the Acquiring Funds long-term returns on such securities (and, indirectly, the long-term returns of the Acquiring Funds common shares) will be diminished.
ETFs are generally not actively managed and may be affected by a general decline in market segments relating to its index. An ETF typically invests in securities included in, or representative of, its index regardless of their investment merits and does not attempt to take defensive positions in declining markets.
Strategic Transactions and Derivatives Risk. The Acquiring Fund may engage in various derivative transactions or portfolio strategies (Strategic Transactions) for duration management and other risk management purposes, including to attempt to protect against possible changes in the market value of the Acquiring Funds portfolio resulting from trends in the securities markets and changes in interest rates or to protect the Acquiring Funds unrealized gains in the value of its portfolio securities, to facilitate the sale of portfolio securities for investment purposes or to establish a position in the securities markets as a temporary substitute for purchasing particular securities or to enhance income or gain. Derivatives are financial contracts or instruments whose value depends on, or is derived from, the value of an underlying asset, reference rate or index (or relationship between two indices). The Acquiring Fund also may use derivatives to add leverage to the portfolio and/or to hedge against increases in the Acquiring Funds costs associated with any leverage strategy that it may employ. The use of Strategic Transactions to enhance current income may be particularly speculative.
Strategic Transactions involve risks. The risks associated with Strategic Transactions include (i) the imperfect correlation between the value of such instruments and the underlying assets, (ii) the possible default of the counterparty to the transaction, (iii) illiquidity of the derivative instruments, and (iv) high volatility losses caused by unanticipated market movements, which are potentially unlimited. Although both over-the-counter (OTC) and exchange-traded derivatives markets may experience a lack of liquidity, OTC non-standardized derivative transactions are generally less liquid than exchange-traded instruments. The illiquidity of the derivatives markets may be due to various factors, including congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, and technical and operational or system failures. In addition, daily limits on price fluctuations and speculative position limits on exchanges on which the Acquiring Fund may conduct its transactions in derivative instruments may prevent prompt liquidation of positions, subjecting the Acquiring Fund to the potential of greater losses. Furthermore, the Acquiring Funds ability to successfully use Strategic Transactions depends on the Investment Advisors ability to predict pertinent securities prices, interest rates, currency exchange rates and other economic factors, which cannot be assured. The use of Strategic Transactions may result in losses greater than if they had not been used, may require the Acquiring Fund to sell or purchase portfolio securities at inopportune times or for prices other than current market values, may limit the amount of appreciation the Acquiring Fund can realize on an investment or may cause the Acquiring Fund to hold a security that it might otherwise sell. Additionally, segregated or earmarked liquid assets, amounts paid by the Acquiring Fund as premiums and cash or other assets held in margin accounts with respect to Strategic Transactions are not otherwise available to the Acquiring Fund for investment purposes. Please see the Statement of Additional Information for a more detailed description of Strategic Transactions and the various derivative instruments the Acquiring Fund may use and the various risks associated with them.
Exchange-traded derivatives and OTC derivative transactions submitted for clearing through a central counterparty are also subject to minimum initial and variation margin requirements set by the relevant clearinghouse, as well as
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possible SEC- or Commodity Futures Trading Commission (CFTC) mandated margin requirements. The CFTC and federal banking regulators also have imposed margin requirements on non-cleared OTC derivatives, and the SEC has proposed (but not yet finalized) such non-cleared margin requirements. As applicable, margin requirements will increase the overall costs for the Acquiring Fund.
Many OTC derivatives are valued on the basis of dealers pricing of these instruments. However, the price at which dealers value a particular derivative and the price that the same dealers would actually be willing to pay for such derivative should the Acquiring Fund wish or be forced to sell such position may be materially different. Such differences can result in an overstatement of the Acquiring Funds NAV and may materially adversely affect the Acquiring Fund in situations in which the Acquiring Fund is required to sell derivative instruments.
While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurances that the Acquiring Funds hedging transactions will be effective.
Derivatives may give rise to a form of leverage and may expose the Acquiring Fund to greater risk and increase its costs. Recent legislation calls for new regulation of the derivatives markets. The extent and impact of the regulation is not yet known and may not be known for some time. New regulation may make derivatives more costly, may limit the availability of derivatives, or may otherwise adversely affect the value or performance of derivatives.
In November 2019, the SEC proposed new regulations governing the use of derivatives by registered investment companies. If adopted as proposed, new Rule 18f-4 would impose limits on the amount of derivatives a fund could enter into, eliminate the asset segregation framework currently used by funds to comply with Section 18 of the 1940 Act, treat derivatives as senior securities so that a failure to comply with the proposed limits would result in a statutory violation and require funds whose use of derivatives is more than a limited specified exposure amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager.
Counterparty Risk. The Acquiring Fund will be subject to credit risk with respect to the counterparties to the derivative contracts purchased by the Acquiring Fund. Because derivative transactions in which the Acquiring Fund may engage may involve instruments that are not traded on an exchange or cleared through a central counterparty but are instead traded between counterparties based on contractual relationships, the Acquiring Fund is subject to the risk that a counterparty will not perform its obligations under the related contracts. If a counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, the Acquiring Fund may experience significant delays in obtaining any recovery in bankruptcy or other reorganization proceedings. The Acquiring Fund may obtain only a limited recovery, or may obtain no recovery, in such circumstances. Although the Acquiring Fund intends to enter into transactions only with counterparties that the Investment Advisor believes to be creditworthy, there can be no assurances that, as a result, a counterparty will not default and that the Acquiring Fund will not sustain a loss on a transaction. In the event of the counterpartys bankruptcy or insolvency, the Acquiring Funds collateral may be subject to the conflicting claims of the counterpartys creditors, and the Acquiring Fund may be exposed to the risk of a court treating the Acquiring Fund as a general unsecured creditor of the counterparty, rather than as the owner of the collateral.
The counterparty risk for cleared derivatives is generally lower than for uncleared OTC derivative transactions since generally a clearing organization becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties performance under the contract as each party to a trade looks only to the clearing organization for performance of financial obligations under the derivative contract. However, there can be no assurances that a clearing organization, or its members, will satisfy its obligations to the Acquiring Fund, or that the Acquiring Fund would be able to recover the full amount of assets deposited on its behalf with the clearing organization in the event of the default by the clearing organization or the Acquiring Funds clearing broker. In addition, cleared derivative transactions benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Uncleared OTC derivative transactions generally do not benefit from such protections. This exposes the Acquiring Fund to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the Acquiring Fund to suffer a loss. Such counterparty risk is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the Acquiring Fund has concentrated its transactions with a single or small group of counterparties.
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In addition, the Acquiring Fund is subject to the risk that issuers of the instruments in which it invests and trades may default on their obligations under those instruments, and that certain events may occur that have an immediate and significant adverse effect on the value of those instruments. There can be no assurances that an issuer of an instrument in which the Acquiring Fund invests will not default, or that an event that has an immediate and significant adverse effect on the value of an instrument will not occur, and that the Acquiring Fund will not sustain a loss on a transaction as a result.
Swaps Risk. Swaps are a type of derivative. Swap agreements involve the risk that the party with which the Acquiring Fund has entered into the swap will default on its obligation to pay the Acquiring Fund and the risk that the Acquiring Fund will not be able to meet its obligations to pay the other party to the agreement. In order to seek to hedge the value of the Acquiring Funds portfolio, to hedge against increases in the Acquiring Funds cost associated with interest payments on any outstanding borrowings or to seek to increase the Acquiring Funds return, the Acquiring Fund may enter into swaps, including interest rate swap, total return swap and/or credit default swap transactions. In interest rate swap transactions, there is a risk that yields will move in the direction opposite of the direction anticipated by the Acquiring Fund, which would cause the Acquiring Fund to make payments to its counterparty in the transaction that could adversely affect Acquiring Fund performance. In addition to the risks applicable to swaps generally (including counterparty risk, high volatility, liquidity risk and credit risk), credit default swap transactions involve special risks because they are difficult to value, are highly susceptible to liquidity and credit risk, and generally pay a return to the party that has paid the premium only in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial difficulty).
Historically, swap transactions have been individually negotiated non-standardized transactions entered into in OTC markets and have not been subject to the same type of government regulation as exchange-traded instruments. However, since the global financial crisis, the OTC derivatives markets have recently become subject to comprehensive statutes and regulations. In particular, in the United States, the Dodd-Frank Act requires that certain derivatives with U.S. persons must be executed on a regulated market and a substantial portion of OTC derivatives must be submitted for clearing to regulated clearinghouses. As a result, swap transactions entered into by the Acquiring Fund may become subject to various requirements applicable to swaps under the Dodd-Frank Act, including clearing, exchange-execution, reporting and recordkeeping requirements, which may make it more difficult and costly for the Acquiring Fund to enter into swap transactions and may also render certain strategies in which the Acquiring Fund might otherwise engage impossible or so costly that they will no longer be economical to implement. Furthermore, the number of counterparties that may be willing to enter into swap transactions with the Acquiring Fund may also be limited if the swap transactions with the Acquiring Fund are subject to the swap regulation under the Dodd-Frank Act.
Credit default and total return swap agreements may effectively add leverage to the Acquiring Funds portfolio because, in addition to its managed assets, the Acquiring Fund would be subject to investment exposure on the notional amount of the swap. Total return swap agreements are subject to the risk that a counterparty will default on its payment obligations to the Acquiring Fund thereunder. The Acquiring Fund is not required to enter into swap transactions for hedging purposes or to enhance income or gain and may choose not to do so. In addition, the swaps market is subject to a changing regulatory environment. It is possible that regulatory or other developments in the swaps market could adversely affect the Acquiring Funds ability to successfully use swaps.
Legal, Tax and Regulatory Risks. Legal, tax and regulatory changes could occur that may have material adverse effects on the Acquiring Fund. For example, the regulatory and tax environment for derivative instruments in which the Acquiring Fund may participate is evolving, and such changes in the regulation or taxation of derivative instruments may have material adverse effects on the value of derivative instruments held by the Acquiring Fund and the ability of the Acquiring Fund to pursue its investment strategies.
To qualify for the favorable U.S. federal income tax treatment generally accorded to RICs, the Acquiring Fund must, among other things, derive in each taxable year at least 90% of its gross income from certain prescribed sources and distribute for each taxable year at least 90% of its investment company taxable income (generally, ordinary income plus the excess, if any, of net short-term capital gain over net long-term capital loss) and at least 90% of its net tax-exempt
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interest income, if any. If for any taxable year the Acquiring Fund does not qualify as a RIC, all of its taxable income for that year (including its net capital gain) would be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions would be taxable as ordinary dividends to the extent of the Acquiring Funds current and accumulated earnings and profits.
The current presidential administration has called for, and in certain instances has begun to implement, significant changes to U.S. fiscal, tax, trade, healthcare, immigration, foreign, and government regulatory policy. In this regard, there is significant uncertainty with respect to legislation, regulation and government policy at the federal level, as well as the state and local levels. Recent events have created a climate of heightened uncertainty and introduced new and difficult-to-quantify macroeconomic and political risks with potentially far-reaching implications. There has been a corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and monetary policy. To the extent the U.S. Congress or the current presidential administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory environment, inflation and other areas. Some particular areas identified as subject to potential change, amendment or repeal include the Dodd-Frank Act, including the Volcker Rule and various swaps and derivatives regulations, credit risk retention requirements and the authorities of the Federal Reserve, the Financial Stability Oversight Council and the SEC. Although the Acquiring Fund cannot predict the impact, if any, of these changes to the Acquiring Funds business, they could adversely affect the Acquiring Funds business, financial condition, operating results and cash flows. Until the Acquiring Fund knows what policy changes are made and how those changes impact the Acquiring Funds business and the business of the Acquiring Funds competitors over the long term, the Acquiring Fund will not know if, overall, the Acquiring Fund will benefit from them or be negatively affected by them.
The risks and uncertainties associated with these policy proposals are heightened by the 2018 U.S. federal election, which has resulted in different political parties controlling the U.S. House of Representatives, on the one hand, and the U.S. Senate and the Executive Branch, on the other hand. Additional risks arising from the differences in expressed policy preferences among the various constituencies in these branches of the U.S. government has led in the past, and may lead in the future, to short-term or prolonged policy impasses, which could, and has, resulted in shutdowns of the U.S. federal government. U.S. federal government shutdowns, especially prolonged shutdowns, could have a significant adverse impact on the economy in general and could impair the ability of issuers to raise capital in the securities markets. Any of these effects could have an adverse impact on companies in the Acquiring Funds portfolio and consequently on the value of their securities and the Acquiring Funds NAV.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. The Acquiring Fund cannot predict how any changes in the tax laws might affect its investors or the Acquiring Fund itself. New legislation, U.S. Treasury regulations, administrative interpretations or court decisions, with or without retroactive application, could significantly and negatively affect the Acquiring Funds ability to qualify as a RIC or the U.S. federal income tax consequences to its investors and itself of such qualification, or could have other adverse consequences. You are urged to consult with your tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in the Acquiring Funds shares.
1940 Act Regulation. The Acquiring Fund is a registered closed-end management investment company and as such is subject to regulations under the 1940 Act. Generally speaking, any contract or provision thereof that is made, or where performance involves a violation of the 1940 Act or any rule or regulation thereunder is unenforceable by either party unless a court finds otherwise.
Legislation Risk. At any time after the date of this Joint Proxy Statement/Prospectus, legislation may be enacted that could negatively affect the assets of the Acquiring Fund. Legislation or regulation may change the way in which the Acquiring Fund itself is regulated. The Investment Advisor cannot predict the effects of any new governmental regulation that may be implemented and there can be no assurance that any new governmental regulation will not adversely affect the Acquiring Funds ability to achieve its investment objective.
LIBOR Risk. The Acquiring Fund may be exposed to financial instruments that are tied to the London Interbank Offered Rate (LIBOR) to determine payment obligations, financing terms, hedging strategies or investment value.
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The Acquiring Funds investments may pay interest at floating rates based on LIBOR or may be subject to interest caps or floors based on LIBOR. The Acquiring Fund may also obtain financing at floating rates based on LIBOR. Derivative instruments utilized by the Acquiring Fund may also reference LIBOR.
In 2017, the head of the United Kingdoms Financial Conduct Authority announced a desire to phase out the use of LIBOR by the end of 2021, and it is expected that LIBOR will cease to be published after that time. The Acquiring Fund may have investments linked to other interbank offered rates, such as the Euro Overnight Index Average (EONIA), which may also cease to be published. Various financial industry groups have begun planning for the transition away from LIBOR, but there are challenges to converting certain securities and transactions to a new reference rate (e.g., the Secured Overnight Financing Rate (SOFR), which is intended to replace the U.S. dollar LIBOR).
Neither the effect of the LIBOR transition process nor its ultimate success can yet be known. The transition process might lead to increased volatility and illiquidity in markets for, and reduce the effectiveness of new hedges placed against, instruments whose terms currently include LIBOR. While some existing LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate-setting methodology, there may be significant uncertainty regarding the effectiveness of any such alternative methodologies to replicate LIBOR. Not all existing LIBOR-based instruments may have alternative rate-setting provisions and there remains uncertainty regarding the willingness and ability of issuers to add alternative rate-setting provisions in certain existing instruments. In addition, a liquid market for newly issued instruments that use a reference rate other than LIBOR still may be developing. There may also be challenges for the Acquiring Fund to enter into hedging transactions against such newly issued instruments until a market for such hedging transactions develops. All of the aforementioned may adversely affect the Acquiring Funds performance or NAV.
Risks Associated with Recent Market Events. Stresses associated with the 2008 financial crisis in the United States and global economies peaked approximately a decade ago, but periods of unusually high volatility in the financial markets and restrictive credit conditions, sometimes limited to a particular sector or a geography, continue to recur. Some countries, including the United States, have adopted and/or are considering the adoption of more protectionist trade policies, a move away from the tighter financial industry regulations that followed the financial crisis, and/or substantially reducing corporate taxes. The exact shape of these policies is still being considered, but the equity and debt markets may react strongly to expectations of change, which could increase volatility, especially if the markets expectations are not borne out. A rise in protectionist trade policies, and the possibility of changes to some international trade agreements, could affect the economies of many nations in ways that cannot necessarily be foreseen at the present time. In addition, geopolitical and other risks, including environmental and public health, may add to instability in world economies and markets generally. Economies and financial markets throughout the world are becoming increasingly interconnected. As a result, whether or not the Fund invests in securities of issuers located in or with significant exposure to countries experiencing economic, political and/or financial difficulties, the value and liquidity of the Funds investments may be negatively affected by such events.
An outbreak of respiratory disease caused by a novel coronavirus was first detected in China in December 2019 and has now developed into a global pandemic. The pandemic has resulted in closing borders, enhanced health screenings, healthcare service preparation and delivery, quarantines, cancellations, disruptions to supply chains and customer activity, as well as general concern and uncertainty. The impact of this pandemic, and other pandemics and epidemics that may arise in the future, could affect the economies of many nations, individual companies and the market in general in ways that cannot necessarily be foreseen at the present time. In addition, the impact of infectious diseases in developing or emerging market countries may be greater due to less established health care systems. Health crises caused by the novel coronavirus pandemic may exacerbate other pre-existing political, social and economic risks in certain countries. The impact of the pandemic may last for an extended period of time.
Market Disruption and Geopolitical Risk. The occurrence of events similar to those in recent years, such as the aftermath of the war in Iraq, instability in Afghanistan, Pakistan, Egypt, Libya, Syria, Russia, Ukraine and the Middle East, new and ongoing epidemics and pandemics of infectious diseases and other global health events, natural/environmental disasters, terrorist attacks in the United States and around the world, social and political discord, debt crises (such as the Greek crisis), sovereign debt downgrades, increasingly strained relations between the United States and a number of foreign countries, including traditional allies, such as certain European countries, and historical adversaries, such as North Korea, Iran, China and Russia, and the international community generally, new and
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continued political unrest in various countries, such as Venezuela and Spain, the exit or potential exit of one or more countries from the European Union (the EU) or the European Monetary Union (the EMU), continued changes in the balance of political power among and within the branches of the U.S. government, among others, may result in market volatility, may have long-term effects on the U.S. and worldwide financial markets, and may cause further economic uncertainties in the United States and worldwide. The coronavirus pandemic has led to illiquidity and volatility in the municipal bond markets and may lead to downgrades in the credit quality of certain municipal issuers.
China and the United States have each recently imposed tariffs on the other countrys products. These actions may trigger a significant reduction in international trade, the oversupply of certain manufactured goods, substantial price reductions of goods and possible failure of individual companies and/or large segments of Chinas export industry, which could have a negative impact on the Acquiring Funds performance. U.S. companies that source material and goods from China and those that make large amounts of sales in China would be particularly vulnerable to an escalation of trade tensions. Uncertainty regarding the outcome of the trade tensions and the potential for a trade war could cause the U.S. dollar to decline against safe haven currencies, such as the Japanese yen and the euro. Events such as these and their consequences are difficult to predict and it is unclear whether further tariffs may be imposed or other escalating actions may be taken in the future.
The decision made in the British referendum of June 23, 2016 to leave the EU, an event widely referred to as Brexit, has led to volatility in the financial markets of the United Kingdom and more broadly across Europe and may also lead to weakening in consumer, corporate and financial confidence in such markets. The formal notification to the European Council required under Article 50 of the Treaty on EU was made on March 29, 2017, following which the terms of exit were negotiated. Pursuant to an agreement between the United Kingdom and the EU, the United Kingdom left the EU on January 31, 2020, subject to a transition period ending December 31, 2020. The longer term economic, legal, political and social framework to be put in place between the United Kingdom and the EU are unclear at this stage and are likely to lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. In particular, the decision made in Brexit may lead to a call for similar referendums in other European jurisdictions which may cause increased economic volatility in the European and global markets. This mid- to long-term uncertainty may have an adverse effect on the economy generally and on the ability of the Acquiring Fund to execute its strategies and to receive attractive returns. In particular, currency volatility may mean that the returns of the Acquiring Fund and its investments are adversely affected by market movements and may make it more difficult, or more expensive, for the Acquiring Fund to execute prudent currency hedging policies. Potential decline in the value of the British Pound and/or the Euro against other currencies, along with the potential downgrading of the United Kingdoms sovereign credit rating, may also have an impact on the performance of portfolio companies or investments located in the United Kingdom or Europe. In light of the above, no definitive assessment can currently be made regarding the impact that Brexit will have on the Acquiring Fund, its investments or its organization more generally.
The occurrence of any of these above events could have a significant adverse impact on the value and risk profile of the Acquiring Funds portfolio. The Acquiring Fund does not know how long the securities markets may be affected by similar events and cannot predict the effects of similar events in the future on the U.S. economy and securities markets. There can be no assurance that similar events and other market disruptions will not have other material and adverse implications.
Regulation and Government Intervention Risk. The U.S. Government and the Federal Reserve, as well as certain foreign governments, recently have taken unprecedented actions designed to support certain financial institutions and segments of the financial markets that have experienced extreme volatility, such as implementing stimulus packages, providing liquidity in fixed-income, commercial paper and other markets, and providing tax breaks, among other actions. The reduction or withdrawal of Federal Reserve or other U.S. or non-U.S. governmental support could negatively affect financial markets generally and reduce the value and liquidity of certain securities. Additionally, with the cessation of certain market support activities, the Acquiring Fund may face a heightened level of interest rate risk as a result of a rise or increased volatility in interest rates.
Federal, state, and other governments, their regulatory agencies or self-regulatory organizations may take actions that affect the regulation of the issuers in which the Acquiring Fund invests. Legislation or regulation may also change the way in which the Acquiring Fund is regulated. Such legislation or regulation could limit or preclude the Acquiring Funds ability to achieve its investment objective.
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In the aftermath of the global financial crisis, there appears to be a renewed popular, political and judicial focus on finance related consumer protection. Financial institution practices are also subject to greater scrutiny and criticism generally. In the case of transactions between financial institutions and the general public, there may be a greater tendency toward strict interpretation of terms and legal rights in favor of the consuming public, particularly where there is a real or perceived disparity in risk allocation and/or where consumers are perceived as not having had an opportunity to exercise informed consent to the transaction. In the event of conflicting interests between retail investors holding common shares of a closed-end investment company such as the Acquiring Fund and a large financial institution, a court may similarly seek to strictly interpret terms and legal rights in favor of retail investors. The Acquiring Fund may be affected by governmental action in ways that are not foreseeable, and there is a possibility that such actions could have a significant adverse effect on the Acquiring Fund and its ability to achieve its investment objective.
Potential Conflicts of Interest of the Investment Advisor and Others. The investment activities of BlackRock, Inc. (BlackRock), the ultimate parent company of the Investment Advisor, and its affiliates (including BlackRock and its subsidiaries (collectively, the Affiliates)), and their respective directors, officers or employees, in the management of, or their interest in, their own accounts and other accounts they manage, may present conflicts of interest that could disadvantage the Acquiring Fund and its shareholders. BlackRock and its Affiliates provide investment management services to other funds and discretionary managed accounts that may follow investment programs similar to that of the Acquiring Fund. Subject to the requirements of the 1940 Act, BlackRock and its Affiliates intend to engage in such activities and may receive compensation from third parties for their services. Neither BlackRock nor any Affiliate is under any obligation to share any investment opportunity, idea or strategy with the Acquiring Fund. As a result, BlackRock and its Affiliates may compete with the Acquiring Fund for appropriate investment opportunities. The results of the Acquiring Funds investment activities, therefore, may differ from those of an Affiliate and of other accounts managed by BlackRock or an Affiliate and it is possible that the Acquiring Fund could sustain losses during periods in which one or more Affiliates and other accounts achieve profits on their trading for proprietary or other accounts. BlackRock has adopted policies and procedures designed to address potential conflicts of interests. For additional information about potential conflicts of interest and the way in which BlackRock addresses such conflicts, please see Conflicts of Interest in the Statement of Additional Information.
Market and Selection Risk. Market risk is the possibility that the market values of securities owned by the Acquiring Fund will decline. There is a risk that equity and/or bond markets will go down in value, including the possibility that such markets will go down sharply and unpredictably.
Stock markets are volatile, and the price of equity securities fluctuates based on changes in a companys financial condition and overall market and economic conditions. An adverse event, such as an unfavorable earnings report, may depress the value of a particular common stock held by the Acquiring Fund. Also, the price of common stocks is sensitive to general movements in the stock market and a drop in the stock market may depress the price of common stocks to which the Acquiring Fund has exposure. Common stock prices fluctuate for several reasons, including changes in investors perceptions of the financial condition of an issuer or the general condition of the relevant stock market, or when political or economic events affecting the issuers occur.
The prices of fixed income securities tend to fall as interest rates rise, and such declines tend to be greater among fixed income securities with longer maturities. Market risk is often greater among certain types of fixed income securities, such as zero-coupon bonds that do not make regular interest payments but are instead bought at a discount to their face values and paid in full upon maturity. As interest rates change, these securities often fluctuate more in price than securities that make regular interest payments and therefore subject the Acquiring Fund to greater market risk than a fund that does not own these types of securities.
When-issued and delayed delivery transactions are subject to changes in market conditions from the time of the commitment until settlement, which may adversely affect the prices or yields of the securities being purchased. The greater the Acquiring Funds outstanding commitments for these securities, the greater the Acquiring Funds exposure to market price fluctuations.
Selection risk is the risk that the securities that the Acquiring Funds management selects will underperform the equity and/or bond market, the market relevant indices or other funds with similar investment objectives and investment strategies.
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Defensive Investing Risk. For defensive purposes, the Acquiring Fund may allocate assets into cash or short-term fixed income securities. In doing so, the Acquiring Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective. Further, the value of short-term fixed income securities may be affected by changing interest rates and by changes in credit ratings of the investments. If the Acquiring Fund holds cash uninvested it will be subject to the credit risk of the depository institution holding the cash.
Decision-Making Authority Risk. Investors have no authority to make decisions or to exercise business discretion on behalf of the Acquiring Fund, except as set forth in the Acquiring Funds governing documents. The authority for all such decisions is generally delegated to the Board, which in turn, has delegated the day-to-day management of the Acquiring Funds investment activities to the Investment Advisor, subject to oversight by the Board.
Management Risk. The Acquiring Fund is subject to management risk because it is an actively managed investment portfolio. The Investment Advisor and the individual portfolio managers will apply investment techniques and risk analyses in making investment decisions for the Acquiring Fund, but there can be no guarantee that these will produce the desired results. The Acquiring Fund may be subject to a relatively high level of management risk because the Acquiring Fund may invest in derivative instruments, which may be highly specialized instruments that require investment techniques and risk analyses different from those associated with equities and bonds.
Valuation Risk. The Acquiring Fund is subject to valuation risk, which is the risk that one or more of the securities in which the Acquiring Fund invests are valued at prices that the Acquiring Fund is unable to obtain upon sale due to factors such as incomplete data, market instability or human error. The Investment Advisor may use an independent pricing service or prices provided by dealers to value securities at their market value. Because the secondary markets for certain investments may be limited, such instruments may be difficult to value. When market quotations are not available, the Investment Advisor may price such investments pursuant to a number of methodologies, such as computer-based analytical modeling or individual security evaluations. These methodologies generate approximations of market values, and there may be significant professional disagreement about the best methodology for a particular type of financial instrument or different methodologies that might be used under different circumstances. In the absence of an actual market transaction, reliance on such methodologies is essential, but may introduce significant variances in the ultimate valuation of the Acquiring Funds investments. Technological issues and/or errors by pricing services or other third-party service providers may also impact the Acquiring Funds ability to value its investments and the calculation of the Acquiring Funds NAV.
When market quotations are not readily available or are deemed to be inaccurate or unreliable, the Acquiring Fund values its investments at fair value as determined in good faith pursuant to policies and procedures approved by the Board. Fair value is defined as the amount for which assets could be sold in an orderly disposition over a reasonable period of time, taking into account the nature of the asset. Fair value pricing may require determinations that are inherently subjective and inexact about the value of a security or other asset. As a result, there can be no assurance that fair value priced assets will not result in future adjustments to the prices of securities or other assets, or that fair value pricing will reflect a price that the Acquiring Fund is able to obtain upon sale, and it is possible that the fair value determined for a security or other asset will be materially different from quoted or published prices, from the prices used by others for the same security or other asset and/or from the value that actually could be or is realized upon the sale of that security or other asset. For example, the Acquiring Funds NAV could be adversely affected if the Acquiring Funds determinations regarding the fair value of the Acquiring Funds investments were materially higher than the values that the Acquiring Fund ultimately realizes upon the disposal of such investments. Where market quotations are not readily available, valuation may require more research than for more liquid investments. In addition, elements of judgment may play a greater role in valuation in such cases than for investments with a more active secondary market because there is less reliable objective data available. The Acquiring Fund prices its shares daily and therefore all assets, including assets valued at fair value, are valued daily.
Reliance on the Investment Advisor Risk. The Acquiring Fund is dependent upon services and resources provided by the Investment Advisor, and therefore the Investment Advisors parent, BlackRock. The Investment Advisor is not required to devote its full time to the business of the Acquiring Fund and there is no guarantee or requirement that any investment professional or other employee of the Investment Advisor will allocate a substantial portion of his or her time to the Acquiring Fund. The loss of one or more individuals involved with the Investment Advisor could have a material adverse effect on the performance or the continued operation of the Acquiring Fund.
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Reliance on Service Providers Risk. The Acquiring Fund must rely upon the performance of service providers to perform certain functions, which may include functions that are integral to the Acquiring Funds operations and financial performance. Failure by any service provider to carry out its obligations to the Acquiring Fund in accordance with the terms of its appointment, to exercise due care and skill or to perform its obligations to the Acquiring Fund at all as a result of insolvency, bankruptcy or other causes could have a material adverse effect on the Acquiring Funds performance and returns to common shareholders. The termination of the Acquiring Funds relationship with any service provider, or any delay in appointing a replacement for such service provider, could materially disrupt the business of the Acquiring Fund and could have a material adverse effect on the Acquiring Funds performance and returns to common shareholders.
Information Technology Systems Risk. The Acquiring Fund is dependent on the Investment Advisor for certain management services as well as back-office functions. The Investment Advisor depends on information technology systems in order to assess investment opportunities, strategies and markets and to monitor and control risks for the Acquiring Fund. It is possible that a failure of some kind which causes disruptions to these information technology systems could materially limit the Investment Advisors ability to adequately assess and adjust investments, formulate strategies and provide adequate risk control. Any such information technology-related difficulty could harm the performance of the Acquiring Fund. Further, failure of the back-office functions of the Investment Advisor to process trades in a timely fashion could prejudice the investment performance of the Acquiring Fund.
Cyber Security Risk. With the increased use of technologies such as the Internet to conduct business, the Acquiring Fund is susceptible to operational, information security and related risks. In general, cyber incidents can result from deliberate attacks or unintentional events. Cyber-attacks include, but are not limited to, gaining unauthorized access to digital systems (e.g., through hacking or malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on websites (i.e., efforts to make network services unavailable to intended users). Cyber security failures by or breaches of the Investment Advisor and other service providers (including, but not limited to, fund accountants, custodians, transfer agents and administrators), and the issuers of securities in which the Acquiring Fund invests, have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with the Acquiring Funds ability to calculate its NAV, impediments to trading, the inability of shareholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, or additional compliance costs. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future. While the Acquiring Fund has established business continuity plans in the event of, and risk management systems to prevent, such cyber-attacks, there are inherent limitations in such plans and systems including the possibility that certain risks have not been identified. Furthermore, the Acquiring Fund cannot control the cyber security plans and systems put in place by service providers to the Acquiring Fund and issuers in which the Acquiring Fund invests. As a result, the Acquiring Fund or its shareholders could be negatively impacted.
Misconduct of Employees and of Service Providers Risk. Misconduct or misrepresentations by employees of the Investment Advisor or the Acquiring Funds service providers could cause significant losses to the Acquiring Fund. Employee misconduct may include binding the Acquiring Fund to transactions that exceed authorized limits or present unacceptable risks and unauthorized trading activities, concealing unsuccessful trading activities (which, in any case, may result in unknown and unmanaged risks or losses) or making misrepresentations regarding any of the foregoing. Losses could also result from actions by the Acquiring Funds service providers, including, without limitation, failing to recognize trades and misappropriating assets. In addition, employees and service providers may improperly use or disclose confidential information, which could result in litigation or serious financial harm, including limiting the Acquiring Funds business prospects or future marketing activities. Despite the Investment Advisors due diligence efforts, misconduct and intentional misrepresentations may be undetected or not fully comprehended, thereby potentially undermining the Investment Advisors due diligence efforts. As a result, no assurances can be given that the due diligence performed by the Investment Advisor will identify or prevent any such misconduct.
Inflation Risk. Inflation risk is the risk that the value of assets or income from investment will be worth less in the future, as inflation decreases the value of money. As inflation increases, the real value of the common shares and distributions on those shares can decline. In addition, during any periods of rising inflation, interest rates on any borrowings by the Acquiring Fund would likely increase, which would tend to further reduce returns to the common shareholders.
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Deflation Risk. Deflation risk is the risk that prices throughout the economy decline over time, which may have an adverse effect on the market valuation of companies, their assets and their revenues. In addition, deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more likely, which may result in a decline in the value of the Acquiring Funds portfolio.
Portfolio Turnover Risk. The Acquiring Funds annual portfolio turnover rate may vary greatly from year to year, as well as within a given year. Portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Acquiring Fund. A higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne by the Acquiring Fund. High portfolio turnover may result in an increased realization of net short-term capital gains by the Acquiring Fund which, when distributed to common shareholders, will be taxable as ordinary income. Additionally, in a declining market, portfolio turnover may create realized capital losses.
Anti-Takeover Provisions Risk. The charter and bylaws of the Acquiring Fund and Maryland law include provisions that could limit the ability of other entities or persons to acquire control of the Acquiring Fund or convert the Acquiring Fund to open-end status or to change the composition of the Board. Such provisions could limit the ability of common shareholders to sell their common shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Acquiring Fund. See Certain Provisions in the Declarations of Trust, Charter and Bylaws.
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INFORMATION ABOUT THE REORGANIZATIONS
The Reorganizations seek to combine five funds that have the same investment adviser, the same Board Members, and substantially similar or similar investment objectives and similar investment strategies, policies and restrictions.
Description of the Reorganizations
Each Reorganization Agreement (a form of which is attached as Appendix A to this Joint Proxy Statement/Prospectus) provides for the Acquiring Funds acquisition of substantially all of the assets of the applicable Target Fund and assumption of substantially all of the liabilities of the applicable Target Fund in exchange for newly issued Acquiring Fund common shares, with a par value $0.10 per share, and newly issued Acquiring Fund VMTP Shares, with a par value of $0.10 per share and liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on the Target Fund VMTP Shares up to and including the day immediately preceding the Closing Date if such dividends have not been paid prior to the Closing Date). The Acquiring Fund will list the newly issued common shares on the NYSE. Each Target Fund will distribute Acquiring Fund Shares received by it pro rata to its shareholders (although cash may be paid in lieu of any fractional common shares). The newly-issued Acquiring Fund Shares will be issued in the form of book-entry interests. Such distribution of Acquiring Fund Shares to Target Fund shareholders will be accomplished by opening new accounts on the books of the Acquiring Fund in the names of the Target Fund shareholders and transferring to those shareholder accounts Acquiring Fund Shares.
Each newly-opened account on the books of the Acquiring Fund for the former common shareholders of BAF, BBK, MUH and MUS will represent the respective pro rata number of Acquiring Fund common shares (rounded down, in the case of fractional common shares held other than in an automatic dividend reinvestment plan account (Plan Account), to the next largest number of whole common shares) due such common shareholder. No fractional Acquiring Fund common shares will be issued (except for common shares held in a Plan Account). In the event there are fractional common shares in an account other than a Plan Account, the Acquiring Funds transfer agent will aggregate all such fractional BAF, BBK, MUH or MUS common shares and sell the resulting whole common shares on the NYSE for the account of all holders of such fractional interests, and each such holder will be entitled to the pro rata share of the proceeds from such sale upon being issued book-entry interests for the Acquiring Fund common shares. See Terms of the Reorganization AgreementsBook-Entry Interests for a description of the procedures to be followed by BAF, BBK, MUH and MUS common shareholders to obtain their Acquiring Fund common shares (and cash in lieu of fractional common shares, if any). Similarly, each newly-opened account on the books of the Acquiring Fund for BAF, BBK, MUH and MUS VMTP Holders would represent the number of Acquiring Fund VMTP Shares issued on a one-for-one basis for each such VMTP Holders holdings of BAF, BBK, MUH and MUS VMTP Shares.
As a result of the Reorganizations, each common shareholder of BAF, BBK, MUH and MUS will own Acquiring Fund common shares that (except for cash payments received in lieu of fractional common shares) will have an aggregate NAV (not the market value) immediately after the Closing Date equal to the aggregate NAV (not the market value) of that shareholders BAF, BBK, MUH or MUS common shares, respectively, immediately prior to the Closing Date. The aggregate NAV of each Fund immediately prior to the applicable Reorganization will reflect accrued expenses associated with such Reorganization. The NAV of BAF, BBK, MUH and MUS common shares will not be diluted as a result of the Reorganizations. The value of each Funds net assets will be calculated net of the liquidation preference (including accumulated and unpaid dividends) of all outstanding VMTP Shares of such Fund. The market value per share of the common shares of the Combined Fund may be less than the market value per share of the common shares of each respective Fund prior to the Reorganizations.
Assuming all of the Reorganizations are approved by shareholders, upon the Closing Date of the Reorganizations, a Target Fund VMTP Holder will receive on a one-for-one basis one newly issued Acquiring Fund VMTP Share, par value $0.10 per share and with a liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on the VMTP Shares of the applicable Target Fund up to and including the day immediately preceding the Closing Date of the Reorganizations if such dividends have not been paid prior to the Closing Date), in exchange for each Target Fund VMTP Share held by such Target Fund VMTP Holder immediately prior to the Closing Date. The newly issued Acquiring Fund VMTP Shares may be of the same series as the Acquiring Funds Series W-7 VMTP Shares or a substantially identical series. No fractional Acquiring Fund VMTP Shares will be issued. The terms of the Acquiring Fund VMTP Shares to be issued in connection with the Reorganizations will
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be substantially identical to the terms of the Acquiring Funds outstanding VMTP Shares and will rank on parity with the Acquiring Funds outstanding VMTP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The Reorganizations will not result in any changes to the terms of the Acquiring Funds VMTP Shares currently outstanding. The terms of the Acquiring Funds VMTP Shares may change from time to time, subject to Board approval.
The newly issued Acquiring Fund VMTP Shares will have terms that are substantially identical to the terms of the outstanding BAF, BBK, MUH and MUS VMTP Shares, including the same term redemption date of July 2, 2021.
Since the Acquiring Fund VMTP Shares would be issued at a liquidation preference and value per share equal to the liquidation preference and value per share of the VMTP Shares of BAF, BBK, MUH and MUS, the interests of BAF, BBK, MUH and MUS VMTP Holders will not be diluted as a result of the Reorganizations.
As a result of the Reorganizations, a common or preferred shareholder of any of the Funds may hold a reduced percentage of ownership in the Combined Fund than they did in BAF, BBK, MUH and MUS. No sales charge or fee of any kind will be charged to shareholders of BAF, BBK, MUH and MUS in connection with their receipt of Acquiring Fund Shares in the Reorganizations.
As soon as practicable after the Closing Date for the Reorganizations, each of BAF, BBK, MUH and MUS will deregister as an investment company under the 1940 Act. BAF and BBK will liquidate, dissolve and terminate in accordance with its respective Agreement and Declaration of Trust and Delaware law. MUH and MUS will liquidate, dissolve and terminate in accordance with its respective charter and Maryland law. The Acquiring Fund will continue to operate after the Reorganizations as a registered, diversified, closed-end management investment company with the investment objective, investment strategies, investment policies and investment restrictions described in this Joint Proxy Statement/Prospectus.
No Reorganization is contingent upon the approval of any other Reorganization. If a Reorganization is not consummated, the Fund for which such Reorganization(s) was not consummated would continue to exist and operate on a standalone basis. Both the Target Fund and the Acquiring Fund will continue to be advised by the Investment Advisor. If a Reorganization is not consummated, the Investment Advisor may recommend alternative proposals to the Board of each Fund for which such Reorganization was not consummated.
The Board of BAF recommends that the common shareholders of BAF vote FOR the proposed BAF Reorganization Agreement at the Special Meeting.
The Board of BBK recommends that the common shareholders of BBK vote FOR the proposed BBK Reorganization Agreement at the Special Meeting.
The Board of MUH recommends that the common shareholders of MUH vote FOR the proposed MUH Reorganization Agreement at the Special Meeting.
The Board of MUS recommends that the common shareholders of MUS vote FOR the proposed MUS Reorganization Agreement at the Special Meeting.
The Board of the Acquiring Fund recommends that common shareholders of the Acquiring Fund vote FOR the proposed BAF Issuance at the Special Meeting.
The Board of the Acquiring Fund recommends that common shareholders of the Acquiring Fund vote FOR the proposed BBK Issuance at the Special Meeting.
The Board of the Acquiring Fund recommends that common shareholders of the Acquiring Fund vote FOR the proposed MUH Issuance at the Special Meeting.
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The Board of the Acquiring Fund recommends that common shareholders of the Acquiring Fund vote FOR the proposed MUS Issuance at the Special Meeting.
Shareholder approval of the BAF Reorganization Agreement requires (i) with respect to Proposal 1(A), the affirmative vote of the holders of a 1940 Act Majority (as defined below) of the outstanding BAF common shares and BAF VMTP Shares voting as a single class, (ii) with respect to Proposal 1(B), the affirmative vote of the holders of a 1940 Act Majority of BAF VMTP Shares voting as a separate class, and (iii) with respect to Proposal 1(I), the affirmative vote of the holders of a 1940 Act Majority of Acquiring Fund VMTP Shares voting as a separate class.
Shareholder approval of the BBK Reorganization Agreement requires (i) with respect to Proposal 1(C), the affirmative vote of the holders of a 1940 Act Majority of the outstanding BBK common shares and BBK VMTP Shares voting as a single class, (ii) with respect to Proposal 1(D), the affirmative vote of the holders of a 1940 Act Majority of BBK VMTP Shares voting as a separate class, and (iii) with respect to Proposal 1(J), the affirmative vote of the holders of a 1940 Act Majority of Acquiring Fund VMTP Shares voting as a separate class.
Shareholder approval of the MUH Reorganization Agreement requires (i) with respect to Proposal 1(E), the affirmative vote of the holders of the majority of the outstanding MUH common shares and MUH VMTP Shares voting as a single class, (ii) with respect to Proposal 1(F), the affirmative vote of the holders of a 1940 Act Majority of MUH VMTP Shares voting as a separate class, and (iii) with respect to Proposal 1(K), the affirmative vote of the holders of a 1940 Act Majority of Acquiring Fund VMTP Shares voting as a separate class.
Shareholder approval of the MUS Reorganization Agreement requires (i) with respect to Proposal 1(G), affirmative vote of the holders of the majority of the outstanding MUS common shares and MUS VMTP Shares voting as a single class, (ii) with respect to Proposal 1(H), the affirmative vote of the holders of a 1940 Act Majority of MUS VMTP Shares voting as a separate class, and (iii) with respect to Proposal 1(L), the affirmative vote of the holders of a 1940 Act Majority of Acquiring Fund VMTP Shares voting as a separate class.
Each issuance of additional common shares of the Acquiring Fund in connection with a Reorganization Agreement contemplated by Proposal 2(A), Proposal 2(B), Proposal 2(C) and Proposal 2(D) requires the affirmative vote of a majority of the votes entitled to be cast by holders of the Acquiring Fund common shares and Acquiring Fund VMTP Shares present at the Special Meeting or represented by proxy voting as a single class.
A 1940 Act Majority means the affirmative vote of either (i) 67% or more of the voting securities present at the Special Meeting, if the holders of more than 50% of the outstanding voting securities of the Fund are present or represented by proxy or (ii) more than 50% of the outstanding voting securities of the Fund, whichever is less.
In order for the Reorganizations to occur, each Fund must obtain all requisite shareholder approvals with respect to its Reorganization, as well as any consents, confirmations and/or waivers from various third parties. Because the closing of the Reorganization with respect to BAF, BBK, MUH or MUS is contingent upon such Fund and the Acquiring Fund obtaining the requisite shareholder approvals and any third-party consents and satisfying (or obtaining the waiver of) other closing conditions, it is possible that a Reorganization will not occur, even if shareholders of a Fund entitled to vote on the Reorganization approve the Reorganization and such Fund satisfies all of its closing conditions, if the other Fund in the Reorganization does not obtain its requisite shareholder approvals or satisfy its closing conditions.
No Reorganization is contingent upon the approval of any other Reorganization. If a Reorganization is not consummated, then the Fund for which such Reorganization(s) was not consummated would continue to exist and operate on a standalone basis.
The preferred shares of the Funds were issued on a private placement basis to one or a small number of institutional holders. Please see Information about the Preferred Shares of the Funds for additional information. To the extent that one or more preferred shareholder(s) of BAF, BBK, MUH, MUS or the Acquiring Fund owns, holds or controls, individually or in the aggregate, all or a significant portion of such Funds outstanding preferred shares, the preferred shareholder approval required for the Reorganizations may turn on the exercise of voting rights by such particular preferred shareholder(s) and its (or their) determination as to the favorability of the Reorganization with respect to its
48
(or their) interests. The Funds exercise no influence or control over the determinations of such preferred shareholder(s) with respect to the Reorganization; there is no guarantee that such preferred shareholder(s) will approve the Reorganization, over which it (or they) may exercise effective disposition power.
Subject to the requisite approval of the shareholders of each Fund with respect to its respective Reorganization, as well as any consents, confirmations and/or waivers from various third parties, it is expected that the Closing Date of the Reorganizations will be sometime during the first quarter of 2021, but it may be at a different time as described herein.
For additional information regarding voting requirements, see Voting Information and Requirements.
Reasons for the Reorganizations
The Board of each Fund, including the Independent Board Members, considered the Reorganizations at a meeting held on June 16, 2020. Each Board, including the Independent Board Members, has unanimously approved the applicable Reorganization Agreement(s) (the Approval). Based on the considerations below, the Board of each Fund, including the Independent Board Members, has determined that the Reorganizations are in the best interests of such Fund and that the interests of its existing common shareholders and VMTP Holders would not be diluted with respect to NAV and the liquidation preference, respectively, as a result of the Reorganizations. As a result of the Reorganizations, however, common shareholders and VMTP Holders of each Fund may hold a reduced percentage of ownership in the larger Combined Fund than they did in any of the individual Funds before the Reorganizations.
Each Boards determination to approve the Reorganizations was made on the basis of each Board Members business judgment after consideration of all of the factors taken as a whole with respect to each Fund and its shareholders, although individual Board Members may have placed different weight and assigned different degrees of materiality to various factors. Because the shareholders of each Fund will vote separately on the Funds respective Reorganization(s) or Issuances, as applicable, there are multiple potential combinations of Reorganizations. To the extent that one or more Reorganizations is not completed, any expected expense savings by the Combined Fund, or other potential benefits resulting from the Reorganizations, may be reduced. If a Reorganization is not consummated, then the Investment Advisor may, in connection with ongoing management of the Fund for which such Reorganization(s) was not consummated and its product line, recommend alternative proposals to the Board of that Fund. Before reaching these conclusions, the Board of each Fund, including the Independent Board Members, engaged in a thorough review process relating to the Reorganizations, as well as alternatives to the Reorganizations. The Board of each Fund also received a memorandum outlining, among other things, the legal standards and certain other considerations relevant to the Boards deliberations.
The Board of each Fund considered the Reorganizations over a series of meetings. In preparation for the Approval, the Investment Advisor provided each Board with information regarding the Reorganizations, including the rationale therefor and alternatives considered to the Reorganizations.
Each Board considered a number of factors presented at the time of the Approval or prior meetings in reaching their determinations, including, but not limited to, the following, which are discussed in further detail below:
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potential for improved economies of scale and a lower Total Expense Ratio with respect to each Fund; |
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the potential effects of the Reorganizations on the earnings and distributions of each Fund; |
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the potential effects of the Reorganizations on each Funds premium/discount to NAV of common shares; |
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the potential effects of the Reorganizations on each Funds VMTP Shares; |
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the compatibility of the Funds investment objectives, investment strategies and policies and related risks and risk profiles; |
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consistency of portfolio management and portfolio composition; |
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the potential for improved secondary market trading, including the potential for greater secondary market liquidity for the Combined Funds common shares, which may result in tighter bid-ask spreads and better trade execution for the Combined Funds common shareholders when purchasing or selling the Combined Funds common shares; |
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the potential for operating and administrative efficiencies for the Combined Fund, including the potential for the following benefits: |
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greater investment flexibility and investment options, greater diversification of portfolio investments, the ability to trade in larger positions, additional sources of leverage or more competitive leverage terms and more favorable transaction terms; |
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benefits from having fewer closed-end funds offering similar products in the market, including an increased focus by investors on the remaining funds in the market (including the Combined Fund) and additional research coverage; and |
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benefits from having fewer similar funds in the same fund complex, including a simplified operational model and a reduction in risk of operational, legal and financial errors; |
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the anticipated tax-free nature of the Reorganizations (except with respect to taxable distributions, if any, from any Fund prior to, or after, the consummation of the Reorganizations, and the receipt of cash in lieu of fractional Shares); |
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the potential effects on the Funds capital loss carryforwards; |
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the potential effects on each Funds undistributed net investment income; |
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the expected costs of the Reorganizations; |
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the terms of the Reorganizations and whether the Reorganizations would dilute the interests of shareholders of the Funds; |
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the effect of the Reorganizations on shareholder rights; |
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alternatives to the Reorganizations for each Fund; and |
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any potential benefits of the Reorganizations to the Investment Advisor and its affiliates. |
Potential for Improved Economies of Scale and Potential for a Lower Expense Ratio. Each Board considered the fees and Total Operating Expenses of its Fund (including estimated expenses of the Combined Fund after the Reorganizations). For the 12-month period ended August 31, 2020, the Total Expense Ratios of BAF and BBK were 2.34% and 2.34%, respectively. Total Expenses means a Funds total annual operating expenses (including interest expense). For the fiscal year ended April 30, 2020, the Total Expense Ratios of the Acquiring Fund, MUH and MUS were 2.16%, 2.31% and 2.42%, respectively. Total Expense Ratio means a Funds Total Expenses expressed as a percentage of its average net assets attributable to its common shares.
Each Fund and the Investment Advisor have entered into the Fee Waiver Agreement, pursuant to which the Investment Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees each Fund pays to the Investment Advisor indirectly through its investment in money market funds managed by the Investment Advisor or its affiliates, through June 30, 2022 (previously defined as the Affiliated Money Market Fund Fee Waiver). Prior to December 1, 2019, the Affiliated Money Market Fund Fee Waiver was voluntary. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Funds (upon the vote of a majority of the Board Members who are not interested persons of the Fund (as defined in the 1940 Act) or a majority of the outstanding voting securities of each Fund, upon 90 days written notice by the Fund to the Investment Advisor.
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With respect to BBK, the Investment Advisor voluntarily agreed to waive a portion of the investment advisory fees or other expenses of BBK equal to an annual rate of 0.075% of BBKs average weekly managed assets (previously defined as the BBK Voluntary Waiver). With respect to MUS, the Investment Advisor voluntarily agreed to waive its investment advisory fee on the proceeds of the VMTP Shares and TOB trusts that exceed 35% of total assets minus the sum of its accrued liabilities (which does not include liabilities represented by TOB trusts and the liquidation preference of any outstanding VMTP Shares) (previously defined as the MUS Voluntary Waiver and together with the BBK Voluntary Waiver, the Voluntary Waivers). The Voluntary Waivers may be reduced or discontinued at any time without notice.
If any of the Reorganizations are consummated, the Investment Advisor has contractually agreed to waive a portion of its investment management fee equal to an annual rate of 0.01% of the average daily net assets (as defined above) of the Combined Fund through June 30, 2022 (the Combined Fund Contractual Waiver). The Combined Fund Contractual Waiver may be terminated prior to June 30, 2022 only by action of a majority of the Independent Board Members or by a vote of the Combined Funds outstanding voting securities.
In the Investment Advisors view, the most likely combination is the Reorganizations of all of the Funds, which is also expected to result in the lowest Total Expense Ratio for the Combined Fund. If the only Reorganization discussed in this Joint Proxy Statement/Prospectus that is completed is the Reorganization of BAF into the Acquiring Fund, the Combined Fund would be expected to have a higher Total Expense Ratio than if any other combination of Reorganizations were completed. Any combination of Reorganizations is expected to result in a Total Expense Ratio for the Combined Fund that is lower than the Total Expense Ratio of each Target Fund.
As of April 30, 2020 for MUH, MUS, the Acquiring Fund and the Combined Fund, and as of August 31, 2020 for BAF and BBK, the historical and pro forma Total Expense Ratios (after giving effect to the Combined Fund Contractual Waiver) applicable to the Reorganizations are as follows:
With Voluntary Waivers and Affiliated Money Market Fund Fee Waiver
BAF |
BBK |
MUH |
MUS |
Acquiring Fund (MHD) |
Pro forma Combined Fund (BAF into MHD) |
Pro forma Combined Fund (BAF, BBK, MUH and MUS into MHD) |
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2.34% | 2.21% | 2.31% | 2.36% | 2.15% | 2.13% | 2.11% |
Without Voluntary Waivers or Affiliated Money Market Fund Fee Waiver
BAF |
BBK |
MUH |
MUS |
Acquiring Fund (MHD) |
Pro forma Combined Fund (BAF into MHD) |
Pro forma Combined Fund (BAF, BBK, MUH and MUS into MHD) |
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2.34% |
2.34% | 2.31% | 2.42% | 2.16% | 2.13% | 2.11% |
The Funds estimate that the completion of all of the Reorganizations would result in a Total Expense Ratio (including interest expense and after giving effect to the Combined Fund Contractual Waiver) for the Combined Fund of 2.11% on a historical and pro forma basis for the 12-month period ended April 30, 2020, representing a reduction in the net Total Expense Ratio (including interest expense and after giving effect to the Voluntary Waivers and, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund by 0.23%, 0.10%, 0.20%, 0.25% and 0.04%, respectively. Without giving effect to the Voluntary Waivers (which may be reduced or discontinued at any time without notice) or, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver, the gross Total Expense Ratio (including interest expense and after giving effect to the Combined Fund Contractual Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund is expected to decrease by 0.23%, 0.23%, 0.20%, 0.31% and 0.05%, respectively.
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Each Funds Total Expenses include interest expense associated with such Funds VMTP Shares. For the fiscal year ended April 30, 2020, the Total Expense Ratios (excluding interest expense and after giving effect to the MUS Voluntary Waiver and, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) of the Acquiring Fund, MUH and MUS were 0.97%, 1.03% and 0.99% respectively, and the Total Expense Ratios (excluding interest expense and without giving effect to the MUS Voluntary Waiver or, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) of the Acquiring Fund, MUH and MUS were 0.98%, 1.03% and 1.05%, respectively. For the 12-month period ended August 31, 2020, the Total Expense Ratios (excluding interest expense and after giving effect to the BBK Voluntary Waiver) of BAF and BBK were 1.17% and 1.14%, respectively, and the Total Expense Ratios (excluding interest expense and without giving effect to the BBK Voluntary Waiver) of BAF and BBK were 1.17% and 1.27%, respectively.
BAF and BBKs Total Expenses include Reorganization-related expenses which will not be incurred in the Combined Fund. For 12-month period ended August 31, 2020, the Total Expense Ratios (excluding interest expense and Reorganization-related expenses and after giving effect of the BBK Voluntary Waiver) of BAF and BBK were 1.11% and 1.09%, respectively.
The Funds estimate that the completion of all of the Reorganizations would result in a Total Expense Ratio (excluding interest expense and after giving effect to the Combined Fund Contractual Waiver) for the Combined Fund of 0.93% on a historical and pro forma basis for the 12-month period ended April 30, 2020, representing a reduction in the Total Expense Ratio (excluding interest expense and, if applicable, Reorganization-related expenses and after giving effect to the Voluntary Waivers and, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund by 0.18%, 0.16%, 0.10%, 0.06% and 0.04%, respectively. Without giving effect to the Voluntary Waivers (which may be reduced or discontinued at any time without notice) or, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver, the gross Total Expense Ratio (excluding interest expense and, if applicable, Reorganization-related expenses and after giving effect to the Combined Fund Contractual Waiver) for the common shareholders of BAF, BBK, MUH, MUS and the Acquiring Fund is expected to decrease by 0.18%, 0.29%, 0.10%, 0.12% and 0.05%, respectively.
BAF currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average weekly managed assets. BBK currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.65% of its average weekly managed assets. For purposes of calculating these fees, managed assets means the total assets of the relevant Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of its accrued liabilities (other than money borrowed for investment purposes, including liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares). Each of MUH, MUS and the Acquiring Fund currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average daily net assets. For purposes of calculating these fees, net assets means the Acquiring Funds total assets minus the sum of the Acquiring Funds accrued liabilities (which does not include liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares).
If any of the Reorganizations are consummated, the annual contractual investment management fee rate of the Acquiring Fund will be the annual contractual investment management fee rate of the Combined Fund, which will be 0.55% of the average daily net assets of the Combined Fund. The annual contractual investment management fee rate of the Combined Fund represents a 10 basis point reduction in the annual contractual investment management fee rate for BBK and no change in the annual contractual investment management fee rates for BAF, MUH and MUS. Additionally, if any of the Reorganizations are consummated, the Investment Advisor has agreed to the Combined Fund Contractual Waiver through June 30, 2022, resulting in an actual investment management fee rate of 0.54% of the average daily net assets of the Combined Fund. Please see Expense Table For Common Shareholders in the Joint Proxy Statement/Prospectus for additional information.
Based on a pro forma Broadridge peer expense universe for the Combined Fund, the estimated total annual fund expense ratio (excluding investment-related expenses and taxes) is expected to be in the second quartile and contractual investment management fee rate and actual investment management fee rate over total assets are each expected to be in the first quartile.
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The level of expense savings (or increases) will vary depending on the combination of the Funds in the Reorganizations, and furthermore, there can be no assurance that future expenses will not increase or that any expense savings for any Fund will be realized as a result of any Reorganization.
Potential Effects of the Reorganizations on Earnings and Distributions. The Boards noted that the Combined Funds net earnings yield on NAV following the Reorganizations (after giving effect to the Combined Fund Contractual Waiver) is expected to be potentially higher than the current net earnings yield on NAV for each of BAF, BBK, MUH and MUS and the same as the current net earnings yield on NAV for the Acquiring Fund. The distribution level of any fund is subject to change based upon a number of factors, including the current and projected level of the funds earnings, and may fluctuate over time; thus, subject to a number of other factors, including the funds distribution policy, a higher earnings profile may potentially have a positive impact on such funds distribution level over time. The Combined Funds earnings and distribution rate on NAV will change over time, and depending on market conditions, may be higher or lower than each Funds earnings and distribution rate on NAV prior to the Reorganizations. A Funds earnings and net investment income are variables which depend on many factors, including its asset mix, portfolio turnover level, the amount of leverage utilized by the Fund, the costs of such leverage, the performance of its investments, the movement of interest rates and general market conditions. In addition, the Combined Funds future earnings will vary depending upon the combination of completed Reorganizations. There can be no assurance that the future earnings of a Fund, including the Combined Fund after the Reorganizations, will remain constant.
Potential Effects of the Reorganizations on Premium/Discount to NAV of Common Shares. Each Board noted that the common shares of its Fund have historically traded at both a premium and a discount. As of August 31, 2020, the NAV per common share of BAF was $15.26 and the market price per Common Share of BAF was $14.39, representing a discount to NAV of 5.70%, the NAV per Common Share of BBK was $16.42 and the market price per Common Share of BBK was $15.39, representing a discount to NAV of 6.27%, the NAV per Common Share of MUH was $15.65 and the market price per Common Share of MUH was $14.81, representing a discount to NAV of 5.37%, the NAV per Common Share of MUS was $13.90 and the market price per Common Share of MUS was $12.71, representing a discount to NAV of 8.56% and the NAV per Common Share of the Acquiring Fund was $16.80 and the market price per Common Share of the Acquiring Fund was $15.53, representing a discount to NAV of 7.56%. The Boards of BAF, BBK, MUH and MUS noted that to the extent BAFs, BBKs, MUHs and MUSs common shares are trading at a wider discount (or a narrower premium) than the Acquiring Fund at the time of the Reorganizations, BAFs, BBKs, MUHs and MUSs common shareholders would have the potential for an economic benefit by the narrowing of the discount or widening of the premium. The Boards of BAF, BBK, MUH and MUS also noted that to the extent the BAFs, BBKs, MUHs or MUSs common shares are trading at a narrower discount (or wider premium) than the Acquiring Fund at the time of the Reorganizations, BAFs, BBKs, MUHs and MUSs common shareholders may be negatively impacted if its Reorganization is consummated. The Board of the Acquiring Fund noted that Acquiring Fund common shareholders would only benefit from a premium/discount perspective to the extent the post-Reorganization discount (or premium) of the Acquiring Fund common shares improves. There can be no assurance that, after the Reorganizations, common shares of the Combined Fund will trade at a narrower discount to NAV or wider premium to NAV than the common shares of any individual Fund prior to the Reorganizations. Upon consummation of the Reorganizations, the Combined Fund common shares may trade at a price that is less than the current market price of Acquiring Fund common shares. In the Reorganizations, common shareholders of BAF, BBK, MUH and MUS will receive Acquiring Fund common shares based on the relative NAVs (not the market values) of the respective Funds common shares. The market value of the common shares of the Combined Fund may be less than the market value of the common shares of each respective Fund prior to the Reorganizations.
Potential Effects of the Reorganizations on the Preferred Shares. The Board noted that each Fund has preferred shares outstanding. As of August 31, 2020, BAF has 422 Series W-7 VMTP Shares outstanding, BBK has 799 Series W-7 VMTP Shares outstanding, MUH has 550 Series W-7 VMTP Shares outstanding, MUS has 870 Series W-7 VMTP Shares outstanding and the Acquiring Fund has 837 Series W-7 VMTP Shares outstanding. In connection with the Reorganizations, the Acquiring Fund expects to issue 422 additional VMTP Shares to BAF VMTP Holders, 799 additional VMTP Shares to BBK VMTP Holders, 550 additional VMTP Shares to MUH VMTP Holders and 870 additional VMTP Shares to MUS VMTP Holders. Following the completion of the Reorganizations, the Combined Fund is expected to have 3,478 VMTP Shares outstanding.
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The Board noted that, upon the Closing Date of the Reorganizations, BAF, BBK, MUH and MUS VMTP Holders will receive on a one-for-one basis one newly issued Acquiring Fund VMTP Share, par value $0.10 per share and with a liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on the BAF, BBK, MUH or MUS VMTP Shares up to and including the day immediately preceding the Closing Date if such dividends have not been paid prior to the Closing Date), in exchange for each BAF, BBK, MUH and MUS VMTP Share held by the BAF, BBK, MUH or MUS VMTP Holders immediately prior to the Closing Date. The newly issued Acquiring Fund VMTP Shares may be of the same series as the Acquiring Funds Series W-7 VMTP Shares or a substantially identical series. No fractional Acquiring Fund VMTP Shares will be issued. The terms of the Acquiring Fund VMTP Shares to be issued in connection with the Reorganizations will be substantially identical to the terms of the Acquiring Funds outstanding VMTP Shares and will rank on parity with the Acquiring Funds outstanding VMTP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The Reorganizations will not result in any changes to the terms of the Acquiring Funds VMTP Shares currently outstanding. The terms of the Acquiring Funds VMTP Shares may change from time to time, subject to Board approval.
The newly issued Acquiring Fund VMTP Shares will have terms that are substantially identical to the outstanding BAF, BBK, MUH and MUS VMTP Shares, including the same term redemption date of July 2, 2021.
The Board noted that none of the expenses of the Reorganizations are expected to be borne by the VMTP Holders of the Funds.
Following the Reorganizations, the VMTP Holders of each Fund will be VMTP Holders of the larger Combined Fund that will have a larger asset base and more VMTP Shares outstanding than any Fund individually before the Reorganizations. With respect to matters requiring all preferred shareholders to vote separately or common and preferred shareholders to vote together as a single class, following the Reorganizations, VMTP Holders of the Combined Fund may hold a smaller percentage of the outstanding preferred shares of the Combined Fund as compared to their percentage holdings of outstanding preferred shares of their respective Fund prior to the Reorganizations.
Compatibility of Investment Objectives, Investment Strategies and Policies and Related Risks and Risk Profiles. Each Board noted that its Funds shareholders will remain invested in an exchange-listed, closed-end management investment company registered under the 1940 Act that will have substantially greater net assets and the same (in the case of the Acquiring Fund, MUH and MUS), substantially similar (in the case of BBK) or similar (in the case of BAF) investment objective and similar investment strategies, policies and restrictions. Under normal circumstances, BAF, as a fundamental policy will invest at least 80% of its managed assets in Municipal Bonds (as defined above) that pay interest that is exempt from federal income tax, including the alternative minimum tax, and Florida intangible property tax.2 BBK, as a fundamental policy, under normal market conditions, will invest at least 80% of its managed assets in Municipal Bonds, the interest of which is exempt from regular federal income tax. At all times, except during temporary defensive periods, each of MUH and MUS will invest at least 80% of its total assets in a portfolio of Municipal Bonds paying interest that, in the opinion of bond counsel to the issuer, is exempt from federal income taxes. The Acquiring Fund seeks to achieve its investment objective by investing, as a fundamental policy at least 80% of an aggregate of the Funds net assets (including proceeds from the issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in a portfolio of Municipal Bonds, each of which pays interest that, in the opinion of bond counsel to the issuer, is excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum tax). Each Fund also utilizes leverage in the form of VMTP Shares and TOBs. The risk/return profile of the Combined Fund is expected to remain comparable to those of each Fund before the Reorganizations because of the similarities in the investment policies of each Fund.
2 |
The State of Florida repealed the Florida Intangible Tax as of January 2007. As a result, on September 12, 2008, the Board of Trustees of BAF voted unanimously to approve BAF investing in Municipal Bonds regardless of geographic location. If Florida were to reinstate the Florida Intangible Tax or adopt a state income tax, however, BAF would be required to realign its portfolio such that substantially all of its assets would be invested in Florida Municipal Bonds or obtain shareholder approval to amend BAFs fundamental investment objective to remove references to the Florida Intangible Tax. See The Target Funds Investment Objectives and PoliciesBAFs Investment Objective and Policies. |
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Consistency of Portfolio Management and Portfolio Composition. Each Board noted that each Fund has the same investment adviser and a common portfolio manager and that each Funds shareholders will benefit from the experience and expertise of the Combined Funds anticipated portfolio management team. BAF is managed by a team of investment professionals led by Michael Perilli, CFA, Theodore Jaeckel, CFA, and Phillip Soccio. BBK is managed by a team of investment professionals led by Theodore Jaeckel, CFA, Walter OConnor, CFA, Christian Romaglino and Kevin Maloney. MUH is managed by a team of investment professionals led by Theodore Jaeckel, CFA, Walter OConnor, CFA and Christian Romaglino. MUS is managed by a team of investment professionals led by Phillip Soccio, Theodore Jaeckel, CFA and Christian Romaglino. The Acquiring Fund is managed by a team of investment professionals led by Theodore Jaeckel, CFA and Walter OConnor, CFA. Following the Reorganizations, it is expected that the Combined Fund will be managed by a team of investment professionals led by Theodore Jaeckel, CFA and Walter OConnor, CFA. Each Board also considered the portfolio composition of its Fund and the impact of the Reorganizations on the Funds portfolio. Each Board noted that it is not anticipated that there will be any significant disposition of the holdings in its Fund as a result of the Reorganizations because of the similarities among the portfolio guidelines of the Funds. For additional information, please see Risk Factors and Special Considerations.
Potential for Improved Secondary Market Trading for Common Shares. While it is not possible to predict trading levels at the time the Reorganizations close, each Board considered that the Combined Fund may provide greater secondary market liquidity for its common shares as it would be larger than any of the Funds, which may result in tighter bid-ask spreads, better trade execution for the Combined Funds common shareholders when purchasing or selling Combined Fund common shares. However, there can be no assurance that the Reorganizations will result in such benefits or that the common shares of the Combined Fund will trade at a narrower discount to NAV or wider premium to NAV than the common shares of any individual Fund prior to the Reorganizations. Upon consummation of the Reorganizations, the secondary market liquidity, bid-ask spreads, and trade execution with respect to the Combined Funds common shares may deteriorate. Furthermore, the Combined Fund common shares may trade at a price that is less than the current market price of Acquiring Fund common shares.
Potential for Operating and Administrative Efficiencies. Each Board noted that the Combined Fund may achieve certain operating and administrative efficiencies from its larger net asset size, including greater investment flexibility and investment options, greater diversification of portfolio investments, the ability to trade in larger positions, additional sources of leverage or more competitive leverage terms and more favorable transaction terms. Each Board also noted that the Combined Fund may experience potential benefits from having fewer closed-end funds offering similar products in the market, including an increased focus by investors on the remaining funds in the market (including the Combined Fund) and additional research coverage.
Each Board also noted that the Combined Fund may experience potential benefits from having fewer similar funds in the same fund complex, including a simplified operational model, the elimination of complexities involved with having duplicative funds, easier product differentiation for shareholders (including shareholders of the Combined Fund) and reduced risk of operational, legal and financial errors.
Anticipated Tax-Free Reorganizations. Each Board noted that it is anticipated that shareholders of its Fund will generally recognize no gain or loss for U.S. federal income tax purposes as a result of the Reorganizations (except with respect to cash received in lieu of fractional common shares), as each Reorganization is intended to qualify as a reorganization within the meaning of Section 368(a) of the Code.
Shareholders of each Fund may receive distributions prior to, or after, the consummation of the Reorganizations, including distributions attributable to their proportionate share of each Funds undistributed net investment income declared prior to the consummation of the Reorganizations or the Combined Fund built-in gains, if any, recognized after the Reorganizations, when such income and gains are eventually distributed by the Combined Fund. To the extent that such a distribution is not an exempt interest dividend (as defined in the Code), the distribution may be taxable to shareholders for U.S. federal income tax purposes.
Capital Loss Carryforward Considerations. Each Board considered that capital loss carryforwards of the Combined Fund attributable to each Fund will be subject to tax loss limitation rules by reason of each Fund undergoing an ownership change in the Reorganizations. Each Board also noted that the Combined Funds capital loss carryforward loss on a per share basis is expected to be lower than BAFs and MUSs capital loss carryforward loss
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per share, but higher than the Acquiring Funds, BBKs and MUHs capital loss carryforward loss per share. Each Board considered that the ability of its Fund to fully utilize its existing capital loss carryforwards depends on many variables and assumptions, including projected performance, and is, therefore, highly uncertain.
Potential Effects of the Reorganizations on Undistributed Net Investment Income. If the Reorganizations are approved by shareholders, then the greater of (1) substantially all of the undistributed net investment income, if any, or (2) the monthly distribution of each Fund is expected to be declared to such Funds common shareholders prior to the Closing Date (the Pre-Reorganization Declared UNII Distributions). The declaration date, ex-dividend date (the Ex-Dividend Date) and record date of the Pre-Reorganization Declared UNII Distributions will occur prior to the Closing Date. However, all or a significant portion of the Pre-Reorganization Declared UNII Distributions may be paid in one or more distributions to common shareholders of the Funds entitled to such Pre-Reorganization Declared UNII Distributions after the Closing Date. Former BAF, BBK, MUH and MUS shareholders entitled to such Pre-Reorganization Declared UNII Distributions paid after the Closing Date will receive such distributions in cash for a partial month post-Reorganization.
Persons who purchase common shares of any of the Funds on or after the Ex-Dividend Date for the Pre-Reorganization Declared UNII Distributions should not expect to receive any distributions from any Fund until distributions, if any, are declared by the Board of the Combined Fund and paid to shareholders entitled to any such distributions. No such distributions are expected to be paid by the Combined Fund until at least approximately one month following the Closing Date.
Additionally, the Acquiring Fund, in order to seek to provide its common shareholders with distribution rate stability, may include in its Pre-Reorganization Declared UNII Distribution amounts in excess of its undistributed net investment income and net investment income accrued through the Closing Date; any such excess amounts are not expected to constitute a return of capital. This would result in the Acquiring Fund issuing incrementally more common shares in the Reorganizations since its NAV as of the Valuation Time would be lower relative to a scenario where such excess amounts were not included in the Acquiring Funds Pre-Reorganization Declared UNII Distribution.
The Combined Fund is anticipated to retain a lower UNII balance after the Reorganizations than BAF, BBK, MUH and MUS prior to the Reorganizations. The lower anticipated UNII balance for the Combined Fund relative to the UNII balance of each of BAG, BBK, MUH and MUS poses risks for shareholders of the Combined Fund. UNII balances, in part, support the level of a funds regular distributions and provide a cushion in the event a funds net earnings for a particular distribution period are insufficient to support the level of its regular distribution for that period. If the Combined Funds net earnings are below the level of its current distribution rate, the Combined Funds UNII balance could be more likely to contribute to a determination to decrease the Combined Funds distribution rate, or could make it more likely that the Combined Fund will make distributions consisting in part of a return of capital to maintain the level of its regular distributions. See Dividends and Distributions. Moreover, because a funds UNII balance, in part, supports the level of a funds regular distributions, the UNII balance of the Combined Fund could impact the trading market for the Combined Funds common shares and the magnitude of the trading discount to NAV of the Combined Funds common shares. However, the Combined Fund is anticipated to benefit from a lower expense ratio (compared to BAF, BBK, MUH and MUS), a potentially higher net earnings profile and other anticipated benefits of economies of scale as discussed herein. Each Fund, including the Combined Fund, reserves the right to change its distribution policy with respect to common share distributions and the basis for establishing the rate of its distributions for the common shares at any time and may do so without prior notice to common shareholders. The payment of any distributions by any Fund, including the Combined Fund, is subject to, and will only be made when, as, and if, declared by the Board of such Fund. There is no assurance the Board of any Fund, including the Combined Fund, will declare any distributions for such Fund.
To the extent any Pre-Reorganization Declared UNII Distribution is not an exempt interest dividend (as defined in the Code), the distribution may be taxable to shareholders for U.S. federal income tax purposes.
Expected Costs of the Reorganizations. Each Board considered the terms and conditions of the applicable Funds Reorganization Agreement(s), including the estimated costs associated with the Reorganizations, and the allocation of such costs among the Funds. Each Board noted, however, that the Investment Advisor anticipated that the projected costs of the Reorganizations may be recovered over time. Common shareholders of each Fund will indirectly bear all or a portion of the costs of the Reorganizations. Because of the expected expense savings and other anticipated benefits
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for each of BAF, BBK and MUH, the Investment Advisor recommended and the Board of each such Fund has approved that its respective Fund be responsible for its own reorganization expenses. The expenses of the applicable Reorganizations are estimated to be approximately $223,500 for BAF, $242,000 for BBK and $229,900 for MUH. For MUS and the Acquiring Fund, the expenses of the applicable Reorganization(s) are estimated to be approximately $228,000 and $253,400, of which the Investment Advisor will bear approximately $63,000 and $124,000, respectively. The actual costs associated with the Reorganizations may be more or less than the estimated costs discussed herein. Each Board also noted that the VMTP Holders of the Funds are not expected to bear any of the costs of the Reorganizations, while the common shareholders of the Funds will indirectly bear all or a portion of the costs of the Reorganizations.
Terms of the Reorganizations and Impact on Shareholders. Each Board noted that the aggregate NAV (not the market value) of the Acquiring Fund common shares that a Target Funds common shareholders will receive in the applicable Reorganization is expected to equal the aggregate NAV (not the market value) of the Target Fund common shares that the Target Funds common shareholders owned immediately prior to the Closing Date. The aggregate NAV of each Fund immediately prior to the applicable Reorganization will reflect accrued expenses associated with such Reorganization. The NAV of BAFs, BBKs, MUHs and MUSs common shares will not be diluted as a result of the Reorganizations. Fractional Acquiring Fund common shares will generally not be issued to BAF, BBK, MUH and MUS common shareholders in connection with the Reorganizations, and BAF, BBK, MUH and MUS common shareholders should expect to receive cash in lieu of such fractional common shares.
Each Board further noted that holders of BAF, BBK, MUH and MUS VMTP Shares will receive the same number of Acquiring Fund VMTP Shares as the BAF, BBK, MUH or MUS VMTP Shares held by such VMTP Holders immediately prior to the Closing Date.
The newly issued Acquiring Fund VMTP Shares will have terms that are substantially identical to the terms of the outstanding BAF, BBK, MUH and MUS VMTP Shares, including the same term redemption date of July 2, 2021.
Effect on Shareholder Rights. Each Board noted that BAF and BBK are each formed as a Delaware statutory trust and that MUH, MUS and the Acquiring Fund are each organized as a Maryland corporation. Each Board also noted that the common shareholders of each Fund have substantially similar voting rights and rights with respect to the payment of dividends and distribution of assets upon liquidation of their respective Fund and have no preemptive, conversion or exchange rights.
Each Board also noted that the terms of the Acquiring Fund VMTP Shares to be issued in connection with the Reorganizations will have terms that are substantially identical to the terms of the Acquiring Funds outstanding VMTP Shares and will rank on parity with the Acquiring Funds outstanding VMTP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The Reorganizations will not result in any changes to the terms of the Acquiring Funds VMTP Shares currently outstanding.
The newly issued Acquiring Fund VMTP Shares will have terms that are substantially identical to the terms of the outstanding BAF, BBK, MUH and MUS VMTP Shares, including the same term redemption date of July 2, 2021.
Alternatives to the Reorganizations. In reaching its decision to approve the Reorganizations, the Board considered alternatives to the Reorganizations, including continuing to operate each Fund as a separate Fund.
Potential Benefits to the Investment Advisor and its Affiliates. Each Board recognized that the Reorganizations may result in some benefits and economies of scale for the Investment Advisor and its affiliates. These may include, for example, administrative and operational efficiencies or a reduction in certain operational expenses as a result of the elimination of BAF, BBK, MUH and MUS as separate funds in the BlackRock Fixed-Income Complex.
Each Board noted that, if the Reorganizations are consummated, the annual contractual investment management fee rate of the Acquiring Fund will be 0.55% of the average daily net assets of the Combined Fund. Each Board noted that the annual contractual investment management fee rate of the Combined Fund represents a 10 basis point reduction in the annual contractual investment management fee rate for BBK and no change in the annual contractual
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investment management fee rates for BAF, MUH and MUS. Additionally, if any of the Reorganizations are consummated, the Investment Advisor has agreed to the Combined Fund Contractual Waiver through June 30, 2022, resulting in an actual investment management fee rate of 0.54% of the average daily net assets of the Combined Fund.
Conclusion. Each Board, including the Independent Board Members, unanimously approved each Reorganization Agreement and each Issuance, as applicable, concluding that the Reorganizations are in the best interests of its Fund and that the interests of existing common shareholders and preferred shareholders of its Fund will not be diluted with respect to NAV and liquidation preference, respectively, as a result of the Reorganizations. This determination was made on the basis of each Board Members business judgment after consideration of all of the factors taken as a whole with respect to its Fund and the Funds common and preferred shareholders, although individual Board Members may have placed different weight on various factors and assigned different degrees of materiality to various factors.
Because the shareholders of each Fund will vote separately on the Funds respective Reorganization(s) or Issuances, as applicable, there are multiple potential combinations of Reorganizations. To the extent that one or more Reorganizations is not completed, any expected expense savings by the Combined Fund, or other potential benefits resulting from the Reorganizations, may be reduced.
If a Reorganization is not consummated, then the Investment Advisor may, in connection with ongoing management of the Fund for which such Reorganization(s) was not consummated and its product line, recommend alternative proposals to the Board of that Fund.
Terms of the Reorganization Agreements
The following is a summary of the significant terms of each Reorganization Agreement. This summary is qualified in its entirety by reference to the Forms of Agreement and Plan of Reorganization attached as Appendix A to this Joint Proxy Statement/Prospectus.
Valuation of Assets and Liabilities
The respective assets of each of the Funds will be valued on the business day prior to the Closing Date of the Reorganizations (the Valuation Time). The valuation procedures are the same for each Fund: the NAV per Common Share of each Fund will be determined after the close of business on the NYSE (generally, 4:00 p.m., Eastern time) at the Valuation Time. For the purpose of determining the NAV of a Common Share of each Fund, the value of the securities held by such Fund plus any cash or other assets (including interest accrued but not yet received) minus all liabilities (including accrued expenses) of such Fund is divided by the total number of common shares of such Fund outstanding at such time. Daily expenses, including the fees payable to the Investment Advisor, will accrue at the Valuation Time.
Dividends will accumulate on the BAF, BBK, MUH and MUS VMTP Shares up to and including the day immediately preceding the Closing Date. BAF, BBK, MUH and MUS VMTP Holders will receive on a one-for-one basis one newly issued VMTP Shares of the Acquiring Fund, par value $0.10 per share and with a liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on the BAF, BBK, MUH or MUS VMTP Shares, as applicable, up to and including the day immediately preceding the Closing Date if such dividends have not been paid prior to Closing Date), in exchange for each BAF, BBK, MUH and MUS VMTP Share held by the BAF, BBK, MUH or MUS VMTP Holders immediately prior to the Closing Date. The newly issued Acquiring Fund VMTP Shares may be of the same series as the Acquiring Funds Series W-7 VMTP Shares or a substantially identical series. No fractional Acquiring Fund VMTP Shares will be issued.
The first dividend period for the Acquiring Fund VMTP Shares to be issued in the Reorganizations will commence on the Closing Date and end on the day immediately preceding the first dividend payment date for such VMTP Shares, which will be the first business day of the month following the month in which the Closing Date occurs.
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Amendments and Conditions
A Reorganization Agreement may be amended at any time prior to the Closing Date with respect to any of the terms therein upon mutual agreement. However, after adoption of the Reorganization Agreement and approval of the Reorganization, no amendment or modification may be made which by law requires further approval by shareholders without such further approval. The obligations of each Fund pursuant to a Reorganization Agreement are subject to various conditions, including a registration statement on Form N-14 being declared effective by the SEC, approval of the Reorganization Agreement by the shareholders of the applicable Target Fund and the VMTP Holders of the Acquiring Fund, the approval of each Issuance by the shareholders of the Acquiring Fund, receipt of an opinion of counsel as to tax matters, receipt of an opinion of counsel as to corporate and securities matters and the continuing accuracy of various representations and warranties of the Funds being confirmed by the respective parties.
No Reorganization is contingent upon the approval of any other Reorganization. If a Reorganization is not consummated, then the Fund for which such Reorganization(s) was not consummated would continue to exist and operate on a standalone basis.
Postponement; Termination
Under a Reorganization Agreement, the Board of any Fund that is a party to the Reorganization Agreement may cause the related Reorganization to be postponed or abandoned under certain circumstances should such Board determine that it is in the best interests of the shareholders of its respective Fund to do so. A Reorganization Agreement may be terminated, and the related Reorganization abandoned at any time (whether before or after adoption thereof by the shareholders of either of the Funds involved in the Reorganization) prior to the Closing Date, or the Closing Date may be postponed: (i) by mutual consent of the Boards of such Funds and (ii) by the Board of either such Fund if any condition to that Funds obligations set forth in the Reorganization Agreement has not been fulfilled or waived by such Board.
Book-Entry Interests
The Acquiring Fund will issue to BAF, BBK, MUH and MUS VMTP Holders book-entry interests for the Acquiring Fund VMTP Shares registered in the name of such BAF, BBK, MUH and MUS VMTP Holders on a one-for-one basis for each holders holdings of BAF, BBK, MUH or MUS VMTP Shares. Each Funds VMTP Shares were or will be issued in book-entry form as global securities, and such global securities were deposited with, or on behalf of, The Depository Trust Company (DTC) and registered in the name of Cede & Co., the nominee of DTC. Beneficial interests in the global securities are held only through DTC and any of its participants.
The Acquiring Fund will issue to BAF, BBK, MUH and MUS common shareholders book-entry interests for the Acquiring Fund common shares registered in the name of such shareholders on the basis of each shareholders proportionate interest in the aggregate net asset value of BAF, BBK, MUH and MUS common shares, respectively.
Expenses of the Reorganizations
Each Fund will bear expenses incurred in connection with its Reorganization(s). The expenses incurred in connection with the Reorganizations include but are not limited to, costs related to the preparation and distribution of materials distributed to each Funds Board, expenses incurred in connection with the preparation of the Reorganization Agreements, the registration statement on Form N-14 and the separate Joint Proxy Statement to preferred shareholders, the printing and distribution of this Joint Proxy Statement/Prospectus delivered to common shareholders, the separate Joint Proxy Statement delivered to preferred shareholders and any other materials required to be distributed to shareholders, SEC and state securities commission filing fees, and legal and audit fees in connection with the Reorganizations, including fees incurred in obtaining the requisite consents of rating agencies, counterparties or service providers to the VMTP Shares, legal fees incurred in connection with amending the transaction documents for the VMTP Shares, which may include the legal fees of counterparties and service providers to the extent applicable, legal fees incurred preparing each Funds Board materials, attending each Funds Board meetings and preparing the minutes, rating agency fees associated with the ratings of the preferred shares in connection with the Reorganization, auditing fees associated with each Funds financial statements, stock exchange fees, transfer agency fees, rating agency fees, portfolio transfer taxes (if any), and any similar expenses incurred in connection with the Reorganizations.
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Common shareholders of each Fund will indirectly bear all or a portion of the costs of the Reorganizations. Because of the expected expense savings and other anticipated benefits for each of the BAF, BBK and MUH, the Investment Advisor recommended and the Board of each such Fund has approved that its respective Fund be responsible for its own reorganization expenses. The expenses of the applicable Reorganizations are estimated to be approximately $223,500 for BAF, $242,000 for BBK and $229,900 for MUH. For MUS and the Acquiring Fund, the expenses of the applicable Reorganization(s) are estimated to be approximately $228,000 and $253,400, of which the Investment Advisor will bear approximately $63,000 and $124,000, respectively. The actual costs associated with the Reorganizations may be more or less than the estimated costs discussed herein. Each Board also noted that the VMTP Holders of the Funds are not expected to bear any of the costs of the Reorganizations, while the common shareholders of the Funds will indirectly bear all or a portion of the costs of the Reorganizations.
Neither the Funds nor the Investment Advisor will pay any direct expenses of shareholders arising out of or in connection with the Reorganizations (e.g., expenses incurred by the shareholder as a result of attending the Special Meeting, voting on the Reorganizations or other action taken by the shareholder in connection with the Reorganizations). The actual costs associated with the Reorganizations may be more or less than the estimated costs discussed herein.
Common shareholders of BAF and BBK do not have appraisal rights for their respective common shares because BAF and BBK are each organized as a Delaware statutory trust and each Funds respective Agreements and Declarations of Trust states that the shareholders are not entitled to appraisal rights. Under Maryland law, stockholders are not entitled to demand the fair value of their shares in connection with a reorganization if any shares of the class or series of their stock are listed on a national securities exchange, such as common shares of MUH, MUS and the Acquiring Fund, on the Record Date.
Description of Common Shares to Be Issued by the Acquiring Fund
The terms of the Acquiring Fund common shares to be issued pursuant to the Reorganizations will be substantially identical to the terms of the Acquiring Fund common shares that are currently outstanding. The Acquiring Fund common shares, when issued, will be fully paid and non-assessable and have no preemptive, conversion or exchange rights or rights to cumulative voting.
Please see Information about the Common Shares of the Funds for additional information about the Funds common shares.
Description of VMTP Shares to Be Issued by the Acquiring Fund
Assuming all of the Reorganizations are approved by shareholders, upon the Closing Date of the Reorganizations, BAF, BBK, MUH and MUS VMTP Holders will receive on a one-for-one basis one newly issued Acquiring Fund VMTP Share, par value $0.10 per share and with a liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on the BAF, BBK, MUH or MUS VMTP Shares up to and including the day immediately preceding the Closing Date of the Reorganizations if such dividends have not been paid prior to the Closing Date), in exchange for each BAF, BBK, MUH or MUS VMTP Share held by the BAF, BBK, MUH or MUS VMTP Holders immediately prior to the Closing Date. The newly issued Acquiring Fund VMTP Shares may be of the same series as the Acquiring Funds Series W-7 VMTP Shares or a substantially identical series. No fractional Acquiring Fund VMTP Shares will be issued. The terms of the Acquiring Fund VMTP Shares to be issued in connection with the Reorganizations will be substantially identical to the terms of the Acquiring Funds outstanding VMTP Shares and will rank on parity with the Acquiring Funds outstanding VMTP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The Reorganizations will not result in any changes to the terms of the Acquiring Funds VMTP Shares currently outstanding. The terms of the Acquiring Funds VMTP Shares may change from time to time, subject to Board approval.
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The newly issued Acquiring Fund VMTP Shares will have terms that are substantially identical to the outstanding BAF, BBK, MUH and MUS VMTP Shares, including the same term redemption date of July 2, 2021.
None of the expenses of the Reorganizations are expected to be borne by the VMTP Holders of the Funds.
Following the Reorganizations, the VMTP Holders of each Fund will be VMTP Holders of the larger Combined Fund that will have a larger asset base and more VMTP Shares outstanding than any Fund individually before the Reorganizations. With respect to matters requiring all preferred shareholders to vote separately or common and preferred shareholders to vote together as a single class, following the Reorganizations, VMTP Holders of the Combined Fund may hold a smaller percentage of the outstanding VMTP Shares of the Combined Fund as compared to their percentage holdings of outstanding VMTP Shares of their respective Fund prior to the Reorganizations.
Please see Information about the Preferred Shares of the Funds for additional information.
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BAF and BBK are each formed as a Delaware statutory trust pursuant to its Agreement and Declaration of Trust governed by the laws of the State of Delaware. MUH, MUS, and the Acquiring Fund are each organized as a Maryland corporation pursuant to its Articles of Incorporation (the Charter) and governed by the laws of the State of Maryland. Each of BAF, BBK, MUH, MUS and the Acquiring Fund is a diversified, closed-end management investment company registered under the 1940 Act. Each Funds principal office is located at 100 Bellevue Parkway, Wilmington, Delaware 19809, and each Funds telephone number is (800) 882-0052.
BAF was formed as a Delaware statutory trust pursuant to an Agreement and Declaration of Trust governed by the laws of the State of Delaware on August 30, 2002, and commenced operations on October 31, 2002.
BBK was formed as a Delaware statutory trust pursuant to an Agreement and Declaration of Trust governed by the laws of the State of Delaware on February 15, 2002, and commenced operations on April 30, 2002.
MUH was formed as a Maryland corporation governed by the laws of the State of Maryland on April 24, 1997, and commenced operations on February 27, 1998.
MUS was formed as a Maryland corporation governed by the laws of the State of Maryland on March 11, 1998, and commenced operations on May 1, 1998.
The Acquiring Fund was formed as a Maryland corporation governed by the laws of the State of Maryland on February 27, 1997, and commenced operations on May 2, 1997.
The Acquiring Fund common shares are listed on the NYSE as MHD. BAFs common shares are listed on the NYSE as BAF. BBKs common shares are listed on the NYSE as BBK. MUHs common shares are listed on the NYSE as MUH. MUSs common shares are listed on the NYSE as MUS.
Each of the Acquiring Fund, MUH and MUS has an April 30 fiscal year end.
Each of BAF and BBK has an August 31 fiscal year end.
Each Fund has VMTP Shares outstanding. Each Funds VMTP Shares are not listed on a national stock exchange and have not been registered under the Securities Act, or any state securities laws, and unless so registered, may not be offered, sold, assigned, transferred, pledged, encumbered or otherwise disposed of except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. Please see Information about the Preferred Shares of the Funds for additional information.
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THE ACQUIRING FUNDS INVESTMENTS
Investment Objective and Policies
The Acquiring Funds investment objective is to provide stockholders with current income exempt from federal income taxes. There can be no assurance that the Acquiring Funds investment objective will be realized. The Acquiring Funds investment policies provide that it seeks to achieve its investment objective by investing, as a fundamental policy at least 80% of an aggregate of the Acquiring Funds net assets (including proceeds from the issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in a portfolio of municipal obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities, each of which pays interest that, in the opinion of bond counsel to the issuer, is excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum tax) (previously defined as Municipal Bonds).
The Acquiring Funds investment objective and its policy of investing at least 80% of an aggregate of the Acquiring Funds net assets (including proceeds from the issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in Municipal Bonds are fundamental policies that may not be changed without the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares, including the VMTP Shares, voting together as a single class, and of the holders of a majority of the outstanding preferred shares, including the VMTP Shares, voting as a separate class. A majority of the outstanding means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50% of the outstanding shares, whichever is less. See Description of VMTP SharesVoting Rights for additional information with respect to the voting rights of holders of VMTP Shares.
The Acquiring Funds investment policies provide that it will invest at least 75% of its total assets in a portfolio of Municipal Bonds that are commonly referred to as investment grade securities, which are obligations rated at the time of purchase within the four highest quality ratings as determined by either Moodys Investors Service, Inc. (Moodys) (currently Aaa, Aa, A and Baa), Standard & Poors (S&P) (currently AAA, AA, A and BBB) or Fitch Ratings (Fitch) (currently AAA, AA, A and BBB). In the case of short-term notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moodys and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys and BBB and F-3 for Fitch), while considered investment grade, may have certain speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect to the foregoing requirements, the Investment Advisor takes into account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit enhancement. If unrated, such securities will possess creditworthiness comparable, in the opinion of the Investment Advisor, to other obligations in which the Acquiring Fund may invest.
The Acquiring Fund may invest up to 25% of its total assets in Municipal Bonds that are rated below Baa by Moodys or below BBB by S&P or Fitch or, if unrated, are considered by the Investment Advisor to possess similar credit characteristics. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Such securities, sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the issuers ability to pay interest and any required redemption or principal payments and are susceptible to default or decline in market value due to adverse economic and business developments.
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The foregoing credit quality policies apply only at the time a security is purchased, and the Acquiring Fund is not required to dispose of a security if a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, the Investment Advisor may consider such factors as the Investment Advisors assessment of the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. Appendix A of the Statement of Additional Information contains a general description of Moodys, S&Ps and Fitchs ratings of municipal bonds. In the event that the Acquiring Fund disposes of a portfolio security subsequent to its being downgraded, the Acquiring Fund may experience a greater risk of loss than if such security had been sold prior to such downgrade.
The Acquiring Fund may also purchase Municipal Bonds that are additionally secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce the Acquiring Funds income. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the common shares. The Acquiring Fund may purchase insured bonds and may purchase insurance for bonds in its portfolio.
The Acquiring Fund may invest in certain tax exempt securities classified as private activity bonds (or industrial development bonds, under pre-1986 law) (in general, bonds that benefit non-governmental entities) that may subject certain investors in the Acquiring Fund to an alternative minimum tax. The percentage of the Acquiring Funds total assets invested in private activity bonds will vary from time to time. The Acquiring Fund has not established any limit on the percentage of its portfolio that may be invested in Municipal Bonds subject to the federal alternative minimum tax provisions of federal tax law, and the Acquiring Fund expects that a portion of the income it produces will be includable in alternative minimum taxable income. VMTP Shares therefore would not ordinarily be a suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing VMTP Shares. The suitability of an investment in VMTP Shares will depend upon a comparison of the after-tax yield likely to be provided from the Acquiring Fund with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investors tax position. Special considerations may apply to corporate investors.
The Acquiring Fund also may not invest more than 25% of its total assets (taken at market value at the time of each investment) in Municipal Bonds whose issuers are located in the same state.
The average maturity of the Acquiring Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. The Acquiring Funds portfolio at any given time may include both long-term, intermediate-term and short-term Municipal Bonds.
The Acquiring Funds stated expectation is that it will invest in Municipal Bonds that, in the Investment Advisors opinion, are underrated or undervalued. Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Investment Advisor, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Investment Advisor, are worth more than the value assigned to them in the marketplace. The Investment Advisor may at times believe that bonds associated with a particular municipal market sector (for example, but not limited to electric utilities), or issued by a particular municipal issuer, are undervalued. The Investment Advisor may purchase those bonds for the Acquiring Funds portfolio because they represent a market sector or issuer that the Investment Advisor considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do not apply to the particular Municipal Bonds that are considered undervalued. The Acquiring Funds investment in underrated or undervalued Municipal Bonds will be based on the Investment Advisors belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by the Acquiring Fund will generally result in capital gain distributions subject to federal capital gains taxation.
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The Acquiring Fund ordinarily does not intend to realize significant investment income not exempt from federal income tax. From time to time, the Acquiring Fund may realize taxable capital gains.
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by the Acquiring Fund.
Description of Municipal Bonds
Set forth below is a detailed description of the Municipal Bonds in which the Acquiring Fund invests. Information with respect to ratings assigned to tax-exempt obligations that the Acquiring Fund may purchase is set forth in Appendix ARatings of Investments in the Statement of Additional Information. Obligations are included within the term Municipal Bonds if the interest paid thereon is excluded from gross income for federal income tax purposes in the opinion of bond counsel to the issuer.
Municipal Bonds include debt obligations issued to obtain funds for various public purposes, including the construction of a wide range of public facilities, refunding of outstanding obligations and obtaining funds for general operating expenses and loans to other public institutions and facilities. In addition, certain types of PABs are issued by or on behalf of public authorities to finance various privately owned or operated facilities, including among other things, airports, public ports, mass commuting facilities, multi-family housing projects, as well as facilities for water supply, gas, electricity, sewage or solid waste disposal and other specialized facilities. Other types of PABs, the proceeds of which are used for the construction, equipment or improvement of privately operated industrial or commercial facilities, may constitute Municipal Bonds. The interest on Municipal Bonds may bear a fixed rate or be payable at a variable or floating rate. The two principal classifications of Municipal Bonds are general obligation bonds and revenue bonds, which latter category includes PABs and, for bonds issued on or before August 15, 1986, industrial development bonds. Municipal Bonds typically are issued to finance public projects, such as roads or public buildings, to pay general operating expenses or to refinance outstanding debt. Municipal Bonds may also be issued for private activities, such as housing, medical and educational facility construction, or for privately owned industrial development and pollution control projects. General obligation bonds are backed by the full faith and credit, or taxing authority, of the issuer and may be repaid from any revenue source. Revenue bonds may be repaid only from the revenues of a specific facility or source. Municipal Bonds may be issued on a long-term basis to provide permanent financing. The repayment of such debt may be secured generally by a pledge of the full faith and credit taxing power of the issuer, a limited or special tax, or any other revenue source, including project revenues, which may include tolls, fees and other user charges, lease payments and mortgage payments. Municipal Bonds may also be issued to finance projects on a short-term interim basis, anticipating repayment with the proceeds of the later issuance of long-term debt.
The Municipal Bonds in which the Acquiring Fund invests pay interest or income that, in the opinion of bond counsel to the issuer, is exempt from regular Federal income tax. The Investment Advisor does not conduct its own analysis of the tax status of the interest paid by Municipal Bonds held by the Acquiring Fund, but will rely on the opinion of counsel to the issuer of each such instrument. The Acquiring Fund may also invest in Municipal Bonds issued by United States Territories (such as Puerto Rico or Guam) that are exempt from regular Federal income tax. In addition to the types of Municipal Bonds described in this Prospectus, the Acquiring Fund may invest in other securities that pay interest or income that is, or make other distributions that are, exempt from regular Federal income tax and/or state and local personal taxes, regardless of the technical structure of the issuer of the instrument. The Acquiring Fund treats all of such tax-exempt securities as Municipal Bonds.
The yields on Municipal Bonds are dependent on a variety of factors, including prevailing interest rates and the condition of the general money market and the Municipal Bond market, the size of a particular offering, the maturity of the obligation and the rating of the issue. The market value of Municipal Bonds will vary with changes in interest rate levels and as a result of changing evaluations of the ability of bond issuers to meet interest and principal payments.
The Acquiring Fund has not established any limit on the percentage of its portfolio that may be invested in PABs. The Acquiring Fund may not be a suitable investment for investors who are already subject to the federal alternative minimum tax or who would become subject to the federal alternative minimum tax as a result of an investment in the Acquiring Funds common shares.
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General Obligation Bonds. General obligation bonds are typically secured by the issuers pledge of its faith, credit and taxing power for the repayment of principal and the payment of interest. The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or laws, and an entitys creditworthiness will depend on many factors, including potential erosion of its tax base due to population declines, natural disasters, declines in the states industrial base or inability to attract new industries, economic limits on the ability to tax without eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on federal or state aid, access to capital markets or other factors beyond the states or entitys control. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due is affected by the issuers maintenance of its tax base.
Revenue Bonds. Revenue or special obligation bonds are typically payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue sources such as payments from the user of the facility being financed. Accordingly, the timely payment of interest and the repayment of principal in accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such revenue source. Revenue bonds issued by state or local agencies to finance the development of low-income, multi-family housing involve special risks in addition to those associated with municipal securities generally, including that the underlying properties may not generate sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds.
Municipal Notes. Municipal notes are shorter term municipal debt obligations. They may provide interim financing in anticipation of tax collection, bond sales or revenue receipts. If there is a shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be fully repaid, and the Acquiring Fund may lose money.
Municipal Commercial Paper. Municipal commercial paper is generally unsecured and issued to meet short-term financing needs. The lack of security presents some risk of loss to the Acquiring Fund since, in the event of an issuers bankruptcy, unsecured creditors are repaid only after the secured creditors out of the assets, if any, that remain.
PABs. The Acquiring Fund may purchase Municipal Bonds classified as PABs. Interest received on certain PABs is treated as an item of tax preference for purposes of the federal alternative minimum tax and may impact the overall tax liability of certain investors in the Acquiring Fund. PABs, formerly referred to as industrial development bonds, are issued by, or on behalf of, states, municipalities or public authorities to obtain funds to provide privately operated housing facilities, airport, mass transit or port facilities, sewage disposal, solid waste disposal or hazardous waste treatment or disposal facilities and certain local facilities for water supply, gas or electricity. Other types of PABs, the proceeds of which are used for the construction, equipment, repair or improvement of privately operated industrial or commercial facilities, may constitute Municipal Bonds, although the federal tax laws may place substantial limitations on the size of such issues. Such bonds are secured primarily by revenues derived from loan repayments or lease payments due from the entity which may or may not be guaranteed by a parent company or otherwise secured. PABs generally are not secured by a pledge of the taxing power of the issuer of such bonds. Therefore, an investor should be aware that repayment of such bonds generally depends on the revenues of a private entity and be aware of the risks that such an investment may entail. The continued ability of an entity to generate sufficient revenues for the payment of principal and interest on such bonds will be affected by many factors including the size of the entity, capital structure, demand for its products or services, competition, general economic conditions, government regulation and the entitys dependence on revenues for the operation of the particular facility being financed.
Moral Obligation Bonds. Municipal Bonds may also include moral obligation bonds, which are normally issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality in question.
Municipal Lease Obligations. Also included within the general category of Municipal Bonds are certificates of participation (COPs) issued by government authorities or entities to finance the acquisition or construction of
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equipment, land and/or facilities. COPs represent participations in a lease, an installment purchase contract or a conditional sales contract (hereinafter collectively called lease obligations) relating to such equipment, land or facilities. Municipal leases, like other municipal debt obligations, are subject to the risk of non-payment. Although lease obligations do not constitute general obligations of the issuer for which the issuers unlimited taxing power is pledged, a lease obligation is frequently backed by the issuers covenant to budget for, appropriate and make the payments due under the lease obligation. However, certain lease obligations contain non-appropriation clauses which provide that the issuer has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. Although non-appropriation lease obligations are secured by the leased property, disposition of the property in the event of foreclosure might prove difficult and the value of the property may be insufficient to issue lease obligations. Certain investments in lease obligations may be illiquid.
The ability of issuers of municipal leases to make timely lease payments may be adversely impacted in general economic downturns and as relative governmental cost burdens are allocated and reallocated among federal, state and local governmental units. Such non-payment would result in a reduction of income to the Acquiring Fund, and could result in a reduction in the value of the municipal lease experiencing non-payment and a potential decrease in the NAV of the Acquiring Fund. Issuers of municipal lease obligations might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, the Acquiring Fund could experience delays and limitations with respect to the collection of principal and interest on such municipal leases and the Acquiring Fund may not, in all circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in lease payments, the Acquiring Fund might take possession of and manage the assets securing the issuers obligations on such securities, which may increase the Acquiring Funds operating expenses and adversely affect the NAV of the Acquiring Fund. When the lease contains a non-appropriation clause, however, the failure to pay would not be a default and the Acquiring Fund would not have the right to take possession of the assets. Any income derived from the Acquiring Funds ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for purposes of the income tests applicable to regulated investment companies. In addition, the Acquiring Funds intention to qualify as a regulated investment company under the Internal Revenue Code of 1986 may limit the extent to which the Acquiring Fund may exercise its rights by taking possession of such assets, because as a regulated investment company the Acquiring Fund is subject to certain limitations on its investments and on the nature of its income.
Zero-Coupon Bonds. Municipal Bonds may include zero-coupon bonds. Zero-coupon bonds are securities that are sold at a discount to par value and do not pay interest during the life of the security. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity at a rate of interest reflecting the market rate of the security at the time of issuance. Upon maturity, the holder of a zero-coupon bond is entitled to receive the par value of the security.
While interest payments are not made on such securities, holders of such securities are deemed to have received income (phantom income) annually, notwithstanding that cash may not be received currently. The effect of owning instruments that do not make current interest payments is that a fixed yield is earned not only on the original investment but also, in effect, on all discount accretion during the life of the obligations. This implicit reinvestment of earnings at a fixed rate eliminates the risk of being unable to invest distributions at a rate as high as the implicit yield on the zero-coupon bond, but at the same time eliminates the holders ability to reinvest at higher rates in the future. For this reason, some of these securities may be subject to substantially greater price fluctuations during periods of changing market interest rates than are comparable securities that pay interest currently. Longer term zero-coupon bonds are more exposed to interest rate risk than shorter term zero-coupon bonds. These investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of cash.
The Acquiring Fund accrues income with respect to these securities for U.S. federal income tax and accounting purposes prior to the receipt of cash payments. Zero-coupon bonds may be subject to greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash interest at regular intervals.
Further, to maintain its qualification for pass-through treatment under the federal tax laws, the Acquiring Fund is required to distribute income to its shareholders and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage itself by borrowing in order to generate the cash to satisfy these distributions. The required distributions may result in an increase in the Acquiring Funds exposure to zero-coupon bonds.
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In addition to the above-described risks, there are certain other risks related to investing in zero-coupon bonds. During a period of severe market conditions, the market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, the Acquiring Funds investment exposure to these securities and their risks, including credit risk, will increase during the time these securities are held in the Acquiring Funds portfolio.
Pre-Refunded Municipal Securities. The principal of, and interest on, pre-refunded municipal securities are no longer paid from the original revenue source for the securities. Instead, the source of such payments is typically an escrow fund consisting of U.S. Government securities. The assets in the escrow fund are derived from the proceeds of refunding bonds issued by the same issuer as the pre-refunded municipal securities. Issuers of municipal securities use this advance refunding technique to obtain more favorable terms with respect to securities that are not yet subject to call or redemption by the issuer. For example, advance refunding enables an issuer to refinance debt at lower market interest rates, restructure debt to improve cash flow or eliminate restrictive covenants in the indenture or other governing instrument for the pre-refunded municipal securities.
However, except for a change in the revenue source from which principal and interest payments are made, the pre-refunded municipal securities remain outstanding on their original terms until they mature or are redeemed by the issuer.
Special Taxing Districts. Special taxing districts are organized to plan and finance infrastructure developments to induce residential, commercial and industrial growth and redevelopment. The bond financing methods such as tax increment finance, tax assessment, special services district and Mello-Roos bonds (a type of municipal security established by the Mello-Roos Community Facilities Act of 1982), are generally payable solely from taxes or other revenues attributable to the specific projects financed by the bonds without recourse to the credit or taxing power of related or overlapping municipalities. They often are exposed to real estate development-related risks and can have more taxpayer concentration risk than general tax-supported bonds, such as general obligation bonds. Further, the fees, special taxes, or tax allocations and other revenues that are established to secure such financings are generally limited as to the rate or amount that may be levied or assessed and are not subject to increase pursuant to rate covenants or municipal or corporate guarantees. The bonds could default if development failed to progress as anticipated or if larger taxpayers failed to pay the assessments, fees and taxes as provided in the financing plans of the districts.
Indexed and Inverse Floating Rate Securities. The Acquiring Fund may invest in Municipal Bonds (and Non-Municipal Tax-Exempt Securities) that yield a return based on a particular index of value or interest rates. For example, the Acquiring Fund may invest in Municipal Bonds that pay interest based on an index of Municipal Bond interest rates. The principal amount payable upon maturity of certain Municipal Bonds also may be based on the value of the index. To the extent the Acquiring Fund invests in these types of Municipal Bonds, the Acquiring Funds return on such Municipal Bonds will be subject to risk with respect to the value of the particular index. Interest and principal payable on the Municipal Bonds may also be based on relative changes among particular indices. Also, the Acquiring Fund may invest in so-called inverse floating rate bonds or residual interest bonds on which the interest rates vary inversely with a short-term floating rate (which may be reset periodically by a Dutch auction, a remarketing agent, or by reference to a short-term tax-exempt interest rate index). The Acquiring Fund may purchase synthetically created inverse floating rate bonds evidenced by custodial or trust receipts. Generally, income on inverse floating rate bonds will decrease when short-term interest rates increase, and will increase when short-term interest rates decrease. Such securities have the effect of providing a degree of investment leverage, since they may increase or decrease in value in response to changes, as an illustration, in market interest rates at a rate which is a multiple (typically two) of the rate at which fixed rate long-term tax-exempt securities increase or decrease in response to such changes. As a result, the market values of such securities will generally be more volatile than the market values of fixed rate tax-exempt securities. To seek to limit the volatility of these securities, the Acquiring Fund may purchase inverse floating rate bonds with shorter-term maturities or limitations on the extent to which the interest rate may vary. Certain investments in such obligations may be illiquid. See The Acquiring Funds InvestmentsLeverageTender Option Bond Transactions.
When-Issued Securities, Delayed Delivery Securities and Forward Commitments. The Acquiring Fund may purchase or sell securities that it is entitled to receive on a when-issued basis. The Acquiring Fund may also purchase or sell
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securities on a delayed delivery basis. The Acquiring Fund may also purchase or sell securities through a forward commitment. These transactions involve the purchase or sale of securities by the Acquiring Fund at an established price with payment and delivery taking place in the future. The purchase will be recorded on the date the Acquiring Fund enters into the commitment and the value of the securities will thereafter be reflected in the Acquiring Funds NAV. The Acquiring Fund has not established any limit on the percentage of its assets that may be committed in connection with these transactions. At the time the Acquiring Fund enters into a transaction on a when-issued basis, it will segregate or designate on its books and records cash or liquid assets with a value not less than the value of the when-issued securities.
There can be no assurance that a security purchased on a when-issued basis will be issued or that a security purchased or sold through a forward commitment will be delivered. A default by a counterparty may result in the Acquiring Fund missing the opportunity of obtaining a price considered to be advantageous. The value of securities in these transactions on the delivery date may be more or less than the Acquiring Funds purchase price. The Acquiring Fund may bear the risk of a decline in the value of the security in these transactions and may not benefit from an appreciation in the value of the security during the commitment period.
If deemed advisable as a matter of investment strategy, the Acquiring Fund may dispose of or renegotiate a commitment after it has been entered into, and may sell securities it has committed to purchase before those securities are delivered to the Acquiring Fund on the settlement date. In these cases the Acquiring Fund may realize a taxable capital gain or loss.
When the Acquiring Fund engages in when-issued, delayed delivery or forward commitment transactions, it relies on the other party to consummate the trade. Failure of such party to do so may result in the Acquiring Funds incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase securities, and any subsequent fluctuations in their market value, is taken into account when determining the market value of the Acquiring Fund starting on the day the Acquiring Fund agrees to purchase the securities. The Acquiring Fund does not earn interest on the securities it has committed to purchase until they are paid for and delivered on the settlement date.
Yields. Yields on Municipal Bonds are dependent on a variety of factors, including the general condition of the money market and of the Municipal Bond market, the size of a particular offering, the financial condition of the issuer, the maturity of the obligation and the rating of the issue. The ability of the Acquiring Fund to achieve its investment objective is also dependent on the continuing ability of the issuers of the securities in which the Acquiring Fund invests to meet their obligations for the payment of interest and principal when due. There are variations in the risks involved in holding Municipal Bonds, both within a particular classification and between classifications, depending on numerous factors. Furthermore, the rights of owners of Municipal Bonds and the obligations of the issuer of such Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar laws and court decisions affecting the rights of creditors generally and to general equitable principles, which may limit the enforcement of certain remedies.
High Yield or Junk Bonds. The Acquiring Fund may invest up to 25% of its total assets in Municipal Bonds that are rated below Baa by Moodys or below BBB by S&P or Fitch or, if unrated, are considered by the Investment Advisor to possess similar credit characteristics. Information with respect to ratings assigned to tax-exempt obligations that the Acquiring Fund may purchase is set forth in Appendix ARatings of Investments in the Statement of Additional Information. Municipal Bonds of below investment grade quality (Ba/BB or below) are commonly known as junk bonds. Securities rated below investment grade are judged to have speculative characteristics with respect to their interest and principal payments. Such securities may face major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments.
Temporary Investments
During temporary defensive periods (e.g., times when, in the Investment Advisors opinion, temporary imbalances of supply and demand or other temporary dislocations in the tax-exempt bond market adversely affect the price at which long-term or intermediate-term Municipal Bonds are available), and in order to keep cash on hand fully invested, the
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Acquiring Fund may invest up to 100% of its total assets in liquid, short-term investments including high quality, short-term securities which may be either tax-exempt or taxable and securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds of the type in which the Acquiring Fund may invest directly. The Acquiring Fund intends to invest in taxable short-term investments only in the event that suitable tax-exempt temporary investments are not available at reasonable prices and yields. The Acquiring Funds stated expectation is that it will invest only in taxable temporary investments which are U.S. government securities or securities rated within the highest grade by Moodys, S&P or Fitch, and which mature within one year from the date of purchase or carry a variable or floating rate of interest (such short-term obligations being referred to herein as Temporary Investments). Temporary Investments of the Acquiring Fund may include certificates of deposit issued by U.S. banks with assets of at least $1 billion, commercial paper or corporate notes, bonds or debentures with a remaining maturity of one year or less, or repurchase agreements. See Repurchase Agreements. To the extent the Acquiring Fund invests in Temporary Investments, the Acquiring Fund will not at such times be in a position to achieve its investment objective of tax-exempt income.
Short-term taxable fixed income investments include, without limitation, the following:
(1) U.S. Government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or by U.S. Government agencies or instrumentalities. U.S. Government securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. Government provides financial support to such U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. Government, its agencies and instrumentalities do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Certificates of deposit purchased by the Acquiring Fund may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time the Acquiring Fund purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield for the Acquiring Fund during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for the Acquiring Fund to invest temporarily available cash. The Acquiring Fund may enter into repurchase agreements only with respect to obligations of the U.S. Government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in which the Acquiring Fund may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Acquiring Fund is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that the Acquiring Fund is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, and if the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Acquiring Fund could incur a loss of both principal and interest. The Investment Advisor monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. The Investment Advisor does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Acquiring Fund. If the seller were to be subject to a federal bankruptcy proceeding, the ability of the Acquiring Fund to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
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(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Acquiring Fund and a corporation. There is no secondary market for such notes. However, they are redeemable by the Acquiring Fund at any time. The Investment Advisor will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporations ability to meet all of its financial obligations, because the Acquiring Funds liquidity might be impaired if the corporation were unable to pay principal and interest on demand. The Acquiring Funds stated expectation is that its investments in commercial paper will be limited to commercial paper rated in the highest categories by a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
Tax-exempt temporary investments include various obligations issued by state and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such Municipal Bonds maturing in three years or less from the date of issuance) and municipal commercial paper. Short-term tax-exempt fixed income securities include, without limitation, the following:
Bond Anticipation Notes (BANs) are usually general obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or bonds. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuers access to the long-term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuers capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies could adversely affect the issuers ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes (RANs) are issued by governments or governmental bodies with the expectation that future revenues from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated revenues from another level of government, could adversely affect an issuers ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for specific projects. Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs. These notes may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (municipal paper) represents very short-term unsecured, negotiable promissory notes, issued by states, municipalities and their agencies. Payment of principal and interest on issues of municipal paper may be made from various sources, to the extent the funds are available therefrom. Maturities on municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of municipal paper.
VRDOs are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments typically are based upon SIFMA or some other appropriate interest rate adjustment
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index. The Acquiring Fund may invest in all types of tax exempt instruments currently outstanding or to be issued in the future which satisfy its short-term maturity and quality standards. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities.
Certain Municipal Bonds may carry variable or floating rates of interest whereby the rate of interest is not fixed but varies with changes in specified market rates or indices, such as a bank prime rate or tax-exempt money market indices.
While the various types of notes described above as a group represent the major portion of the tax-exempt note market, other types of notes are available in the marketplace and the Acquiring Fund may invest in such other types of notes to the extent permitted under its investment objective, policies and limitations. Such notes may be issued for different purposes and may be secured differently from those mentioned above.
The Acquiring Funds investment policies provide that the Temporary Investments and VRDOs in which the Acquiring Fund may invest will be in the following rating categories at the time of purchase: MIG-1/VMIG-1 through MIG- 3/VMIG-3 for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as determined by Moodys), SP-1 through SP-2 for notes and A-1 through A-3 for VRDOs and commercial paper (as determined by S&P), or F- 1 through F-3 for notes, VRDOs and commercial paper (as determined by Fitch). Temporary Investments, if not rated, must be of comparable quality in the opinion of the Investment Advisor. In addition, the Acquiring Fund reserves the right to invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment of the Investment Advisor, market conditions warrant.
Strategic Transactions and Other Management Techniques
The Acquiring Fund may use a variety of other investment management techniques and instruments. The Acquiring Fund may purchase and sell futures contracts, enter into various interest rate transactions and may purchase and sell exchange- listed and over-the-counter put and call options on securities, financial indices and futures contracts (collectively, Strategic Transactions). These Strategic Transactions may be used for duration management and other risk management to attempt to protect against possible changes in the market value of the Acquiring Funds portfolio resulting from trends in the debt securities markets and changes in interest rates, to protect the Acquiring Funds unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes, to establish a position in the securities markets as a temporary substitute for purchasing particular securities and to enhance income or gain. There is no particular strategy that requires use of one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The Strategic Transactions are described below. The ability of the Acquiring Fund to use them successfully will depend on the Investment Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Inasmuch as any obligations of the Acquiring Fund that arise from the use of Strategic Transactions will be covered by segregated liquid high grade assets or offsetting transactions, the Acquiring Fund and the Investment Advisor believes such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. Certain provisions of the Internal Revenue Code of 1986 may restrict or affect the ability of the Acquiring Fund to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to taxable income and have certain other consequences.
Interest Rate Transactions. The Acquiring Fund may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. The Acquiring Fund expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio as a duration management technique or to protect against any increase in the price of securities the Acquiring Fund anticipates purchasing at a later date. The Acquiring Fund will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. The Acquiring Fund may not sell interest rate caps or floors that it does not own. Interest rate swaps involve the exchange by the Acquiring Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor.
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The Acquiring Fund may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, and will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with the Acquiring Fund receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. The Acquiring Fund will accrue the net amount of the excess, if any, of the Acquiring Funds obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate with a custodian an amount of cash or liquid high grade securities having an aggregate net asset value at all times at least equal to the accrued excess. If there is a default by the other party to such a transaction, the Acquiring Fund will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps.
Credit Default Swap Agreements. The Acquiring Fund may enter into credit default swap agreements for hedging purposes or to seek to increase its return. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by the Acquiring Fund. The protection buyer in a credit default contract may be obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the contract, provided that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount (the difference between the market value of the reference obligation and its par value), if the swap is cash settled. The Acquiring Fund may be either the buyer or seller in the transaction. If the Acquiring Fund is a buyer and no credit event occurs, the Acquiring Fund may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, the Acquiring Fund generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six (6) months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As the seller, the Acquiring Fund would effectively add leverage to its portfolio because, in addition to its total net assets, the Acquiring Fund would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if the Acquiring Fund had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. The Acquiring Fund expects to enter into credit default swap agreements only with counterparties who are rated investment grade quality by at least one nationally recognized statistical rating organization at the time of entering into such transaction or whose creditworthiness is believed by the Investment Advisor to be equivalent to such rating. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. A seller of a credit default swap or similar instrument is exposed to many of the same risks of leverage since, if a credit event occurs, the seller may be required to pay the buyer the full notional value of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations. The Acquiring Funds obligations under a credit default swap agreement will be accrued daily (offset against any amounts owing to the Acquiring Fund). The Acquiring Fund will at all times segregate with its custodian in connection with each such transaction liquid securities or cash with a value at least equal to the Acquiring Funds exposure (any accrued but unpaid net amounts owed by the Acquiring Fund to any counterparty), on a marked-to-market basis (as calculated pursuant to requirements of the SEC). Such segregation will ensure that the Acquiring Fund has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of the Acquiring Funds portfolio. Such segregation will not limit the Acquiring Funds exposure to loss.
Futures Contracts and Options on Futures Contracts. The Acquiring Fund may also enter into contracts for the purchase or sale for future delivery (futures contracts) of debt securities, aggregates of debt securities or indices or prices thereof, other financial indices and U.S. government debt securities or options on the above. The Acquiring Fund will ordinarily engage in such transactions only for bona fide hedging, risk management (including duration
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management) and other portfolio management purposes. However, the Acquiring Fund is also permitted to enter into such transactions for non-hedging purposes to enhance income or gain, in accordance with the rules and regulations of the CFTC, which currently provide that no such transaction may be entered into if at such time more than 5% of the Acquiring Funds net assets would be posted as initial margin and premiums with respect to such non-hedging transactions.
Calls on Securities Indices and Futures Contracts. The Acquiring Fund may sell or purchase call options (calls) on Municipal Bonds and indices based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A call gives the purchaser of the option the right to buy, and obligates the seller to sell, the underlying security, futures contract or index at the exercise price at any time or at a specified time during the option period. All such calls sold by the Acquiring Fund must be covered as long as the call is outstanding (i.e., the Acquiring Fund must own the securities or futures contract subject to the call or other securities acceptable for applicable escrow requirements). A call sold by the Acquiring Fund exposes the Acquiring Fund during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security, index or futures contract and may require the Acquiring Fund to hold a security of futures contract which it might otherwise have sold. The purchase of a call gives the Acquiring Fund the right to buy a security, futures contract or index at a fixed price. Calls on futures on Municipal Bonds must also be covered by deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy the Acquiring Funds obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. The Acquiring Fund may purchase put options (puts) that relate to Municipal Bonds (whether or not it holds such securities in its portfolio), indices or futures contracts. The Acquiring Fund may also sell puts on Municipal Bonds, indices or futures contracts on such securities if the Acquiring Funds contingent obligations on such puts are secured by segregated assets consisting of cash or liquid high grade debt securities having a value not less than the exercise price.
Municipal Market Data Rate Locks. The Acquiring Fund may purchase and sell Municipal Market Data Rate Locks (MMD Rate Locks). An MMD Rate Lock permits the Acquiring Fund to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect against any increase in the price of securities to be purchased at a later date. The Acquiring Fund will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. An MMD Rate Lock is a contract between the Acquiring Fund and an MMD Rate Lock provider pursuant to which the parties agree to make payments to each other on a notional amount, contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or below a specified level on the expiration date of the contract. For example, if the Acquiring Fund buys an MMD Rate Lock and the Municipal Market Data AAA General Obligation Scale is below the specified level on the expiration date, the counterparty to the contract will make a payment to the Acquiring Fund equal to the specified level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA General Obligation Scale is above the specified level on the expiration date, the Acquiring Fund will make a payment to the counterparty equal to the actual level minus the specified level multiplied by the notional amount of the contract. In entering into MMD Rate Locks, there is a risk that municipal yields will move in the direction opposite of the direction anticipated by the Acquiring Fund. The Acquiring Fund may not enter into MMD Rate Locks if, as a result, more than 50% of its total assets would be required to cover its potential obligations under its hedging and other investment transactions.
Restricted and Illiquid Securities
Certain of the Acquiring Funds investments may be illiquid. Illiquid securities are subject to legal or contractual restrictions on disposition or lack an established secondary trading market. The sale of restricted and illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the- counter markets. Restricted securities may sell at a price lower than similar securities that are not subject to restrictions on resale.
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Repurchase Agreements
As temporary investments, the Acquiring Fund may invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the seller of securities agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during the Acquiring Funds holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. The Acquiring Fund may only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of the Investment Advisor, present minimal credit risk. The risk to the Acquiring Fund is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but the Acquiring Fund might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by the Acquiring Fund may be delayed or limited. The Investment Advisor will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, the Investment Advisor will demand additional collateral from the issuer to increase the value of the collateral to at least that of the repurchase price, including interest.
Reverse Repurchase Agreements
The Acquiring Fund may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of securities held by the Acquiring Fund with an agreement by the Acquiring Fund to repurchase the securities at an agreed upon price, date and interest payment. At the time the Acquiring Fund enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the custodian containing liquid instruments having a value not less than the repurchase price (including accrued interest). If the Acquiring Fund establishes and maintains such a segregated account, a reverse repurchase agreement will not be considered a borrowing by the Acquiring Fund; however, under certain circumstances in which the Acquiring Fund does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of the Acquiring Funds limitation on borrowings. The use by the Acquiring Fund of reverse repurchase agreements involves many of the same risks of leverage since the proceeds derived from such reverse repurchase agreements may be invested in additional securities. Reverse repurchase agreements involve the risk that the market value of the securities acquired in connection with the reverse repurchase agreement may decline below the price of the securities the Acquiring Fund has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by the Acquiring Fund in connection with the reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Acquiring Funds obligation to repurchase the securities, and the Acquiring Funds use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, the Acquiring Fund would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement.
Borrowings
The Acquiring Fund is authorized to borrow money in amounts of up to 5% of the value of its total assets at the time of such borrowings; provided, however, that the Acquiring Fund is authorized to borrow moneys in amounts of up to 33 1/3% of the value of its total assets at the time of such borrowings to finance the repurchase of its own common stock pursuant to tender offers or otherwise to redeem or repurchase shares of preferred stock. Borrowings by the Acquiring Fund (commonly known, as with the issuance of preferred stock, as leveraging) create an opportunity for greater total return since, for example, the Acquiring Fund will not be required to sell portfolio securities to repurchase or redeem shares but, at the same time, increase exposure to capital risk. In addition, borrowed funds are subject to interest costs that may offset or exceed the return earned on the borrowed funds.
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Lending of Securities
The Acquiring Fund may lend portfolio securities to certain borrowers determined to be creditworthy by the Investment Advisor, including to borrowers affiliated with the Investment Advisor. The borrowers provide collateral that is maintained in an amount at least equal to the current market value of the securities loaned. No securities loan will be made on behalf of the Acquiring Fund if, as a result, the aggregate value of all securities loans of the Acquiring Fund exceeds one-third of the value of the Acquiring Funds total assets (including the value of the collateral received). The Acquiring Fund may terminate a loan at any time and obtain the return of the securities loaned. The Acquiring Fund receives the value of any interest or cash or non-cash distributions paid on the loaned securities.
With respect to loans that are collateralized by cash, the borrower may be entitled to receive a fee based on the amount of cash collateral. The Acquiring Fund is compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to the borrower. In the case of collateral other than cash, the Acquiring Fund is compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned securities. Any cash collateral received by the Acquiring Fund for such loans, and uninvested cash, may be invested, among other things, in a private investment company managed by an affiliate of the Investment Advisor or in registered money market funds advised by the Investment Advisor or its affiliates; such investments are subject to investment risk.
The Acquiring Fund conducts its securities lending pursuant to an exemptive order from the SEC permitting it to lend portfolio securities to borrowers affiliated with the Acquiring Fund and to retain an affiliate of the Acquiring Fund as lending agent. To the extent that the Acquiring Fund engages in securities lending, BlackRock Investment Management, LLC (BIM), an affiliate of the Investment Advisor, acts as securities lending agent for the Acquiring Fund, subject to the overall supervision of the Investment Advisor. BIM administers the lending program in accordance with guidelines approved by the Board. Pursuant to the current securities lending agreement, BIM may lend securities only when the difference between the borrower rebate rate and the risk free rate exceeds a certain level (such securities, the specials only securities).
To the extent that the Acquiring Fund engages in securities lending, the Acquiring Fund retains a portion of securities lending income and remits a remaining portion to BIM as compensation for its services as securities lending agent.
Securities lending income is equal to the total of income earned from the reinvestment of cash collateral (and excludes collateral investment expenses as defined below), and any fees or other payments to and from borrowers of securities. As securities lending agent, BIM bears all operational costs directly related to securities lending. The Acquiring Fund is responsible for expenses in connection with the investment of cash collateral received for securities on loan in a private investment company managed by an affiliate of the Investment Advisor (the collateral investment expenses), however, BIM has agreed to cap the collateral investment expenses the Acquiring Fund bears to an annual rate of 0.04% of the daily net assets of such private investment company. In addition, in accordance with the exemptive order, the investment adviser to the private investment company will not charge any advisory fees with respect to shares purchased by the Acquiring Fund. Such shares also will not be subject to a sales load, redemption fee, distribution fee or service fee.
Pursuant to the current securities lending agreement, the Acquiring Fund retains 82% of securities lending income (which excludes collateral investment expenses).
In addition, commencing the business day following the date that the aggregate securities lending income earned across the BlackRock Fixed-Income Complex in a calendar year exceeds the breakpoint dollar threshold applicable in the given year set forth in the securities lending agreement, the Acquiring Fund, pursuant to the current securities lending agreement, will receive for the remainder of that calendar year securities lending income in an amount equal to 85% of securities lending income (which excludes collateral investment expenses).
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The Acquiring Fund currently leverages its assets through the use of VMTP Shares and tender option bonds. The Acquiring Fund currently does not intend to borrow money or issue debt securities. Although it has no present intention to do so, the Acquiring Fund reserves the right to borrow money from banks or other financial institutions, or issue debt securities, in the future if it believes that market conditions would be conducive to the successful implementation of a leveraging strategy through borrowing money or issuing debt securities or preferred shares. Any such leveraging will not be fully achieved until the proceeds resulting from the use of leverage have been invested in accordance with the Acquiring Funds investment objective and policies.
The use of leverage can create risks. When leverage is employed, the NAV and market price of the common shares and the yield to holders of common shares will be more volatile than if leverage were not used. Changes in the value of the Acquiring Funds portfolio, including securities bought with the proceeds of leverage, will be borne entirely by the holders of common shares. If there is a net decrease or increase in the value of the Acquiring Funds investment portfolio, leverage will decrease or increase, as the case may be, the NAV per common share to a greater extent than if the Acquiring Fund did not utilize leverage. A reduction in the Acquiring Funds NAV may cause a reduction in the market price of its shares. During periods in which the Acquiring Fund is using leverage, the fee paid to the Investment Advisor for advisory services will be higher than if the Acquiring Fund did not use leverage, because the fees paid will be calculated on the basis of the Acquiring Funds managed assets, which includes the proceeds from leverage. Any leveraging strategy the Acquiring Fund employs may not be successful. See RisksLeverage Risk. See RisksTender Option Bond Risk for details about the risks associated with the Acquiring Funds use of TOB Residuals.
Certain types of leverage the Acquiring Fund may use may result in the Acquiring Fund being subject to covenants relating to asset coverage and portfolio composition requirements. The Acquiring Fund may be subject to certain restrictions on investments imposed by one or more lenders or by guidelines of one or more rating agencies, which may issue ratings for any short-term debt securities or preferred shares issued by the Acquiring Fund. The terms of any borrowings or rating agency guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the 1940 Act. The Investment Advisor does not believe that these covenants or guidelines will impede it from managing the Acquiring Funds portfolio in accordance with its investment objective and policies if the Acquiring Fund were to utilize leverage.
Under the 1940 Act, the Acquiring Fund is not permitted to issue senior securities if, immediately after the issuance of such senior securities, the Acquiring Fund would have an asset coverage ratio (as defined in the 1940 Act) of less than 300% with respect to senior securities representing indebtedness (i.e., for every dollar of indebtedness outstanding, the Acquiring Fund is required to have at least three dollars of assets) or less than 200% with respect to senior securities representing preferred shares (i.e., for every dollar of preferred shares outstanding, the Acquiring Fund is required to have at least two dollars of assets). The 1940 Act also provides that the Acquiring Fund may not declare distributions or purchase its stock (including through tender offers) if, immediately after doing so, it will have an asset coverage ratio of less than 300% or 200%, as applicable. Under the 1940 Act, certain short-term borrowings (such as for cash management purposes) are not subject to these limitations if (i) repaid within 60 days, (ii) not extended or renewed and (iii) not in excess of 5% of the total assets of the Acquiring Fund.
Effects of Leverage
Assuming that leverage will represent approximately 38.6% of the Combined Funds total managed assets and that the Combined Fund will bear expenses relating to that leverage at an average annual rate of 1.18%, the income generated by the Combined Funds portfolio (net of estimated expenses) must exceed 0.45% in order to cover the expenses specifically related to the Combined Funds estimated use of leverage. Of course, these numbers are merely estimates used for illustration. Actual leverage expenses will vary frequently and may be significantly higher or lower than the rate estimated above.
The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on Common Share total return, assuming investment portfolio total returns (comprised of income and changes
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in the value of securities held in the Combined Funds portfolio) of (10)%, (5)%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Combined Fund. The table further reflects the use of leverage representing 38.6% of the Combined Funds total managed assets and the Combined Funds currently projected annual leverage expenses of 1.18%.
Assumed Portfolio Total Return (net of expenses) |
(10 | )% | (5 | )% | 0 | % | 5 | % | 10 | % | ||||||||||
Common Share Total Return |
(17.02 | )% | (8.88 | )% | (0.74 | )% | 7.40 | % | 15.53 | % |
Common Share total return is composed of two elements: the Common Share dividends paid by the Combined Fund (the amount of which is largely determined by the net investment income of the Combined Fund) and gains or losses on the value of the securities the Combined Fund owns. As required by SEC rules, the table assumes that the Combined Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, a total return of 0% assumes that the tax-exempt interest the Combined Fund receives on its municipal bonds investments is entirely offset by losses in the value of those securities.
Preferred Shares
The Acquiring Fund has leveraged its portfolio by issuing VMTP Shares. Under the 1940 Act, the Acquiring Fund is not permitted to issue preferred shares if, immediately after such issuance, the liquidation value of the Acquiring Funds outstanding preferred shares exceeds 50% of its assets (including the proceeds from the issuance) less liabilities other than borrowings (i.e., the value of the Acquiring Funds assets must be at least 200% of the liquidation value of its outstanding preferred shares). In addition, the Acquiring Fund would not be permitted to declare any cash dividend or other distribution on its common shares unless, at the time of such declaration, the value of the Acquiring Funds assets less liabilities other than borrowings is at least 200% of such liquidation value. Please see Information about the Preferred Shares of the Funds for a description of the Acquiring Funds VMTP Shares.
For tax purposes, the Acquiring Fund is currently required to allocate tax-exempt interest income, net capital gain and other taxable income, if any, between its common shares and preferred shares outstanding in proportion to total dividends paid to each class for the year in which or with respect to which tax-exempt income, the net capital gain or other taxable income is paid. If net capital gain or other taxable income is allocated to preferred shares, instead of solely tax-exempt income, the Acquiring Fund will likely have to pay higher total dividends to preferred shareholders or make special payments to preferred shareholders to compensate them for the increased tax liability. This would reduce the total amount of dividends paid to the common shareholders, but would increase the portion of the dividend that is tax-exempt. If the increase in dividend payments or the special payments to preferred shareholders are not entirely offset by a reduction in the tax liability of, and an increase in the tax-exempt dividends received by, the common shareholders, the advantage of the Acquiring Funds leveraged structure to common shareholders will be reduced.
Tender Option Bonds
The Acquiring Fund currently leverages its assets through the use of TOB Residuals, which are derivative interests in municipal bonds. The TOB Residuals in which the Acquiring Fund will invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax. No independent investigation will be made to confirm the tax-exempt status of the interest or income paid by TOB Residuals held by the Acquiring Fund. Although volatile, TOB Residuals typically offer the potential for yields exceeding the yields available on fixed rate municipal bonds with comparable credit quality.
TOB Residuals represent beneficial interests in a TOB Trust formed for the purpose of holding municipal bonds contributed by one or more funds. A TOB Trust typically issues two classes of beneficial interests: TOB Floaters, which are sold to third-party investors, and TOB Residuals, which are generally issued to the fund(s) that transferred municipal bonds to the TOB Trust. The Fund may invest in both TOB Floaters and TOB Residuals. TOB Floaters may have first priority on the cash flow from the municipal bonds held by the TOB Trust and are enhanced with a
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liquidity support arrangement from a third-party TOBs Liquidity Provider (defined below) which allows holders to tender their position at par (plus accrued interest). The Acquiring Fund, as a holder of TOB Residuals, is paid the residual cash flow from the TOB Trust. The Acquiring Fund contributes municipal bonds to the TOB Trust and is paid the cash received by the TOB Trust from the sale of the TOB Floaters, less certain transaction costs, and typically will invest the cash to purchase additional municipal bonds or other investments permitted by its investment policies. If the Acquiring Fund ever purchases all or a portion of the TOB Floaters sold by the TOB Trust, it may surrender those TOB Floaters together with a proportionate amount of TOB Residuals to the TOB Trust in exchange for a proportionate amount of the municipal bonds owned by the TOB Trust.
Other registered investment companies advised by the Investment Advisor or its affiliates (the BlackRock-advised Funds) may contribute municipal bonds to a TOB Trust into which the Acquiring Fund has contributed municipal bonds. If multiple BlackRock-advised Funds participate in the same TOB Trust, the economic rights and obligations under the TOB Residual will generally be shared among the funds ratably in proportion to their participation in the TOB Trust.
The municipal bonds transferred to a TOB Trust typically are high grade municipal bonds. In certain cases, when municipal bonds transferred are lower grade municipal bonds, the TOB Trust transaction includes a credit enhancement feature that provides for the timely payment of principal and interest on the bonds to the TOB Trust by a credit enhancement provider. The TOB Trust would be responsible for the payment of the credit enhancement fee and the Acquiring Fund, as a TOB Residual holder, would be responsible for reimbursement of any payments of principal and interest made by the credit enhancement provider.
The TOB Residuals held by the Acquiring Fund generally provide the Acquiring Fund with the right to cause the holders of a proportional share of the TOB Floaters to tender their notes to the TOB Trust at par plus accrued interest. Thereafter, the Acquiring Fund may withdraw a corresponding share of the municipal bonds from the TOB Trust. As a result, a tender option bond transaction, in effect, creates exposure for the Acquiring Fund to the entire return of the municipal bonds in the TOB Trust, with a net cash investment by the Acquiring Fund that is less than the value of the municipal bonds in the TOB Trust. This multiplies the positive or negative impact of the municipal bonds return within the Acquiring Fund (thereby creating leverage). The leverage within a TOB Trust depends on the value of the municipal bonds deposited in the TOB Trust relative to the value of the TOB Floaters it issues.
The Acquiring Fund may invest in highly leveraged TOB Residuals. A TOB Residual generally is considered highly leveraged if the principal amount of the TOB Floaters issued by the related TOB Trust exceeds 75% of the principal amount of the municipal bonds owned by the TOB Trust.
The leverage attributable to the Acquiring Funds use of TOB Residuals may be called away on relatively short notice and therefore may be less permanent than more traditional forms of leverage. The TOB Trust may be collapsed without the consent of the Acquiring Fund upon the occurrence of termination events, as defined in the TOB Trust agreements. Upon the occurrence of a termination event, a TOB Trust would be liquidated with the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the remarketing agent of the TOB Floaters and the TOBs Liquidity Provider. Upon certain termination events, the holders of the TOB Floaters would be paid before the TOB Residual holders (i.e., the Acquiring Fund) whereas in other termination events, the holders of TOB Floaters and the TOB Residual holders would be paid pro rata.
TOB Trusts are typically supported by a liquidity facility provided by a TOBs Liquidity Provider that allows the holders of the TOB Floaters to tender their TOB Floaters in exchange for payment of par plus accrued interest on any business day (subject to the non-occurrence of a termination event). The tendered TOB Floaters are remarketed by a remarketing agent. In the event of a failed remarketing, the TOB Trust may draw upon a loan from the TOBs Liquidity Provider to purchase the tendered TOB Floaters. Any loans made by the TOBs Liquidity Provider will be secured by the purchased TOB Floaters held by the TOB Trust and will be subject to an increased interest rate based on number of days the loan is outstanding.
The Acquiring Fund may invest in a TOB Trust on either a non-recourse or recourse basis. When the Acquiring Fund invests in TOB Trusts on a non-recourse basis, and the TOBs Liquidity Provider is required to make a payment under the liquidity facility, the TOBs Liquidity Provider will typically liquidate all or a portion of the municipal bonds held in the TOB Trust and then fund the balance, if any, of the Liquidation Shortfall. If the Acquiring Fund invests in a
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TOB Trust on a recourse basis, it will typically enter into a reimbursement agreement with the TOBs Liquidity Provider pursuant to which the Acquiring Fund is required to reimburse the TOBs Liquidity Provider the amount of any Liquidation Shortfall. As a result, if the Acquiring Fund invests in a recourse TOB Trust, the Acquiring Fund will bear the risk of loss with respect to any Liquidation Shortfall. If multiple BlackRock-advised Funds participate in any such TOB Trust, these losses will be shared ratably, in proportion to their participation in the TOB Trust.
Under accounting rules, Municipal Bonds of the Acquiring Fund that are deposited into a TOB Trust are investments of the Acquiring Fund and are presented on the Acquiring Funds Schedule of Investments and outstanding TOB Floaters issued by a TOB Trust are presented as liabilities in the Acquiring Funds Statement of Assets and Liabilities. Interest income from the underlying Municipal Bonds is recorded by the Acquiring Fund on an accrual basis. Interest expense incurred on the TOB Floaters and other expenses related to remarketing, administration, trustee and other services to a TOB Trust are reported as expenses of the Acquiring Fund. In addition, under accounting rules, loans made to a TOB Trust sponsored by the Acquiring Fund may be presented as loans of the Acquiring Fund in the Acquiring Funds financial statements even if there is no recourse to the Acquiring Funds assets.
For TOB Floaters, generally, the interest rate earned will be based upon the market rates for municipal bonds with maturities or remarketing provisions that are comparable in duration to the periodic interval of the tender option. Since the tender option feature has a shorter term than the final maturity or first call date of the underlying municipal bonds deposited in the TOB Trust, the holder of the TOB Floaters relies upon the terms of the agreement with the financial institution furnishing the liquidity facility as well as the credit strength of that institution. The perceived reliability and creditworthiness, of many major financial institutions, some of which sponsor and/or provide liquidity support to TOB Trusts increases the risk associated with TOB Floaters. This in turn may reduce the desirability of TOB Floaters as investments, which could impair the viability or availability of TOB Trusts.
The use of TOB Residuals will require the Acquiring Fund to earmark or segregate liquid assets in an amount equal to any TOB Floaters, plus any accrued but unpaid interest due on the TOB Floaters, issued by TOB Trusts sponsored by, or on behalf of, the Acquiring Fund that are not owned by the Acquiring Fund. The use of TOB Residuals may also require the Acquiring Fund to earmark or segregate liquid assets in an amount equal to loans provided by the TOBs Liquidity Provider to the TOB Trust to purchase tendered TOB Floaters. The Acquiring Fund reserves the right to modify its asset segregation policies in the future to the extent that such changes are in accordance with applicable regulations or interpretations. Future regulatory requirements or SEC guidance may necessitate more onerous contractual or regulatory requirements, which may increase the costs or reduce the degree of potential economic benefits of TOB Trust transactions or limit the Acquiring Funds ability to enter into or manage TOB Trust transactions.
See Risk Factors and Special ConsiderationsGeneral Risks of Investing in the Acquiring FundTender Option Bond Risk for a description of the risks involved with a TOB issuer.
Credit Facility
The Acquiring Fund is permitted to leverage its portfolio by entering into one or more credit facilities. If the Acquiring Fund enters into a credit facility, the Acquiring Fund may be required to prepay outstanding amounts or incur a penalty rate of interest upon the occurrence of certain events of default. The Acquiring Fund would also likely have to indemnify the lenders under the credit facility against liabilities they may incur in connection therewith. In addition, the Acquiring Fund expects that any credit facility would contain covenants that, among other things, likely would limit the Acquiring Funds ability to pay distributions in certain circumstances, incur additional debt, change certain of its investment policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required by the 1940 Act. The Acquiring Fund may be required to pledge its assets and to maintain a portion of its assets in cash or high-grade securities as a reserve against interest or principal payments and expenses. The Acquiring Fund expects that any credit facility would have customary covenant, negative covenant and default provisions. There can be no assurance that the Acquiring Fund will enter into an agreement for a credit facility, or one on terms and conditions representative of the foregoing, or that additional material terms will not apply. In addition, if entered into, a credit facility may in the future be replaced or refinanced by one or more credit facilities having substantially different terms or by the issuance of preferred shares.
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Derivatives
The Acquiring Fund may enter into derivative transactions that have economic leverage embedded in them. Derivative transactions that the Acquiring Fund may enter into and the risks associated with them are described elsewhere in this Joint Proxy Statement/Prospectus and are also referred to as Strategic Transactions. The Acquiring Fund cannot assure you that investments in derivative transactions that have economic leverage embedded in them will result in a higher return on its common shares.
To the extent the terms of such transactions obligate the Acquiring Fund to make payments, the Acquiring Fund may earmark or segregate cash or liquid assets in an amount at least equal to the current value of the amount then payable by the Acquiring Fund under the terms of such transactions or otherwise cover such transactions in accordance with applicable interpretations of the staff of the SEC. If the current value of the amount then payable by the Acquiring Fund under the terms of such transactions is represented by the notional amounts of such investments, the Acquiring Fund would segregate or earmark cash or liquid assets having a market value at least equal to such notional amounts, and if the current value of the amount then payable by the Acquiring Fund under the terms of such transactions is represented by the market value of the Acquiring Funds current obligations, the Acquiring Fund would segregate or earmark cash or liquid assets having a market value at least equal to such current obligations. To the extent the terms of such transactions obligate the Acquiring Fund to deliver particular securities to extinguish the Acquiring Funds obligations under such transactions the Acquiring Fund may cover its obligations under such transactions by either (i) owning the securities or collateral underlying such transactions or (ii) having an absolute and immediate right to acquire such securities or collateral without additional cash consideration (or, if additional cash consideration is required, having earmarked or segregated an appropriate amount of cash or liquid assets). Such earmarking, segregation or cover is intended to provide the Acquiring Fund with available assets to satisfy its obligations under such transactions. As a result of such earmarking, segregation or cover, the Acquiring Funds obligations under such transactions will not be considered senior securities representing indebtedness for purposes of the 1940 Act, or considered borrowings subject to the Acquiring Funds limitations on borrowings discussed above, but may create leverage for the Acquiring Fund. To the extent that the Acquiring Funds obligations under such transactions are not so earmarked, segregated or covered, such obligations may be considered senior securities representing indebtedness under the 1940 Act and therefore subject to the 300% asset coverage requirement.
These earmarking, segregation or cover requirements can result in the Acquiring Fund maintaining securities positions it would otherwise liquidate, segregating or earmarking assets at a time when it might be disadvantageous to do so or otherwise restrict portfolio management.
Temporary Borrowings
The Acquiring Fund may also borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise might require untimely dispositions of Acquiring Fund securities.
Each Fund has adopted certain investment restrictions that are fundamental, meaning such investment restrictions cannot be changed without approval by holders of a majority of the Funds outstanding voting securities as defined in the 1940 Act. As defined in the 1940 Act, this phrase means the vote of (1) 67% or more of the voting securities present at a meeting, if the holders of more than 50% of the outstanding voting securities are present or represented by proxy, or (2) more than 50% of the outstanding voting securities, whichever is less. Each Fund has also adopted certain non-fundamental investment restrictions. The investment restrictions of the Funds are similar, although there are some differences, and are set forth in Appendix B to this Joint Proxy Statement/Prospectus.
Each Fund is currently classified as a diversified fund under the 1940 Act. This means that each Fund may not purchase securities of an issuer (other than (i) obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities and (ii) securities of other investment companies) if, with respect to 75% of its total assets, (a) more than 5% of the Funds total assets would be invested in securities of that issuer or (b) the Fund would hold more than 10% of the outstanding voting securities of that issuer. With respect to the remaining 25% of its total assets, each Fund can invest more than 5% of its assets in one issuer. Under the 1940 Act, a fund cannot change its classification from diversified to non-diversified without shareholder approval.
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To the extent that a Fund assumes large positions in the securities of a small number of issuers, its yield may fluctuate to a greater extent than that of a diversified company as a result of changes in the financial condition or in the markets assessment of the issuers.
Each Funds VMTP Shares are assigned long-term ratings by Moodys and Fitch. In order to maintain the required ratings, each Fund is required to comply with certain investment quality, diversification and other guidelines established by Moodys and Fitch. Such guidelines may be more restrictive than the restrictions set forth above. Each Fund does not anticipate that such guidelines would have a material adverse effect on its ability to achieve its investment objective. Moodys and Fitch receive fees in connection with their ratings issuances. Each Fund is also subject to certain requirements under the terms of the VMTP Shares. Such requirements may be more restrictive than the restrictions set forth above. Each Fund does not anticipate that such requirements would have a material adverse effect on its ability to achieve its investment objective. Please see Information about the Preferred Shares of the Funds for additional information.
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THE TARGET FUNDS INVESTMENT OBJECTIVES AND POLICIES
BAFs Investment Objective and Policies
BAFs investment objective is to provide current income exempt from federal income taxes, including the alternative minimum tax, and Florida intangible property tax. BAFs investment policies provide that, under normal circumstances, BAF as a fundamental policy will invest at least 80% of its managed assets in Municipal Bonds that pay interest that is exempt from federal income tax, including the alternative minimum tax, and Florida intangible property tax. BAFs investment policies provide that BAF will not invest in any bond if the interest on that bond is subject to the alternative minimum tax. BAF cannot change its investment objectives or its policy of investing 80% of its managed assets in bonds that pay interest that is exempt from federal income tax, including the alternative minimum tax, and Florida intangible property tax, without the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares, including the VMTP Shares, voting together as a single class, and of the holders of a majority of the outstanding preferred shares, including the VMTP Shares, voting as a separate class. A majority of the outstanding means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50% of the outstanding shares, whichever is less. See Description of VMTP SharesVoting Rights for additional information with respect to the voting rights of holders of VMTP Shares.
BAF invests primarily in municipal bonds that are investment grade quality at the time of investment. Investment grade quality means that such bonds are rated, at the time of investment, within the four highest grades (Baa or BBB or better by Moodys, S&P or Fitch) or are unrated but judged to be of comparable quality by the Investment Advisor. Municipal Bonds rated Baa by Moodys are investment grade, but Moodys considers Municipal Bonds rated Baa to have speculative characteristics. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity for issuers of Municipal Bonds that are rated BBB or Baa (or that have equivalent ratings) to make principal and interest payments than is the case for issues of higher grade Municipal Bonds. In the case of short-term notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moodys and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys and BBB and F-3 for Fitch), while considered investment grade, may have certain speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect to the foregoing requirements, the Investment Advisor takes into account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit enhancement.
BAF may invest up to 20% of its managed assets in securities that are rated below investment grade, or are considered by BlackRock to be of comparable quality, at the time of purchase, subject to BAFs other investment policies. Bonds of below investment grade quality (Ba/BB or below) are commonly referred to as junk bonds. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Such securities, sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the issuers ability to pay interest and any required redemption or principal payments and are susceptible to default or decline in market value due to adverse economic and business developments.
The foregoing credit quality policies apply only at the time a security is purchased, and BAF is not required to dispose of a security if a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, the Investment Advisor may consider such factors as the Investment Advisors assessment of the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. Appendix A of the Statement of Additional Information contains a general description of Moodys, S&Ps and Fitchs ratings of municipal bonds. In the event that BAF disposes of a portfolio security subsequent to its being downgraded, BAF may experience a greater risk of loss than if such security had been sold prior to such downgrade.
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BAF may purchase Municipal Bonds that are additionally secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce BAFs income. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the common shares. BAF may purchase insured bonds and may purchase insurance for bonds in its portfolio.
The average maturity of BAFs portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. BAFs portfolio at any given time may include both long-term and intermediate-term Municipal Bonds.
BAFs stated expectation is that it will invest in Municipal Bonds that, in the Investment Advisors opinion, are underrated or undervalued. Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Investment Advisor, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Investment Advisor, are worth more than the value assigned to them in the marketplace. The Investment Advisor may at times believe that bonds associated with a particular municipal market sector (for example, but not limited to electric utilities), or issued by a particular municipal issuer, are undervalued. The Investment Advisor may purchase those bonds for BAFs portfolio because they represent a market sector or issuer that the Investment Advisor considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do not apply to the particular Municipal Bonds that are considered undervalued. BAFs investment in underrated or undervalued Municipal Bonds will be based on the Investment Advisors belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by BAF will generally result in capital gain distributions subject to federal capital gains taxation.
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by BAF.
The State of Florida repealed the Florida Intangible Tax as of January 2007. As a result, on September 12, 2008, the Board of Trustees of BAF voted unanimously to approve BAF investing in Municipal Bonds regardless of geographic location. If Florida were to reinstate the Florida Intangible Tax or adopt a state income tax, however, BAF would be required to realign its portfolio such that substantially all of its assets would be invested in Florida Municipal Bonds or obtain shareholder approval to amend BAFs fundamental investment objective to remove references to the Florida Intangible Tax. There can be no assurance that the State of Florida will not reinstate the Florida Intangible Tax or adopt a state income tax in the future. There can also be no assurance that the reinstatement of the Florida Intangible Tax or the adoption of a state income tax will not have a material adverse effect on BAF or will not impair the ability of BAF to achieve its investment objectives.
Description of Municipal Bonds
Please see The Acquiring Funds InvestmentsDescription of Municipal Bonds for additional information regarding the types of Municipal Bonds in which BAF invests.
When-Issued, Delayed Delivery Securities and Forward Commitment Securities
BAF may purchase Municipal Bonds on a when-issued basis and may purchase or sell Municipal Bonds on a forward commitment basis or on a delayed delivery basis. When such transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. When-issued and forward commitment securities may be sold prior to the settlement date, but BAF will enter into when-issued and forward commitment securities only with the intention of actually receiving or delivering the securities, as the case may be. If BAF disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it can incur a gain or
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loss. At the time BAF entered into a transaction on a when-issued or forward commitment basis, it will segregate with its custodian cash or other liquid high grade debt securities with a value not less than the value of the when-issued or forward commitment securities. The value of these assets will be monitored daily to ensure that their marked to market value will at all times equal or exceed the corresponding obligations of BAF. There is always a risk that the securities may not be delivered and that BAF may incur a loss. Settlements in the ordinary course are not treated by BAF as when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions.
Other Investment Companies
BAF may invest up to 10% of its total assets in securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds of the types in which BAF may invest directly, subject to the Eligible Assets requirements of the Statement of Preferences which limit BAFs investment in such securities to 5% of its managed assets at the time of investment. BAF generally expects to invest in other investment companies either during periods when it has large amounts of uninvested cash or during periods when there is a shortage of attractive, high-yielding Municipal Bonds available in the market. As a shareholder in an investment company, BAF will bear its ratable share of that investment companys expenses, and would remain subject to payment of BAFs advisory and other fees and expenses with respect to assets so invested. The Investment Advisor will take expenses into account when evaluating the investment merits of an investment in an investment company relative to available Municipal Bond investments. In addition, the securities of other investment companies may be leveraged and will therefore be subject to leverage risks. The net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares. Investment companies may have investment policies that differ from those of BAF. In addition, to the extent that BAF invests in other investment companies, BAF will be dependent upon the investment and research abilities of persons other than the Investment Advisor. BAF treats its investments in such open- or closed-end investment companies as investments in Municipal Bonds.
Tax-Exempt Preferred Shares
BAF may invest up to 15% of its total assets in preferred interests of other investment funds that pay dividends that are exempt from federal income tax, including the alternative minimum tax and Florida intangible property tax, subject to the Eligible Assets requirements of the Statement of Preferences which limit BAFs investment in such securities to 5% of its managed assets at the time of investment. A portion of such dividends may be capital gain distributions subject to federal capital gains tax. Such funds in turn invest in Municipal Bonds and other assets that pay interest or make distributions that are exempt from federal income tax, including the alternative minimum tax, such as revenue bonds issued by state or local agencies to fund the development of low- income, multi-family housing. Investment in such tax-exempt preferred shares involves many of the same issues as investing in other open- or closed-end investment companies as discussed above. These investments also have additional risks, including liquidity risk, the absence of regulation governing investment practices, capital structure and leverage, affiliated transactions and other matters, and concentration of investments in particular issuers or industries. Revenue bonds issued by state or local agencies to finance the development of low income, multi-family housing involve special risks in addition to those associated with Municipal Bonds generally, including that the underlying properties may not generate sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds. BAF will treat investments in tax-exempt preferred shares as investments in Municipal Bonds.
Temporary Investments
During temporary defensive periods (e.g., times when, in the Investment Advisors opinion, temporary imbalances of supply and demand or other temporary dislocations in the tax-exempt bond market adversely affect the price at which long-term or intermediate-term Municipal Bonds are available), and in order to keep cash on hand fully invested, BAF may invest up to 100% of its total assets in liquid, short-term investments including high quality, short-term securities which may be either tax-exempt or taxable and securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds of the type in which BAF may invest directly. BAF intends to invest in taxable short-term investments only in the event that suitable tax-exempt temporary investments are not available at reasonable
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prices and yields. BAFs stated expectation is that it will invest only in taxable temporary investments which are U.S. government securities or securities rated within the highest grade by Moodys, S&P or Fitch, and which mature within one year from the date of purchase or carry a variable or floating rate of interest (such short-term obligations being referred to herein as Temporary Investments). Temporary Investments of BAF may include certificates of deposit issued by U.S. banks with assets of at least $1 billion, commercial paper or corporate notes, bonds or debentures with a remaining maturity of one year or less, or repurchase agreements. See Repurchase Agreements. To the extent BAF invests in Temporary Investments, BAF will not at such times be in a position to achieve its investment objective of tax-exempt income.
Short-term taxable fixed income investments include, without limitation, the following:
(1) U.S. Government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or by U.S. Government agencies or instrumentalities. U.S. Government securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. Government provides financial support to such U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. Government, its agencies and instrumentalities do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Certificates of deposit purchased by BAF may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time BAF purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield for BAF during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for BAF to invest temporarily available cash. BAF may enter into repurchase agreements only with respect to obligations of the U.S. Government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in which BAF may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to BAF is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that BAF is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, and if the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, BAF could incur a loss of both principal and interest. The Investment Advisor monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. The Investment Advisor does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to BAF. If the seller were to be subject to a federal bankruptcy proceeding, the ability of BAF to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between BAF and a corporation. There is no secondary market for such notes. However, they are redeemable by BAF at any time. The Investment Advisor will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporations ability to meet all of its financial obligations, because BAFs liquidity might be impaired if the corporation were unable to pay principal and interest on demand. BAFs stated expectation is that its investments in commercial paper will be limited to commercial paper rated in the highest categories by a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
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Tax-exempt temporary investments include various obligations issued by state and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such Municipal Bonds maturing in three years or less from the date of issuance) and municipal commercial paper. Short-term tax-exempt fixed income securities include, without limitation, the following:
Bond Anticipation Notes (BANs) are usually general obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or bonds. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuers access to the long-term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuers capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies could adversely affect the issuers ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes (RANs) are issued by governments or governmental bodies with the expectation that future revenues from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated revenues from another level of government, could adversely affect an issuers ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for specific projects. Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs. These notes may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (municipal paper) represents very short-term unsecured, negotiable promissory notes, issued by states, municipalities and their agencies. Payment of principal and interest on issues of municipal paper may be made from various sources, to the extent the funds are available therefrom. Maturities on municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of municipal paper.
Certain Municipal Bonds may carry variable or floating rates of interest whereby the rate of interest is not fixed but varies with changes in specified market rates or indices, such as a bank prime rate or tax-exempt money market indices.
While the various types of notes described above as a group represent the major portion of the tax-exempt note market, other types of notes are available in the marketplace and BAF may invest in such other types of notes to the extent permitted under its investment objective, policies and limitations. Such notes may be issued for different purposes and may be secured differently from those mentioned above.
Strategic Transactions and Other Management Techniques
BAF may use a variety of other investment management techniques and instruments. BAF may purchase and sell futures contracts, enter into various interest rate transactions and may purchase and sell exchange- listed and over-the-counter put and call options on securities, financial indices and futures contracts (collectively, Strategic Transactions). These Strategic Transactions may be used for duration management and other risk management to attempt to protect against possible changes in the market value of BAFs portfolio resulting from trends in the debt
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securities markets and changes in interest rates, to protect BAFs unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes, to establish a position in the securities markets as a temporary substitute for purchasing particular securities and to enhance income or gain. There is no particular strategy that requires use of one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The Strategic Transactions are described below. The ability of BAF to use them successfully will depend on the Investment Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Inasmuch as any obligations of BAF that arise from the use of Strategic Transactions will be covered by segregated liquid high grade assets or offsetting transactions, BAF and the Investment Advisor believes such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. Certain provisions of the Internal Revenue Code of 1986 may restrict or affect the ability of BAF to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to taxable income and have certain other consequences.
Interest Rate Transactions. BAF may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. BAF expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio as a duration management technique or to protect against any increase in the price of securities BAF anticipates purchasing at a later date. BAF will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. BAF may not sell interest rate caps or floors that it does not own. Interest rate swaps involve the exchange by BAF with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor.
BAF may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, and will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with BAF receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. BAF will accrue the net amount of the excess, if any, of BAFs obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate with a custodian an amount of cash or liquid high grade securities having an aggregate net asset value at all times at least equal to the accrued excess. BAF may not enter into any interest rate swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in the highest rating category of at least one nationally recognized statistical rating organization at the time of entering into such transaction. If there is a default by the other party to such a transaction, BAF will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps.
Credit Default Swap Agreements. BAF may enter into credit default swap agreements for hedging purposes or to seek to increase its return. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by BAF. The protection buyer in a credit default contract may be obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the contract, provided that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount (the difference between the market value of the reference obligation and its par value), if the swap is cash settled. BAF may be either the buyer or seller in the transaction. If BAF is a buyer and no credit event occurs, BAF may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, BAF generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six (6) months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As the seller, BAF would effectively add leverage to its portfolio because, in addition to its total net assets, BAF would be subject to investment exposure on the notional amount of the swap.
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Credit default swap agreements involve greater risks than if BAF had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. BAF expects to enter into credit default swap agreements only with counterparties who are rated investment grade quality by at least one nationally recognized statistical rating organization at the time of entering into such transaction or whose creditworthiness is believed by the Investment Advisor to be equivalent to such rating. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. A seller of a credit default swap or similar instrument is exposed to many of the same risks of leverage since, if a credit event occurs, the seller may be required to pay the buyer the full notional value of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations. BAFs obligations under a credit default swap agreement will be accrued daily (offset against any amounts owing to BAF). BAF will at all times segregate with its custodian in connection with each such transaction liquid securities or cash with a value at least equal to BAFs exposure (any accrued but unpaid net amounts owed by BAF to any counterparty), on a marked-to-market basis (as calculated pursuant to requirements of the SEC). Such segregation will ensure that BAF has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of BAFs portfolio. Such segregation will not limit BAFs exposure to loss.
Futures Contracts and Options on Futures Contracts. BAF may also enter into contracts for the purchase or sale for future delivery (futures contracts) of debt securities, aggregates of debt securities or indices or prices thereof, other financial indices and U.S. government debt securities or options on the above. BAF will ordinarily engage in such transactions only for bona fide hedging, risk management (including duration management) and other portfolio management purposes. However, BAF is also permitted to enter into such transactions for non-hedging purposes to enhance income or gain, in accordance with the rules and regulations of the CFTC, which currently provide that no such transaction may be entered into if at such time more than 5% of BAFs net assets would be posted as initial margin and premiums with respect to such non-hedging transactions.
Calls on Securities Indices and Futures Contracts. BAF may sell or purchase call options (calls) on Municipal Bonds and indices based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A call gives the purchaser of the option the right to buy, and obligates the seller to sell, the underlying security, futures contract or index at the exercise price at any time or at a specified time during the option period. All such calls sold by BAF must be covered as long as the call is outstanding (i.e., BAF must own the securities or futures contract subject to the call or other securities acceptable for applicable escrow requirements). A call sold by BAF exposes BAF during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security, index or futures contract and may require BAF to hold a security of futures contract which it might otherwise have sold. The purchase of a call gives BAF the right to buy a security, futures contract or index at a fixed price. Calls on futures on Municipal Bonds must also be covered by deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy BAFs obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. BAF may purchase put options (puts) that relate to Municipal Bonds (whether or not it holds such securities in its portfolio), indices or futures contracts. BAF may also sell puts on Municipal Bonds, indices or futures contracts on such securities if BAFs contingent obligations on such puts are secured by segregated assets consisting of cash or liquid high grade debt securities having a value not less than the exercise price. BAF may not sell puts if, as a result, more than 50% of BAFs assets would be required to cover its potential obligations under its hedging and other investment transactions. In selling puts, there is a risk that BAF may be required to buy the underlying security at a price higher than the current market price.
Municipal Market Data Rate Locks. BAF may purchase and sell Municipal Market Data Rate Locks (MMD Rate Locks). An MMD Rate Lock permits BAF to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect against any increase in the price of securities to be purchased at a later date. BAF will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance
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income or gain. An MMD Rate Lock is a contract between BAF and an MMD Rate Lock provider pursuant to which the parties agree to make payments to each other on a notional amount, contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or below a specified level on the expiration date of the contract. For example, if BAF buys an MMD Rate Lock and the Municipal Market Data AAA General Obligation Scale is below the specified level on the expiration date, the counterparty to the contract will make a payment to BAF equal to the specified level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA General Obligation Scale is above the specified level on the expiration date, BAF will make a payment to the counterparty equal to the actual level minus the specified level multiplied by the notional amount of the contract. In entering into MMD Rate Locks, there is a risk that municipal yields will move in the direction opposite of the direction anticipated by BAF. BAF may not enter into MMD Rate Locks if, as a result, more than 50% of its total assets would be required to cover its potential obligations under its hedging and other investment transactions.
Short Sales
BAF may make short sales of Municipal Bonds. A short sale is a transaction in which BAF sells a security it does not own in anticipation that the market price of that security will decline. BAF may make short sales to hedge positions, for duration and risk management, in order to maintain portfolio flexibility or to enhance income or gain.
When BAF makes a short sale, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. BAF may have to pay a fee to borrow particular securities and is often obligated to pay over any payments received on such borrowed securities.
BAFs obligation to replace the borrowed security are required to be secured by collateral deposited with the broker-dealer, usually cash, U.S. government securities or other liquid securities. BAF will also be required to segregate similar collateral with its custodian to the extent, if any, necessary so that the aggregate collateral value is at all times at least equal to the current market value of the security sold short. Depending on arrangements made with the broker-dealer from which it borrowed the security regarding payment over of any payments received by BAF on such security, BAF may not receive any payments (including interest) on its collateral deposited with such broker-dealer.
If the price of the security sold short increases between the time of the short sale and the time BAF replaces the borrowed security, BAF will incur a loss; conversely, if the price declines, BAF will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. Although BAFs gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
BAF may not make a short sale if, after giving effect to such sale, the market value of all securities sold short exceeds 25% of the value of its total assets or BAFs aggregate short sales of a particular class of securities exceeds 25% of the outstanding securities of that class. BAF may also make short sales against the box without respect to such limitations. In this type of short sale, at the time of the sale, BAF owns or has the immediate and unconditional right to acquire at no additional cost the identical security.
VRDOs
VRDOs are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments typically are based upon SIFMA or some other appropriate interest rate adjustment index. BAF may invest in all types of tax exempt instruments currently outstanding or to be issued in the future which satisfy its short-term maturity and quality standards. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities.
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Restricted and Illiquid Securities
Certain of BAFs investments may be illiquid. Illiquid securities are subject to legal or contractual restrictions on disposition or lack of an established secondary trading market. The sale of restricted and illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the- counter markets. Restricted securities may sell at a price lower than similar securities that are not subject to restrictions on resale.
Repurchase Agreements
As temporary investments, BAF may invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the seller of securities agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during BAFs holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. BAF may only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of the Investment Advisor, present minimal credit risk. The risk to BAF is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but BAF might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by BAF may be delayed or limited. The Investment Advisor will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, the Investment Advisor will demand additional collateral from the issuer to increase the value of the collateral to at least that of the repurchase price, including interest.
Reverse Repurchase Agreements
BAF may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of securities held by BAF with an agreement by BAF to repurchase the securities at an agreed upon price, date and interest payment. At the time BAF enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the custodian containing liquid instruments having a value not less than the repurchase price (including accrued interest). If BAF establishes and maintains such a segregated account, a reverse repurchase agreement will not be considered a borrowing by BAF; however, under certain circumstances in which BAF does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of BAFs limitation on borrowings. The use by BAF of reverse repurchase agreements involves many of the same risks of leverage since the proceeds derived from such reverse repurchase agreements may be invested in additional securities. Reverse repurchase agreements involve the risk that the market value of the securities acquired in connection with the reverse repurchase agreement may decline below the price of the securities BAF has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by BAF in connection with the reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce BAFs obligation to repurchase the securities, and BAFs use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, BAF would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement.
Borrowings
BAF reserves the right to borrow funds to the extent permitted as described under the below caption Investment Restrictions. The proceeds of borrowings may be used for any valid purpose including, without limitation, liquidity, investments and repurchases of shares of BAF. Borrowing is a form of leverage and, in that respect, entails risks comparable to those associated with the issuance of Preferred Shares.
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Lending of Securities
See The Acquiring Funds InvestmentsLending of Securities for a discussion of the securities lending arrangements applicable to BAF.
BBKs Investment Objective and Policies
BBKs investment objective is to provide current income exempt from regular federal income taxes. As a fundamental policy, under normal market conditions, BBK will invest at least 80% of its managed assets in Municipal Bonds, the interest of which is exempt from regular federal income tax. BBK cannot change its investment objective or the foregoing fundamental policy without the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares, including the VMTP Shares, voting together as a single class, and of the holders of a majority of the outstanding preferred shares, including the VMTP Shares, voting as a separate class. A majority of the outstanding means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50% of the outstanding shares, whichever is less. See Description of VMTP SharesVoting Rights for additional information with respect to the voting rights of holders of VMTP Shares.
BBKs investment policies provide that, under normal market conditions, BBK will invest at least 80% of its managed assets in investment grade quality Municipal Bonds. Investment grade quality means that such bonds are rated, at the time of investment, within the four highest grades (Baa or BBB or better by Moodys, S&P or Fitch) or are unrated but judged to be of comparable quality by the Investment Advisor. Municipal Bonds rated Baa by Moodys are investment grade, but Moodys considers Municipal Bonds rated Baa to have speculative characteristics. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity for issuers of Municipal Bonds that are rated BBB or Baa (or that have equivalent ratings) to make principal and interest payments than is the case for issues of higher grade Municipal Bonds. In the case of short-term notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moodys and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys and BBB and F-3 for Fitch), while considered investment grade, may have certain speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect to the foregoing requirements, the Investment Advisor takes into account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit enhancement.
BBK may invest up to 20% of its managed assets in Municipal Bonds that are rated, at the time of investment, Ba/BB or B by Moodys, S&P or Fitch or that are unrated but judged to be of comparable quality by the Investment Advisor. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Such securities, sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the issuers ability to pay interest and any required redemption or principal payments and are susceptible to default or decline in market value due to adverse economic and business developments.
The foregoing credit quality policies apply only at the time a security is purchased, and BBK is not required to dispose of a security if a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, the Investment Advisor may
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consider such factors as the Investment Advisors assessment of the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. Appendix A of the Statement of Additional Information contains a general description of Moodys, S&Ps and Fitchs ratings of municipal bonds. In the event that BBK disposes of a portfolio security subsequent to its being downgraded, BBK may experience a greater risk of loss than if such security had been sold prior to such downgrade.
BBK may also invest in securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds of the types in which BBK may invest directly and in tax-exempt preferred shares that pay dividends that are exempt from regular federal income tax. See Other Investment Companies, and Tax-Exempt Preferred Shares. In addition, BBK may purchase Municipal Bonds that are additionally secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce BBKs income. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the common shares. BBK may purchase insured bonds and may purchase insurance for bonds in its portfolio.
BBK may invest in certain tax exempt securities classified as private activity bonds (or industrial development bonds, under pre-1986 law) (PABs) (in general, bonds that benefit non-governmental entities) that may subject certain investors in BBK to an alternative minimum tax. The percentage of BBKs total assets invested in PABs will vary from time to time. BBK has not established any limit on the percentage of its portfolio that may be invested in Municipal Bonds subject to the federal alternative minimum tax provisions of federal tax law, and BBK expects that a portion of the income it produces will be includable in alternative minimum taxable income. VMTP Shares therefore would not ordinarily be a suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing VMTP Shares. The suitability of an investment in VMTP Shares will depend upon a comparison of the after-tax yield likely to be provided from BBK with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investors tax position. Special considerations may apply to corporate investors.
The average maturity of BBKs portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. BBKs portfolio at any given time may include both long-term and intermediate-term Municipal Bonds.
BBKs stated expectation is that it will invest in Municipal Bonds that, in the Investment Advisors opinion, are underrated or undervalued. Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Investment Advisor, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Investment Advisor, are worth more than the value assigned to them in the marketplace. The Investment Advisor may at times believe that bonds associated with a particular municipal market sector (for example, but not limited to electric utilities), or issued by a particular municipal issuer, are undervalued. The Investment Advisor may purchase those bonds for BBKs portfolio because they represent a market sector or issuer that the Investment Advisor considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do not apply to the particular Municipal Bonds that are considered undervalued. BBKs investment in underrated or undervalued Municipal Bonds will be based on the Investment Advisors belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by BBK will generally result in capital gain distributions subject to federal capital gains taxation.
BBK ordinarily does not intend to realize significant investment income not exempt from federal income tax. From time to time, BBK may realize taxable capital gains.
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Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by BBK.
Description of Municipal Bonds
See The Acquiring Funds InvestmentsDescription of Municipal Bonds for additional information regarding the types of Municipal Bonds in which BBK invests.
When-Issued and Forward Commitment Securities
BBK may purchase Municipal Bonds on a when-issued basis and may purchase or sell Municipal Bonds on a forward commitment basis. When such transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. When-issued and forward commitment securities may be sold prior to the settlement date, but BBK will enter into when-issued and forward commitment securities only with the intention of actually receiving or delivering the securities, as the case may be. If BBK disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it can incur a gain or loss. At the time BBK entered into a transaction on a when-issued or forward commitment basis, it will segregate with its custodian cash or other liquid high grade debt securities with a value not less than the value of the when-issued or forward commitment securities. The value of these assets will be monitored daily to ensure that their marked to market value will at all times equal or exceed the corresponding obligations of BBK. There is always a risk that the securities may not be delivered and that BBK may incur a loss. Settlements in the ordinary course are not treated by BBK as when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions.
Other Investment Companies
BBK may invest up to 10% of its total assets in securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds of the types in which BBK may invest directly, subject to the Eligible Assets requirements of the Statement of Preferences which limit BBKs investment in such securities to 5% of its managed assets at the time of investment. BBK generally expects to invest in other investment companies either during periods when it has large amounts of uninvested cash or during periods when there is a shortage of attractive, high-yielding Municipal Bonds available in the market. As a shareholder in an investment company, BBK will bear its ratable share of that investment companys expenses, and would remain subject to payment of BBKs advisory and other fees and expenses with respect to assets so invested. The Investment Advisor will take expenses into account when evaluating the investment merits of an investment in an investment company relative to available Municipal Bond investments. In addition, the securities of other investment companies may be leveraged and will therefore be subject to leverage risks. The net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares. Investment companies may have investment policies that differ from those of BBK. In addition, to the extent that BBK invests in other investment companies, BBK will be dependent upon the investment and research abilities of persons other than the Investment Advisor. BBK treats its investments in such open- or closed-end investment companies as investments in Municipal Bonds.
Tax-Exempt Preferred Shares
BBK may invest up to 15% of its total assets in preferred interests of other investment funds that pay dividends that are exempt from regular federal income tax, subject to the Eligible Assets requirements of the Statement of Preferences which limit BBKs investment in such securities to 5% of its managed assets at the time of investment. A portion of such dividends may be capital gain distributions subject to federal capital gains tax. Such funds in turn invest in Municipal Bonds and other assets that pay interest or make distributions that are exempt from regular federal income tax, such as revenue bonds issued by state or local agencies to fund the development of low-income, multi-family housing. Investment in such tax-exempt preferred shares involves many of the same issues as investing in other open- or closed-end investment companies as discussed above. These investments also have additional risks, including liquidity risk, the absence of regulation governing investment practices, capital structure and leverage, affiliated transactions and other matters, and concentration of investments in particular issuers or industries. Revenue bonds issued by state or local agencies to finance the development of low-income, multi-family housing involve special risks
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in addition to those associated with Municipal Bonds generally, including that the underlying properties may not generate sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds. BBK will treat investments in tax-exempt preferred shares as investments in Municipal Bonds.
Temporary Investments
During temporary defensive periods (e.g., times when, in Advisors opinion, temporary imbalances of supply and demand or other temporary dislocations in the tax-exempt bond market adversely affect the price at which long-term or intermediate-term Municipal Bonds are available), and in order to keep cash on hand fully invested, BBK may invest up to 100% of its total assets in liquid, short-term investments including high quality, short-term securities which may be either tax-exempt or taxable and securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds of the type in which BBK may invest directly. BBK intends to invest in taxable short-term investments only in the event that suitable tax-exempt temporary investments are not available at reasonable prices and yields. BBKs stated expectation is that it will invest only in taxable temporary investments which are U.S. government securities or securities rated within the highest grade by Moodys, S&P or Fitch, and which mature within one year from the date of purchase or carry a variable or floating rate of interest (such short-term obligations being referred to herein as Temporary Investments). Temporary Investments of BBK may include certificates of deposit issued by U.S. banks with assets of at least $1 billion, commercial paper or corporate notes, bonds or debentures with a remaining maturity of one year or less, or repurchase agreements. See Repurchase Agreements. To the extent BBK invests in Temporary Investments, BBK will not at such times be in a position to achieve its investment objective of tax-exempt income.
Short-term taxable fixed income investments include, without limitation, the following:
(1) U.S. Government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or by U.S. Government agencies or instrumentalities. U.S. Government securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. Government provides financial support to such U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. Government, its agencies and instrumentalities do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Certificates of deposit purchased by BBK may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time BBK purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield for BBK during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for BBK to invest temporarily available cash. BBK may enter into repurchase agreements only with respect to obligations of the U.S. Government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in which BBK may invest. Repurchase agreements
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may be considered loans to the seller, collateralized by the underlying securities. The risk to BBK is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that BBK is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, and if the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, BBK could incur a loss of both principal and interest. The Investment Advisor monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. The Investment Advisor does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to BBK. If the seller were to be subject to a federal bankruptcy proceeding, the ability of BBK to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between BBK and a corporation. There is no secondary market for such notes. However, they are redeemable by BBK at any time. The Investment Advisor will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporations ability to meet all of its financial obligations, because BBKs liquidity might be impaired if the corporation were unable to pay principal and interest on demand. BBKs stated expectation is that its investments in commercial paper will be limited to commercial paper rated in the highest categories by a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
Tax-exempt temporary investments include various obligations issued by state and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such Municipal Bonds maturing in three years or less from the date of issuance) and municipal commercial paper. Short-term tax-exempt fixed income securities include, without limitation, the following:
Bond Anticipation Notes (BANs) are usually general obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or bonds. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuers access to the long-term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuers capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies could adversely affect the issuers ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes (RANs) are issued by governments or governmental bodies with the expectation that future revenues from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated revenues from another level of government, could adversely affect an issuers ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for specific projects. Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs. These notes may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (municipal paper) represents very short-term unsecured, negotiable promissory notes, issued by states, municipalities and their agencies. Payment of principal and interest on issues of municipal paper may be made from various sources, to the extent the funds are available therefrom. Maturities on municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of municipal paper.
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Certain Municipal Bonds may carry variable or floating rates of interest whereby the rate of interest is not fixed but varies with changes in specified market rates or indices, such as a bank prime rate or tax-exempt money market indices.
While the various types of notes described above as a group represent the major portion of the tax-exempt note market, other types of notes are available in the marketplace and BBK may invest in such other types of notes to the extent permitted under its investment objective, policies and limitations. Such notes may be issued for different purposes and may be secured differently from those mentioned above.
Strategic Transactions and Other Management Techniques
BBK may use a variety of other investment management techniques and instruments. BBK may purchase and sell futures contracts, enter into various interest rate transactions and may purchase and sell exchange- listed and over-the-counter put and call options on securities, financial indices and futures contracts (collectively, Strategic Transactions). These Strategic Transactions may be used for duration management and other risk management to attempt to protect against possible changes in the market value of BBKs portfolio resulting from trends in the debt securities markets and changes in interest rates, to protect BBKs unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes, to establish a position in the securities markets as a temporary substitute for purchasing particular securities and to enhance income or gain.
There is no particular strategy that requires use of one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The Strategic Transactions are described below. The ability of BBK to use them successfully will depend on the Investment Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Inasmuch as any obligations of BBK that arise from the use of Strategic Transactions will be covered by segregated liquid high grade assets or offsetting transactions, BBK and the Investment Advisor believe such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. Certain provisions of the Internal Revenue Code of 1986 may restrict or affect the ability of BBK to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to taxable income and have certain other consequences.
Interest Rate Transactions. BBK may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. BBK expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio as a duration management technique or to protect against any increase in the price of securities BBK anticipates purchasing at a later date. BBK will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. BBK may not sell interest rate caps or floors that it does not own. Interest rate swaps involve the exchange by BBK with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor.
BBK may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, and will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with BBK receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. BBK will accrue the net amount of the excess, if any, of BBKs obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate with a custodian an amount of cash or liquid high grade securities having an aggregate net asset value at all times at least equal to the accrued excess. BBK may not enter into any interest rate swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in the highest rating category of at least one nationally recognized statistical rating organization at the time of entering into such transaction. If there is a default by the other party to such a transaction, BBK will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a
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large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps.
Credit Default Swap Agreements. BBK may enter into credit default swap agreements for hedging purposes or to seek to increase its return. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by BBK. The protection buyer in a credit default contract may be obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the contract, provided that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount (the difference between the market value of the reference obligation and its par value), if the swap is cash settled. BBK may be either the buyer or seller in the transaction. If BBK is a buyer and no credit event occurs, BBK may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, BBK generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six (6) months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As the seller, BBK would effectively add leverage to its portfolio because, in addition to its total net assets, BBK would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if BBK had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. BBK expects to enter into credit default swap agreements only with counterparties who are rated investment grade quality by at least one nationally recognized statistical rating organization at the time of entering into such transaction or whose creditworthiness is believed by the Investment Advisor to be equivalent to such rating. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. A seller of a credit default swap or similar instrument is exposed to many of the same risks of leverage since, if a credit event occurs, the seller may be required to pay the buyer the full notional value of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations. BBKs obligations under a credit default swap agreement will be accrued daily (offset against any amounts owing to BBK). BBK will at all times segregate with its custodian in connection with each such transaction liquid securities or cash with a value at least equal to BBKs exposure (any accrued but unpaid net amounts owed by BBK to any counterparty), on a marked-to-market basis (as calculated pursuant to requirements of the SEC). Such segregation will ensure that BBK has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of BBKs portfolio. Such segregation will not limit BBKs exposure to loss.
Futures Contracts and Options on Futures Contracts. BBK may also enter into contracts for the purchase or sale for future delivery (futures contracts) of debt securities, aggregates of debt securities or indices or prices thereof, other financial indices and U.S. government debt securities or options on the above. BBK will ordinarily engage in such transactions only for bona fide hedging, risk management (including duration management) and other portfolio management purposes. However, BBK is also permitted to enter into such transactions for non-hedging purposes to enhance income or gain, in accordance with the rules and regulations of the CFTC, which currently provide that no such transaction may be entered into if at such time more than 5% of BBKs net assets would be posted as initial margin and premiums with respect to such non-hedging transactions.
Calls on Securities Indices and Futures Contracts. BBK may sell or purchase call options (calls) on Municipal Bonds and indices based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A call gives the purchaser of the option the right to buy, and obligates the seller to sell, the underlying security, futures contract or index at the exercise price at any time or at a specified time during the option period. All such calls sold by BBK must be covered as long as the call is outstanding (i.e., BBK must own the securities or futures contract subject to the call or other securities acceptable for applicable escrow requirements). A call sold by BBK exposes BBK during the term of the option to possible loss of opportunity
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to realize appreciation in the market price of the underlying security, index or futures contract and may require BBK to hold a security of futures contract which it might otherwise have sold. The purchase of a call gives BBK the right to buy a security, futures contract or index at a fixed price. Calls on futures on Municipal Bonds must also be covered by deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy BBKs obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. BBK may purchase put options (puts) that relate to Municipal Bonds (whether or not it holds such securities in its portfolio), indices or futures contracts. BBK may also sell puts on Municipal Bonds, indices or futures contracts on such securities if BBKs contingent obligations on such puts are secured by segregated assets consisting of cash or liquid high grade debt securities having a value not less than the exercise price. BBK may not sell puts if, as a result, more than 50% of BBKs assets would be required to cover its potential obligations under its hedging and other investment transactions. In selling puts, there is a risk that BBK may be required to buy the underlying security at a price higher than the current market price.
Municipal Market Data Rate Locks. BBK may purchase and sell Municipal Market Data Rate Locks (MMD Rate Locks). An MMD Rate Lock permits BBK to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect against any increase in the price of securities to be purchased at a later date. BBK will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. An MMD Rate Lock is a contract between BBK and an MMD Rate Lock provider pursuant to which the parties agree to make payments to each other on a notional amount, contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or below a specified level on the expiration date of the contract. For example, if BBK buys an MMD Rate Lock and the Municipal Market Data AAA General Obligation Scale is below the specified level on the expiration date, the counterparty to the contract will make a payment to BBK equal to the specified level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA General Obligation Scale is above the specified level on the expiration date, BBK will make a payment to the counterparty equal to the actual level minus the specified level multiplied by the notional amount of the contract. In entering into MMD Rate Locks, there is a risk that municipal yields will move in the direction opposite of the direction anticipated by BBK. BBK may not enter into MMD Rate Locks if, as a result, more than 50% of its total assets would be required to cover its potential obligations under its hedging and other investment transactions.
Short Sales
BBK may make short sales of Municipal Bonds. A short sale is a transaction in which BBK sells a security it does not own in anticipation that the market price of that security will decline. BBK may make short sales to hedge positions, for duration and risk management, in order to maintain portfolio flexibility or to enhance income or gain.
When BBK makes a short sale, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. BBK may have to pay a fee to borrow particular securities and is often obligated to pay over any payments received on such borrowed securities.
BBKs obligation to replace the borrowed security are required to be secured by collateral deposited with the broker-dealer, usually cash, U.S. government securities or other liquid securities. BBK will also be required to segregate similar collateral with its custodian to the extent, if any, necessary so that the aggregate collateral value is at all times at least equal to the current market value of the security sold short. Depending on arrangements made with the broker-dealer from which it borrowed the security regarding payment over of any payments received by BBK on such security, BBK may not receive any payments (including interest) on its collateral deposited with such broker-dealer.
If the price of the security sold short increases between the time of the short sale and the time BBK replaces the borrowed security, BBK will incur a loss; conversely, if the price declines, BBK will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. Although BBKs gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
BBK may not make a short sale if, after giving effect to such sale, the market value of all securities sold short exceeds 25% of the value of its total assets or BBKs aggregate short sales of a particular class of securities exceeds 25% of
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the outstanding securities of that class. BBK may also make short sales against the box without respect to such limitations. In this type of short sale, at the time of the sale, BBK owns or has the immediate and unconditional right to acquire at no additional cost the identical security.
VRDOs
VRDOs are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments typically are based upon SIFMA or some other appropriate interest rate adjustment index. BBK may invest in all types of tax exempt instruments currently outstanding or to be issued in the future which satisfy its short-term maturity and quality standards. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities.
Restricted and Illiquid Securities
Certain of BBKs investments may be illiquid. Illiquid securities are subject to legal or contractual restrictions on disposition or lack of an established secondary trading market. The sale of restricted and illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the-counter markets. Restricted securities may sell at a price lower than similar securities that are not subject to restrictions on resale.
Repurchase Agreements
As temporary investments, BBK may invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the seller of securities agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during BBKs holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. BBK may only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of the Investment Advisor, present minimal credit risk. The risk to BBK is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but BBK might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by BBK may be delayed or limited. The Investment Advisor will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, the Investment Advisor will demand additional collateral from the issuer to increase the value of the collateral to at least that of the repurchase price, including interest.
Reverse Repurchase Agreements
BBK may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of securities held by BBK with an agreement by BBK to repurchase the securities at an agreed upon price, date and interest payment. At the time BBK enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the custodian containing liquid instruments having a value not less than the repurchase price (including accrued interest). If BBK establishes and maintains such a segregated account, a reverse repurchase agreement will not be considered a borrowing by BBK; however, under certain circumstances in which BBK does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of BBKs
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limitation on borrowings. The use by BBK of reverse repurchase agreements involves many of the same risks of leverage since the proceeds derived from such reverse repurchase agreements may be invested in additional securities. Reverse repurchase agreements involve the risk that the market value of the securities acquired in connection with the reverse repurchase agreement may decline below the price of the securities BBK has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by BBK in connection with the reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce BBKs obligation to repurchase the securities, and BBKs use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, BBK would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement.
Borrowings
BBK reserves the right to borrow funds to the extent permitted as described under the below caption Investment Restrictions. The proceeds of borrowings may be used for any valid purpose including, without limitation, liquidity, investments and repurchases of shares of BBK. Borrowing is a form of leverage and, in that respect, entails risks comparable to those associated with the issuance of Preferred Shares.
Lending of Securities
See The Acquiring Funds InvestmentsLending of Securities for a discussion of the securities lending arrangements applicable to BBK.
MUHs Investment Objectives and Policies
MUHs investment objective is to provide stockholders with current income exempt from federal income taxes. There can be no assurance that MUHs investment objective will be realized. MUHs investment objective may not be changed without the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares, including the VMTP Shares, voting together as a single class, and of the holders of a majority of the outstanding preferred shares, including the VMTP Shares, voting as a separate class. A majority of the outstanding means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50% of the outstanding shares, whichever is less. See Description of VMTP SharesVoting Rights for additional information with respect to the voting rights of holders of VMTP Shares.
MUHs investment policies provide that it will invest primarily in a portfolio of long-term, investment grade municipal obligations, the interest on which, in the opinion of bond counsel to the issuer, is exempt from federal income taxes (except that the interest may be subject to the alternative minimum tax). MUHs investment policies provide that, at all times, except during temporary defensive periods, it will invest at least 80% of its total assets in a portfolio of obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities, paying interest that, in the opinion of bond counsel to the issuer, is exempt from federal income taxes (Municipal Bonds).
MUHs investment policies provide that it will invest at least 75% of its total assets in a portfolio of Municipal Bonds that are commonly referred to as investment grade securities, which are obligations rated at the time of purchase within the four highest quality ratings as determined by either Moodys Investors Service, Inc. (Moodys) (currently Aaa, Aa, A and Baa), Standard & Poors (S&P) (currently AAA, AA, A and BBB) or Fitch Ratings (Fitch) (currently AAA, AA, A and BBB). In the case of short-term notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moodys and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys and BBB and F-3 for Fitch), while considered investment grade, may have certain speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect
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to the foregoing requirements, the Investment Advisor takes into account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit enhancement. If unrated, such securities will possess creditworthiness comparable, in the opinion of the Investment Advisor, to other obligations in which MUH may invest.
MUH may invest up to 25% of its total assets in Municipal Bonds that are rated below Baa by Moodys or below BBB by S&P or Fitch or, if unrated, are considered by the Investment Advisor to possess similar credit characteristics. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Such securities, sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the issuers ability to pay interest and any required redemption or principal payments and are susceptible to default or decline in market value due to adverse economic and business developments.
The foregoing credit quality policies apply only at the time a security is purchased, and MUH is not required to dispose of a security if a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, the Investment Advisor may consider such factors as the Investment Advisors assessment of the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. Appendix A of the Statement of Additional Information contains a general description of Moodys, S&Ps and Fitchs ratings of municipal bonds. In the event that MUH disposes of a portfolio security subsequent to its being downgraded, MUH may experience a greater risk of loss than if such security had been sold prior to such downgrade.
MUH may also purchase Municipal Bonds that are additionally secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce MUHs income. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the common shares. MUH may purchase insured bonds and may purchase insurance for bonds in its portfolio.
MUH may invest in certain tax exempt securities classified as private activity bonds (or industrial development bonds, under pre-1986 law) (in general, bonds that benefit non-governmental entities) that may subject certain investors in MUH to an alternative minimum tax. The percentage of MUHs total assets invested in private activity bonds will vary from time to time. MUH has not established any limit on the percentage of its portfolio that may be invested in Municipal Bonds subject to the federal alternative minimum tax provisions of federal tax law, and MUH expects that a portion of the income it produces will be includable in alternative minimum taxable income. VMTP Shares therefore would not ordinarily be a suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing VMTP Shares. The suitability of an investment in VMTP Shares will depend upon a comparison of the after-tax yield likely to be provided from MUH with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investors tax position. Special considerations may apply to corporate investors.
MUH also may not invest more than 25% of its total assets (taken at market value at the time of each investment) in Municipal Bonds whose issuers are located in the same state.
The average maturity of MUHs portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. MUHs portfolio at any given time may include long-term, intermediate-term and short-term Municipal Bonds.
MUHs stated expectation is that it will invest in Municipal Bonds that, in the Investment Advisors opinion, are underrated or undervalued. Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Investment Advisor, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Investment Advisor, are worth more than the value assigned to them in the marketplace. The Investment Advisor may at times believe that bonds associated with a particular municipal market sector (for example, but not
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limited to electric utilities), or issued by a particular municipal issuer, are undervalued. The Investment Advisor may purchase those bonds for MUHs portfolio because they represent a market sector or issuer that the Investment Advisor considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do not apply to the particular Municipal Bonds that are considered undervalued. MUHs investment in underrated or undervalued Municipal Bonds will be based on the Investment Advisors belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by MUH will generally result in capital gain distributions subject to federal capital gains taxation.
MUH ordinarily does not intend to realize significant investment income not exempt from federal income tax. From time to time, MUH may realize taxable capital gains.
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by MUH.
Description of Municipal Bonds
See The Acquiring Funds InvestmentsDescription of Municipal Bonds for additional information regarding the types of Municipal Bonds in which MUH invests.
When-Issued, Delayed Delivery Securities and Forward Commitment Securities
MUH may purchase Municipal Bonds on a when-issued basis and may purchase or sell Municipal Bonds on a forward commitment basis or on a delayed delivery basis. When such transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. When-issued and forward commitment securities may be sold prior to the settlement date, but MUH will enter into when-issued and forward commitment securities only with the intention of actually receiving or delivering the securities, as the case may be. If MUH disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it can incur a gain or loss. At the time MUH entered into a transaction on a when-issued or forward commitment basis, it will segregate with its custodian cash or other liquid high grade debt securities with a value not less than the value of the when-issued or forward commitment securities. The value of these assets will be monitored daily to ensure that their marked to market value will at all times equal or exceed the corresponding obligations of MUH. There is always a risk that the securities may not be delivered and that MUH may incur a loss. Settlements in the ordinary course are not treated by MUH as when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions.
Temporary Investments
For temporary periods or to provide liquidity, MUH has the authority to invest as much as 20% of its total assets in tax-exempt and taxable money market obligations with a maturity of one year or less (such short-term obligations being referred to herein as Temporary Investments). In addition, MUH reserves the right as a defensive measure to invest temporarily a greater portion of its assets in Temporary Investments, when, in the Investment Advisors opinion, prevailing market or financial conditions warrant. Taxable money market obligations will yield taxable income. The tax exempt money market securities may include municipal notes, municipal commercial paper, municipal bonds with a remaining maturity of less than one year, variable rate demand notes and participations therein. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes and grant anticipation notes. Anticipation notes are sold as interim financing in anticipation of tax collection, bond sales, government grants or revenue receipts. Municipal commercial paper refers to short-term unsecured promissory notes generally issued to finance short-term credit needs. The taxable money market securities in which MUH may invest as Temporary Investments consist of U.S. Government securities, U.S. Government agency securities, domestic bank or savings institution certificates of deposit and bankers acceptances, short-term corporate debt securities such as commercial
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paper and repurchase agreements. These Temporary Investments must have a stated maturity not in excess of one year from the date of purchase. MUH may not invest in any security issued by a commercial bank or a savings institution unless the bank or institution is organized and operating in the United States, has total assets of at least one billion dollars. To the extent MUH invests in Temporary Investments, MUH may not at such times be in a position to achieve its investment objective of tax-exempt income.
To the extent MUH invests in Temporary Investments, MUH will not at such times be in a position to achieve its investment objective of tax-exempt income.
Short-term taxable fixed income investments include, without limitation, the following:
(1) U.S. Government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or by U.S. Government agencies or instrumentalities. U.S. Government securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. Government provides financial support to such U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. Government, its agencies and instrumentalities do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Certificates of deposit purchased by MUH may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time MUH purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield for MUH during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for MUH to invest temporarily available cash. MUH may enter into repurchase agreements only with respect to obligations of the U.S. Government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in which MUH may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to MUH is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that MUH is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, and if the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, MUH could incur a loss of both principal and interest. The Investment Advisor monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. The Investment Advisor does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to MUH. If the seller were to be subject to a federal bankruptcy proceeding, the ability of MUH to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between MUH and a corporation. There is no secondary market for such notes. However, they are redeemable by MUH at any time. The Investment Advisor will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporations ability to meet all of its financial obligations, because MUHs liquidity might be impaired if the corporation were unable to pay principal and interest on demand. MUHs stated expectation is that its investments in commercial paper will be limited to commercial paper rated in the highest categories by a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
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Tax-exempt temporary investments include various obligations issued by state and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such Municipal Bonds maturing in three years or less from the date of issuance) and municipal commercial paper. Short-term tax-exempt fixed income securities include, without limitation, the following:
Bond Anticipation Notes (BANs) are usually general obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or bonds. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuers access to the long-term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuers capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies could adversely affect the issuers ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes (RANs) are issued by governments or governmental bodies with the expectation that future revenues from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated revenues from another level of government, could adversely affect an issuers ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for specific projects. Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs. These notes may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (municipal paper) represents very short-term unsecured, negotiable promissory notes, issued by states, municipalities and their agencies. Payment of principal and interest on issues of municipal paper may be made from various sources, to the extent the funds are available therefrom. Maturities on municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of municipal paper.
VRDOs are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments typically are based upon SIFMA or some other appropriate interest rate adjustment index. MUH may invest in all types of tax exempt instruments currently outstanding or to be issued in the future which satisfy its short-term maturity and quality standards. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities.
Certain Municipal Bonds may carry variable or floating rates of interest whereby the rate of interest is not fixed but varies with changes in specified market rates or indices, such as a bank prime rate or tax-exempt money market indices.
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While the various types of notes described above as a group represent the major portion of the tax-exempt note market, other types of notes are available in the marketplace and MUH may invest in such other types of notes to the extent permitted under its investment objective, policies and limitations. Such notes may be issued for different purposes and may be secured differently from those mentioned above.
MUHs investment policies provide that the Temporary Investments and VRDOs in which MUH may invest will be in the following rating categories at the time of purchase: MIG-1/VMIG-1 through MIG- 3/VMIG-3 for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as determined by Moodys), SP-1 through SP-2 for notes and A-1 through A-3 for VRDOs and commercial paper (as determined by S&P), or F- 1 through F-3 for notes, VRDOs and commercial paper (as determined by Fitch). Temporary Investments, if not rated, must be of comparable quality in the opinion of the Investment Advisor. In addition, MUH reserves the right to invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment of the Investment Advisor, market conditions warrant.
Strategic Transactions and Other Management Techniques
MUH may use a variety of other investment management techniques and instruments. MUH may purchase and sell futures contracts, enter into various interest rate transactions and may purchase and sell exchange-listed and over-the-counter put and call options on securities, financial indices and futures contracts (collectively, Strategic Transactions). These Strategic Transactions may be used for duration management and other risk management to attempt to protect against possible changes in the market value of MUHs portfolio resulting from trends in the debt securities markets and changes in interest rates, to protect MUHs unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes, to establish a position in the securities markets as a temporary substitute for purchasing particular securities and to enhance income or gain. There is no particular strategy that requires use of one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The Strategic Transactions are described below. The ability of MUH to use them successfully will depend on the Investment Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Inasmuch as any obligations of MUH that arise from the use of Strategic Transactions will be covered by segregated liquid high grade assets or offsetting transactions, MUH and the Investment Advisor believe such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. Certain provisions of the Internal Revenue Code of 1986 may restrict or affect the ability of MUH to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to taxable income and have certain other consequences.
Interest Rate Transactions. MUH may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. MUH expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio as a duration management technique or to protect against any increase in the price of securities MUH anticipates purchasing at a later date. MUH will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. MUH may not sell interest rate caps or floors that it does not own. Interest rate swaps involve the exchange by MUH with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor.
MUH may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, and will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with MUH receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. MUH will accrue the net amount of the excess, if any, of MUHs obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate with a custodian an amount of cash or liquid high grade securities having an aggregate net asset value at all times at least equal to the accrued excess. If there is a default by the other party to such a transaction, MUH will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps.
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Credit Default Swap Agreements. MUH may enter into credit default swap agreements for hedging purposes or to seek to increase its return. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by MUH. The protection buyer in a credit default contract may be obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the contract, provided that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount (the difference between the market value of the reference obligation and its par value), if the swap is cash settled. MUH may be either the buyer or seller in the transaction. If MUH is a buyer and no credit event occurs, MUH may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, MUH generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six (6) months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As the seller, MUH would effectively add leverage to its portfolio because, in addition to its total net assets, MUH would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if MUH had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. MUH expects to enter into credit default swap agreements only with counterparties who are rated investment grade quality by at least one nationally recognized statistical rating organization at the time of entering into such transaction or whose creditworthiness is believed by the Investment Advisor to be equivalent to such rating. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. A seller of a credit default swap or similar instrument is exposed to many of the same risks of leverage since, if a credit event occurs, the seller may be required to pay the buyer the full notional value of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations. MUHs obligations under a credit default swap agreement will be accrued daily (offset against any amounts owing to MUH). MUH will at all times segregate with its custodian in connection with each such transaction liquid securities or cash with a value at least equal to MUHs exposure (any accrued but unpaid net amounts owed by MUH to any counterparty), on a marked-to-market basis (as calculated pursuant to requirements of the SEC). Such segregation will ensure that MUH has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of MUHs portfolio. Such segregation will not limit MUHs exposure to loss.
Futures Contracts and Options on Futures Contracts. MUH may also enter into contracts for the purchase or sale for future delivery (futures contracts) of debt securities, aggregates of debt securities or indices or prices thereof, other financial indices and U.S. government debt securities or options on the above. MUH will ordinarily engage in such transactions only for bona fide hedging, risk management (including duration management) and other portfolio management purposes. However, MUH is also permitted to enter into such transactions for non-hedging purposes to enhance income or gain, in accordance with the rules and regulations of the CFTC, which currently provide that no such transaction may be entered into if at such time more than 5% of MUHs net assets would be posted as initial margin and premiums with respect to such non-hedging transactions.
Calls on Securities Indices and Futures Contracts. MUH may sell or purchase call options (calls) on Municipal Bonds and indices based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A call gives the purchaser of the option the right to buy, and obligates the seller to sell, the underlying security, futures contract or index at the exercise price at any time or at a specified time during the option period. All such calls sold by MUH must be covered as long as the call is outstanding (i.e., MUH must own the securities or futures contract subject to the call or other securities acceptable for applicable escrow requirements). A call sold by MUH exposes MUH during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security, index or futures contract and may require MUH
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to hold a security of futures contract which it might otherwise have sold. The purchase of a call gives MUH the right to buy a security, futures contract or index at a fixed price. Calls on futures on Municipal Bonds must also be covered by deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy MUHs obligations pursuant to such instruments.
MUH is authorized to write (i.e., sell) covered call options with respect to Municipal Bonds it owns, thereby giving the holder of the option the right to buy the underlying security covered by the option from MUH at the stated exercise price until the option expires. MUH writes only covered call options, which means that so long as MUH is obligated as the writer of a call option, it will own the underlying securities subject to the option. MUH may not write covered call options on underlying securities in an amount exceeding 15% of the market value of its total assets.
Puts on Securities, Indices and Futures Contracts. MUH may purchase put options (puts) that relate to Municipal Bonds (whether or not it holds such securities in its portfolio), indices or futures contracts. MUH may also sell puts on Municipal Bonds, indices or futures contracts on such securities if MUHs contingent obligations on such puts are secured by segregated assets consisting of cash or liquid high grade debt securities having a value not less than the exercise price. MUH may not purchase options on securities if, as a result of such purchase, the aggregate cost of all outstanding options on securities held by MUH would exceed 5% of the market value of MUHs total assets.
Restrictions on OTC Options. MUH will engage in transactions in OTC options only with banks or dealers that have capital of at least $50 million or whose obligations are guaranteed by an entity having capital of at least $50 million. Certain OTC options and assets used to cover OTC options written by MUH may be considered to be illiquid. The illiquidity of such options or assets may prevent a successful sale of such options or assets, result in a delay of sale, or reduce the amount of proceeds that might otherwise be realized.
Municipal Market Data Rate Locks. MUH may purchase and sell Municipal Market Data Rate Locks (MMD Rate Locks). An MMD Rate Lock permits MUH to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect against any increase in the price of securities to be purchased at a later date. MUH will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. An MMD Rate Lock is a contract between MUH and an MMD Rate Lock provider pursuant to which the parties agree to make payments to each other on a notional amount, contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or below a specified level on the expiration date of the contract. For example, if MUH buys an MMD Rate Lock and the Municipal Market Data AAA General Obligation Scale is below the specified level on the expiration date, the counterparty to the contract will make a payment to MUH equal to the specified level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA General Obligation Scale is above the specified level on the expiration date, MUH will make a payment to the counterparty equal to the actual level minus the specified level multiplied by the notional amount of the contract. In entering into MMD Rate Locks, there is a risk that municipal yields will move in the direction opposite of the direction anticipated by MUH. MUH may not enter into MMD Rate Locks if, as a result, more than 50% of its total assets would be required to cover its potential obligations under its hedging and other investment transactions.
Restricted and Illiquid Securities
Certain of MUHs investments may be illiquid. Illiquid securities are subject to legal or contractual restrictions on disposition or lack an established secondary trading market. The sale of restricted and illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the- counter markets. Restricted securities may sell at a price lower than similar securities that are not subject to restrictions on resale. MUH may invest without limit in illiquid investments.
Repurchase Agreements
As temporary investments, MUH may invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the seller of securities agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during MUHs holding period.
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Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. MUH may only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of the Investment Advisor, present minimal credit risk. The risk to MUH is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but MUH might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by MUH may be delayed or limited. The Investment Advisor will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, the Investment Advisor will demand additional collateral from the issuer to increase the value of the collateral to at least that of the repurchase price, including interest.
Reverse Repurchase Agreements
MUH may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of securities held by MUH with an agreement by MUH to repurchase the securities at an agreed upon price, date and interest payment. At the time MUH enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the custodian containing liquid instruments having a value not less than the repurchase price (including accrued interest). If MUH establishes and maintains such a segregated account, a reverse repurchase agreement will not be considered a borrowing by MUH; however, under certain circumstances in which MUH does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of MUHs limitation on borrowings. The use by MUH of reverse repurchase agreements involves many of the same risks of leverage since the proceeds derived from such reverse repurchase agreements may be invested in additional securities. Reverse repurchase agreements involve the risk that the market value of the securities acquired in connection with the reverse repurchase agreement may decline below the price of the securities MUH has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by MUH in connection with the reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce MUHs obligation to repurchase the securities, and MUHs use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, MUH would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement.
Borrowings
MUH is authorized to borrow money in amounts of up to 5% of the value of its total assets at the time of such borrowings; provided, however, that MUH is authorized to borrow moneys in amounts of up to 33 1/3% of the value of its total assets at the time of such borrowings to finance the repurchase of its own common stock pursuant to tender offers or otherwise to redeem or repurchase shares of preferred stock. Borrowings by MUH (commonly known, as with the issuance of preferred stock, as leveraging) create an opportunity for greater total return since, for example, MUH will not be required to sell portfolio securities to repurchase or redeem shares but, at the same time, increase exposure to capital risk. In addition, borrowed funds are subject to interest costs that may offset or exceed the return earned on the borrowed funds.
Lending of Securities
See The Acquiring Funds InvestmentsLending of Securities for a discussion of the securities lending arrangements applicable to MUH.
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MUSs Investment Objectives and Policies
MUSs investment objective is to provide stockholders with current income exempt from federal income taxes. There can be no assurance that MUSs investment objective will be realized. MUSs investment objective may not be changed without the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares, including the VMTP Shares, voting together as a single class, and of the holders of a majority of the outstanding preferred shares, including the VMTP Shares, voting as a separate class. A majority of the outstanding means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50% of the outstanding shares, whichever is less. See Description of VMTP SharesVoting Rights for additional information with respect to the voting rights of holders of VMTP Shares.
MUSs investment policies provide that it will invest primarily in a portfolio of long-term, investment grade municipal obligations, the interest on which, in the opinion of bond counsel to the issuer, is exempt from federal income taxes. MUSs investment policies provide that, at all times, except during temporary defensive periods, it will invest at least 80% of its total assets in a portfolio of obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities, paying interest that, in the opinion of bond counsel to the issuer, is exempt from federal income taxes (Municipal Bonds). MUSs investment policies provide that, under normal market conditions, MUS invests at least 80% of its assets in Municipal Bonds with remaining maturities of one year or more at the time of investment.
The investment grade Municipal Bonds in which MUS will primarily invest are those Municipal Bonds that are rated at the date of purchase in the four highest rating categories of S&P, Moodys or Fitch or, if unrated, are considered to be of comparable quality by the Investment Advisor. In the case of long-term debt, the investment grade rating categories are AAA through BBB for S&P and Fitch and Aaa through Baa for Moodys. In the case of short-term notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moodys and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys and BBB and F-3 for Fitch), while considered investment grade, may have certain speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect to the foregoing requirements, the Investment Advisor takes into account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit enhancement. If unrated, such securities will possess creditworthiness comparable, in the opinion of the Investment Advisor, to other obligations in which MUS may invest.
MUS may invest up to 20% of its managed assets in securities that are rated below investment grade, or are considered by BlackRock to be of comparable quality, at the time of purchase, subject to MUSs other investment policies. Bonds of below investment grade quality (Ba/BB or below) are commonly referred to as junk bonds. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Such securities, sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the issuers ability to pay interest and any required redemption or principal payments and are susceptible to default or decline in market value due to adverse economic and business developments.
The foregoing credit quality policies apply only at the time a security is purchased, and MUS is not required to dispose of a security if a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, the Investment Advisor may consider such factors as the Investment Advisors assessment of the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies.
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Appendix A of the Statement of Additional Information contains a general description of Moodys, S&Ps and Fitchs ratings of municipal bonds. In the event that MUS disposes of a portfolio security subsequent to its being downgraded, MUS may experience a greater risk of loss than if such security had been sold prior to such downgrade.
MUS may also purchase Municipal Bonds that are additionally secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce MUSs income. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the common shares. MUS may purchase insured bonds and may purchase insurance for bonds in its portfolio.
MUS may invest in certain tax exempt securities classified as private activity bonds (or industrial development bonds, under pre-1986 law) (in general, bonds that benefit non-governmental entities) that may subject certain investors in MUS to an alternative minimum tax. The percentage of MUSs total assets invested in private activity bonds will vary from time to time. MUS has not established any limit on the percentage of its portfolio that may be invested in Municipal Bonds subject to the federal alternative minimum tax provisions of federal tax law, and MUS expects that a portion of the income it produces will be includable in alternative minimum taxable income. VMTP Shares therefore would not ordinarily be a suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing VMTP Shares. The suitability of an investment in VMTP Shares will depend upon a comparison of the after-tax yield likely to be provided from MUS with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investors tax position. Special considerations may apply to corporate investors.
MUS also may not invest more than 25% of its total assets (taken at market value at the time of each investment) in Municipal Bonds whose issuers are located in the same state
The average maturity of MUSs portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. MUSs portfolio at any given time may include both long-term, intermediate-term and short-term Municipal Bonds.
MUSs stated expectation is that it will invest in Municipal Bonds that, in the Investment Advisors opinion, are underrated or undervalued. Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Investment Advisor, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Investment Advisor, are worth more than the value assigned to them in the marketplace. The Investment Advisor may at times believe that bonds associated with a particular municipal market sector (for example, but not limited to electric utilities), or issued by a particular municipal issuer, are undervalued. The Investment Advisor may purchase those bonds for MUSs portfolio because they represent a market sector or issuer that the Investment Advisor considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do not apply to the particular Municipal Bonds that are considered undervalued. MUSs investment in underrated or undervalued Municipal Bonds will be based on the Investment Advisors belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by MUS will generally result in capital gain distributions subject to federal capital gains taxation.
MUS ordinarily does not intend to realize significant investment income not exempt from federal income tax. From time to time, MUS may realize taxable capital gains.
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by MUS.
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Description of Municipal Bonds
Please see The Acquiring Funds InvestmentsDescription of Municipal Bonds for additional information regarding the types of Municipal Bonds in which MUS invests.
When-Issued, Delayed Delivery Securities and Forward Commitment Securities
MUS may purchase Municipal Bonds on a when-issued basis and may purchase or sell Municipal Bonds on a forward commitment basis or on a delayed delivery basis. When such transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. When-issued and forward commitment securities may be sold prior to the settlement date, but MUS will enter into when-issued and forward commitment securities only with the intention of actually receiving or delivering the securities, as the case may be. If MUS disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it can incur a gain or loss. At the time MUS entered into a transaction on a when-issued or forward commitment basis, it will segregate with its custodian cash or other liquid high grade debt securities with a value not less than the value of the when-issued or forward commitment securities. The value of these assets will be monitored daily to ensure that their marked to market value will at all times equal or exceed the corresponding obligations of MUS. There is always a risk that the securities may not be delivered and that MUS may incur a loss. Settlements in the ordinary course are not treated by MUS as when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions.
Temporary Investments
For temporary periods or to provide liquidity, MUS has the authority to invest as much as 20% of its total assets in tax-exempt and taxable money market obligations with a maturity of one year or less (such short-term obligations being referred to herein as Temporary Investments). In addition, MUS reserves the right as a defensive measure to invest temporarily a greater portion of its assets in Temporary Investments, when, in the opinion of the Investment Advisor, prevailing market or financial conditions warrant. Taxable money market obligations will yield taxable income. The tax exempt money market securities may include municipal notes, municipal commercial paper, municipal bonds with a remaining maturity of less than one year, variable rate demand notes and participations therein. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes and grant anticipation notes. Anticipation notes are sold as interim financing in anticipation of tax collection, bond sales, government grants or revenue receipts. Municipal commercial paper refers to short-term unsecured promissory notes generally issued to finance short-term credit needs. The taxable money market securities in which MUS may invest as Temporary Investments consist of U.S. Government securities, U.S. Government agency securities, domestic bank or savings institution certificates of deposit and bankers acceptances, short-term corporate debt securities such as commercial paper and repurchase agreements. These Temporary Investments must have a stated maturity not in excess of one year from the date of purchase. MUS may not invest in any security issued by a commercial bank or a savings institution unless the bank or institution is organized and operating in the United States, has total assets of at least one billion dollars. To the extent MUS invests in Temporary Investments, MUS may not at such times be in a position to achieve its investment objective of tax-exempt income. To the extent MUS invests in Temporary Investments, MUS will not at such times be in a position to achieve its investment objective of tax-exempt income.
Short-term taxable fixed income investments include, without limitation, the following:
(1) U.S. Government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or by U.S. Government agencies or instrumentalities. U.S. Government securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. Government provides financial support to such U.S. Government-
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sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. Government, its agencies and instrumentalities do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Certificates of deposit purchased by MUS may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time MUS purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield for MUS during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for MUS to invest temporarily available cash. MUS may enter into repurchase agreements only with respect to obligations of the U.S. Government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in which MUS may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to MUS is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that MUS is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, and if the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, MUS could incur a loss of both principal and interest. The Investment Advisor monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. The Investment Advisor does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to MUS. If the seller were to be subject to a federal bankruptcy proceeding, the ability of MUS to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between MUS and a corporation. There is no secondary market for such notes. However, they are redeemable by MUS at any time. The Investment Advisor will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporations ability to meet all of its financial obligations, because MUSs liquidity might be impaired if the corporation were unable to pay principal and interest on demand. MUSs stated expectation is that its investments in commercial paper will be limited to commercial paper rated in the highest categories by a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
Tax-exempt temporary investments include various obligations issued by state and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such Municipal Bonds maturing in three years or less from the date of issuance) and municipal commercial paper. Short-term tax-exempt fixed income securities include, without limitation, the following:
Bond Anticipation Notes (BANs) are usually general obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or bonds. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuers access to the long-term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuers capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies could adversely affect the issuers ability to meet its obligations on outstanding TANs.
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Revenue Anticipation Notes (RANs) are issued by governments or governmental bodies with the expectation that future revenues from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated revenues from another level of government, could adversely affect an issuers ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for specific projects. Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs. These notes may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (municipal paper) represents very short-term unsecured, negotiable promissory notes, issued by states, municipalities and their agencies. Payment of principal and interest on issues of municipal paper may be made from various sources, to the extent the funds are available therefrom. Maturities on municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of municipal paper.
VRDOs are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments typically are based upon SIFMA or some other appropriate interest rate adjustment index. MUS may invest in all types of tax exempt instruments currently outstanding or to be issued in the future which satisfy its short-term maturity and quality standards. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities.
Certain Municipal Bonds may carry variable or floating rates of interest whereby the rate of interest is not fixed but varies with changes in specified market rates or indices, such as a bank prime rate or tax-exempt money market indices.
While the various types of notes described above as a group represent the major portion of the tax-exempt note market, other types of notes are available in the marketplace and MUS may invest in such other types of notes to the extent permitted under its investment objective, policies and limitations. Such notes may be issued for different purposes and may be secured differently from those mentioned above.
MUSs investment policies provide that the Temporary Investments and VRDOs in which MUS may invest will be in the following rating categories at the time of purchase: MIG-1/VMIG-1 through MIG- 3/VMIG-3 for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as determined by Moodys), SP-1 through SP-2 for notes and A-1 through A-3 for VRDOs and commercial paper (as determined by S&P), or F- 1 through F-3 for notes, VRDOs and commercial paper (as determined by Fitch). Temporary Investments, if not rated, must be of comparable quality in the opinion of the Investment Advisor. In addition, MUS reserves the right to invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment of the Investment Advisor, market conditions warrant.
Strategic Transactions and Other Management Techniques
MUS may use a variety of other investment management techniques and instruments. MUS may purchase and sell futures contracts, enter into various interest rate transactions and may purchase and sell exchange- listed and over-the-counter put and call options on securities, financial indices and futures contracts (collectively, Strategic Transactions). These Strategic Transactions may be used for duration management and other risk management to
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attempt to protect against possible changes in the market value of MUSs portfolio resulting from trends in the debt securities markets and changes in interest rates, to protect MUSs unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes, to establish a position in the securities markets as a temporary substitute for purchasing particular securities and to enhance income or gain. There is no particular strategy that requires use of one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The Strategic Transactions are described below. The ability of MUS to use them successfully will depend on the Investment Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Inasmuch as any obligations of MUS that arise from the use of Strategic Transactions will be covered by segregated liquid high grade assets or offsetting transactions, MUS and the Investment Advisor believes such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. Certain provisions of the Internal Revenue Code of 1986 may restrict or affect the ability of MUS to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to taxable income and have certain other consequences.
Interest Rate Transactions. MUS may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. MUS expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio as a duration management technique or to protect against any increase in the price of securities MUS anticipates purchasing at a later date. MUS will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. MUS may not sell interest rate caps or floors that it does not own. Interest rate swaps involve the exchange by MUS with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor.
MUS may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, and will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with MUS receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. MUS will accrue the net amount of the excess, if any, of MUSs obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate with a custodian an amount of cash or liquid high grade securities having an aggregate net asset value at all times at least equal to the accrued excess. If there is a default by the other party to such a transaction, MUS will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps.
Credit Default Swap Agreements. MUS may enter into credit default swap agreements for hedging purposes or to seek to increase its return. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by MUS. The protection buyer in a credit default contract may be obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the contract, provided that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount (the difference between the market value of the reference obligation and its par value), if the swap is cash settled. MUS may be either the buyer or seller in the transaction. If MUS is a buyer and no credit event occurs, MUS may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, MUS generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six (6) months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As the seller, MUS would effectively add leverage to its portfolio because, in addition to its total net assets, MUS would be subject to investment exposure on the notional amount of the swap.
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Credit default swap agreements involve greater risks than if MUS had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. MUS expects to enter into credit default swap agreements only with counterparties who are rated investment grade quality by at least one nationally recognized statistical rating organization at the time of entering into such transaction or whose creditworthiness is believed by the Investment Advisor to be equivalent to such rating. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. A seller of a credit default swap or similar instrument is exposed to many of the same risks of leverage since, if a credit event occurs, the seller may be required to pay the buyer the full notional value of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations. MUSs obligations under a credit default swap agreement will be accrued daily (offset against any amounts owing to MUS). MUS will at all times segregate with its custodian in connection with each such transaction liquid securities or cash with a value at least equal to MUSs exposure (any accrued but unpaid net amounts owed by MUS to any counterparty), on a marked-to-market basis (as calculated pursuant to requirements of the SEC). Such segregation will ensure that MUS has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of MUSs portfolio. Such segregation will not limit MUSs exposure to loss.
Futures Contracts and Options on Futures Contracts. MUS may also enter into contracts for the purchase or sale for future delivery (futures contracts) of debt securities, aggregates of debt securities or indices or prices thereof, other financial indices and U.S. government debt securities or options on the above. MUS will ordinarily engage in such transactions only for bona fide hedging, risk management (including duration management) and other portfolio management purposes. However, MUS is also permitted to enter into such transactions for non-hedging purposes to enhance income or gain, in accordance with the rules and regulations of the CFTC, which currently provide that no such transaction may be entered into if at such time more than 5% of MUSs net assets would be posted as initial margin and premiums with respect to such non-hedging transactions.
Calls on Securities Indices and Futures Contracts. MUS may sell or purchase call options (calls) on Municipal Bonds and indices based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A call gives the purchaser of the option the right to buy, and obligates the seller to sell, the underlying security, futures contract or index at the exercise price at any time or at a specified time during the option period. All such calls sold by MUS must be covered as long as the call is outstanding (i.e., MUS must own the securities or futures contract subject to the call or other securities acceptable for applicable escrow requirements). A call sold by MUS exposes MUS during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security, index or futures contract and may require MUS to hold a security of futures contract which it might otherwise have sold. The purchase of a call gives MUS the right to buy a security, futures contract or index at a fixed price. Calls on futures on Municipal Bonds must also be covered by deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy MUSs obligations pursuant to such instruments.
MUS is authorized to write (i.e., sell) covered call options with respect to Municipal Bonds it owns, thereby giving the holder of the option the right to buy the underlying security covered by the option from MUS at the stated exercise price until the option expires. MUS writes only covered call options, which means that so long as MUS is obligated as the writer of a call option, it will own the underlying securities subject to the option. MUS may not write covered call options on underlying securities in an amount exceeding 15% of the market value of its total assets.
Puts on Securities, Indices and Futures Contracts. MUS may purchase put options (puts) that relate to Municipal Bonds (whether or not it holds such securities in its portfolio), indices or futures contracts. MUS may also sell puts on Municipal Bonds, indices or futures contracts on such securities if MUSs contingent obligations on such puts are secured by segregated assets consisting of cash or liquid high grade debt securities having a value not less than the exercise price. MUS may not purchase options on securities if, as a result of such purchase, the aggregate cost of all outstanding options on securities held by MUS would exceed 5% of the market value of MUSs total assets.
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Restrictions on OTC Options. MUS will engage in transactions in OTC options only with banks or dealers that have capital of at least $50 million or whose obligations are guaranteed by an entity having capital of at least $50 million. Certain OTC options and assets used to cover OTC options written by MUS may be considered to be illiquid. The illiquidity of such options or assets may prevent a successful sale of such options or assets, result in a delay of sale, or reduce the amount of proceeds that might otherwise be realized.
Municipal Market Data Rate Locks. MUS may purchase and sell Municipal Market Data Rate Locks (MMD Rate Locks). An MMD Rate Lock permits MUS to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect against any increase in the price of securities to be purchased at a later date. MUS will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. An MMD Rate Lock is a contract between MUS and an MMD Rate Lock provider pursuant to which the parties agree to make payments to each other on a notional amount, contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or below a specified level on the expiration date of the contract. For example, if MUS buys an MMD Rate Lock and the Municipal Market Data AAA General Obligation Scale is below the specified level on the expiration date, the counterparty to the contract will make a payment to MUS equal to the specified level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA General Obligation Scale is above the specified level on the expiration date, MUS will make a payment to the counterparty equal to the actual level minus the specified level multiplied by the notional amount of the contract. In entering into MMD Rate Locks, there is a risk that municipal yields will move in the direction opposite of the direction anticipated by MUS. MUS may not enter into MMD Rate Locks if, as a result, more than 50% of its total assets would be required to cover its potential obligations under its hedging and other investment transactions.
Restricted and Illiquid Securities
Certain of MUSs investments may be illiquid. Illiquid securities are subject to legal or contractual restrictions on disposition or lack of an established secondary trading market. The sale of restricted and illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the- counter markets. Restricted securities may sell at a price lower than similar securities that are not subject to restrictions on resale. MUS may invest without limit in illiquid investments.
Repurchase Agreements
As temporary investments, MUS may invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the seller of securities agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during MUSs holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. MUS may only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of the Investment Advisor, present minimal credit risk. The risk to MUS is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but MUS might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by MUS may be delayed or limited. The Investment Advisor will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, the Investment Advisor will demand additional collateral from the issuer to increase the value of the collateral to at least that of the repurchase price, including interest.
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Reverse Repurchase Agreements
MUS may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of securities held by MUS with an agreement by MUS to repurchase the securities at an agreed upon price, date and interest payment. At the time MUS enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the custodian containing liquid instruments having a value not less than the repurchase price (including accrued interest). If MUS establishes and maintains such a segregated account, a reverse repurchase agreement will not be considered a borrowing by MUS; however, under certain circumstances in which MUS does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of MUSs limitation on borrowings. The use by MUS of reverse repurchase agreements involves many of the same risks of leverage since the proceeds derived from such reverse repurchase agreements may be invested in additional securities. Reverse repurchase agreements involve the risk that the market value of the securities acquired in connection with the reverse repurchase agreement may decline below the price of the securities MUS has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by MUS in connection with the reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce MUSs obligation to repurchase the securities, and MUSs use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, MUS would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement.
Borrowings
MUS is authorized to borrow money in amounts of up to 5% of the value of its total assets at the time of such borrowings; provided, however, that MUS is authorized to borrow moneys in amounts of up to 33 1/3% of the value of its total assets at the time of such borrowings to finance the repurchase of its own common stock pursuant to tender offers or otherwise to redeem or repurchase shares of preferred stock. Borrowings by MUS (commonly known, as with the issuance of preferred stock, as leveraging) create an opportunity for greater total return since, for example, MUS will not be required to sell portfolio securities to repurchase or redeem shares but, at the same time, increase exposure to capital risk. In addition, borrowed funds are subject to interest costs that may offset or exceed the return earned on the borrowed funds.
Lending of Securities
See The Acquiring Funds InvestmentsLending of Securities for a discussion of the securities lending arrangements applicable to MUS.
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The Board of Trustees or Board of Directors and Officers
The Funds have the same Board Members and officers. The Board of each Fund is responsible for the overall supervision of the operations of the Fund and performs the various duties imposed on the trustees of investment companies by the 1940 Act and under applicable state law. A list of the Board Members and officers of the Funds, a brief biography of each Board Member and officer and additional information relating to the Board and officers are included in Management of the Funds in the Statement of Additional Information.
BlackRock Advisors, LLC serves as the investment adviser for each Fund and is expected to continue to serve as investment adviser for the Combined Fund. The Investment Advisor is responsible for the management of each Funds portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of each Fund.
Each Fund entered into an Investment Management Agreement with the Investment Advisor to provide investment advisory services. For such services, BAF currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average weekly managed assets. BBK currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.65% of its average weekly managed assets. For purposes of calculating these fees, managed assets means the total assets of the relevant Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of its accrued liabilities (other than money borrowed for investment purposes, including liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares). Each of MUH, MUS and the Acquiring Fund currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average daily net assets. For purposes of calculating these fees, net assets means the Acquiring Funds total assets minus the sum of the Acquiring Funds accrued liabilities (which does not include liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares).
Each Fund and the Investment Advisor have entered into the Fee Waiver Agreement, pursuant to which the Investment Advisor has contractually agreed to waive the management fee with respect to any portion of each Funds assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the Investment Advisor or its affiliates that have a contractual fee, through June 30, 2022. In addition, effective December 1, 2019, pursuant to the Fee Waiver Agreement, the Investment Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees each Fund pays to the Investment Advisor indirectly through its investment in money market funds advised by the Investment Advisor or its affiliates, through June 30, 2022. The Fee Waiver Agreement may be continued from year to year thereafter, provided that such continuance is specifically approved by the Investment Advisor and each Fund (including by a majority of each Funds Independent Board Members). Neither the Investment Advisor nor the Funds are obligated to extend the Fee Waiver Agreement. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by each Fund (upon the vote of a majority of the Independent Board Members or a majority of the outstanding voting securities of each Fund), upon 90 days written notice by each Fund to the Investment Advisor.
If the Reorganizations are consummated, the annual contractual investment management fee rate of the Acquiring Fund will be the annual contractual investment management fee rate of the Combined Fund, which will be 0.55% of the average daily net assets of the Combined Fund. The annual contractual investment management fee rate of the Combined Fund represents a 10 basis point reduction in the annual contractual investment management fee rate for BBK and no change in the annual contractual investment management fee rates for BAF, MUH and MUS. Additionally, if any of the Reorganizations are consummated, the Investment Advisor has agreed to the Combined Fund Contractual Waiver through June 30, 2022, resulting in an actual investment management fee rate of 0.54% of the average daily net assets of the Combined Fund.
Based on a pro forma Broadridge peer expense universe for the Combined Fund, the estimated total annual fund expense ratio (excluding investment-related expenses and taxes) is expected to be in the second quartile and contractual investment management fee rate and actual investment management fee rate over total assets are each expected to be in the first quartile.
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The level of expense savings (or increases) will vary depending on the combination of the Funds in the Reorganizations, and furthermore, there can be no assurance that future expenses will not increase or that any expense savings for any Fund will be realized as a result of any Reorganization.
A discussion regarding the basis for the approval of the Investment Management Agreement by the Board of each Fund is provided in such Funds Form N-CSR for BAF and BBKs fiscal year ended August 31, 2020 and for the Acquiring Funds, MUHs and MUSs semi-annual fiscal period ended October 31, 2020 available at www.sec.gov or by visiting www.blackrock.com.
The Investment Advisor is located at 100 Bellevue Parkway, Wilmington, Delaware 19809 and is a wholly owned subsidiary of BlackRock. BlackRock is one of the worlds largest publicly-traded investment management firms. As of September 30, 2020, BlackRocks assets under management were approximately $7.808 trillion. BlackRock has over 25 years of experience managing closed-end products and, as of September 30, 2020, advised a registered closed-end family of 70 exchange-listed active funds with approximately $52 billion in assets.
BlackRock is a global leader in investment management, risk management and advisory services for institutional and retail clients. BlackRock helps clients meet their goals and overcome challenges with a range of products that include separate accounts, mutual funds, iShares® (exchange-traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors through BlackRock Solutions®. Headquartered in New York City, as of September 30, 2020, the firm had approximately 16,000 employees in more than 39 countries and a major presence in key global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa.
BAF is managed by a team of investment professionals led by Michael Perilli, CFA, Theodore Jaeckel, CFA, and Phillip Soccio. Messrs. Perilli, Jaeckel and Soccio are BAFs portfolio managers and are responsible for the day-to-day management of each Funds portfolio and the selection of its investments. Messrs. Perilli, Jaeckel and Soccio have been members of BAFs portfolio management team since 2016, 2006, and 2018, respectively.
BBK is managed by a team of investment professionals led by Theodore Jaeckel, CFA, Walter OConnor, CFA, Christian Romaglino and Kevin Maloney. Messrs. Jaeckel, OConnor, Romaglino and Maloney are BBKs portfolio managers and are responsible for the day-to-day management of each Funds portfolio and the selection of its investments. Messrs. Jaeckel, OConnor, Romaglino and Maloney have been members of BBKs portfolio management team since 2017, 2008, 2018 and 2018, respectively.
MUH is managed by a team of investment professionals led by Theodore Jaeckel, CFA, Walter OConnor, CFA and Christian Romaglino. Messrs. Jaeckel, OConnor and Romaglino are each of MUHs portfolio managers and are responsible for the day-to-day management of MUHs portfolio and the selection of its investments. Messrs. Jaeckel, OConnor and Romaglino have been members of MUHs portfolio management team since 2006, 2006 and 2018, respectively.
MUS is managed by a team of investment professionals led by Phillip Soccio, Theodore Jaeckel, CFA and Christian Romaglino. Messrs. Soccio, Jaeckel and Romaglino are MUSs portfolio managers and are responsible for the day-to-day management of each Funds portfolio and the selection of its investments. Messrs. Soccio, Jaeckel and Romaglino have been members of MUSs portfolio management team since 2016, 2006 and 2017, respectively.
The Acquiring Fund is managed by a team of investment professionals led by Theodore Jaeckel, CFA and Walter OConnor, CFA. Messrs. Jaeckel and OConnor are the Acquiring Funds portfolio managers and are responsible for the day-to-day management of the Acquiring Funds portfolio and the selection of its investments. Messrs. Jaeckel and OConnor have both been members of the Acquiring Funds portfolio management team since 2006.
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The biography of each portfolio manager of the Funds are set forth below:
Portfolio Manager |
Biography |
|
Michael Perilli, CFA | Vice President of BlackRock since 2014; Associate of BlackRock from 2008 to 2014. | |
Walter OConnor, CFA | Managing Director of BlackRock since 2006; Managing Director of MLIM from 2003 to 2006; Director of MLIM from 1998 to 2003. | |
Theodore Jaeckel, CFA | Managing Director of BlackRock since 2006; Managing Director of MLIM from 2005 to 2006; Director of MLIM from 1997 to 2005. | |
Phillip Soccio | Director of BlackRock since 2009; Vice President of BlackRock from 2005 to 2008. | |
Christian Romaglino | Director of BlackRock since 2017; Portfolio Manager for the Municipal Mutual Fund Desk within BlackRocks Global Fixed Income Group since 2017; Portfolio Manager at Brown Brothers Harriman from 2007 to 2017. | |
Kevin Maloney | Vice President of BlackRock since 2018; Associate of BlackRock from 2014 to 2017; Analyst of BlackRock from 2011 to 2013. |
Following the Reorganizations, it is expected that the Combined Fund will be managed by a team of investment professionals led by Messrs. Jaeckel and OConnor.
The Statement of Additional Information provides additional information about the portfolio managers compensation, other accounts managed by the portfolio managers, and the portfolio managers ownership of securities in each Fund.
Portfolio Transactions with Affiliates
The Investment Advisor may place portfolio transactions, to the extent permitted by law, with brokerage firms affiliated with the Funds and the Investment Advisor, if it reasonably believes that the quality of execution and the commission are comparable to that available from other qualified brokerage firms.
None of the Funds paid brokerage commissions to affiliated broker-dealers during their three most recent fiscal years.
The professional service providers for the Funds are or will be as follows:
Service |
Service Providers to the Funds |
|
Accounting Agent | State Street Bank and Trust Company | |
Custodian | State Street Bank and Trust Company | |
Transfer Agent, Dividend Disbursing Agent and Registrar | Computershare Trust Company, N.A. | |
Redemption and Paying Agent to VMTP Shares | The Bank of New York Mellon | |
Independent Registered Public Accounting Firm | Deloitte & Touche LLP | |
Fund Counsel | Willkie Farr & Gallagher LLP | |
Counsel to the Independent Board Members | Debevoise & Plimpton LLP |
It is not anticipated that the Reorganizations will result in any change in the organizations providing services to the Acquiring Fund as set forth above. As a result of the Reorganizations, the service providers to the Acquiring Fund are anticipated to be the service providers to the Combined Fund.
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State Street Bank and Trust Company provides certain administration and accounting services to the Funds pursuant to an Administration and Fund Accounting Services Agreement (the Administration Agreement). Pursuant to the Administration Agreement, State Street Bank and Trust Company provides the Funds with, among other things, customary fund accounting services, including computing each Funds NAV and maintaining books, records and other documents relating to each Funds financial and portfolio transactions, and customary fund administration services, including assisting the Funds with regulatory filings, tax compliance and other oversight activities. For these and other services it provides to the Funds, State Street Bank and Trust Company is paid a monthly fee from the Funds at an annual rate ranging from 0.0075% to 0.015% of each Funds managed assets, along with an annual fixed fee ranging from $0 to $10,000 for the services it provides to the Funds.
The custodian of the assets of each Fund is State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. The custodian is responsible for, among other things, receipt of and disbursement of funds from each Funds accounts, establishment of segregated accounts as necessary, and transfer, exchange and delivery of Fund portfolio securities.
Transfer Agent, Dividend Disbursing Agent and Registrar
Computershare Trust Company, N.A., 150 Royall Street, Canton, Massachusetts 02021, serves as each Funds transfer agent with respect to such Funds common shares.
VMTP Shares Redemption and Paying Agent
The Bank of New York Mellon, One Wall Street, New York, New York 10286, acts as the transfer agent and registrar, dividend disbursing agent and paying agent and redemption price disbursing agent with respect to the each Funds VMTP Shares and will serve in such capacity in connection with the VMTP Shares of the Combined Fund.
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INFORMATION ABOUT THE COMMON SHARES OF THE FUNDS
Common shareholders of each Fund are entitled to share pro rata in dividends declared by such Funds Board as payable to holders of the Funds common shares and in the net assets of the Fund available for distribution to holders of the common shares. Common shareholders do not have preemptive or conversion rights and each Funds common shares are not redeemable. Voting rights are identical for the common shareholders of each Fund. Common shareholders of each Fund are entitled to one vote for each Share held by them and do not have any preemptive or preferential right to purchase or subscribe to any Shares of such Fund. Each Funds common shares do not have cumulative voting rights, which means that the holders of more than 50% of a Funds common shares voting for the election of Board Members can elect all of the Board Members standing for election by such holders, and, in such event, the holders of the Funds remaining common shares will not be able to elect any Board Members. The outstanding BAF, BBK, MUH, MUS and Acquiring Fund common shares are fully paid and non-assessable, except that the Board of each Fund has the power to cause common shareholders to pay certain expenses of the applicable Fund by setting off charges due from common shareholders from declared but unpaid dividends or distributions owed the common shareholders and/or by reducing the number of common shares owned by each respective common shareholder. Whenever preferred shares, including VMTP Shares, are outstanding, a Fund may not declare a dividend or distribution to common shareholders (other than a distribution in common shares of the Fund) or purchase its common shares unless all accumulated dividends on preferred shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to preferred shares at the time of declaration of such dividend or distribution or at the time of such purchase would be at least 200% after giving effect to the dividend or distribution or purchase price.
Purchase and Sale of Common Shares
Purchase and sale procedures for the common shares of each of the Funds are identical. Each Fund has its common shares listed on the NYSE. Investors typically purchase and sell common shares of the Funds through a registered broker-dealer on the NYSE, thereby incurring a brokerage commission set by the broker-dealer. Alternatively, investors may purchase or sell common shares of each of the Funds through privately negotiated transactions with existing common shareholders. Set forth below is information about each Funds common shares as of October 16, 2020.
Fund |
Title of Class |
Amount
Authorized |
Amount
Held by Fund for its Own Account |
Amount
Outstanding Exclusive of Amount Shown in Previous Column |
||||||||||||
BAF |
Common Shares | Unlimited | 0 | 8,749,418 | ||||||||||||
BBK |
Common Shares | Unlimited | 0 | 10,522,957 | ||||||||||||
MUH |
Common Shares | 200,000,000 | 0 | 11,336,282 | ||||||||||||
MUS |
Common Shares | 200,000,000 | 0 | 13,018,276 | ||||||||||||
Acquiring Fund (MHD) |
Common Shares | 200,000,000 | 0 | 14,209,722 |
The following tables set forth the high and low market prices for common shares of each Fund on the NYSE for each full quarterly period within each Funds two most recent fiscal years and each full quarter since the beginning of each Funds current fiscal year, along with the NAV and discount or premium to NAV for each quotation.
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BAF |
Market Price | NAV | Premium/(Discount) to NAV | |||||||||||||||||||||||||
Period Ended |
High | Low | High | Low | High | Low | ||||||||||||||||||||||
8/31/2020 |
$ | 14.98 | $ | 13.59 | $ | 15.38 | $ | 15.05 | (2.6 | )% | (9.7 | )% | ||||||||||||||||
5/31/2020 |
$ | 14.82 | $ | 10.84 | $ | 15.88 | $ | 14.17 | (6.7 | )% | (23.5 | )% | ||||||||||||||||
2/29/2020 |
$ | 15.36 | $ | 14.14 | $ | 15.93 | $ | 15.40 | (3.6 | )% | (8.2 | )% | ||||||||||||||||
11/30/2019 |
$ | 14.53 | $ | 12.88 | $ | 15.57 | $ | 15.46 | (6.7 | )% | (16.7 | )% | ||||||||||||||||
8/31/2019 |
$ | 14.70 | $ | 14.04 | $ | 15.28 | $ | 15.34 | (3.8 | )% | (8.5 | )% | ||||||||||||||||
5/31/2019 |
$ | 14.75 | $ | 13.53 | $ | 14.98 | $ | 14.93 | (1.5 | )% | (9.4 | )% | ||||||||||||||||
2/28/2019 |
$ | 13.63 | $ | 12.53 | $ | 14.75 | $ | 14.65 | (7.6 | )% | (14.5 | )% | ||||||||||||||||
11/30/2018 |
$ | 13.57 | $ | 12.48 | $ | 14.86 | $ | 14.46 | (8.7 | )% | (13.7 | )% | ||||||||||||||||
BBK |
Market Price | NAV | Premium/(Discount) to NAV | |||||||||||||||||||||||||
Period Ended |
High | Low | High | Low | High | Low | ||||||||||||||||||||||
8/31/2020 |
$ | 16.30 | $ | 14.70 | $ | 16.74 | $ | 15.85 | (2.6 | )% | (7.3 | )% | ||||||||||||||||
5/31/2020 |
$ | 16.76 | $ | 11.61 | $ | 17.14 | $ | 15.16 | (2.2 | )% | (23.4 | )% | ||||||||||||||||
2/29/2020 |
$ | 16.30 | $ | 15.31 | $ | 15.90 | $ | 15.37 | 2.5 | % | (0.4 | )% | ||||||||||||||||
11/30/2019 |
$ | 15.98 | $ | 13.96 | $ | 15.67 | $ | 15.46 | 2.0 | % | (9.7 | )% | ||||||||||||||||
8/31/2019 |
$ | 15.95 | $ | 14.52 | $ | 15.68 | $ | 15.26 | 1.7 | % | (4.9 | )% | ||||||||||||||||
5/31/2019 |
$ | 14.88 | $ | 13.97 | $ | 14.93 | $ | 14.98 | (0.3 | )% | (6.7 | )% | ||||||||||||||||
2/28/2019 |
$ | 14.32 | $ | 13.30 | $ | 14.75 | $ | 14.66 | (2.9 | )% | (9.3 | )% | ||||||||||||||||
11/30/2018 |
$ | 14.36 | $ | 13.11 | $ | 14.81 | $ | 14.48 | (3.0 | )% | (9.4 | )% | ||||||||||||||||
MUH |
Market Price | NAV | Premium/(Discount) to NAV | |||||||||||||||||||||||||
Period Ended |
High | Low | High | Low | High | Low | ||||||||||||||||||||||
7/31/2020 |
$ | 15.19 | $ | 13.33 | $ | 15.86 | $ | 14.68 | (4.2 | )% | (9.2 | )% | ||||||||||||||||
4/30/2020 |
$ | 16.45 | $ | 10.89 | $ | 16.24 | $ | 14.43 | 1.3 | % | (24.5 | )% | ||||||||||||||||
1/31/2020 |
$ | 15.60 | $ | 14.67 | $ | 15.98 | $ | 15.74 | (2.4 | )% | (6.8 | )% | ||||||||||||||||
10/31/2019 |
$ | 15.61 | $ | 12.98 | $ | 15.95 | $ | 15.84 | (2.2 | )% | (18.1 | )% | ||||||||||||||||
7/31/2019 |
$ | 15.56 | $ | 14.46 | $ | 15.67 | $ | 15.47 | (0.7 | )% | (6.5 | )% | ||||||||||||||||
4/30/2019 |
$ | 15.20 | $ | 13.67 | $ | 15.27 | $ | 14.86 | (0.5 | )% | (8.0 | )% | ||||||||||||||||
1/31/2019 |
$ | 13.68 | $ | 12.67 | $ | 14.89 | $ | 14.64 | (8.1 | )% | (13.5 | )% | ||||||||||||||||
10/31/2018 |
$ | 14.36 | $ | 12.67 | $ | 15.15 | $ | 14.70 | (5.2 | )% | (13.8 | )% | ||||||||||||||||
7/31/2018 |
$ | 13.94 | $ | 13.63 | $ | 15.24 | $ | 15.11 | (8.6 | )% | (9.8 | )% | ||||||||||||||||
MUS |
Market Price | NAV | Premium/(Discount) to NAV | |||||||||||||||||||||||||
Period Ended |
High | Low | High | Low | High | Low | ||||||||||||||||||||||
7/31/2020 |
$ | 13.05 | $ | 11.49 | $ | 14.08 | $ | 12.81 | (7.3 | )% | (10.3 | )% | ||||||||||||||||
4/30/2020 |
$ | 13.27 | $ | 9.55 | $ | 14.37 | $ | 12.80 | (7.7 | )% | (25.4 | )% | ||||||||||||||||
1/31/2020 |
$ | 13.02 | $ | 12.42 | $ | 14.19 | $ | 13.73 | (8.3 | )% | (9.6 | )% | ||||||||||||||||
10/31/2019 |
$ | 12.86 | $ | 11.28 | $ | 13.94 | $ | 13.91 | (7.8 | )% | (18.9 | )% | ||||||||||||||||
7/31/2019 |
$ | 12.56 | $ | 12.02 | $ | 13.81 | $ | 13.53 | (9.1 | )% | (11.2 | )% | ||||||||||||||||
4/30/2019 |
$ | 12.92 | $ | 11.80 | $ | 13.45 | $ | 13.24 | (3.9 | )% | (10.9 | )% | ||||||||||||||||
1/31/2019 |
$ | 12.03 | $ | 11.12 | $ | 13.18 | $ | 13.13 | (8.7 | )% | (15.3 | )% | ||||||||||||||||
10/31/2018 |
$ | 12.21 | $ | 11.14 | $ | 13.38 | $ | 12.96 | (8.8 | )% | (14.0 | )% | ||||||||||||||||
7/31/2018 |
$ | 12.53 | $ | 11.95 | $ | 13.47 | $ | 13.46 | (7.0 | )% | (11.2 | )% |
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Acquiring Fund (MHD) |
Market Price | NAV | Premium/(Discount) to NAV | |||||||||||||||||||||||||
Period Ended |
High | Low | High | Low | High | Low | ||||||||||||||||||||||
7/31/2020 |
$ | 15.85 | $ | 13.93 | $ | 17.01 | $ | 15.31 | (6.8 | )% | (9.0 | )% | ||||||||||||||||
4/30/2020 |
$ | 17.65 | $ | 12.06 | $ | 17.39 | $ | 13.89 | 1.5 | % | (13.2 | )% | ||||||||||||||||
1/31/2020 |
$ | 17.50 | $ | 16.22 | $ | 16.93 | $ | 16.91 | 3.4 | % | (4.1 | )% | ||||||||||||||||
10/31/2019 |
$ | 17.13 | $ | 14.30 | $ | 16.96 | $ | 17.01 | 1.0 | % | (15.9 | )% | ||||||||||||||||
7/31/2019 |
$ | 17.70 | $ | 15.95 | $ | 16.80 | $ | 16.60 | 5.4 | % | (3.9 | )% | ||||||||||||||||
4/30/2019 |
$ | 16.80 | $ | 15.28 | $ | 16.50 | $ | 16.16 | 1.8 | % | (5.4 | )% | ||||||||||||||||
1/31/2019 |
$ | 16.06 | $ | 13.90 | $ | 16.17 | $ | 15.96 | (0.7 | )% | (12.9 | )% | ||||||||||||||||
10/31/2018 |
$ | 15.92 | $ | 14.03 | $ | 16.50 | $ | 16.01 | (3.5 | )% | (12.3 | )% | ||||||||||||||||
7/31/2018 |
$ | 16.15 | $ | 14.98 | $ | 16.55 | $ | 16.42 | (2.4 | )% | (8.8 | )% |
For the periods shown in the tables above, the common shares of BAF and MUS have traded at a discount and the common shares of BBK, MUH and the Acquiring Fund have traded at both a premium and a discount.
The table below sets forth the market price, NAV, and the premium/discount to NAV of each Fund as of August 31, 2020.
Fund |
Market
Price |
NAV |
Premium/
(Discount) to NAV |
|||||||||
BAF |
$ | 14.39 | $ | 15.26 | (5.70 | )% | ||||||
BBK |
$ | 15.39 | $ | 16.42 | (6.27 | )% | ||||||
MUH |
$ | 14.81 | $ | 15.65 | (5.37 | )% | ||||||
MUS |
$ | 12.71 | $ | 13.90 | (8.56 | )% | ||||||
Acquiring Fund (MHD) |
$ | 15.53 | $ | 16.80 | (7.56 | )% |
To the extent BAFs, BBKs, MUHs or MUSs common shares are trading at a wider discount (or a narrower premium) than the Acquiring Fund at the time of its Reorganization, BAFs, BBKs, MUHs or MUSs common shareholders would have the potential for an economic benefit by the narrowing of the discount or widening of the premium. To the extent BAFs, BBKs, MUHs or MUSs common shares are trading at a narrower discount (or wider premium) than the Acquiring Fund at the time of its Reorganization, BAFs, BBKs, MUHs or MUSs common shareholders may be negatively impacted if its Reorganization is consummated. Acquiring Fund common shareholders would only benefit from a premium/discount perspective to the extent the post-Reorganization discount (or premium) of the Acquiring Fund common shares improves.
There can be no assurance that, after the Reorganizations, common shares of the Combined Fund will trade at, above or below NAV. Upon consummation of the Reorganizations, the Combined Fund common shares may trade at a price that is less than the current market price of Acquiring Fund common shares. In the Reorganizations, common shareholders of BAF, BBK, MUH and MUS will receive Acquiring Fund common shares based on the relative NAVs (not the market values) of the respective Funds common shares. The market value of the common shares of the Combined Fund may be less than the market value of the common shares of a Fund prior to the Reorganizations.
The performance table below illustrates the past performance of an investment in common shares of each Fund by setting forth the average total returns for the Funds for the periods indicated. A Funds past performance does not indicate or guarantee how its common shares will perform in the future. Investment return and principal value of an investment will fluctuate so that the common shares, when sold, may be worth more or less than the original cost.
125
Current performance may be lower or higher than the performance quoted, and numbers may reflect small variances due to rounding. Standardized performance and performance data current to the most recent month end may be obtained by visiting the Closed-End Funds section of www.blackrock.com. References to BlackRocks website are intended to allow investors public access to information regarding the Funds and do not, and are not intended to, incorporate BlackRocks website in this Joint Proxy Statement/Prospectus.
Average Annual Total Returns as of December 31, 2019
Annualized Rates of Return | ||||||||||||||||||||||||||||||||
Trailing 12-
month Distribution Yield based on December 31, 2019 NAV |
One Year
ended December 31, 2019 based on NAV |
One Year
ended December 31, 2019 based on Market Price |
Five Year
ended December 31, 2019 based on NAV |
Five Year
ended December 31, 2019 based on Market Price |
Ten Year
ended December 31, 2019 based on NAV |
Ten Year
ended December 31, 2019 based on Market Price |
||||||||||||||||||||||||||
BlackRock Municipal Income Investment Quality Trust |
BAF | 4.28 | % | 10.13 | % | 13.72 | % | 4.47 | % | 5.32 | % | 6.65 | % | 6.40 | % | |||||||||||||||||
BlackRock Municipal Bond Trust |
BBK | 4.06 | % | 12.16 | % | 21.38 | % | 5.54 | % | 5.47 | % | 8.60 | % | 7.77 | % | |||||||||||||||||
BlackRock MuniHoldings Fund II, Inc. |
MUH | 4.49 | % | 11.37 | % | 23.24 | % | 5.03 | % | 5.23 | % | 7.75 | % | 7.79 | % | |||||||||||||||||
BlackRock MuniHoldings Quality Fund, Inc. |
MUS | 3.94 | % | 10.14 | % | 16.03 | % | 4.26 | % | 4.42 | % | 6.74 | % | 5.97 | % | |||||||||||||||||
BlackRock MuniHoldings Fund, Inc. |
MHD | 4.62 | % | 10.09 | % | 20.62 | % | 4.79 | % | 5.61 | % | 7.76 | % | 8.27 | % |
126
INFORMATION ABOUT THE PREFERRED SHARES OF THE FUNDS
BAFs and BBKs respective Agreement and Declaration of Trust authorizes the issuance of an unlimited number of shares, par value $.001 per share, all of which were initially classified as common shares. MUHs, MUSs and the Acquiring Funds respective charter authorizes 200 million shares, par value $0.10 per share, all of which were initially classified as common shares. The Board of each Fund is authorized, however, to reclassify any unissued common shares to preferred shares without the approval of its common shareholders. Set forth below is information about each Funds preferred shares as of August 31, 2020.
Fund |
Title of
Class |
Amount
Authorized |
Amount
Authorized Under Each Series |
Amount
Held by Fund for its Own Account |
Amount
Outstanding Exclusive of Amount Shown in Previous Column |
Issue Date |
Term
Redemption Date |
|||||||||||||
BAF |
VMTP Shares | 422 | Series W-7 422 | 0 | 422 | 12/16/2011 | 7/2/2021 | |||||||||||||
BBK |
VMTP Shares | 799 | Series W-7 799 | 0 | 799 | 12/16/2011 | 7/2/2021 | |||||||||||||
MUH |
VMTP Shares | 550 | Series W-7 550 | 0 | 550 | 12/16/2011 | 7/2/2021 | |||||||||||||
MUS |
VMTP Shares | 870 | Series W-7 870 | 0 | 870 | 12/16/2011 | 7/2/2021 | |||||||||||||
Acquiring Fund (MHD) |
VMTP Shares | 837 | Series W-7 837 | 0 | 837 | 12/16/2011 | 7/2/2021 |
The outstanding preferred shares of each Fund are fully paid and non-assessable and have no preemptive or cumulative voting rights.
Below is a table that details, as of August 31, 2020, (i) each Funds current leverage attributable to preferred shares as a percentage of its total net assets, (ii) the Combined Funds leverage attributable to preferred shares on a pro forma basis as a percentage of its total net assets assuming only the BAF Reorganization was consummated as of August 31, 2020, which represents the combination of completed Reorganizations presented in this Joint Proxy/Prospectus that would result in the highest leverage attributable to preferred shares, and (iii) the Combined Funds leverage attributable to preferred shares on a pro forma basis as a percentage of its total net assets assuming all of the Reorganizations were consummated as of August 31, 2020, which represents, in the Investment Advisors view, the most likely combination of the Reorganizations and the combination of completed Reorganizations that would result in the lowest leverage attributable to preferred shares.
Fund |
Title of Class |
Shares
Outstanding |
Liquidation
Preference Per Share |
Aggregate
Liquidation Preference |
Total Managed
Assets |
As
Percentage of Net Assets |
||||||||||||||||||
BAF |
VMTP Shares | 422 | $ | 100,000 | $ | 42,200,000 | $ | 225,265,807 | 18.7 | % | ||||||||||||||
BBK |
VMTP Shares | 799 | $ | 100,000 | $ | 79,900,000 | $ | 287,421,860 | 27.8 | % | ||||||||||||||
MUH |
VMTP Shares | 550 | $ | 100,000 | $ | 55,000,000 | $ | 282,776,832 | 19.4 | % | ||||||||||||||
MUS |
VMTP Shares | 870 | $ | 100,000 | $ | 87,000,000 | $ | 297,376,250 | 29.3 | % | ||||||||||||||
Acquiring Fund (MHD) |
VMTP Shares | 837 | $ | 100,000 | $ | 83,700,000 | $ | 374,039,752 | 22.4 | % | ||||||||||||||
Pro forma Combined Fund (BAF into MHD) |
VMTP Shares | 1,259 | $ | 100,000 | $ | 125,900,000 | $ | 599,305,559 | 21.0 | % | ||||||||||||||
Pro forma Combined Fund (BAF, BBK, MUH and MUS into MHD) |
VMTP Shares | 3,478 | $ | 100,000 | $ | 347,800,000 | $ | 1,466,880,501 | 23.7 | % |
127
BAF, BBK, MUH, MUS and the Acquiring Fund have each issued VMTP Shares, $100,000 liquidation value per share, with substantially identical terms, including the same term redemption date of July 2, 2021.
The VMTP Shares were offered to qualified institutional buyers in private transactions exempt from registration under the Securities Act.
The annualized dividend rates for the preferred shares for each Funds most recent fiscal year end were as follows:
Fund |
Rate | |||
BAF |
1.67 | % | ||
BBK |
1.67 | % | ||
MUH |
2.18 | % | ||
MUS |
2.18 | % | ||
Acquiring Fund (MHD) |
2.18 | % |
In connection with the Reorganizations, the Acquiring Fund expects to issue 422 additional VMTP Shares to BAF VMTP Holders, 799 additional VMTP Shares to BBK, 550 additional VRDP Shares to MUH and 870 additional VMTP Shares to MUS VMTP Holders. Following the completion of the Reorganizations, the Combined Fund is expected to have 3,478 VMTP Shares outstanding. Assuming all of the Reorganizations are approved by shareholders, upon the Closing Date of the Reorganizations, BAF, BBK, MUH and MUS VMTP Holders will receive on a one-for-one basis one newly issued Acquiring Fund VMTP Share, par value $0.10 per share and with a liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on the BAF, BBK, MUH or MUS VMTP Shares up to and including the day immediately preceding the Closing Date of the Reorganizations if such dividends have not been paid prior to the Closing Date), in exchange for each BAF, BBK, MUH or MUS VMTP Share held by the BAF, BBK, MUH or MUS VMTP Holders immediately prior to the Closing Date. The newly issued Acquiring Fund VMTP Shares may be of the same series as the Acquiring Funds Series W-7 VMTP Shares or a substantially identical series. No fractional Acquiring Fund VMTP Shares will be issued. The terms of the Acquiring Fund VMTP Shares to be issued in connection with the Reorganizations will be substantially identical to the terms of the Acquiring Funds outstanding VMTP Shares and will rank on parity with the Acquiring Funds outstanding VMTP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The Reorganizations will not result in any changes to the terms of the Acquiring Funds VMTP Shares currently outstanding. The terms of the Acquiring Funds VMTP Shares may change from time to time, subject to Board approval.
The newly issued Acquiring Fund VMTP Shares will have terms that are substantially identical to the terms of the outstanding BAF, BBK, MUH and MUS VMTP Shares, including the same term redemption date of July 2, 2021.
Description of the VMTP Shares of Each Fund
Each Funds VMTP Shares may be redeemed, in whole or in part, at any time at the option of each Fund. The redemption price per VMTP Share is equal to the liquidation preference per share plus any outstanding unpaid dividends. Each Fund is required to redeem its VMTP Shares on the term redemption date of the VMTP Shares, unless earlier redeemed or repurchased or unless extended. There is no assurance that the term of each Funds VMTP Shares will be extended further or that each Funds VMTP Shares will be replaced with any other preferred shares or other form of leverage upon the redemption or repurchase of the VMTP Shares. Six months prior to the term redemption date of the VMTP Shares, each Fund is required to begin to segregate liquid assets with its respective custodian to fund the redemption. In addition, each Fund is required to redeem certain of its outstanding VMTP Shares if it fails to comply with certain asset coverage, basic maintenance amount or leverage requirements.
Dividends on each Funds VMTP Shares are declared daily and payable monthly at a variable rate set weekly at a fixed rate spread to the SIFMA Municipal Swap Index. The fixed spread is determined based on the long-term preferred share rating assigned to each Funds VMTP Shares by the ratings agencies then rating its respective VMTP Shares. At the date of issuance, each Funds VMTP Shares were assigned long-term ratings of Aaa from Moodys and AAA from Fitch. Subsequent to the issuance of Funds VMTP Shares, Moodys completed a review of its methodology for rating securities issued by registered closed-end funds. As of August 31, 2020, each Funds VMTP
128
Shares were assigned a long-term rating of Aa1 from Moodys under its new rating methodology. Each Funds VMTP Shares continue to be assigned a long-term rating of AAA from Fitch. The dividend rate on each Funds VMTP Shares is subject to a step-up spread if each Fund fails to comply with certain provisions, including, among other things, the timely payment of dividends, redemptions or gross-up payments, and complying with certain asset coverage and leverage requirements. For the fiscal year ended April 30, 2020, the annualized dividend rates for the VMTP Shares of the Acquiring Fund, MUH and MUS were 2.18%, 2.18% and 2.18%, respectively. For the fiscal year ended August 31, 2020, the annualized dividend rates for the VMTP Shares of BAF and BBK was 1.67% and 1.67%, respectively.
Each Funds VMTP Shares are subject to certain restrictions on transfer, and each Fund may also be required to register its VMTP Shares for sale under the Securities Act under certain circumstances. In addition, amendments to each Funds VMTP Shares governing documents generally require the consent of the holders of VMTP Shares.
Each Funds VMTP Shares rank prior to each Funds common shares as to the payment of dividends by each Fund and distribution of assets upon dissolution or liquidation of each Fund. The 1940 Act prohibits the declaration of any dividend on each Funds common shares or the repurchase of each Funds common shares if each Fund fails to maintain asset coverage of at least 200% of the liquidation preference of each Funds outstanding VMTP Shares. In addition, pursuant to the VMTP Shares governing instruments, each Fund is restricted from declaring and paying dividends on classes of shares ranking junior to or on parity with each Funds VMTP Shares or repurchasing such shares if each Fund fails to declare and pay dividends on the VMTP Shares, redeem any VMTP Shares required to be redeemed under the VMTP Shares governing instruments or comply with the basic maintenance amount requirement of the ratings agencies rating the VMTP Shares.
The holders of each Funds VMTP Shares have voting rights equal to the voting rights of the holders of their respective common shares (one vote per share) and will vote together with holders of their respective common shares (one vote per share) as a single class on certain matters. However, the holders of each Funds VMTP Shares, voting as a separate class, are also entitled to elect two trustees to the Board of each Fund. The holders of each Funds VMTP Shares are also entitled to elect each Funds full board of trustees if dividends on the VMTP Shares are not paid for a period of two years. The holders of each Funds VMTP Shares are also generally entitled to a separate class vote to amend the VMTP Shares governing documents. In addition, the 1940 Act requires the approval of the holders of a majority of any outstanding VMTP Shares, voting as a separate class, to (a) adopt any plan of reorganization that would adversely affect the VMTP Shares, (b) change each Funds sub-classification as a closed-end investment company or change its fundamental investment restrictions or (c) change its business so as to cease to be an investment company.
129
BlackRock Municipal Income Investment Quality Trust (BAF)
The Financial Highlights table is intended to help you understand BAFs financial performance for the periods shown. Certain information reflects the financial results for a single common share of BAF. The total returns in the table represent the rate an investor would have earned or lost on an investment in BAF (assuming reinvestment of all dividends and/or distributions, if applicable). The information shown has been audited by Deloitte & Touche LLP, BAFs independent registered public accounting firm. Financial statements for the fiscal year ended August 31, 2020 and the Report of the Independent Registered Public Accounting Firm thereon appear in BAFs Annual Report for the fiscal year ended August 31, 2020, which is available upon request.
Please see next page for Financial Highlights Table
130
BAF Financial Highlights
Year Ended August 31, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Net asset value, beginning of year |
$ | 15.68 | $ | 14.86 | $ | 15.69 | $ | 16.56 | $ | 15.80 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net investment income(a) |
0.67 | 0.65 | 0.74 | 0.79 | 0.83 | |||||||||||||||
Net realized and unrealized gain (loss) |
(0.45 | ) | 0.86 | (0.77 | ) | (0.84 | ) | 0.75 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net increase (decrease) from investment operations |
0.22 | 1.51 | (0.03 | ) | (0.05 | ) | 1.58 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Distributions to Common Shareholders from net investment income(b) |
(0.64 | ) | (0.69 | ) | (0.80 | ) | (0.82 | ) | (0.82 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net asset value, end of year |
$ | 15.26 | $ | 15.68 | $ | 14.86 | $ | 15.69 | $ | 16.56 | ||||||||||
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|
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|
|
|
|
|
|||||||||||
Market price, end of year |
$ | 14.39 | $ | 14.53 | $ | 13.54 | $ | 15.11 | $ | 15.79 | ||||||||||
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|
|
|
|
|
|
|
|
|||||||||||
Total Return Applicable to Common Shareholders(c) |
||||||||||||||||||||
Based on net asset value |
1.76 | % | 10.96 | % | 0.18 | % | 0.14 | % | 10.57 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Based on market price |
3.55 | % | 12.85 | % | (5.22 | )% | 1.15 | % | 19.92 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ratios to Average Net Assets Applicable to Common Shareholders |
||||||||||||||||||||
Total expenses |
2.34 | %(d) | 2.82 | % | 2.47 | % | 2.06 | % | 1.61 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses after fees waived and/or reimbursed |
2.34 | %(d) | 2.82 | % | 2.47 | % | 2.06 | % | 1.61 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses after fees waived and/or reimbursed and excluding interest expense, fees, and amortization of offering costs(e) |
1.17 | %(d) | 1.11 | % | 1.08 | % | 1.06 | % | 1.01 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net investment income to Common Shareholders |
4.43 | % | 4.38 | % | 4.84 | % | 5.06 | % | 5.09 | % | ||||||||||
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|
|
|
|
|
|
|
|||||||||||
Supplemental Data |
||||||||||||||||||||
Net assets applicable to Common Shareholders, end of year (000) |
$ | 133,526 | $ | 137,226 | $ | 130,022 | $ | 137,264 | $ | 144,927 | ||||||||||
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|
|||||||||||
VMTP Shares outstanding at $100,000 liquidation value, end of year (000) |
$ | 42,200 | $ | 42,200 | $ | 42,200 | $ | 42,200 | $ | 42,200 | ||||||||||
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|
|
|
|
|
|
|
|||||||||||
Asset coverage per VMTP Shares at $100,000 liquidation value, end of year |
$ | 416,413 | $ | 425,179 | $ | 408,109 | $ | 425,270 | $ | 443,429 | ||||||||||
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|
|||||||||||
Borrowings outstanding, end of year (000) |
$ | 49,539 | $ | 54,030 | $ | 49,192 | $ | 44,937 | $ | 42,089 | ||||||||||
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|
|
|
|||||||||||
Portfolio turnover rate |
27 | % | 36 | % | 28 | % | 31 | % | 29 | % | ||||||||||
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|
|
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|
|
|
(a) |
Based on average common shares outstanding. |
(b) |
Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
(c) |
Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices. |
(d) |
Includes non-recurring expenses of reorganization costs. Without these costs, total expenses, total expenses after fees waived and/or reimbursed and total expenses after fees waived and/or reimbursed and excluding interest expense, fees, and amortization of offering costs would have been 2.28%, 2.28% and 1.11%, respectively. |
(e) |
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares. |
131
BlackRock Municipal Bond Trust (BBK)
The Financial Highlights table is intended to help you understand BBKs financial performance for the periods shown. Certain information reflects the financial results for a single Common Share of BBK. The total returns in the table represent the rate an investor would have earned or lost on an investment in BBK (assuming reinvestment of all dividends and/or distributions, if applicable). The information shown has been audited by Deloitte & Touche LLP, BBKs independent registered public accounting firm. Financial statements for the fiscal year ended August 31, 2020 and the Report of the Independent Registered Public Accounting Firm thereon appear in BBKs Annual Report for the fiscal year ended August 31, 2020, which is available upon request.
Please see next page for Financial Highlights Table
132
BBK Financial Highlights
Year Ended August 31, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Net asset value, beginning of year |
$ | 16.82 | $ | 15.78 | $ | 16.32 | $ | 17.89 | $ | 16.49 | ||||||||||
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|
|
|
|
|
|
|
|||||||||||
Net investment income(a) |
0.73 | 0.65 | 0.70 | 0.74 | 0.89 | |||||||||||||||
Net realized and unrealized gain (loss) |
(0.45 | ) | 1.15 | (0.47 | ) | (1.09 | ) | 1.42 | ||||||||||||
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|
|||||||||||
Net increase (decrease) from investment operations |
0.28 | 1.80 | 0.23 | (0.35 | ) | 2.31 | ||||||||||||||
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|
|||||||||||
Distributions to Common Shareholders(b) |
||||||||||||||||||||
From net investment income |
(0.68 | ) | (0.70 | ) | (0.77 | ) | (0.83 | ) | (0.90 | ) | ||||||||||
|
|
|||||||||||||||||||
From net realized gain |
| (0.06 | ) | | (0.39 | ) | (0.01 | ) | ||||||||||||
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|
|||||||||||
Total distributions to Common Shareholders |
(0.68 | ) | (0.76 | ) | (0.77 | ) | (1.22 | ) | (0.91 | ) | ||||||||||
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|
|
|||||||||||
Net asset value, end of year |
$ | 16.42 | $ | 16.82 | $ | 15.78 | $ | 16.32 | $ | 17.89 | ||||||||||
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|
|
|
|||||||||||
Market price, end of year |
$ | 15.39 | $ | 15.95 | $ | 14.35 | $ | 15.99 | $ | 18.22 | ||||||||||
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|
|||||||||||
Total Return Applicable to Common Shareholders(c) |
||||||||||||||||||||
Based on net asset value |
2.02 | % | 12.35 | % | 1.87 | % | (1.44 | )% | 14.53 | % | ||||||||||
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|
|
|
|
|
|
|
|||||||||||
Based on market price |
0.84 | % | 17.16 | % | (5.45 | )% | (5.18 | )% | 26.29 | % | ||||||||||
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|
|
|
|
|
|
|
|||||||||||
Ratios to Average Net Assets Applicable to Common Shareholders |
||||||||||||||||||||
Total expenses |
2.34 | %(d) | 2.79 | % | 2.49 | % | 2.31 | % | 1.78 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses after fees waived and/or reimbursed | 2.21 | %(d) | 2.77 | % | 2.49 | % | 2.31 | % | 1.77 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses after fees waived and/or reimbursed and excluding interest expense, fees, and amortization of offering costs(e) | 1.14 | %(d) | 1.18 | % | 1.18 | % | 1.19 | % | 1.16 | % | ||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||
Net investment income to Common Shareholders |
4.51 | % | 4.13 | % | 4.39 | % | 4.55 | % | 5.18 | % | ||||||||||
|
|
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|
|
|
|
|
|
|
|||||||||||
Supplemental Data |
||||||||||||||||||||
Net assets applicable to Common Shareholders, end of year (000) |
$ | 172,838 | $ | 177,030 | $ | 166,079 | $ | 171,705 | $ | 188,107 | ||||||||||
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|
|
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|
|
|
|||||||||||
VMTP Shares outstanding at $100,000 liquidation value, end of year (000) |
$ | 79,900 | $ | 79,900 | $ | 79,900 | $ | 79,900 | $ | 79,900 | ||||||||||
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|
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|
|
|||||||||||
Asset coverage per VMTP Shares at $100,000 liquidation value, end of year |
$ | 316,318 | $ | 321,564 | $ | 307,858 | $ | 314,899 | $ | 335,428 | ||||||||||
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Borrowings outstanding, end of year (000) | $ | 34,683 | $ | 29,194 | $ | 23,232 | $ | 22,404 | $ | 25,054 | ||||||||||
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Portfolio turnover rate |
11 | % | 19 | % | 38 | % | 46 | % | 29 | % | ||||||||||
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(a) |
Based on average common shares outstanding. |
(b) |
Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
(c) |
Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices. |
(d) |
Includes non-recurring expenses of reorganization costs. Without these costs, total expenses, total expenses after fees waived and/or reimbursed and total expenses after fees waived and/or reimbursed and excluding interest expense, fees, and amortization of offering costs would have been 2.29%, 2.16% and 1.09%, respectively. |
(e) |
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares. |
133
BlackRock MuniHoldings Fund II, Inc. (MUH)
The Financial Highlights table is intended to help you understand MUHs financial performance for the periods shown. Certain information reflects the financial results for a single Common Share of MUH. The total returns in the table represent the rate an investor would have earned or lost on an investment in MUH (assuming reinvestment of all dividends and/or distributions, if applicable). The information shown has been audited by Deloitte & Touche LLP, MUHs independent registered public accounting firm. Financial statements for the fiscal year ended April 30, 2020 and the Report of the Independent Registered Public Accounting Firm thereon appear in MUHs Annual Report for the fiscal year ended April 30, 2020, which is available upon request.
Please see next page for Financial Highlights Table
134
MUH Financial Highlights
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Net asset value, beginning of year |
$ | 15.32 | $ | 15.11 | $ | 15.52 | $ | 16.51 | $ | 16.21 | ||||||||||
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Net investment income(a) |
0.70 | 0.76 | 0.80 | 0.86 | 0.91 | |||||||||||||||
Net realized and unrealized gain (loss) |
(1.13 | ) | 0.25 | (0.35 | ) | (0.95 | ) | 0.33 | ||||||||||||
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Net increase (decrease) from investment operations |
(0.43 | ) | 1.01 | 0.45 | (0.09 | ) | 1.24 | |||||||||||||
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Distributions to Common Shareholders(b) |
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From net investment income |
(0.69 | ) | (0.75 | ) | (0.85 | ) | (0.90 | ) | (0.94 | ) | ||||||||||
From net realized gain |
| (0.05 | ) | (0.01 | ) | | | |||||||||||||
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Total distributions to Common Shareholders |
(0.69 | ) | (0.80 | ) | (0.86 | ) | (0.90 | ) | (0.94 | ) | ||||||||||
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Net asset value, end of year |
$ | 14.20 | $ | 15.32 | $ | 15.11 | $ | 15.52 | $ | 16.51 | ||||||||||
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Market price, end of year |
$ | 13.31 | $ | 15.05 | $ | 13.75 | $ | 15.59 | $ | 16.23 | ||||||||||
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Total Return Applicable to Common Shareholders(c) |
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Based on net asset value |
(2.93 | )% | 7.46 | % | 3.09 | % | (0.52 | )% | 8.25 | % | ||||||||||
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Based on market price |
(7.38 | )% | 16.00 | % | (6.61 | )% | 1.65 | % | 12.90 | % | ||||||||||
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Ratios to Average Net Assets Applicable to Common Shareholders |
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Total expenses |
2.31 | % | 2.58 | % | 2.12 | % | 1.83 | % | 1.50 | % | ||||||||||
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Total expenses after fees waived and paid indirectly |
2.31 | % | 2.58 | % | 2.12 | % | 1.83 | % | 1.50 | % | ||||||||||
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Total expenses after fees waived and/or reimbursed and paid indirectly and excluding interest expense, fees and amortization of offering costs(d) |
1.03 | % | 1.05 | % | 1.02 | % | 1.00 | % | 1.00 | % | ||||||||||
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Net investment income to Common Shareholders |
4.45 | % | 5.05 | % | 5.16 | % | 5.37 | % | 5.66 | % | ||||||||||
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Supplemental Data |
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Net assets applicable to Common Shareholders, end of year (000) |
$ | 160,923 | $ | 173,628 | $ | 171,346 | $ | 175,637 | $ | 186,553 | ||||||||||
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VMTP Shares outstanding at $100,000 liquidation value, end of year (000) |
$ | 55,000 | $ | 55,000 | $ | 55,000 | $ | 55,000 | $ | 55,000 | ||||||||||
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Asset coverage per VMTP Shares at $100,000 liquidation value, end of year |
$ | 392,588 | $ | 415,686 | $ | 411,538 | $ | 419,340 | $ | 439,188 | ||||||||||
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Borrowings outstanding, end of year (000) |
$ | 49,787 | $ | 53,409 | $ | 54,100 | $ | 47,507 | $ | 46,103 | ||||||||||
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Portfolio turnover rate |
22 | % | 30 | % | 16 | % | 10 | % | 7 | % | ||||||||||
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(a) |
Based on average common shares outstanding. |
(b) |
Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
(c) |
Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices. |
(d) |
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares. |
135
BlackRock MuniHoldings Quality Fund, Inc. (MUS)
The Financial Highlights table is intended to help you understand MUSs financial performance for the periods shown. Certain information reflects the financial results for a single Common Share of MUS. The total returns in the table represent the rate an investor would have earned or lost on an investment in MUS (assuming reinvestment of all dividends and/or distributions, if applicable). The information shown has been audited by Deloitte & Touche LLP, MUSs independent registered public accounting firm. Financial statements for the fiscal year ended April 30, 2020 and the Report of the Independent Registered Public Accounting Firm thereon appear in MUSs Annual Report for the fiscal year ended April 30, 2020, which is available upon request.
Please see next page for Financial Highlights Table
136
MUS Financial Highlights
(a) |
Based on average common shares outstanding. |
(b) |
Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
(c) |
Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices. |
(d) |
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares. |
137
BlackRock MuniHoldings Fund, Inc. (MHD)
The Financial Highlights table is intended to help you understand the Acquiring Funds financial performance for the periods shown. Certain information reflects the financial results for a single Common Share of the Acquiring Fund. The total returns in the table represent the rate an investor would have earned or lost on an investment in the Acquiring Fund (assuming reinvestment of all dividends and/or distributions, if applicable). The information shown has been audited by Deloitte & Touche LLP, the Acquiring Funds independent registered public accounting firm. Financial statements for the fiscal year ended April 30, 2020 and the Report of the Independent Registered Public Accounting Firm thereon appear in the Acquiring Funds Annual Report for the fiscal year ended April 30, 2020, which is available upon request.
Please see next page for Financial Highlights Table
138
The Acquiring Fund (MHD) Financial Highlights
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Net asset value, beginning of year |
$ | 16.56 | $ | 16.41 | $ | 16.85 | $ | 17.95 | $ | 17.59 | ||||||||||
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Net investment income(a) |
0.74 | 0.81 | 0.88 | 0.95 | 1.00 | |||||||||||||||
Net realized and unrealized gain (loss) |
(1.36 | ) | 0.22 | (0.39 | ) | (1.07 | ) | 0.42 | ||||||||||||
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Net increase (decrease) from investment operations |
(0.62 | ) | 1.03 | 0.49 | (0.12 | ) | 1.42 | |||||||||||||
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Distributions to Common Shareholders(b) |
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From net investment income |
(0.76 | ) | (0.83 | ) | (0.92 | ) | (0.98 | ) | (1.06 | ) | ||||||||||
From net realized gain |
| (0.05 | ) | (0.01 | ) | | | |||||||||||||
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Total distributions to Common Shareholders |
(0.76 | ) | (0.88 | ) | (0.93 | ) | (0.98 | ) | (1.06 | ) | ||||||||||
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Net asset value, end of year |
$ | 15.18 | $ | 16.56 | $ | 16.41 | $ | 16.85 | $ | 17.95 | ||||||||||
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Market price, end of year |
$ | 13.91 | $ | 15.92 | $ | 14.98 | $ | 16.65 | $ | 18.14 | ||||||||||
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Total Return Applicable to Common Shareholders(c) |
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Based on net asset value |
(4.02 | )% | 6.84 | % | 3.07 | % | (0.67 | )% | 8.65 | % | ||||||||||
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Based on market price |
(8.52 | )% | 12.51 | % | (4.79 | )% | (2.87 | )% | 11.91 | % | ||||||||||
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Ratios to Average Net Assets Applicable to Common Shareholders |
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Total expenses |
2.16 | %(d) | 2.47 | % | 2.16 | % | 1.87 | % | 1.53 | % | ||||||||||
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Total expenses after fees waived and paid indirectly |
2.15 | %(d) | 2.47 | % | 2.16 | % | 1.87 | % | 1.53 | % | ||||||||||
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Total expenses after fees waived and/or reimbursed and paid indirectly and excluding interest expense, fees and amortization of offering costs(e) |
0.97 | %(d) | 1.00 | % | 1.01 | % | 0.99 | % | 0.99 | % | ||||||||||
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Net investment income to Common Shareholders |
4.40 | %(d) | 4.98 | % | 5.19 | % | 5.42 | % | 5.75 | % | ||||||||||
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Supplemental Data |
|
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Net assets applicable to Common Shareholders, end of year (000) |
$ | 215,764 | $ | 235,029 | $ | 232,921 | $ | 238,684 | $ | 253,864 | ||||||||||
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VMTP Shares outstanding at $100,000 liquidation value, end of year (000) |
$ | 83,700 | $ | 83,700 | $ | 83,700 | $ | 83,700 | $ | 83,700 | ||||||||||
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Asset coverage per VMTP Shares at $100,000 liquidation value, end of year |
$ | 357,782 | $ | 380,799 | $ | 378,281 | $ | 385,166 | $ | 403,302 | ||||||||||
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Borrowings outstanding, end of year (000) |
$ | 53,130 | $ | 52,674 | $ | 63,166 | $ | 62,233 | $ | 60,289 | ||||||||||
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Portfolio turnover rate |
21 | % | 17 | % | 12 | % | 9 | % | 7 | % | ||||||||||
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|
(a) |
Based on average common shares outstanding. |
(b) |
Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
(c) |
Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices. |
(d) |
Excludes 0.01% of expenses incurred indirectly as a result of investments in underlying funds. |
(e) |
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares. |
139
The Acquiring Funds dividend and distribution policy with respect to common shares will be the Combined Funds dividend and distribution policy with respect to common shares. BAFs, BBKs, MUHs and MUSs dividend and distribution policy with respect to common shares is identical as that of the Acquiring Fund. The Acquiring Fund intends to make regular monthly cash distributions of all or a portion of its net investment income, after payment of dividends on the Acquiring Funds preferred shares outstanding, to holders of the Acquiring Funds common shares, except as described below in Undistributed Net Investment Income. The Acquiring Funds net investment income consists of all interest income accrued on portfolio assets less all expenses of the Acquiring Fund. The Acquiring Fund is required to allocate net capital gains and other taxable income, if any, received by the Acquiring Fund among its common shareholders on a pro rata basis in the year for which such capital gains and other income is realized.
Various factors will affect the level of the Acquiring Funds net investment income, such as its asset mix, portfolio turnover level, performance of its investments, level of retained earnings, the amount of leverage utilized by the Acquiring Fund and the effects thereof, the costs of such leverage, the movement of interest rates and general market conditions. In addition, the Combined Funds future earnings will vary depending upon the combination of completed Reorganizations. These factors, among others, may result in the Combined Funds level of net investment income being different from the level of net investment income for any of the individual Funds if the Reorganizations were not completed. To permit the Acquiring Fund to maintain more stable monthly distributions and to the extent consistent with the distribution requirements imposed on regulated investment companies by the Code, the Acquiring Fund may from time to time distribute less than the entire amount earned in a particular period. The income would be available to supplement future distributions. As a result, the distributions paid by the Acquiring Fund for any particular month may be more or less than the amount actually earned by the Acquiring Fund during that month. The amount of undistributed income paid by the Acquiring Fund for any particular month may vary from time to time. The portion of a Combined Funds monthly distribution that consists of undistributed income may be greater than any individual Fund prior to the Reorganizations for any particular month. Undistributed earnings will increase the Acquiring Funds NAV and, correspondingly, distributions from undistributed earnings and from capital, if any, will reduce the Acquiring Funds NAV.
Acquiring Fund common shareholders will automatically have all dividends and distributions reinvested in common shares issued by the Acquiring Fund or Acquiring Fund common shares purchased in the open market in accordance with the Acquiring Funds Automatic Dividend Reinvestment Plan, unless an election is made to receive cash. For information concerning the manner in which dividends and distributions to holders of the Acquiring Fund common shares may be reinvested automatically in the Acquiring Fund common shares, see Automatic Dividend Reinvestment Plan.
Undistributed Net Investment Income
If the Reorganizations are approved by shareholders, then the greater of (1) substantially all of the undistributed net investment income, if any, or (2) the monthly distribution of each Fund is expected to be declared to such Funds common shareholders prior to the Closing Date (the Pre-Reorganization Declared UNII Distributions). The declaration date, ex-dividend date (the Ex-Dividend Date) and record date of the Pre-Reorganization Declared UNII Distributions will occur prior to the Closing Date. However, all or a significant portion of the Pre-Reorganization Declared UNII Distributions may be paid in one or more distributions to common shareholders of the Funds entitled to such Pre-Reorganization Declared UNII Distributions after the Closing Date. Former BAF, BBK, MUH and MUS shareholders entitled to such Pre-Reorganization Declared UNII Distributions paid after the Closing Date will receive such distributions in cash.
Persons who purchase common shares of any of the Funds on or after the Ex-Dividend Date for the Pre-Reorganization Declared UNII Distributions should not expect to receive any distributions from any Fund until distributions, if any, are declared by the Board of the Combined Fund and paid to shareholders entitled to any such distributions. No such distributions are expected to be paid by the Combined Fund until at least approximately one month following the Closing Date.
140
Additionally, the Acquiring Fund, in order to seek to provide its common shareholders with distribution rate stability, may include in its Pre-Reorganization Declared UNII Distribution amounts in excess of its undistributed net investment income and net investment income accrued through the Closing Date; any such excess amounts are not expected to constitute a return of capital. This would result in the Acquiring Fund issuing incrementally more common shares in the Reorganizations since its NAV as of the business day prior to the Closing Date of the Reorganizations would be lower relative to a scenario where such excess amounts were not included in the Acquiring Funds Pre-Reorganization Declared UNII Distribution.
The Combined Fund is anticipated to retain a lower UNII balance after the Reorganizations than BAF, BBK, MUH and MUS prior to the Reorganizations. The lower anticipated UNII balance for the Combined Fund relative to the UNII balance of each of BAF, BBK, MUH and MUS poses risks for shareholders of the Combined Fund. UNII balances, in part, support the level of a funds regular distributions and provide a cushion in the event a funds net earnings for a particular distribution period are insufficient to support the level of its regular distribution for that period. If the Combined Funds net earnings are below the level of its current distribution rate, the Combined Funds UNII balance could be more likely to contribute to a determination to decrease the Combined Funds distribution rate, or could make it more likely that the Combined Fund will make distributions consisting in part of a return of capital to maintain the level of its regular distributions. See Dividends and Distributions. Moreover, because a funds UNII balance, in part, supports the level of a funds regular distributions, the UNII balance of the Combined Fund could impact the trading market for the Combined Funds common shares and the magnitude of the trading discount to NAV of the Combined Funds common shares. However, the Combined Fund is anticipated to benefit from a lower expense ratio (compared to BAF, BBK, MUH and MUS), a potentially higher net earnings profile and other anticipated benefits of economies of scale as discussed herein. Each Fund, including the Combined Fund, reserves the right to change its distribution policy with respect to common share distributions and the basis for establishing the rate of its distributions for the common shares at any time and may do so without prior notice to common shareholders. The payment of any distributions by any Fund, including the Combined Fund, is subject to, and will only be made when, as, and if, declared by the Board of such Fund. There is no assurance the Board of any Fund, including the Combined Fund, will declare any distributions for such Fund.
To the extent any Pre-Reorganization Declared UNII Distribution is not an exempt interest dividend (as defined in the Code), the distribution may be taxable to shareholders for U.S. federal income tax purposes.
Restrictions on Distributions to Common Shares
While there are any preferred shares of the Acquiring Fund outstanding, the Acquiring Fund may not declare any cash dividend or other distribution on its common shares, unless at the time of such declaration, (i) all accrued preferred shares dividends have been paid and (ii) the value of the Acquiring Funds total assets (determined after deducting the amount of such dividend or other distribution), less all liabilities and indebtedness of the Acquiring Fund, is at least 200% (as required by the 1940 Act) of the liquidation preference of the outstanding preferred shares (expected to equal the aggregate original purchase price of the outstanding preferred shares plus any accrued and unpaid dividends thereon, whether or not earned or declared on a cumulative basis). In addition to the requirements of the 1940 Act, the Acquiring Fund may be required to comply with other asset coverage requirements as a condition of the Acquiring Fund obtaining a rating of its preferred shares from a nationally recognized rating service. These requirements may include an asset coverage test more stringent than that under the 1940 Act. This limitation on the Acquiring Funds ability to make distributions on its common shares could in certain circumstances impair the ability of the Acquiring Fund to maintain its qualification for taxation as a regulated investment company under the Code. The Acquiring Fund intends, however, to the extent possible, to purchase or redeem preferred shares from time to time to maintain compliance with such asset coverage requirements and may pay special dividends to the holders of the preferred shares in certain circumstances in connection with any such impairment of the Acquiring Funds status as a regulated investment company under the Code.
Tax Treatment of Distributions
The tax treatment and characterization of the Acquiring Funds distributions may vary significantly from time to time because of the varied nature of the Acquiring Funds investments. The Acquiring Fund will indicate the proportion of its capital gains distributions that constitute long-term and short-term gains annually.
141
The final tax characterization of distributions is determined after the end of the Acquiring Funds fiscal year and is reported to shareholders on Form 1099. Distributions will be characterized as tax-exempt interest income, ordinary income, capital gains and/or return of capital. The Acquiring Funds net investment income or net realized capital gains may not be sufficient to support the level of distributions paid. To the extent that distributions exceed the Acquiring Funds current and accumulated earnings and profits in the current fiscal year, the excess may be treated as a return of capital. A return of capital distribution does not necessarily reflect the Acquiring Funds investment performance and should not be confused with yield or income. A return of capital is a return of a portion of an investors original investment. A return of capital is generally not taxable, but it reduces a shareholders tax basis in his or her shares, thus reducing any loss or increasing any gain on a subsequent disposition by the shareholder of his or her shares. It is possible that a substantial portion of the distributions paid during a calendar year may ultimately be classified as return of capital for income tax purposes when the final determination of the source and character of the distributions is made.
142
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Unless the registered owner of Acquiring Fund common shares elects to receive cash by contacting Computershare Trust Company, N.A. (the Reinvestment Plan Agent), all dividends or other distributions (together, a dividend) declared for your Acquiring Fund common shares will be automatically reinvested by the Reinvestment Plan Agent, as agent for shareholders in administering the Acquiring Funds dividend reinvestment plan (the Reinvestment Plan), in additional Acquiring Fund common shares.
Shareholders who elect not to participate in the Reinvestment Plan will receive all dividends in cash paid by check mailed directly to the shareholder of record (or, if the common shares are held in street or other nominee name, then to such nominee) by the Reinvestment Plan Agent. You may elect not to participate in the Reinvestment Plan and to receive all dividends in cash by contacting Computershare Trust Company, N.A., as Reinvestment Plan Agent, at the address set forth below. Participation in the Reinvestment Plan is completely voluntary and may be terminated or resumed at any time without penalty by telephonic, internet or written notice if received and processed by the Reinvestment Plan Agent prior to the dividend record date. Additionally, the Reinvestment Plan Agent seeks to process notices received after the record date but prior to the payable date and such notices often will become effective by the payable date. Where late notices are not processed by the applicable payable date, such termination or resumption will be effective with respect to any subsequently declared dividend.
Some brokers may automatically elect to receive cash on your behalf and may re-invest that cash in additional Acquiring Fund common shares for you. If you wish for all dividends declared on your Acquiring Fund common shares to be automatically reinvested pursuant to the Reinvestment Plan, please contact your broker.
The Reinvestment Plan Agent will open an account for each Acquiring Fund common shareholder under the Reinvestment Plan in the same name in which such common shareholders Acquiring Fund common shares are registered. Whenever the Acquiring Fund declares a dividend payable in cash, non-participants in the Reinvestment Plan will receive cash and participants in the Reinvestment Plan will receive the equivalent in Acquiring Fund common shares. The Acquiring Fund common shares will be acquired by the Reinvestment Plan Agent for the participants accounts, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized Acquiring Fund common shares from the Acquiring Fund (newly issued Acquiring Fund common shares) or (ii) by purchase of outstanding Acquiring Fund common shares on the open market (open-market purchases). If, on the dividend payment date, the NAV is equal to or less than the market price per share plus estimated per share fees (such condition often referred to as a market premium), the Reinvestment Plan Agent will invest the dividend amount in newly issued Acquiring Fund common shares on behalf of the participants. The number of newly issued Acquiring Fund common shares to be credited to each participants account will be determined by dividing the dollar amount of the dividend by the NAV on the dividend payment date. However, if the NAV is less than 95% of the market price on the dividend payment date, the dollar amount of the dividend will be divided by 95% of the market price on the dividend payment date. If, on the dividend payment date, the NAV is greater than the market price per share plus estimated per share fees (such condition often referred to as a market discount), the Reinvestment Plan Agent will invest the dividend amount in Acquiring Fund common shares acquired on behalf of the participants in open-market purchases. In the event of a market discount on the dividend payment date, the Reinvestment Plan Agent will have until the last business day before the next date on which the Acquiring Fund common shares trade on an ex-dividend basis or 30 days after the dividend payment date, whichever is sooner, to invest the dividend amount in Acquiring Fund common shares acquired in open-market purchases. If, before the Reinvestment Plan Agent has completed its open-market purchases, the market price per Acquiring Fund Common Share exceeds the NAV per Acquiring Fund Common Share, the average per Acquiring Fund Common Share purchase price paid by the Reinvestment Plan Agent may exceed the NAV of the Acquiring Fund common shares, resulting in the acquisition of fewer Acquiring Fund common shares than if the dividend had been paid in newly issued Acquiring Fund common shares on the dividend payment date.
Because of the foregoing difficulty with respect to open-market purchases, the Reinvestment Plan provides that if the Reinvestment Plan Agent is unable to invest the full dividend amount in open-market purchases, or if the market discount shifts to a market premium during the purchase period, the Reinvestment Plan Agent may cease making open-market purchases and may invest any uninvested portion in newly issued Acquiring Fund common shares. Investments in newly issued Acquiring Fund common shares made in this manner would be made pursuant to the same process described above and the date of issue for such newly issued Acquiring Fund common shares will substitute for the dividend payment date.
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The Reinvestment Plan Agent maintains all shareholders accounts in the Reinvestment Plan and furnishes written confirmation of all transactions in the accounts, including information needed by shareholders for tax records. Acquiring Fund Common shares in the account of each participant will be held by the Reinvestment Plan Agent on behalf of such participant, and each shareholder proxy will include those Acquiring Fund common shares purchased or received pursuant to the Reinvestment Plan.
In the case of shareholders such as banks, brokers or nominees, which hold shares for others who are the beneficial owners, the Reinvestment Plan Agent will administer the Reinvestment Plan on the basis of the number of Acquiring Fund common shares certified from time to time by the record shareholders name and held for the account of beneficial owners who participate in the Reinvestment Plan.
The Reinvestment Plan Agents fees for the handling of the reinvestment of dividends will be paid by the Acquiring Fund; however, each participant will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. The automatic reinvestment of dividends pursuant to the Reinvestment Plan will not relieve participants of any U.S. federal, state or local income tax that may be payable (or required to be withheld) on such dividends.
Participants in BBK and BAF that request a sale of shares are subject to a $2.50 sales fee and a $0.15 per share sold brokerage commission fee. Participants in MHD, MUH and MUS that request a sale of shares are subject to a $0.02 per share sold brokerage commission. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to pay.
The Acquiring Fund reserves the right to amend or terminate the Reinvestment Plan. There is no direct service charge to participants with regard to purchases in the Reinvestment Plan; however, the Acquiring Fund reserves the right to amend the Reinvestment Plan to include a service charge payable by the participants. Notice of amendments to the Reinvestment Plan will be sent to participants.
All correspondence concerning the Reinvestment Plan should be directed to the Reinvestment Plan Agent through the internet at www.computershare.com/blackrock, or in writing to Computershare Trust Company, N.A., P.O. Box 505000, Louisville, KY 40233, Telephone: (800) 699-1236.
All overnight correspondence should be directed to the Reinvestment Plan Agent at Computershare, 462 South 4th Street, Suite 1600, Louisville, KY 40202.
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CERTAIN PROVISIONS OF THE DECLARATIONS OF TRUST, CHARTER AND BYLAWS
Each of BAFs and BBKs Agreement and Declaration of Trust and Amended and Restated Bylaws, and each of MUHs, MUSs and the Acquiring Funds Charter and Amended and Restated Bylaws include provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the applicable Fund or to change the composition of its Board. This could have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control over the Fund. Such attempts could have the effect of increasing the expenses of the Fund and disrupting the normal operation of the Fund.
Certain Provisions in the Declaration of Trust or Charter of Each Fund
The Board of each of BAF and BBK is divided into three classes, with the terms of one class expiring at each annual meeting of shareholders. At each annual meeting, one class of Board Members for each such Fund is elected to a three-year term. This provision could delay for up to two years the replacement of a majority of the Board of each Fund. In contrast, the Board of the Acquiring Fund is not classified.
For each of BAF and BBK, a Board Member may be removed from office for cause only, and not without cause, by the action of a majority of the remaining Board Members or by a vote of the holders of at least 75% of the shares entitled to vote in an election of such Board Member. For each of MUH, MUS and the Acquiring Fund, a Board Member may be removed with or without cause, but only by action taken by holders of at least 66 2/3% of the shares entitled to vote in an election to fill that directorship.
Holders of each Funds outstanding preferred shares, including VMTP Shares, voting together as a class, to the exclusion of the holders of all other securities and classes of shares of such Fund, are entitled to elect two Board Members of such Fund at any annual meeting in which Board Members are elected.
In addition, each of BAFs and BBKs Agreement and Declaration of Trust requires the affirmative vote or consent of a majority of the Board Members then in office followed by the affirmative vote of the holders of not less than 75% of the outstanding shares of each affected class or series outstanding, voting as a separate class or series, to approve, adopt or authorize certain transactions with five percent-or-greater holders of a class or series of shares and their associates, unless 80% of the Board Members by resolution have approved a memorandum of understanding with such holders with respect to and substantially consistent with such transaction, in which case approval by a 1940 Act Majority will be the only vote of the shareholders required. These voting requirements are in addition to any regulatory relief required from the SEC with respect to such transaction. For purposes of these provisions, a five percent-or-greater holder of a class or series of shares (a Principal Shareholder) refers to any corporation, person or other entity which is the beneficial owner, directly or indirectly, of 5% or more of the outstanding shares of any class or series and shall include any affiliate or associate.
The transactions subject to these special approval requirements are:
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The merger or consolidation of BAF or BBK or any subsidiary of the Fund with or into any Principal Shareholder. |
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The issuance of any securities of BAF or BBK to any Principal Shareholder for cash (other than pursuant to a dividend reinvestment plan). |
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The sale, lease or exchange of all or any substantial part of the assets of BAF or BBK to any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period). |
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The sale, lease or exchange to BAF or BBK or any subsidiary of BAF or BBK, in exchange for securities of BAF or BBK, of any assets of any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for purposes of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period). |
145
Each of BAF and BBK may merge or consolidate with any other corporation, association, trust or other organization or may sell, lease or exchange all or substantially all of BAFs or BBKs property, including its good will, upon such terms and conditions and for such consideration when and as authorized by two-thirds of BAFs or BBKs Board Members and approved by a 1940 Act Majority of BAFs or BBKs shareholders.
For each of MUH, MUS and the Acquiring Fund, each of MUHs, MUSs and the Acquiring Funds Charter provides that a favorable vote of the holders of at least 66 2/3% of the outstanding shares of capital stock entitled to be voted on the matter shall be required to approve, adopt or authorize (i) a merger or consolidation or statutory share exchange of MUH, MUS or the Acquiring Fund with any other corporation, (ii) a sale of all or substantially all of the assets of MUH, MUS or the Acquiring Fund (other than in the regular course of its investment activities), or (iii) a liquidation or dissolution of MUH, MUS or the Acquiring Fund, unless such action has previously been approved, adopted or authorized by the affirmative vote of at least two-thirds of the MUHs, MUSs or Acquiring Funds Board Members, in which case the affirmative vote of the holders of a majority of the outstanding shares of capital stock of MUH, MUS or the Acquiring Fund entitled to vote thereon shall be required.
If any plan of reorganization (as such term is used under the 1940 Act) adversely affects a Funds preferred shares, including such Funds VMTP Shares, then such plan of reorganization will require the approval of a 1940 Act Majority of the holders of such preferred shares, including such Funds VMTP Holders.
With respect to MUH, MUS and the Acquiring Fund, Subtitle 8 of Title 3 of the Maryland General Corporation Law permits a Maryland corporation with a class of equity securities registered under the Securities and Exchange Act of 1934 and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to a provision requiring that a vacancy on the board be filled only by the remaining directors and for the remainder of the full term of the directorship in which the vacancy occurred. Pursuant to Subtitle 8 and by amendment to the bylaws, the Board of MUH, MUS and the Acquiring Fund elected to provide that vacancies on the Board be filled only by the remaining directors and for the remainder of the full term of the directorship in which the vacancy occurred.
The Board of each Fund has determined that the voting requirements described above are in the best interests of shareholders generally. Reference should be made to the Declaration of Trust or Charter of each Fund on file with the SEC for the full text of these provisions.
Certain Provisions in the Bylaws of Each Fund
Each Funds bylaws generally require that advance notice be given to the Fund in the event a shareholder desires to nominate a person for election to the Board or to transact any other business at an annual meeting of shareholders. Notice of any such nomination or business must be delivered to or received at the principal executive offices of the Fund not less than 120 calendar days nor more than 150 calendar days prior to the anniversary date of the prior years annual meeting (subject to certain exceptions). Any notice by a shareholder must be accompanied by certain information as provided in the bylaws. Reference should be made to each Funds bylaws on file with the SEC for the full text of these provisions.
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BAF was formed as a Delaware statutory trust pursuant to an Agreement and Declaration of Trust governed by the laws of the State of Delaware on August 30, 2002, and commenced operations on October 31, 2002.
BBK was formed as a Delaware statutory trust pursuant to an Agreement and Declaration of Trust governed by the laws of the State of Delaware on February 15, 2002, and commenced operations on April 30, 2002.
MUH was formed as a Maryland corporation governed by the laws of the State of Maryland on April 24, 1997, and commenced operations on February 27, 1998.
MUS was formed as a Maryland corporation governed by the laws of the State of Maryland on March 11, 1998, and commenced operations on May 1, 1998.
The Acquiring Fund was formed as a Maryland corporation governed by the laws of the State of Maryland on February 27, 1997, and commenced operations on May 2, 1997.
In general, a Delaware statutory trust provides greater flexibility with respect to procedural matters and a corporation provides greater certainty with respect to limitation of personal liability. Under the Delaware Statutory Trust Act, shareholders of a Delaware statutory trust are entitled to the same limitation of personal liability as is extended to shareholders of a private corporation organized for profit under the General Corporation Law of the State of Delaware. However, there is a remote possibility that shareholders of a Delaware statutory trust could, under certain circumstances be held liable for the Delaware statutory trusts liabilities to the extent the courts of another state refused to recognize such limited liability in a controversy involving a Delaware statutory trusts obligations. BAFs and BBKs governing document disclaims shareholder liability for acts or obligations of such Fund. Thus, a Delaware statutory trust shareholders risk of incurring financial loss due to shareholder liability is limited to circumstances in which a court refuses to recognize the Delaware Statutory Trust Act and the complaining party is held not bound by the Delaware statutory trusts disclaimer regarding shareholder liability. As noted above, a Maryland corporation provides greater certainty with respect to limitation of personal liability. Shareholders of a Maryland corporation currently have no personal liability for the corporations acts or obligations, except that a shareholder may be liable to the extent that (i) the shareholder knowingly accepted a distribution in violation of such Maryland corporations charter or the Maryland General Corporation Law or (ii) the subscription price or other agreed upon consideration for stock subscribed for has not been paid.
In contrast to the Maryland General Corporation Law, the Delaware Statutory Trust Act allows the parties to define their business relationships. The Delaware Statutory Trust Act generally provides rules only in situations where the governing instrument does not address the subject matter, and the Delaware Statutory Trust Act gives maximum effect to the principle of freedom of contract and to the enforceability of a statutory trusts governing instrument. The Delaware Statutory Trust Act permits a trusts governing instrument to contain provisions relating to shareholder rights and removal of trustees, and provides trusts with the ability to amend or restate the trusts governing instruments. The Delaware Statutory Trust Act also authorizes the trustees to take various actions without requiring shareholder approval if permitted by a Funds governing instruments.
The foregoing discusses only certain differences between MUH, MUS and the Acquiring Fund under Maryland law and BAF and BBK under Delaware law. It is not intended to be a complete list of differences, and shareholders should refer to the relevant laws of each state and the provisions of each Funds applicable organizational documents for a more thorough comparison. Such documents are filed as part of each Funds registration statement with the SEC, and shareholders may obtain copies of such documents as described on page v of this Joint Proxy Statement/Prospectus.
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To convert each of BAF and BBK to an open-end investment company, BAFs and BBKs Agreement and Declaration of Trust each requires an amendment thereto.
For BAF and BBK, the amendment requires the favorable vote a majority of the Board Members then in office followed by the favorable vote of the holders of not less than 75% of the shares of each affected class or series outstanding, voting as separate classes or series, unless such amendment has been approved by 80% of the Board Members, in which case approval by a 1940 Act Majority of such Funds shareholders is required.
With respect to MUH, MUS and the Acquiring Fund, MUHs, MUSs and the Acquiring Funds Charter provides that a favorable vote of the holders of at least 66 2/3% of the outstanding shares of capital stock entitled to be voted on the matter shall be required to convert the Acquiring Fund to an open-end investment company, unless such action has previously been approved, adopted or authorized by the affirmative vote of at least two-thirds of the Acquiring Funds Board Members, in which case the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Acquiring Fund entitled to vote thereon shall be required.
The foregoing votes would satisfy a separate requirement in the 1940 Act that any conversion of a Fund to an open-end investment company be approved by the shareholders. If approved in the foregoing manners, we anticipate conversion of a Fund to an open-end investment company might not occur until 90 days after the shareholders meeting at which such conversion was approved and would also require at least 10 days prior notice to all shareholders. Following any such conversion, it is possible that certain of the Funds investment policies and strategies would have to be modified to assure sufficient portfolio liquidity. In the event of conversion, the Funds common shares would cease to be listed on the NYSE and the Funds preferred shares would be redeemed. Shareholders of an open-end investment company may require the company to redeem their shares at any time, except in certain circumstances as authorized by or under the 1940 Act, at their NAV, less such redemption charge, if any, as might be in effect at the time of redemption. An open-end investment company expects to pay all such redemption requests in cash, but reserves the right to pay redemption requests in a combination of cash and securities. If such partial payment in securities were made, investors may incur brokerage costs in converting such securities to cash. If a Fund were converted to an open-end investment company, it is likely that new shares would be sold at NAV plus a sales load. Each Board believes, however, that its Funds closed-end structure is desirable in light of its Funds investment objective and policies. Therefore, shareholders should assume that it is not likely that any Board would vote to convert its Fund to an open-end fund.
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The Board of each Fund may authorize separate classes of shares together with such designation of preferences, rights, voting powers, restrictions, limitations, qualifications or terms as may be determined from time to time by the Board of such Fund. The tables below set forth (i) the capitalization of BAF and MHD as of August 31, 2020 and the pro forma capitalization of the Combined Fund assuming only the BAF Reorganization was consummated as of August 31, 2020, which represents the combination of the completed Reorganizations presented in this Joint Proxy Statement/Prospectus that would result in the lowest level of capitalization of the Combined Fund; and (ii) the capitalization of the Funds as of August 31, 2020 and the pro forma capitalization of the Combined Fund assuming all of the Reorganizations were consummated as of August 31, 2020, which represents, in the Investment Advisors view, the most likely combination of the Reorganizations and the combination of the completed Reorganizations that would result in the highest level of capitalization of the Combined Fund.
Capitalization of BAF and MHD as of August 31, 2020 and pro forma capitalization of the Combined Fund assuming only the BAF Reorganization is consummated (unaudited)
Target Fund
(BAF) |
Acquiring Fund
(MHD) |
Adjustments |
Pro
forma
Combined Fund (BAF into MHD) |
|||||||||||||
Net Assets Attributable to: |
||||||||||||||||
Common Shares(1) |
$ | 133,526,944 | $ | 238,742,015 | $ | (797,491 | )(2) | $ | 371,471,468 | |||||||
VMTP Shares |
$ | 42,200,000 | $ | 83,700,000 | | $ | 125,900,000 | |||||||||
Shares Outstanding |
||||||||||||||||
Common Shares |
8,749,418 | 14,209,722 | (837,048 | )(3) | 22,122,092 | |||||||||||
VMTP Shares |
422 | 837 | | 1,259 | (4) | |||||||||||
NAV per Common Share |
$ | 15.26 | $ | 16.80 | | $ | 16.79 | |||||||||
Liquidation Preference per VMTP Share |
$ | 100,000.00 | $ | 100,000.00 | | $ | 100,000.00 |
(1) |
Based on the number of outstanding common shares as of August 31, 2020. |
(2) |
Reflects non-recurring aggregate estimated Reorganization expenses of $352,900, of which $223,500 was attributable to BAF and $129,400 was attributable to the Acquiring Fund. The actual costs associated with the Reorganizations may be more or less than the estimated costs discussed herein. Reflects undistributed net investment income (previously defined as UNII) of $444,591, of which $439,904 was attributable to BAF and $4,687 was attributable to the Acquiring Fund. |
(3) |
Reflects adjustments due to differences in per common share NAV. |
(4) |
Assumes no Target Fund VMTP Holders exercise their appraisal rights. |
Capitalization of each Fund as of August 31, 2020 and pro forma capitalization of the Combined Fund assuming all Reorganizations are consummated (unaudited)
BAF | BBK | MUH | MUS |
Acquiring Fund
(MHD) |
Adjustments |
Pro forma
Combined Fund (BAF, BBK, MUH and MUS into MHN) |
||||||||||||||||||||||
Net Assets Attributable to: |
||||||||||||||||||||||||||||
Common Shares(1) |
$ | 133,526,944 | $ | 172,839,136 | $ | 177,415,211 | $ | 181,008,386 | $ | 238,742,015 | $ | (4,707,213 | )(2) | $ | 898,824,479 | |||||||||||||
VMTP Shares |
$ | 42,200,000 | $ | 79,900,000 | $ | 55,000,000 | $ | 87,000,000 | $ | 83,700,000 | | $ | 347,800,000 | |||||||||||||||
Shares Outstanding |
||||||||||||||||||||||||||||
Common Shares |
8,749,418 | 10,522,957 | 11,336,282 | 13,018,276 | 14,209,722 | (4,309,324 | )(3) | 53,527,331 | ||||||||||||||||||||
VMTP Shares |
422 | 799 | 550 | 870 | 837 | | 3,478 | (4) | ||||||||||||||||||||
NAV per Common Share |
$ | 15.26 | $ | 16.42 | $ | 15.65 | $ | 13.90 | $ | 16.80 | | $ | 16.79 | |||||||||||||||
Liquidation Preference per VMTP Share |
$ | 100,000.00 | $ | 100,000.00 | $ | 100,000.00 | $ | 100,000.00 | $ | 100,000.00 | | $ | 100,000 |
(1) |
Based on the number of outstanding common shares as of August 31, 2020. |
149
(2) |
Reflects non-recurring aggregate estimated Reorganization expenses of $989,800, of which $223,500 was attributable to BAF, $242,000 was attributable to BBK, $229,900 was attributable to MUH, $165,000 was attributable to MUS and $129,400 was attributable to the Acquiring Fund. The actual costs associated with the Reorganizations may be more or less than the estimated costs discussed herein. Reflects UNII of $3,717,413, of which $439,904 was attributable to BAF, $1,200,925 was attributable to BBK, $1,081,190 was attributable to MUH, $990,707 was attributable to MUS and $4,687 was attributable to the Acquiring Fund. |
(3) |
Reflects adjustments due to differences in per common share NAV. |
(4) |
Assumes no Target Fund VMTP Holders exercise their appraisal rights. |
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Voting rights are identical for the holders of each Funds common shares. Holders of each Funds common shares are entitled to one vote for each Common Share held by them. Holders of each Funds preferred shares are entitled to one vote for each preferred share held by them. Each Funds common shares and preferred shares do not have cumulative voting rights.
Shareholders of BAF and BBK do not have appraisal rights for their respective common or preferred shares because each Fund is formed as a Delaware statutory trust, and each Funds respective Agreement and Declaration of Trust states that the shareholders are not entitled to appraisal rights. Under Maryland law, stockholders are not entitled to demand the fair value of their shares in connection with a reorganization if any shares of the class or series of their stock are listed on a national securities exchange, such as common shares of MUH, MUS and the Acquiring Fund, on the Record Date.
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U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATIONS
The following is a general summary of the U.S. federal income tax consequences of the Reorganizations to the U.S holders of BAF, BBK, MUH or MUS common shares. The discussion is based upon the Code, Treasury regulations, court decisions, published positions of the IRS and other applicable authorities, all as in effect on the date hereof and all of which are subject to change or differing interpretations (possibly with retroactive effect). The discussion is limited to U.S. persons who hold common shares of BAF, BBK, MUH or MUS as capital assets for U.S. federal income tax purposes (generally, assets held for investment). This summary does not address all of the U.S. federal income tax consequences that may be relevant to a particular shareholder or to shareholders who may be subject to special treatment under U.S. federal income tax laws. No ruling has been or will be obtained from the IRS regarding any matter relating to the Reorganizations. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax aspects described below. This summary of U.S. federal income tax consequences is for general information only. The Funds shareholders should consult their own tax advisers regarding the U.S. federal income tax consequences of the Reorganizations, as well as the effects of state, local and non-U.S. tax laws, including possible changes in tax law.
It is a condition to the closing of the Reorganizations that each Fund receives an opinion from Willkie, dated as of the Closing Date, regarding the characterization of each Reorganization as a reorganization within the meaning of Section 368(a) of the Code. The opinion of Willkie will be based on U.S. federal income tax law in effect on the Closing Date. In rendering its opinion, Willkie will also rely upon certain representations of the management of each Fund and assume, among other things, that the Reorganizations will be consummated in accordance with each Reorganization Agreement and other operative documents and as described herein. An opinion of counsel is not binding on the IRS or any court.
As a reorganization, the U.S. federal income tax consequences of the Reorganizations can be summarized as follows:
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No gain or loss will be recognized by a Fund by reason of the Reorganizations. |
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No gain or loss will be recognized by a shareholder of BAF, BBK, MUH and MUS who exchanges, as the case may be, all of its common shares solely for Acquiring Fund common shares or all of its BAF, BBK, MUH or MUS VMTP Shares solely for Acquiring Fund VMTP Shares pursuant to the Reorganizations (except with respect to cash received in lieu of a fractional Acquiring Fund Common Share, as discussed below). |
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The aggregate tax basis of Acquiring Fund common shares received by a shareholder of BAF, BBK, MUH or MUS pursuant to the Reorganizations will be the same as the aggregate tax basis of the shareholders BAF, BBK, MUH or MUS common shares surrendered in exchange therefor (reduced by any amount of tax basis allocable to a fractional Acquiring Fund Common Share for which cash is received). |
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The holding period of Acquiring Fund common shares received by a shareholder of BAF, BBK, MUH and MUS pursuant to the Reorganizations will include the holding period of the shareholders common shares surrendered in exchange therefor. |
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A shareholder of BAF, BBK, MUH and MUS that receives cash in lieu of a fractional Acquiring Fund Common Share in connection with the Reorganizations will be treated as having received cash in exchange for such fractional Acquiring Fund Common Share. A BAF, BBK, MUH or MUS shareholder that receives cash in lieu of a fractional Acquiring Fund Common Share will recognize capital gain or loss equal to the difference between the amount of cash deemed received for the fractional Acquiring Fund Common Share and BAF, BBK, MUH or MUS shareholders tax basis in BAF, BBK, MUH or MUS common shares allocable to the fractional Acquiring Fund Common Share. The capital gain or loss will be a long-term capital gain or loss if BAF, BBK, MUH or MUS shareholders holding period for BAF, BBK, MUH or MUS common shares is more than one year as of the date the Reorganizations are consummated. |
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The Acquiring Funds tax basis in BAFs, BBKs, MUHs and MUSs assets received by the Acquiring Fund pursuant to the Reorganizations will, in each instance, equal the tax basis of such assets in the hands of BAF, BBK, MUH and MUS immediately prior to the Closing Date, and the Acquiring Funds holding period for such assets will, in each instance, include the period during which the assets were held by BAF, BBK, MUH or MUS. |
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The Acquiring Fund intends to continue to be taxed under the rules applicable to regulated investment companies as defined in Section 851 of the Code, which are the same rules currently applicable to each Fund and its shareholders.
None of the Funds intend to sell any assets in connection with the Reorganizations other than in the ordinary course of business. If, however, assets of BAF, BBK, MUH and MUS were to be sold in connection with the Reorganizations, or if such assets were required to be marked to market as a result of the termination of BAFs, BBKs, MUHs and MUSs taxable year or as a result of the transfer of certain assets in the Reorganizations, the tax impact of any such sales (or deemed sales) would depend on the difference between the price at which such portfolio assets are sold and BAFs, BBKs, MUHs and MUSs basis in such assets. Any capital gains recognized in these sales (or deemed sales) on a net basis will be distributed to BAF, BBK, MUH or MUS shareholders as capital gain dividends (to the extent of net realized long-term capital gains) and/or ordinary dividends (to the extent of net realized short-term capital gains) during or with respect to the year of sale (or deemed sale) and prior to or after the date of the Reorganizations, and such distributions will be taxable to BAF, BBK, MUH or MUS shareholders.
Prior to the Closing Date, each Fund will declare a distribution to its shareholders, which together with all previous distributions, will have the effect of distributing to the shareholders of such Fund all of the Funds (i) investment company income (computed without regard to the deduction for dividends paid), if any, through the Closing Date, (ii) net capital gains, if any, through the Closing Date, and (iii) net tax-exempt interest income, if any, through the Closing Date. To the extent that such a distribution is not an exempt interest dividend (as defined in the Code), the distribution may be taxable to shareholders for U.S. federal income tax purposes.
The Acquiring Fund will succeed to capital loss carryforwards (and certain unrealized built-in losses, if any) of BAF, BBK, MUH and MUS, which are expected to be subject to tax loss limitation rules because BAF, BBK, MUH and MUS will undergo an ownership change for U.S. federal income tax purposes. The Acquiring Fund will also undergo an ownership change for U.S. federal income tax purposes. Because the Acquiring Fund, BAF, BBK, MUH and MUS will undergo an ownership change, the Code will generally limit the amount of pre-ownership change losses of the Acquiring Fund, BAF, BBK, MUH and MUS that may be used to offset post-ownership change gains to a specific annual loss limitation amount (generally the product of (i) the fair market value of the stock of the Acquiring Fund, BAF, BBK, MUH or MUS, with certain adjustments, immediately prior to the Reorganizations and (ii) a rate established by the IRS). Subject to certain limitations, any unused portion of these losses may be available in subsequent years, subject to the remaining portion of any applicable capital loss carryforward limit, as measured from the date of recognition.
Although the capital loss carryforwards of the Combined Fund attributable to BAF, BBK, MUH or MUS may be subject to tax loss limitation rules to the extent outlined above, it is currently expected that such tax loss limitation rules should not have a material adverse effect on the Combined Funds utilization of BAFs, BBKs, MUHs or MUSs capital loss carryforward as compared with what each Funds utilization of its own capital loss carryforward would be without the Reorganizations. The ability of each Fund (and the Combined Fund) to utilize any capital loss carryforwards now or in the future depends on many variables and assumptions, including but not limited to, projected performance of a Fund, the unrealized gain/loss position of a Fund, the types of securities held by a Fund, the current and future market environment (including the level of interest rates), portfolio turnover and applicable law, and is, therefore, highly uncertain. As of August 31, 2020, the Funds unused capital loss carryforwards, which have no expiration date and may be carried forward indefinitely, were as follows:
Capital Loss Carryforward Amount
BAF |
BBK | MUH | MUS |
Acquiring Fund
(MHD) |
||||||||||||
$6,215,759 |
$ | 3,339,636 | $ | 3,613,794 | $ | 10,779,281 | $ | 4,750,576 |
Due to the operation of these tax loss limitation rules, it is possible that shareholders of BAF, BBK, MUH or MUS or the Acquiring Fund would receive taxable distributions of short-term and long-term capital gains earlier than they would have in the absence of the Reorganizations. Such taxable distributions will be treated either as ordinary income
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(and not as favorably taxed qualified dividend income) if such capital gains are short term or as favorably taxed capital gain dividends if such capital gains are long term. The actual financial effect of the loss limitation rules on a shareholder of BAF, BBK, MUH or MUS whose losses are subject to the loss limitation rules would depend on many variables, including BAFs, BBKs, MUHs or MUSs expected growth rate if the relevant Reorganization were not to occur (i.e., whether, in the absence of the Reorganizations, BAF, BBK, MUH or MUS would generate sufficient capital gains against which to utilize its capital loss carryforwards (and certain realized built-in losses), in excess of what would have been the annual loss limitation amount had the relevant Reorganizations occurred), the timing and amount of future capital gains recognized by the Combined Fund if the Reorganizations were to occur, and the timing of a historic BAF, BBK, MUH or MUS shareholders disposition of its Shares (the tax basis of which might, depending on the facts, reflect that shareholders share of such Funds capital losses). Shareholders of all of the Funds should consult their own tax advisors in this regard.
For five years beginning on the Closing Date of the Reorganizations, the Combined Fund will not be allowed to offset certain pre-Reorganization built-in gains attributable to a Fund that is a gain corporation with capital loss carryforwards (and certain built-in losses) attributable to another Fund.
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VOTING INFORMATION AND REQUIREMENTS
The Funds have fixed the close of business on October 16, 2020 as the record date (the Record Date) for the determination of shareholders entitled to notice of, and to vote at, the Special Meeting or any adjournment or postponement thereof. Shareholders on the Record Date will be entitled to one vote for each Share held, with no Shares having cumulative voting rights.
A list of each Funds shareholders of record as of the Record Date will be available for inspection at the shareholder meeting. For each of BAF and BBK, a list of shareholders of record as of the Record Date will be available at the offices of such Funds, 100 Bellevue Parkway, Wilmington, DE 19809, for inspection by a Funds shareholders during regular business hours beginning ten days prior to the date of the Special Meeting.
As of the Record Date, the Funds had the following number of common shares and preferred shares outstanding:
Title of Class |
BAF | BBK | MUH | MUS |
Acquiring
Fund (MHD) |
|||||||||||||||
Common Shares |
8,749,418 | 10,522,957 | 11,336,282 | 13,018,276 | 14,209,722 | |||||||||||||||
VMTP Shares |
422 | 799 | 550 | 870 | 837 |
Shareholders may vote by participating at the Special Meeting remotely, by returning the enclosed proxy card or by casting their vote via telephone or the Internet using the instructions provided on the enclosed proxy card (described in greater detail below). Shareholders of each Fund have the opportunity to submit their voting instructions via the Internet or by touch-tone telephone voting. The giving of such a proxy will not affect your right to vote should you decide to attend the Special Meeting remotely. To use the Internet, please access the Internet address found on your proxy card. To record your voting instructions by automated telephone, please call the toll-free number listed on your proxy card. The Internet and automated telephone voting instructions are designed to authenticate shareholder identities, to allow shareholders to give their voting instructions, and to confirm that shareholders instructions have been recorded properly. Shareholders submitting their voting instructions via the Internet should understand that there may be costs associated with Internet access, such as usage charges from Internet access providers and telephone companies that must be borne by the shareholders. Any person giving a proxy may revoke it at any time prior to its exercise by giving written notice of the revocation to the Secretary of the Fund at 40 East 52nd Street, New York, New York 10022, by delivering a duly executed proxy bearing a later date, by recording later-dated voting instructions via the Internet or automated telephone or by attending the Special Meeting and voting. The giving of a proxy will not affect your right to vote if you attend the Special Meeting and wish to do so.
Votes cast by proxy or at the Special Meeting will be tabulated by the inspectors of election appointed for the Special Meeting. For BAF and BBK, the holders of a majority of the shares entitled to vote on any matter present at the Special Meeting or represented by proxy shall constitute a quorum at such Special Meeting of the shareholders for purposes of conducting business on such matter. For MUH, MUS and the Acquiring Fund, the presence at the Special Meeting or by proxy of the holders of shares entitled to cast one-third of the votes entitled to be cast shall constitute a quorum to conduct business at the Special Meeting, except with respect to any matter which requires approval by a separate vote of one or more classes or series of shares, in which case the presence at the Special Meeting or by proxy of the holders of shares entitled to cast one-third of the votes entitled to be cast by each class or series entitled to vote as a separate class or series shall constitute a quorum to conduct business at the Special Meeting. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the chair of the Special Meeting shall have power to adjourn the meeting from time to time, in the manner provided in the Funds bylaws, until a quorum shall be present or represented.
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The inspectors of election, who may be employees of BlackRock, will determine whether or not a quorum is present at the Special Meeting. The inspectors of election will generally treat abstentions and broker non-votes (i.e., shares held by brokers or nominees, typically in street name, as to which proxies have been returned but (a) instructions have not been received from the beneficial owners or persons entitled to vote and (b) the broker or nominee does not have discretionary voting power or elects not to exercise discretion on a particular matter) as present for purposes of determining a quorum, subject to any applicable rules of the NYSE.
If you hold your shares directly (not through a broker-dealer, bank or other financial institution) and if you return a properly executed proxy card that does not specify how you wish to vote on a proposal, your shares will be voted FOR each proposal on which you are entitled to vote.
Broker-dealer firms holding shares of a Fund in street name for the benefit of their customers and clients will request the instructions of such customers and clients on how to vote their shares on Proposals 1-2 before the Special Meeting. Proposals 1-2 are not routine matters and shareholder instructions are required for broker-dealers to vote a beneficial owners shares.
If you hold shares of a Fund through a bank or other financial institution or intermediary (called a service agent) that has entered into a service agreement with the Fund or a distributor of the Fund, the service agent may be the record holder of your shares. At the Special Meeting, a service agent will vote shares for which it receives instructions from its customers in accordance with those instructions. A properly executed proxy card or other authorization by a shareholder that does not specify how the shareholders shares should be voted on a proposal may be deemed to authorize a service provider to vote such shares in favor of the proposal. Depending on its policies, applicable law or contractual or other restrictions, a service agent may be permitted to vote shares with respect to which it has not received specific voting instructions from its customers. In those cases, the service agent may, but may not be required to, vote such shares in the same proportion as those shares for which the service agent has received voting instructions. This practice is commonly referred to as echo voting.
All properly executed proxies received prior to the Special Meeting will be voted in accordance with the instructions marked thereon or otherwise as provided therein. Unless instructions to the contrary are marked, proxies will be voted FOR the approval of each proposal. Abstentions and broker non-votes are not treated as votes FOR a proposal.
Common shareholders of BAF are being asked to consider Proposal 1(A) below. With respect to Proposal 1(A), abstentions and broker non-votes will be counted as shares present and will therefore have the same effect as votes AGAINST the proposal.
Common shareholders of BBK are being asked to consider Proposal 1(C) below. With respect to Proposal 1(C), abstentions and broker non-votes will be counted as shares present and will therefore have the same effect as votes AGAINST the proposal.
Common shareholders of MUH are being asked to consider Proposal 1(E) below. With respect to Proposal 1(E), abstentions and broker non-votes will be counted as shares present and will therefore have the same effect as votes AGAINST the proposal.
Common shareholders of MUS are being asked to consider Proposal 1(G) below. With respect to Proposal 1(G), abstentions and broker non-votes will be counted as shares present and will therefore have the same effect as votes AGAINST the proposal.
Common shareholders of the Acquiring Fund are being asked to consider Proposals 2(A), 2(B), 2(C) and 2(D) below. With respect to Proposals 2(A), 2(B), 2(C) and 2(D), abstentions will be counted as votes cast and will therefore have the same effect as votes AGAINST the proposal and broker non-votes will not have any effect on the result of the vote.
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Voting Requirement for Proposal 1: The Reorganizations of the Funds
Proposals |
Required Approval of
|
|
Proposal 1(A): The common shareholders and VMTP Holders of BAF are being asked to vote as a single class on a proposal to approve the BAF Reorganization Agreement and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of BAFs assets and the assumption by the Acquiring Fund of substantially all of BAFs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to BAFs common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of BAF, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by BAF of its registration under the 1940 Act, and the liquidation, dissolution and termination of BAF in accordance with its Agreement and Declaration of Trust and Delaware law | 1940 Act Majority | |
Proposal 1(C): The common shareholders and VMTP Holders of BBK are being asked to vote as a single class on a proposal to approve the BBK Reorganization Agreement and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of BBKs assets and the assumption by the Acquiring Fund of substantially all of BBKs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to BBKs common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of BBK, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by BBK of its registration under the 1940 Act, and the liquidation, dissolution and termination of BBK in accordance with its Agreement and Declaration of Trust and Delaware law. | 1940 Act Majority | |
Proposal 1(E): The common shareholders and VMTP Holders of MUH are being asked to vote as a single class on a proposal to approve the MUH Reorganization Agreement and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of MUHs assets and the assumption by the Acquiring Fund of substantially all of MUHs liabilities in exchange solely for newly issued common | Majority of outstanding shares entitled to vote |
157
Proposals |
Required Approval of
|
|
shares and VMTP Shares of the Acquiring Fund, which will be distributed to MUHs common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of MUH, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by MUH of its registration under the 1940 Act, and the liquidation, dissolution and termination of MUH in accordance with its charter and Maryland law. | ||
Proposal 1(G): The common shareholders and VMTP Holders of MUS are being asked to vote as a single class on a proposal to approve the MUS Reorganization Agreement and the transactions contemplated therein, including (i) acquisition by the Acquiring Fund of substantially all of MUSs assets and the assumption by the Acquiring Fund of substantially all of MUSs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to MUSs common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of MUS, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by MUS of its registration under the 1940 Act, and the liquidation, dissolution and termination of MUS in accordance with its charter and Maryland law. | Majority of outstanding shares entitled to vote |
Voting Requirement for Proposal 2: The Issuance of Acquiring Fund Common Shares
Proposals |
Required Approval of
|
|
Proposal 2(A): The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional Acquiring Fund common shares in connection with the BAF Reorganization. | Majority of votes entitled to be cast present at the Special Meeting or represented by proxy | |
Proposal 2(B): The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional Acquiring Fund common shares in connection with the BBK Reorganization. | Majority of votes entitled to be cast present at the Special Meeting or represented by proxy |
158
Proposals |
Required Approval of
|
|
Proposal 2(C): The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional Acquiring Fund common shares in connection with the MUH Reorganization. | Majority of votes entitled to be cast present at the Special Meeting or represented by proxy | |
Proposal 2(D): The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional Acquiring Fund common shares in connection with the MUS Reorganization. | Majority of votes entitled to be cast present at the Special Meeting or represented by proxy |
Unless otherwise indicated, the information set forth below is as of October 16, 2020. To each Funds knowledge, no person beneficially owned more than 5% of the Funds respective outstanding shares, except as set forth below.
Fund |
Investor | Address |
Common
Shares Held |
Common
Shares % Held |
Preferred
Shares Held |
Preferred
Shares % Held |
||||||
BAF |
First Trust
Portfolios L.P. |
120 East
Liberty Drive, Suite 400 Wheaton, Illinois 60187 |
620,533 | 7.09% | N/A | N/A | ||||||
BBK |
N/A | N/A | N/A | N/A | N/A | N/A | ||||||
MUH |
First Trust
Portfolios L.P. |
120 East
Liberty Drive, Suite 400 Wheaton, Illinois 60187 |
714,830 | 6.31% | N/A | N/A | ||||||
MUS |
N/A | N/A | N/A | N/A | N/A | N/A | ||||||
Acquiring Fund (MHD) |
N/A | N/A | N/A | N/A | N/A | N/A |
|
The information contained in this table is based on Schedule 13D/13G filings made on or before October 16, 2020. |
As of September 30, 2020 the officers and Board Members of each Fund, as a group, beneficially owned less than 1% of the outstanding common shares of each such Fund and none of the outstanding VMTP Shares of each such Fund.
To be considered for presentation at a shareholders meeting, rules promulgated by the SEC generally require that, among other things, a shareholders proposal must be received at the offices of the relevant Fund a reasonable time before solicitation is made. In addition, each Funds bylaws provide for advance notice provisions, which require
159
shareholders to give timely notice in proper written form to the Secretary of the Fund. Shareholders should review each Funds bylaws for additional information regarding the Funds advance notice provisions. The bylaws of BAF and MUH were filed with the SEC on October 7, 2008 on Form 8-K, the bylaws of BBK were filed with the SEC on October 29, 2010 on Form 8-K and the bylaws of MUS and the Acquiring Fund were filed with the SEC on September 21, 2010 on Form 8-K. Shareholders may obtain copies of such documents as described on pages v-vi of this Joint Proxy Statement/Prospectus.
The timely submission of a proposal does not necessarily mean that such proposal will be included. Any shareholder who wishes to submit a proposal for consideration at a meeting of such shareholders Fund should send such proposal to the relevant Fund at 40 East 52nd Street, New York, New York 10022.
Solicitation of proxies is being made primarily by the mailing of this Notice and Joint Proxy Statement/Prospectus with its enclosures on or about [], 2020. Shareholders of the Funds whose shares are held by nominees such as brokers can vote their proxies by contacting their respective nominee. In addition to the solicitation of proxies by mail, employees of the Investment Advisor and their affiliates as well as dealers or their representatives may solicit proxies in person or by mail, telephone, fax or the internet. The Funds and the Investment Advisor have retained Georgeson LLC to assist with the distribution of proxy materials and the solicitation and tabulation of proxies. The cost of Georgeson LLCs services in connection with the proxy is anticipated to be approximately $29,100, $41,300, $33,300, $33,000 and $58,000 for BAF, BBK, MUH, MUS and the Acquiring Fund, respectively.
Certain legal matters concerning the U.S. federal income tax consequences of the Reorganizations will be passed upon by Willkie Farr & Gallagher LLP, which serves as counsel to the Funds. Certain legal matters concerning the issuance of the common shares of the Acquiring Fund will be passed upon by Miles & Stockbridge P.C., which serves as special Maryland counsel to the Acquiring Fund.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered public accounting firm for the Funds performs an annual audit of each Funds financial statements. Each Funds Board has appointed Deloitte & Touche LLP to be each Funds independent registered public accounting firm. Deloitte & Touche LLP is located at 200 Berkeley Street, Boston, Massachusetts 02116.
OTHER MATTERS WITH RESPECT TO THE MEETING
Shareholders who want to communicate with the Board or any individual Board Member should write to the attention of the Secretary of their Fund, 40 East 52nd Street, New York, NY 10022. Shareholders may communicate with the Boards electronically by sending an e-mail to closedendfundsbod@blackrock.com. The communication should indicate that you are a Fund shareholder. If the communication is intended for a specific Board Member and so indicates, it will be sent only to that Board Member. If a communication does not indicate a specific Board Member, it will be sent to the Chair of the Governance Committee and the outside counsel to the Independent Board Members for further distribution as deemed appropriate by such persons.
Additionally, shareholders with complaints or concerns regarding accounting matters may address letters to the CCO of their respective Fund 40 East 52nd Street, New York, NY 10022. Shareholders who are uncomfortable submitting complaints to the CCO may address letters directly to the Chair of the Audit Committee of the Board that oversees the Fund. Such letters may be submitted on an anonymous basis.
ADJOURNMENTS AND POSTPONEMENTS
Failure of a quorum to be present at the Special Meeting may necessitate adjournment. The Board of each Fund, prior to the Special Meeting being convened, may postpone such meeting from time to time to a date not more than 120 days after the original record date. The chair of the Special Meeting may also adjourn the Special Meeting from time
160
to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place by which shareholders may be deemed to be present at such adjourned meeting and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. The chair of the Special Meeting may adjourn the Special Meeting to permit further solicitation of proxies with respect to a proposal if they determine that adjournment and further solicitation is reasonable and in the best interests of shareholders. At the adjourned meeting, the Fund may transact any business which might have been transacted at the original meeting. Any adjourned meeting may be held as adjourned one or more times without further notice not later than 120 days after the record date.
PRIVACY PRINCIPLES OF THE FUNDS
The Funds are committed to maintaining the privacy of shareholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information the Funds collect, how we protect that information, and why in certain cases we may share such information with select other parties.
The Funds do not receive any non-public personal information relating to their shareholders who purchase shares through their broker-dealers. In the case of shareholders who are record holders of a Fund, the Fund receives personal non-public information on account applications or other forms. With respect to these shareholders, the Funds also have access to specific information regarding their transactions in each Fund.
The Funds do not disclose any non-public personal information about their shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service our shareholders accounts (for example, to a transfer agent).
The Funds restrict access to non-public personal information about their shareholders to BlackRock employees with a legitimate business need for the information. The Funds maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our shareholders.
BlackRock is independent in ownership and governance, with no single majority stockholder and a majority of independent directors.
If you cannot be present at the Special Meeting, please fill in, sign and return the enclosed proxy card or please record your voting instructions by telephone or via the Internet promptly. No postage is necessary if the enclosed proxy card is mailed in the United States.
John M. Perlowski
President and Chief Executive Officer
BlackRock Municipal Income Investment Quality Trust
BlackRock Municipal Bond Trust
BlackRock MuniHoldings Fund II, Inc.
BlackRock MuniHoldings Quality Fund, Inc.
BlackRock MuniHoldings Fund, Inc.
[], 2020
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FORM OF AGREEMENT AND PLAN OF REORGANIZATION
In order to consummate the reorganization contemplated herein (the Reorganization) and in consideration of the promises and the covenants and agreements hereinafter set forth, and intending to be legally bound, [Target Fund], a registered diversified closed-end investment company, File No. 811-[●] (the Target Fund) and BlackRock MuniHoldings Fund, Inc., a registered diversified closed-end investment company, File No. 811-08081 (the Acquiring Fund and together with the Target Fund, the Funds), each hereby agree as follows:
1. |
REPRESENTATIONS AND WARRANTIES OF THE ACQUIRING FUND. |
The Acquiring Fund represents and warrants to, and agrees with, the Target Fund that:
(a) The Acquiring Fund is a corporation duly organized, validly existing and in good standing in conformity with the laws of the State of Maryland and has the power to own all of its assets and to carry out this Agreement. The Acquiring Fund has all necessary federal, state and local authorizations to carry on its business as it is now being conducted and to carry out this Agreement.
(b) The Acquiring Fund is duly registered under the Investment Company Act of 1940, as amended (the 1940 Act) as a diversified, closed-end management investment company and such registration has not been revoked or rescinded and is in full force and effect.
(c) The Acquiring Fund has full power and authority to enter into and perform its obligations under this Agreement subject:
(i) in the case of the consummation of the Reorganizations, to the approval of this Agreement and the transactions contemplated herein, including amendments to the Articles Supplementary (as defined below) in connection with the issuance of additional Acquiring Fund VMTP Shares (as defined in Section 1(o) herein) in the Reorganization, by the holders of the Acquiring Fund VMTP Shares (Acquiring Fund VMTP Holders) voting as a separate class, and
(ii) in the case of the issuance of additional Acquiring Fund Common Shares (as defined in Section 1(o) herein) in connection with the Reorganization, to the approval of such issuance of additional Acquiring Fund Common Shares by the common shareholders of the Acquiring Fund (Acquiring Fund Common Shareholders and together with the Acquiring Fund VMTP Holders, the Acquiring Fund Shareholders) and the Acquiring Fund VMTP Holders voting as a single class, in each case as described in Sections 9(a) and (b) hereof.
(d) The execution, delivery and performance of this Agreement have been duly authorized by all necessary action of the Acquiring Funds Board of Directors, and this Agreement constitutes a valid and binding contract of the Acquiring Fund enforceable against the Acquiring Fund in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors rights generally and court decisions with respect thereto.
(e) The Acquiring Fund has provided or made available (including by electronic format) to the Target Fund the most recent audited annual financial statements of the Acquiring Fund, which have been prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP) consistently applied and have been audited by Deloitte & Touche LLP, each Funds independent registered public accounting firm, and such statements fairly present the financial condition and the results of operations of the Acquiring Fund as of the respective dates indicated and the results of operations and changes in net assets for the periods indicated, and there are no liabilities of the Acquiring Fund whether actual or contingent and whether or not determined or determinable as of such date that are required to be disclosed but are not disclosed in such statements.
A-1
(f) An unaudited statement of assets, capital and liabilities of the Acquiring Fund and an unaudited schedule of investments of the Acquiring Fund, each as of the Valuation Time (as defined in Section 3(e) herein) (together, the Acquiring Fund Closing Financial Statements), will be provided or made available (including by electronic format) to the Target Fund, at or prior to the Closing Date (as defined in Section 7(a) herein), for the purpose of determining the number of Acquiring Fund Shares (as defined in Section 1(o) herein) to be issued to the Target Fund shareholders (the Target Fund Shareholders) pursuant to Section 3 of this Agreement; the Acquiring Fund Closing Financial Statements will fairly present the financial position of the Acquiring Fund as of the Valuation Time in conformity US GAAP consistently applied.
(g) There are no material legal, administrative or other proceedings pending or, to the knowledge of the Acquiring Fund, threatened against it which assert liability on the part of the Acquiring Fund or which materially affect its financial condition or its ability to consummate the Reorganization other than as have been disclosed to the Target Fund and/or in the N-14 Registration Statement (as defined in Section 1(l) herein). The Acquiring Fund is not charged with or, to the best of its knowledge, threatened with any violation or investigation of any possible violation of any provisions of any federal, state or local law or regulation or administrative ruling relating to any aspect of its business.
(h) There are no material contracts outstanding to which the Acquiring Fund is a party that have not been disclosed in the N-14 Registration Statement or that will not otherwise be disclosed to the Target Fund prior to the Valuation Time.
(i) The Acquiring Fund is not obligated under any provision of its charter or By-laws, each as amended to the date hereof, and is not a party to any contract or other commitment or obligation, and is not subject to any order or decree, which would be violated by its execution of or performance under this Agreement, except insofar as the Funds have mutually agreed to amend such contract or other commitment or obligation to cure any potential violation as a condition precedent to the Reorganization.
(j) The Acquiring Fund has no known liabilities of a material amount, contingent or otherwise, other than those shown on the Acquiring Funds Annual Report for the fiscal year ended April 30, 2020, those incurred since the date thereof in the ordinary course of its business as an investment company, and those incurred in connection with the Reorganization. As of the Valuation Time, the Acquiring Fund will advise the Target Fund of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued as of such time, except to the extent disclosed in the Acquiring Fund Closing Financial Statements or to the extent already known by the Target Fund.
(k) No consent, approval, authorization or order of any court or government authority is required for the consummation by the Acquiring Fund of the Reorganization, except such as may be required under the Securities Act of 1933, as amended (the 1933 Act), the Securities Exchange Act of 1934, as amended (the 1934 Act) and the 1940 Act or state securities laws (which term as used herein shall include the laws of the District of Columbia and Puerto Rico) or the rules of the New York Stock Exchange, each of which will have been obtained on or prior to the Closing Date.
(l) The registration statement filed by the Acquiring Fund on Form N-14, which includes the proxy statement for the common shareholders of the Target Fund and the Acquiring Fund with respect to the transactions contemplated herein (the Joint Proxy Statement/Prospectus), and any supplement or amendment thereto or to the documents included or incorporated by reference therein (collectively, as so amended or supplemented, the N-14 Registration Statement), on its effective date, at the time of the shareholder meeting called to vote on this Agreement and on the Closing Date, insofar as it relates to the Acquiring Fund, (i) complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, not misleading; and the Joint Proxy Statement/Prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection only shall apply to statements in or omissions from the N-14 Registration Statement made in reliance upon and in conformity with information furnished by the Acquiring Fund for use in the N-14 Registration Statement.
A-2
(m) The proxy statement for the Acquiring Fund VMTP Holders and holders of the Target Fund VMTP Shares (as defined in section 2(o) herein) (the Target Fund VMTP Holders) with respect to the transactions contemplated herein, and any supplement or amendment thereto (the Preferred Shares Proxy Statement) or to the documents included or incorporated by reference therein, at the time of the shareholder meeting called to vote on this Agreement and on the Closing Date, insofar as it relates to the Acquiring Fund, (i) complied or will comply in all material respects with the provisions of the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection only shall apply to statements in or omissions from the Preferred Shares Proxy Statement made in reliance upon and in conformity with information furnished by the Acquiring Fund for use in the Preferred Shares Proxy Statement.
(n) The Acquiring Fund has filed, or intends to file, or has obtained extensions to file, all federal, state and local tax returns which are required to be filed by it, and has paid or has obtained extensions to pay, all federal, state and local taxes shown on said returns to be due and owing and all assessments received by it, up to and including the taxable year in which the Closing Date occurs. All tax liabilities of the Acquiring Fund have been adequately provided for on its books, and no tax deficiency or liability of the Acquiring Fund has been asserted and no question with respect thereto has been raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Closing Date occurs.
(o) The Acquiring Fund is authorized to issue 199,994,763 shares of common stock, par value $0.10 per share, 4,400 shares of preferred stock of Auction Market Preferred Stock, par value $0.10 per share, with such shares classified as two separate series consisting of 2,200 shares and each with a liquidation preference of $25,000 per share, and 837 shares of preferred stock of Series W-7 Variable Rate Muni Term Preferred Shares or any other series of Variable Rate Muni Term Preferred Shares, par value $0.10 per share and liquidation preference $100,000 per share (Acquiring Fund VMTP Shares and together with Acquiring Fund Common Shares, the Acquiring Fund Shares). Each outstanding Acquiring Fund Share is fully paid and nonassessable, and has the voting rights provided by the Acquiring Funds charter, By-laws and applicable law.
(p) The books and records of the Acquiring Fund made available to the Target Fund and/or its counsel are substantially true and correct and contain no material misstatements or omissions with respect to the operations of the Acquiring Fund.
(q) The Acquiring Fund Shares to be issued to the Target Fund Shareholders pursuant to this Agreement will have been duly authorized and, when issued and delivered pursuant to this Agreement, will be legally and validly issued and will be fully paid and nonassessable and will have full voting rights, except as provided by the Acquiring Funds charter or applicable law, and no Acquiring Fund Shareholder will have any preemptive right of subscription or purchase in respect thereof.
(r) At or prior to the Closing Date, the Acquiring Fund Common Shares to be transferred to the Target Fund for distribution to the Target Fund Shareholders on the Closing Date will be duly qualified for offering to the public in all states of the United States in which the sale of shares of the Funds presently are qualified, and there will be a sufficient number of such Acquiring Fund Common Shares registered under the 1933 Act and, as may be necessary, with each pertinent state securities commission to permit the transfers contemplated by this Agreement to be consummated.
(s) At or prior to the Closing Date, the Acquiring Fund will have obtained any and all regulatory, board and shareholder approvals necessary to issue the Acquiring Fund Shares to the Target Fund Shareholders.
(t) The Acquiring Fund has elected to qualify and has qualified as a regulated investment company (RIC) within the meaning of Section 851 of the Internal Revenue Code of 1986, as amended (the Code) for each of its taxable years since its inception, and the Acquiring Fund has satisfied the distribution requirements imposed by Section 852 of the Code to maintain RIC status for each of its taxable years.
A-3
2. |
REPRESENTATIONS AND WARRANTIES OF THE TARGET FUND. |
The Target Fund represents and warrants to, and agrees with, the Acquiring Fund that:
(a) The Target Fund is a [corporation duly organized, validly existing and in good standing in conformity with the laws of the State of Maryland]3[statutory trust duly formed, validly existing and in good standing in conformity with the Delaware Statutory Trust Act (the DSTA)]4 and has the power to own all of its assets and to carry out this Agreement. The Target Fund has all necessary federal, state and local authorizations to carry on its business as it is now being conducted and to carry out this Agreement.
(b) The Target Fund is duly registered under the 1940 Act as a diversified, closed-end management investment company, and such registration has not been revoked or rescinded and is in full force and effect.
(c) The Target Fund has full power and authority to enter into and perform its obligations under this Agreement subject, in the case of consummation of the Reorganization, to the approval and adoption of this Agreement by the Target Fund Shareholders as described in Section 8(a) hereof. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action of the Target Funds [Board of Directors]5[Board of Trustees]6 and this Agreement constitutes a valid and binding contract of the Target Fund enforceable against the Target Fund in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors rights generally and court decisions with respect thereto.
(d) The Target Fund has provided or made available (including by electronic format) to the Acquiring Fund the most recent audited annual financial statements of the Target Fund which have been prepared in accordance with US GAAP consistently applied and have been audited by Deloitte & Touche LLP, and such statements fairly present the financial condition and the results of operations of the Target Fund as of the respective dates indicated and the results of operations and changes in net assets for the periods indicated, and there are no liabilities of the Target Fund whether actual or contingent and whether or not determined or determinable as of such date that are required to be disclosed but are not disclosed in such statements.
(e) An unaudited statement of assets, capital and liabilities of the Target Fund and an unaudited schedule of investments of the Target Fund, each as of the Valuation Time (together, the Target Fund Closing Financial Statements), will be provided or made available (including by electronic format) to the Acquiring Fund at or prior to the Closing Date, for the purpose of determining the number of Acquiring Fund Shares to be issued to the Target Fund Shareholders pursuant to Section 3 of this Agreement; the Target Fund Closing Financial Statements will fairly present the financial position of the Target Fund as of the Valuation Time in conformity with US GAAP consistently applied.
(f) There are no material legal, administrative or other proceedings pending or, to the knowledge of the Target Fund, threatened against it which assert liability on the part of the Target Fund or which materially affect its financial condition or its ability to consummate the Reorganization other than as have been disclosed to the Acquiring Fund. The Target Fund is not charged with or, to the best of its knowledge, threatened with any violation or investigation of any possible violation of any provisions of any federal, state or local law or regulation or administrative ruling relating to any aspect of its business.
(g) There are no material contracts outstanding to which the Target Fund is a party that have not been disclosed in the N-14 Registration Statement or will not otherwise be disclosed to the Acquiring Fund prior to the Valuation Time.
3 |
[Applies to MUH and MUS.] |
4 |
[Applies to BAF and BBK.] |
5 |
[Applies to MUH and MUS.] |
6 |
[Applies to BAF and BBK.] |
A-4
(h) The Target Fund is not obligated under any provision of its [charter]7 [Agreement and Declaration of Trust]8 or By-laws, each as amended to the date hereof, or a party to any contract or other commitment or obligation, and is not subject to any order or decree, which would be violated by its execution of or performance under this Agreement, except insofar as the Funds have mutually agreed to amend such contract or other commitment or obligation to cure any potential violation as a condition precedent to the Reorganization.
(i) The Target Fund has no known liabilities of a material amount, contingent or otherwise, other than those shown on the Target Funds Annual Report for the fiscal year ended [April 30, 2020]9[August 31, 2020]10, those incurred since the date thereof in the ordinary course of its business as an investment company and those incurred in connection with the Reorganization. As of the Valuation Time, the Target Fund will advise the Acquiring Fund of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued as of such time, except to the extent disclosed in the Target Fund Closing Financial Statements or to the extent already known by the Acquiring Fund.
(j) At both the Valuation Time and the Closing Date, the Target Fund will have full right, power and authority to sell, assign, transfer and deliver the Target Fund Investments. As used in this Agreement, the term Target Fund Investments shall mean (i) the investments of the Target Fund shown on the schedule of its investments as of the Valuation Time furnished to the Acquiring Fund; and (ii) all other assets owned by the Target Fund as of the Valuation Time, other than cash held in liability reserves in amounts necessary to pay taxes and expenses as provided in Section 6(a)(ii) and Section 6(c)(iv) of this Agreement, respectively, and distributions, if any, as provided in Section 3(c) and 9(l) of this Agreement. At the Closing Date, subject only to the obligation to deliver the Target Fund Investments as contemplated by this Agreement, the Target Fund will have good and marketable title to all of the Target Fund Investments, and the Acquiring Fund will acquire all of the Target Fund Investments free and clear of any encumbrances, liens or security interests and without any restrictions upon the transfer thereof (except those imposed by the federal or state securities laws and those imperfections of title or encumbrances as do not materially detract from the value or use of the Target Fund Investments or materially affect title thereto).
(k) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Target Fund of the Reorganization, except such as may be required under the 1933 Act, the 1934 Act and the 1940 Act or state securities laws (which term as used herein shall include the laws of the District of Columbia and Puerto Rico) or the rules of the New York Stock Exchange, each of which will have been obtained on or prior to the Closing Date.
(l) The N-14 Registration Statement, on its effective date, at the time of the Target Fund Shareholders meeting called to vote on this Agreement and on the Closing Date, insofar as it relates to the Target Fund (i) complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; and the Joint Proxy Statement/Prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, not misleading; provided, however, that the representations and warranties in this subsection shall apply only to statements in or omissions from the N-14 Registration Statement made in reliance upon and in conformity with information furnished by the Target Fund for use in the N-14 Registration Statement.
(m) The Preferred Shares Proxy Statement for the Target Fund VMTP Holders with respect to the transactions contemplated herein, and any supplement or amendment thereto or to the documents included or incorporated by reference therein, at the time of the shareholder meeting called to vote on this Agreement and on the Closing Date, insofar as it relates to the Target Fund, (i) complied or will comply in all material respects with the provisions of the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to
7 |
[Applies to MUH and MUS.] |
8 |
[Applies to BAF and BBK.] |
9 |
[Applies to, MUS and BSD.] |
10 |
[Applies to, BAF and BBK.] |
A-5
make the statements therein in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection shall apply only to statements in or omissions from the Preferred Shares Proxy Statement made in reliance upon and in conformity with information furnished by the Target Fund for use in the Preferred Shares Proxy Statement.
(n) The Target Fund has filed, or intends to file, or has obtained extensions to file, all federal, state and local tax returns which are required to be filed by it, and has paid or has obtained extensions to pay, all federal, state and local taxes shown on said returns to be due and owing and all assessments received by it, up to and including the taxable year in which the Closing Date occurs. All tax liabilities of the Target Fund have been adequately provided for on its books, and no tax deficiency or liability of the Target Fund has been asserted and no question with respect thereto has been raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Closing Date occurs.
(o) The Target Fund is authorized to issue [[●] shares of common stock, par value $0.10 per share]11[an unlimited number of common shares of beneficial interest, par value $0.001 per share]12 (the Target Fund Common Shares) [,[●] shares of preferred stock of Auction Market Preferred Stock, par value $0.10 per share, with [●] and each with a liquidation preference of $25,000 per share, and [●] shares of preferred stock of Series W-7 Variable Rate Muni Term Preferred Shares or any other series of Variable Rate Muni Term Preferred Shares, par value $[0.10] per share and liquidation preference $100,000 per share (Target Fund VMTP Shares and together with Target Fund Common Shares, the Target Fund Shares)]13 [and [●] preferred shares of beneficial interest of Series W-7 Variable Rate Muni Term Preferred Shares or any other series of Variable Rate Muni Term Preferred Shares, par value $[0.001] per share and liquidation preference $100,000 per share (Target Fund VMTP Shares and together with Target Fund Common Shares, the Target Fund Shares)]14. Each outstanding Target Fund Share is duly and validly issued and is fully paid and nonassessable, except as provided by the Target Funds [charter]15[Agreement and Declaration of Trust]16, and has the voting rights provided by the Target Funds [charter, By-laws]17[Agreement and Declaration of Trust]18 and applicable law. The Target Fund has no outstanding preferred shares other than [●] VMTP Shares; no outstanding options, warrants or other rights to subscribe for or purchase any shares of the Target Fund; and no outstanding securities convertible into shares of the Target Fund. All of the issued and outstanding Target Fund Shares will, at the time of the Closing, be held by the persons and in the amounts set forth in the records of the Target Funds transfer agent as provided in Section 7(d).
(p) All of the issued and outstanding Target Fund Shares were offered for sale and sold in conformity with all applicable federal and state securities laws.
(q) The Target Fund will not sell or otherwise dispose of any of the Acquiring Fund Shares to be received in the Reorganization, except in distribution to the Target Fund Shareholders as provided in Section 3 of this Agreement.
(r) The books and records of the Target Fund made available to the Acquiring Fund and/or its counsel are substantially true and correct and contain no material misstatements or omissions with respect to the operations of the Target Fund.
11 |
[Applies to MUH and MUS.] |
12 |
[Applies to BAF and BBK.] |
13 |
[Applies to MUH and MUS.] |
14 |
[Applies to BAF and BBK.] |
15 |
[Applies to MUH and MUS.] |
16 |
[Applies to BAF and BBK.] |
17 |
[Applies to MUH and MUS.] |
18 |
[Applies to BAF and BBK.] |
A-6
(s) The Target Fund has elected to qualify and has qualified as a RIC within the meaning of Section 851 of the Code for each of its taxable years since its inception, and the Target Fund has satisfied the distribution requirements imposed by Section 852 of the Code to maintain RIC status for each of its taxable years.
3. |
THE REORGANIZATION. |
(a) Subject to receiving the requisite approvals of the Target Fund Shareholders and the Acquiring Fund Shareholders, and to the other terms and conditions contained herein, and in accordance with the applicable law, the Target Fund agrees to convey, transfer and deliver to the Acquiring Fund and the Acquiring Fund agrees to acquire from the Target Fund, on the Closing Date, all of the Target Fund Investments (including interest accrued as of the Valuation Time on debt instruments held by the Target Fund), and assume substantially all of the liabilities of the Target Fund, in exchange for that number of Acquiring Fund Shares provided in Section 4 of this Agreement, provided however that if, pursuant to the provisions of paragraph (c) of this Section 3 and paragraph (l) of Section 9 hereof, (i) the Target Fund determines to make any portion of the UNII Distributions (as defined in Section 3(c) herein) to the Target Fund Common Shareholders after the Closing Date, the Target Fund Investments to be conveyed, transferred and delivered to the Acquiring Fund hereunder will exclude the amounts required for the payment of such portion of the UNII Distributions and the liabilities to be assumed by the Acquiring Fund shall not include such undistributed amount of such UNII Distributions, or (ii) the Target Fund determines that the Acquiring Fund will pay amounts in respect of such UNII Distributions on behalf of the Target Fund to the Target Fund Common Shareholders entitled to receive such UNII Distributions after the Closing Date, then the Target Fund Investments to be conveyed, transferred and delivered to the Acquiring Fund hereunder will include the amounts required for the payment of such portion of the UNII Distributions and the liabilities to be assumed by the Acquiring Fund shall include such undistributed amount of such UNII Distributions. The existence of the Acquiring Fund shall continue unaffected and unimpaired by the Reorganization and it shall be governed by the laws of Maryland.
(b) If the investment adviser determines that the portfolios of the Target Fund and the Acquiring Fund, when aggregated, would contain investments exceeding certain percentage limitations imposed upon the Acquiring Fund with respect to such investments or that the disposition of certain assets is necessary to ensure that the resulting portfolio will meet the Acquiring Funds investment objective, policies and restrictions, as set forth in the Joint Proxy Statement/Prospectus, a copy of which has been delivered (including by electronic format) to the Target Fund, the Target Fund, if requested by the Acquiring Fund, will dispose of a sufficient amount of such investments as may be necessary to avoid violating such limitations as of the Closing Date. Notwithstanding the foregoing, nothing herein will require the Target Fund to dispose of any portion of its assets if, in the reasonable judgment of the Target Funds [Board of Directors]19[Board of Trustees]20 or investment adviser, such disposition would create more than an insignificant risk that the Reorganization would not be treated as a reorganization described in Section 368(a) of the Code or would otherwise not be in the best interests of the Target Fund.
(c) Prior to the Closing Date, the Target Fund shall declare a dividend or dividends which, together with all such previous dividends, shall have the effect of distributing to holders of Target Fund Common Shares (Target Fund Common Shareholders) entitled to such dividends (i) all of its investment company taxable income to and including the Closing Date, if any (computed without regard to any deduction for dividends paid), (ii) all of its net capital gain, if any, recognized to and including the Closing Date and (iii) the excess of its interest income excludable from gross income under Section 103(a) of the Code, if any, over its deductions disallowed under Sections 265 and 171(a)(2) of the Code for the period to and including the Closing Date. The Target Fund may pay amounts in respect of such distributions (UNII Distributions) in one or more distributions to Target Fund Common Shareholders entitled to receive such UNII Distributions after the Closing Date. In addition, the Acquiring Fund may pay amounts in respect of such UNII Distributions on behalf of the Target Fund to the Target Fund Common Shareholders entitled to receive such UNII Distributions after the Closing Date as an agent out of cash or other short-term liquid assets maturing prior to the payment date of the UNII Distributions acquired from the Target Fund in the Reorganization, segregated for this purpose and maintained in an amount at least equal to the remaining payment obligations in respect of the UNII Distributions.
19 |
[Applies to MUH and MUS.] |
20 |
[Applies to BAF and BBK.] |
A-7
(d) Pursuant to this Agreement, as soon as practicable, and in no event more than 48 hours, exclusive of Sundays and holidays, after the Closing Date, the Target Fund will distribute all Acquiring Fund Common Shares and Acquiring Fund VMTP Shares received by it to its shareholders in exchange for their Target Fund Common Shares and Target Fund VMTP Shares, respectively. Such distributions shall be accomplished by the opening of shareholder accounts on the share ledger records of the Acquiring Fund in the names of and in the amounts due to the Target Fund Shareholders based on their respective holdings in the Target Fund as of the Valuation Time.
(e) The Valuation Time shall be at the close of business of the New York Stock Exchange on the business day immediately preceding the Closing Date, or such earlier or later day and time as may be mutually agreed upon in writing by the Funds (the Valuation Time).
(f) The Target Fund will pay or cause to be paid to the Acquiring Fund any interest the Target Fund receives on or after the Closing Date with respect to any of the Target Fund Investments transferred to the Acquiring Fund hereunder.
(g) Recourse for liabilities assumed from the Target Fund by the Acquiring Fund in the Reorganization will be limited to the net assets acquired by the Acquiring Fund. The known liabilities of the Target Fund, as of the Valuation Time, shall be confirmed to the Acquiring Fund pursuant to Section 2(i) of this Agreement.
(h) The Target Fund will be terminated as soon as practicable following the Closing Date by terminating its registration under the 1940 Act and dissolving and terminating [under the laws of the State of Maryland]21[under the DSTA]22 and will withdraw its authority to do business in any state where it is registered.
(i) For U.S. federal income tax purposes, the parties to this Agreement intend that (i) the Reorganization qualify as a reorganization within the meaning of Section 368(a) of the Code, (ii) this Agreement constitutes a plan of reorganization within the meaning of U.S. Treasury Regulations Section 1.368-2(g), and (iii) the parties to this Agreement will each be a party to such reorganization within the meaning of Section 368(b) of the Code.
4. |
ISSUANCE AND VALUATION OF ACQUIRING FUND SHARES IN THE REORGANIZATION. |
(a) A number of Acquiring Fund Common Shares with an aggregate net asset value equal to the value of the Target Fund Investments (including interest accrued as of the Valuation Time on debt instruments held by the Target Fund) acquired in the Reorganization determined as hereinafter provided, reduced by the amount liabilities of the Target Fund assumed by the Acquiring Fund in the Reorganization, shall be issued by the Acquiring Fund to the Target Fund in exchange for such the Target Fund Investments, which shall be determined as set forth below. The value of each Funds net assets shall be calculated net of the liquidation preference (including accumulated and unpaid dividends) of all outstanding preferred shares of such Fund.
(b) A number of Acquiring Fund VMTP Shares equal to the number of Target Fund VMTP Shares outstanding immediately prior to the Closing Date, with the terms described in the Preferred Shares Proxy Statement, shall be issued by the Acquiring Fund to the Target Fund. No fractional Acquiring Fund VMTP Shares will be issued. Each Acquiring Fund VMTP Share issued to the Target Fund in exchange for a Target Fund VMTP Share will have a liquidation preference of $100,000 plus any accumulated and unpaid dividends that have accrued on such Target Fund VMTP] Share up to and including the day immediately preceding the Closing Date. The Target Fund may pay any such accumulated and unpaid dividends prior to the Closing Date.
(c) The net asset value of the Acquiring Fund and the Target Fund, the values of their assets, the amounts of their liabilities, and the liquidation preference (including accumulated and unpaid dividends) of the Target Fund VMTP Shares and the Acquiring Fund VMTP Shares shall be determined as of the Valuation Time in accordance with the regular procedures of the Acquiring Fund or such other valuation procedures as shall be mutually agreed by the parties, and no adjustment will be made to the net asset value or liquidation preference so determined of any Fund to take into account differences in realized and unrealized gains and losses.
21 |
[Applies to MUH and MUS.] |
22 |
[Applies to BAF and BBK.] |
A-8
Such valuation and determination shall be made by the Acquiring Fund in cooperation with the Target Fund and shall be confirmed by the Acquiring Fund to the Target Fund. The net asset value per share of the Acquiring Fund Common Shares and the liquidation preference (including accumulated and unpaid dividends) per share of the Acquiring Fund VMTP Shares shall be determined in accordance with such procedures.
For purposes of determining the net asset value per share of Target Fund Common Shares and the Acquiring Fund Common Shares, the value of the securities held by the applicable Fund plus any cash or other assets (including interest accrued but not yet received) minus all liabilities (including accrued expenses) and the aggregate liquidation value of the outstanding Target Fund VMTP Shares or Acquiring Fund VMTP Shares, as the case may be, shall be divided by the total number of Target Fund Common Shares or Acquiring Fund Common Shares, as the case may be, outstanding at such time.
(d) The Acquiring Fund shall issue to each Target Fund Common Shareholder book-entry interests for the Acquiring Fund Common Shares registered in the name of such Target Fund Common Shareholder on the basis of each such holders proportionate interest in the aggregate net asset value of the Target Fund Common Shares.
(e) The Acquiring Fund shall issue to each Target Fund VMTP Holder book-entry interests for the Acquiring Fund VMTP Shares registered in the name of such Target Fund VMTP Holder on a one-for-one basis for each holders holdings of the Target Fund VMTP Shares. The Target Fund VMTP Holders shall not receive, or be entitled to, any payment or other consideration in connection with or as a result of the Reorganization other than as provided in this Agreement. In connection with such issuance, the Acquiring Fund shall amend the Acquiring Fund VMTP Shares Articles Supplementary Establishing and Fixing the Rights and Preferences of Variable Rate Muni Term Preferred Shares (the Articles Supplementary), share certificates representing such Acquiring Fund VMTP Shares, and such other agreements, instruments or documents relating to the Acquiring Fund VMTP Shares, in each case as of the Closing Date and only to the extent necessary or applicable to such agreement, instrument or document, to reflect the authorization and issuance of additional Acquiring Fund VMTP Shares in connection with the Reorganization.
(f) No fractional shares of Acquiring Fund Common Shares will be issued to holders of Target Fund Common Shares unless such shares are held in a Dividend Reinvestment Plan account. In lieu thereof, the Acquiring Funds transfer agent will aggregate all fractional Acquiring Fund Common Shares to be issued in connection with the Reorganization (other than those issued to a Dividend Reinvestment Plan account) and sell the resulting full shares on the New York Stock Exchange at the current market price for Acquiring Fund Common Shares for the account of all holders of such fractional interests, and each such holder will receive such holders pro rata share of the proceeds of such sale upon issuance of book-entry interests representing Acquiring Fund Common Shares.
5. |
PAYMENT OF EXPENSES. |
(a) The Target Fund and the Acquiring Fund will bear expenses incurred in connection with the Reorganization, including but not limited to, costs related to the preparation and distribution of materials distributed to each Funds Board of [Directors]23 or [Trustees]24 (the Board), expenses incurred in connection with the preparation of this Agreement, the preparation and filing of any documents required by such Funds state of organization, the preparation and filing of the N-14 Registration Statement and the Preferred Shares Proxy Statement with the U.S. Securities and Exchange Commission (SEC), the printing and distribution of the Joint Proxy Statement/Prospectus, the Preferred Shares Proxy Statement and any other materials required to be distributed to shareholders, the SEC, state securities commission and secretary of state filing fees and legal and audit fees in connection with the Reorganization, fees incurred in obtaining the requisite consents of rating agencies, counterparties or service providers to the preferred shares, legal fees incurred in connection with amending the transaction documents for the preferred shares, which may include the legal fees of counterparties and service providers to the extent
23 |
[Applies to MUH and MUS.] |
24 |
[Applies to BAF and BBK.] |
A-9
applicable, legal fees incurred preparing each Funds board materials, attending each Funds board meetings and preparing the minutes, rating agency fees associated with the ratings of the preferred shares in connection with the Reorganization, audit fees associated with each Funds financial statements, stock exchange fees, transfer agency fees, rating agency fees, portfolio transfer taxes (if any) and any similar expenses incurred in connection with the Reorganization, which will be borne directly by the respective Fund incurring the expense or allocated among the Funds based upon any reasonable methodology approved by the Boards of the Funds, provided, that the Acquiring Funds investment adviser may bear all or a portion of the reorganization expenses of each Fund as set forth in the N-14 Registration Statement. Neither the Funds nor the investment adviser will pay any expenses of shareholders arising out of or in connection with the Reorganization.
(b) If for any reason the Reorganization is not consummated, no party shall be liable to any other party for any damages resulting therefrom, including, without limitation, consequential damages, and each Fund shall be responsible, on a proportionate total assets basis, for all expenses incurred in connection with the Reorganization.
6. |
COVENANTS OF THE FUNDS. |
(a) COVENANTS OF EACH FUND.
(i) Each Fund covenants to operate its business as presently conducted between the date hereof and the Closing Date, except to the extent that the Target Fund is required or permitted to dispose of assets prior to the Closing Date pursuant to Section 3(b) of this Agreement.
(ii) Each of the Funds agrees that by the Closing Date all of its U.S. federal and other tax returns and reports required to be filed on or before such date shall have been filed and all taxes shown as due on said returns either have been paid or adequate liability reserves have been provided for the payment of such taxes.
(iii) The intention of the parties is that the transaction contemplated by this Agreement will qualify as a reorganization within the meaning of Section 368(a) of the Code. Neither the Acquiring Fund nor the Target Fund shall take any action or cause any action to be taken (including, without limitation, the filing of any tax return) that is inconsistent with such treatment or results in the failure of the transaction to qualify as a reorganization within the meaning of Section 368(a) of the Code. At or prior to the Closing Date, the Acquiring Fund and the Target Fund will take such action, or cause such action to be taken, as is reasonably necessary to enable Willkie Farr & Gallagher LLP (Willkie), counsel to the Funds, to render the tax opinion required herein (including, without limitation, each partys execution of representations reasonably requested by and addressed to Willkie).
(iv) In connection with this covenant, the Funds agree to cooperate with each other in filing any tax return, amended return or claim for refund, determining a liability for taxes or a right to a refund of taxes or participating in or conducting any audit or other proceeding in respect of taxes. The Acquiring Fund agrees to retain for a period of ten (10) years following the Closing Date all returns, schedules and work papers and all material records or other documents relating to tax matters of the Target Fund for each of such Funds taxable periods ending on or before the Closing Date.
(v) The Acquiring Fund VMTP Shares to be transferred to the Target Fund for distribution to the Target Fund VMTP Holders on the Closing Date shall only be distributed to the Target Fund VMTP Holders in accordance with an available exemption from registration under the 1933 Act, in a manner not involving any public offering within the meaning of Section 4(a)(2) of the 1933 Act.
(vi) Each Fund shall use reasonable efforts to obtain all requisite consents and approvals necessary to consummate the Reorganization.
A-10
(b) COVENANTS OF THE ACQUIRING FUND.
(i) The Acquiring Fund will file the N-14 Registration Statement and the Preferred Shares Proxy Statement with the SEC and will use its best efforts to provide that the N-14 Registration Statement becomes effective as promptly as practicable. Each Fund agrees to cooperate fully with the other, and each will furnish to the other the information relating to itself to be set forth in the N-14 Registration Statement and the Preferred Shares Proxy Statement as required by the 1933 Act, the 1934 Act and the 1940 Act, and the rules and regulations thereunder and the state securities laws.
(ii) The Acquiring Fund has no plan or intention to sell or otherwise dispose of the Target Fund Investments, except for dispositions made in the ordinary course of business.
(iii) Following the consummation of the Reorganization, the Acquiring Fund will continue its business as a diversified, closed-end management investment company registered under the 1940 Act.
(iv) The Acquiring Fund shall use reasonable efforts to cause the Acquiring Fund Common Shares to be issued in the Reorganization to be approved for listing on the New York Stock Exchange prior to the Closing Date.
(v) The Acquiring Fund agrees to mail to its shareholders of record entitled to vote at the special meeting of shareholders at which action is to be considered regarding this Agreement, in sufficient time to comply with requirements as to notice thereof, the Joint Proxy Statement/Prospectus (but only to the Acquiring Fund Common Shareholders) and the Preferred Shares Proxy Statement (but only to the Acquiring Fund VMTP Holders), each of which complies in all material respects with the applicable provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules and regulations, respectively, thereunder.
(vi) The Acquiring Fund shall use reasonable efforts to cause the Acquiring Fund VMTP Shares to be issued in connection with the Reorganization to be rated no lower than the rating assigned to the Acquiring Fund VMTP Shares immediately prior to the Closing Date by the rating agencies then rating the Acquiring Fund VMTP Shares.
(vii) The Acquiring Fund shall use reasonable efforts to amend the following documents to reflect the authorization and issuance of additional Acquiring Fund VMTP Shares in connection with the Reorganization: (1) the Articles Supplementary; (2) share certificates representing Acquiring Fund VMTP Shares; (3) the VMTP Shares Purchase Agreement for the Acquiring Fund VMTP Shares; (4) the Redemption and Paying Agent Agreement for the Acquiring Fund VMTP Shares; and (5) such other agreements, instruments or documents relating to the Acquiring Fund VMTP Shares, in each case by the Closing Date and only to the extent necessary or applicable to such agreement, instrument or document.
(c) COVENANTS OF THE TARGET FUND.
(i) The Target Fund agrees that following the consummation of the Reorganization, following the payment of any portion of the UNII Distribution to be paid to Target Fund Common Shareholders by the Target Fund in accordance with Sections 3(c) and 9(l) hereof following the Closing, it will dissolve in accordance with the [DTSA]25[laws of State of Maryland]26 and any other applicable law, it will not make any distributions of any Acquiring Fund Common Shares other than to its shareholders and without first paying or adequately providing for the payment of all of its respective liabilities not assumed by the Acquiring Fund, and on and after the Closing Date it shall not conduct any business except in connection with its termination.
25 |
[Applies to BAF, and BBK.] |
26 |
[Applies to MUH and MUS.] |
A-11
(ii) The Target Fund undertakes that if the Reorganization is consummated, it will file an application pursuant to Section 8(f) of the 1940 Act for an order declaring that the Target Fund has ceased to be a registered investment company.
(iii) The Target Fund agrees to mail to its shareholders of record entitled to vote at the special meeting of shareholders at which action is to be considered regarding this Agreement, in sufficient time to comply with requirements as to notice thereof, the Joint Proxy Statement/Prospectus (but only to the Target Fund Common Shareholders) and the Preferred Shares Proxy Statement (but only to the Target Fund VMTP Holders), each of which complies in all material respects with the applicable provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules and regulations, respectively, thereunder.
(iv) After the Closing Date, the Target Fund shall prepare, or cause its agents to prepare, any U.S. federal, state or local tax returns required to be filed by such Target Fund with respect to its final taxable year ending with its complete liquidation and dissolution and for any prior periods or taxable years and further shall cause such tax returns to be duly filed with the appropriate taxing authorities. Notwithstanding the aforementioned provisions of this subsection, any expenses incurred by the Target Fund (other than for payment of taxes) in connection with the preparation and filing of said tax returns after the Closing Date shall be borne by such Target Fund to the extent such expenses have been accrued by such Target Fund in the ordinary course without regard to the Reorganization; any excess expenses shall be paid from a liability reserve established to provide for the payment of such expenses.
(v) Upon the request of the Acquiring Fund, the Target Fund shall use reasonable efforts to perform the following actions by the Closing Date or such later time as may be agreed to by the Acquiring Fund: (a) terminate VMTP Shares Purchase Agreement, Redemption and Paying Agent Agreement and such other agreements, instruments or documents related to the Target Fund VMTP Shares, (b) withdraw the ratings assigned to the Target Fund VMTP Shares, (c) cancel the share certificates representing Target Fund VMTP Shares, and (d) withdraw or deregister the Target Fund VMTP Shares from The Depository Trust Company.
7. |
CLOSING DATE. |
(a) The closing of the Reorganization (the Closing) shall occur prior to the opening of the NYSE at the offices of Willkie, 787 Seventh Avenue, New York, New York 10019, or at such other time or location as may be mutually agreed to by the Funds, on the next full business day following the Valuation Time to occur after the satisfaction or waiver of all of the conditions set forth in Sections 8 and 9 of this Agreement (other than the conditions that relate to actions to be taken, or documents to be delivered at the Closing, it being understood that the occurrence of the Closing shall remain subject to the satisfaction or waiver of such conditions at Closing), or at such other time and date as may be mutually agreed to by the Funds (such date, the Closing Date).
(b) On the Closing Date, the Target Fund shall deliver the Target Fund Investments to the Acquiring Fund, and the Acquiring Fund shall issue the Acquiring Fund Shares as provided in this Agreement. To the extent that any Target Fund Investments, for any reason, are not transferable on the Closing Date, the Target Fund shall cause such Target Fund Investments to be transferred to the Acquiring Funds account with its custodian at the earliest practicable date thereafter.
(c) The Target Fund will deliver to the Acquiring Fund on the Closing Date confirmation or other adequate evidence as to the tax basis of the Target Fund Investments delivered to the Acquiring Fund hereunder.
(d) On the Closing Date, the Target Fund shall deliver or make available to (including by electronic format) the Acquiring Fund a list of the names and addresses of all of the Target Fund Shareholders of record immediately prior to the Closing Date and the number of Target Fund Common Shares and Target Fund VMTP Shares owned by each such Target Fund Shareholder, certified to the best of its knowledge and belief by the transfer agent for the Target Fund Common Shares and Target Fund VMTP Shares or by the Target Funds Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, or Secretary or any Assistant Secretary.
A-12
8. |
CONDITIONS OF THE TARGET FUND. |
The obligations of the Target Fund hereunder shall be subject to the following conditions:
(a) That this Agreement shall have been approved by at least [eighty percent]27[two-thirds] 28 of the members of the Board of the Target Fund and by the affirmative vote of the Target Fund Common Shareholders and the Target Fund VMTP Holders, voting as a single class, representing a [1940 Act Majority (as defined below)]29[majority]30 of the outstanding shares entitled to vote on this Agreement, and by the affirmative vote of the Target Fund VMTP Holders, voting as a separate class, representing a 1940 Act Majority [(as defined below)] of the outstanding VMTP Shares entitled to vote on this Agreement. A 1940 Act Majority means the affirmative vote of either (i) 67% or more of the class or classes of Target Fund Shares entitled to vote on such proposal present at the Target Funds shareholder meeting where this Agreement shall be approved, if the holders of more than 50% of the outstanding class or classes of Target Fund Shares entitled to vote on such proposal are present or represented by proxy or (ii) more than 50% of the outstanding class or classes of Target Fund Shares entitled to vote on such proposal, whichever is less.
(b) That the Acquiring Fund shall have delivered (including in electronic format) to the Target Fund (i) a copy of the resolutions approving this Agreement and the issuance of additional Acquiring Fund Shares in connection with the Reorganization adopted by the Board of the Acquiring Fund, (ii) a certificate setting forth the vote of the Acquiring Fund VMTP Holders, voting as a separate class, approving this Agreement and amendments to the Articles Supplementary in connection with the issuance of additional Acquiring Fund VMTP Shares in the Reorganization, and the vote of the Acquiring Fund Common Shareholders and the Acquiring Fund VMTP Holders, voting as a single class, approving the issuance of additional Acquiring Fund Common Shares in connection with the Reorganization, and (iii) a certificate certifying that the Acquiring Fund has received all requisite consents and approvals necessary to consummate the Reorganization, each certified by the Acquiring Funds Secretary or any Assistant Secretary.
(c) That the Acquiring Fund shall have provided or made available (including by electronic format) to the Target Fund the Acquiring Fund Closing Financial Statements, together with a schedule of the Acquiring Funds investments, all as of the Valuation Time, certified on the Acquiring Funds behalf by its Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, and a certificate signed by the Acquiring Funds Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, dated as of the Closing Date, certifying that as of the Valuation Time and as of the Closing Date there has been no material adverse change in the financial position of the Acquiring Fund since the date of the Acquiring Funds most recent Annual or Semi-Annual Report, as applicable, other than changes in its portfolio securities since that date or changes in the market value of its portfolio securities.
(d) That the Acquiring Fund shall have furnished to the Target Fund a certificate signed by the Acquiring Funds Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, dated as of the Closing Date, certifying that, as of the Valuation Time and as of the Closing Date, all representations and warranties of the Acquiring Fund made in this Agreement are true and correct in all material respects with the same effect as if made at and as of such dates, and that the Acquiring Fund has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to each of such dates.
(e) That there shall not be any material litigation pending with respect to the matters contemplated by this Agreement.
27 |
[Applies to BAF and BBK.] |
28 |
[Applies to MUH and MUS.] |
29 |
[Applies to BAF and BBK.] |
30 |
[Applies to MUH and MUS.] |
A-13
(f) That the Target Fund shall have received the opinion of Miles & Stockbridge P.C., special Maryland counsel to the Acquiring Fund, dated as of the Closing Date, addressed to the Target Fund, that substantively provides the following:
(i) The Acquiring Fund is validly existing as a corporation under the laws of the State of Maryland and in good standing under the laws of the State of Maryland and has the corporate power to conduct its business as described in the definitive Joint Proxy Statement/Prospectus filed with the SEC pursuant to Rule 497 under the 1933 Act.
(ii) The Acquiring Fund has the corporate power and authority to execute, deliver and perform all of the obligations under the Agreement under the applicable laws of the State of Maryland. The execution and delivery of the Agreement and the consummation by the Acquiring Fund of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of the Acquiring Fund under the laws of the State of Maryland and the Acquiring Funds charter.
(iii) The execution and delivery by the Acquiring Fund of this Agreement and the performance of the Acquiring Funds obligations under the Agreement do not violate the Acquiring Funds charter or By-laws.
(iv) Neither the execution, delivery or performance by the Acquiring Fund of the Agreement nor the compliance by the Acquiring Fund with the terms and provisions thereof will violate any provision of law of the State of Maryland applicable to the Acquiring Fund.
(v) Assuming that the Acquiring Fund Shares will be issued in accordance with the terms of this Agreement, the Acquiring Fund Shares to be issued and delivered to the Target Fund Shareholders as provided by this Agreement are duly authorized and upon such delivery will be validly issued and fully paid and non-assessable by the Acquiring Fund, and no shareholder of the Acquiring Fund has, as such holder, any preemptive rights to acquire, purchase or subscribe for any securities of the Acquiring Fund under the Acquiring Funds charter, By-laws or the laws of the State of Maryland.
(g) That the Target Fund shall have received the opinion of Willkie, counsel to the Acquiring Fund, dated as of the Closing Date, addressed to the Target Fund, that substantively provides the following:
(i) The Acquiring Fund is registered with the SEC as a closed-end management investment company under the 1940 Act;
(ii) To the best of such counsels knowledge, no governmental approval, which has not been obtained and is not in full force and effect, is required to authorize, or is required in connection with, the execution or delivery of the Agreement by the Acquiring Fund, or the enforceability of the Agreement against the Acquiring Fund.
(iii) Neither the execution, delivery or performance by the Acquiring Fund of the Agreement nor the compliance by the Acquiring Fund with the terms and provisions thereof will contravene any provision of applicable federal securities law of the United States of America.
(h) That the Target Fund shall have obtained an opinion from counsel for the Acquiring Fund, dated as of the Closing Date, addressed to the Target Fund, that the consummation of the transactions set forth in this Agreement complies with the requirements of a reorganization as described in Section 368(a) of the Code.
(i) That all proceedings taken by the Acquiring Fund and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to the Target Fund.
(j) That the N-14 Registration Statement shall have become effective under the 1933 Act, and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of the Acquiring Fund, be contemplated by the SEC.
A-14
9. |
CONDITIONS OF THE ACQUIRING FUND. |
The obligations of the Acquiring Fund hereunder shall be subject to the following conditions:
(a) That this Agreement and amendments to the Articles Supplementary in connection with the issuance of additional Acquiring Fund VMTP Shares in the Reorganization, shall have been approved by the Board of the Acquiring Fund and by the affirmative vote of the Acquiring Fund VMTP Holders, voting as a separate class, of a 1940 Act Majority of the outstanding Acquiring Fund VMTP Shares.
(b) That the issuance of additional Acquiring Fund Common Shares in connection with the Reorganization shall have been approved by the Board of the Acquiring Fund and by the affirmative vote of the Acquiring Fund Common Shareholders and the Acquiring Fund VMTP Holders, voting as a single class, of a majority of the votes entitled to be cast by the Acquiring Fund Common Shareholders and the Acquiring Fund VMTP Holders present at the Acquiring Fund Shareholders meeting where such issuance of additional Acquiring Fund Common Shares shall be approved or represented by proxy voting.
(c) The Target Fund shall have delivered (including in electronic format) to the Acquiring Fund (i) a copy of the resolutions approving this Agreement adopted by the Board of the Target Fund, (ii) a certificate setting forth the vote of the Target Fund Common Shareholders and the Target Fund VMTP Holders, voting as a single class, approving this Agreement, and the vote of the Target Fund VMTP Holders, voting as a separate class, approving this Agreement, and (iii) a certificate certifying that the Target Fund has received all requisite consents and approvals necessary to consummate the Reorganization, each certified by the Target Funds Secretary or any Assistant Secretary.
(d) That the Target Fund shall have provided or made available (including by electronic format) to the Acquiring Fund the Target Fund Closing Financial Statements, together with a schedule of the Target Funds investments with their respective dates of acquisition and tax costs, all as of the Valuation Time, certified on the Target Funds behalf by its Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, and a certificate signed the Target Funds Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, dated as of the Closing Date, certifying that as of the Valuation Time and as of the Closing Date there has been no material adverse change in the financial position of the Target Fund since the date of the Target Funds most recent Annual Report or Semi-Annual Report, as applicable, other than changes in the Target Fund Investments since that date or changes in the market value of the Target Fund Investments.
(e) That the Target Fund shall have furnished to the Acquiring Fund a certificate signed by the Target Funds Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, dated as of the Closing Date, certifying that as of the Valuation Time and as of the Closing Date all representations and warranties of the Target Fund made in this Agreement are true and correct in all material respects with the same effect as if made at and as of such dates and the Target Fund has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to such dates.
(f) That there shall not be any material litigation pending with respect to the matters contemplated by this Agreement.
(g) That the Acquiring Fund shall have received the opinion of [Miles & Stockbridge P.C., special Maryland counsel]31[Morris, Nichols, Arsht & Tunnell LLP, special Delaware counsel]32 to the Target Fund, dated as of the Closing Date, addressed to the Acquiring Fund, that substantively provides the following:
(i) The Target Fund is validly existing and is in good standing [under the laws of the State of Maryland]33[under the DSTA]34.
31 |
[Applies to MUH and MUS.] |
32 |
[Applies to BAF and BBK.] |
33 |
[Applies to MUH and MUS.] |
34 |
[Applies to BAF and BBK.] |
A-15
(ii) The Target Fund has the [corporate][statutory trust] power and authority to execute and deliver the Agreement and perform all of its obligations under the Agreement under the [laws of the State of Maryland]35[DSTA]36. The execution and delivery of the Agreement and the consummation by the Target Fund of the transactions contemplated thereby have been duly authorized by all necessary [corporate] action on the part of the Target Fund under the [laws of the State of Maryland]37[DSTA]38 and the Target Funds [charter]39[Agreement and Declaration of Trust]40.
(iii) The Agreement has been duly executed and delivered by the Target Fund.
(iv) The execution and delivery by the Target Fund of the Agreement did not, and the performance of the Target Funds obligations under the Agreement, will not violate the [charter]41[Agreement and Declaration of Trust]42 or the By-laws of the Target Fund.
(v) Neither the execution, delivery or performance by the Target Fund of the Agreement nor the compliance by the Target Fund with the terms and provisions thereof will violate any provision of any applicable law of the [State of Maryland]43[State of Delaware]44.
(h) That the Target Fund shall have received the opinion of Willkie, counsel to the Acquiring Fund, dated as of the Closing Date, addressed to the Target Fund, that substantively provides the following:
(i) The Target Fund is registered with the SEC as a closed-end management investment company under the 1940 Act;
(ii) To the best of such counsels knowledge, no governmental approval, which has not been obtained and is not in full force and effect, is required to authorize, or is required in connection with, the execution or delivery of the Agreement by the Target Fund, or the enforceability of the Agreement against the Target Fund.
(iii) Neither the execution, delivery or performance by the Target Fund of the Agreement nor the compliance by the Target Fund with the terms and provisions thereof will contravene any provision of applicable federal securities law of the United States of America.
(i) That the Acquiring Fund shall have obtained an opinion from counsel for the Target Fund, dated as of the Closing Date, addressed to the Acquiring Fund, that the consummation of the transactions set forth in this Agreement complies with the requirements of a reorganization as described in Section 368(a) of the Code.
35 |
[Applies to MUH and MUS.] |
36 |
[Applies to BAF and BBK.] |
37 |
[Applies to MUH and MUS.] |
38 |
[Applies to BAF and BBK.] |
39 |
[Applies to MUH and MUS.] |
40 |
[Applies to BAF and BBK.] |
41 |
[Applies to MUH and MUS.] |
42 |
[Applies to BAF and BBK.] |
43 |
[Applies to MUH and MUS.] |
44 |
[Applies to BAF and BBK.] |
A-16
(j) That all proceedings taken by the Target Fund and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to the Acquiring Fund.
(k) That the N-14 Registration Statement shall have become effective under the 1933 Act and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of the Target Fund, be contemplated by the SEC.
(l) That prior to the Closing Date, the Target Fund shall have declared a dividend or dividends which, together with all such previous dividends, shall have the effect of distributing to the Target Fund Common Shareholders entitled to such dividends (i) all of its investment company taxable income to and including the Closing Date, if any (computed without regard to any deduction for dividends paid), (ii) all of its net capital gain, if any, recognized to and including the Closing Date and (iii) the excess of its interest income excludable from gross income under Section 103(a) of the Code, if any, over its deductions disallowed under Sections 265 and 171(a)(2) of the Code for the period to and including the Closing Date. The Target Fund may pay amounts in respect of such UNII Distributions in one or more distributions to Target Fund Common Shareholders entitled to receive such UNII Distributions after the Closing Date. In addition, the Acquiring Fund may pay amounts in respect of such UNII Distributions on behalf of the Target Fund to the Target Fund Common Shareholders entitled to receive such UNII Distributions after the Closing Date as an agent out of cash or other short-term liquid assets maturing prior to the payment date of the UNII Distributions acquired from the Target Fund in the Reorganization, segregated for this purpose and maintained in an amount at least equal to the remaining payment obligations in respect of the UNII Distributions.
(m) That the redemption and paying agent and the rating agencies for the Acquiring Fund VMTP Shares shall have consented to any amendments to the Articles Supplementary, share certificates representing Acquiring Fund VMTP Shares and such other agreements, instruments or documents relating to the Acquiring Fund VMTP Shares that are necessary to reflect the issuance of additional Acquiring Fund VMTP Shares in connection with the Reorganization, but only to the extent such consent is required under the Related Documents (as defined in the Articles Supplementary).
10. |
TERMINATION, POSTPONEMENT AND WAIVERS. |
(a) Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and the Reorganization abandoned at any time (whether before or after adoption thereof by the shareholders of the Target Fund and the Acquiring Fund) prior to the Closing Date, or the Closing Date may be postponed, (i) by mutual consent of the Boards of the Acquiring Fund and the Target Fund; (ii) by the Board of the Target Fund if any condition of the Target Funds obligations set forth in Section 8 of this Agreement has not been fulfilled or waived by such Board; and (iii) by the Board of the Acquiring Fund if any condition of the Acquiring Funds obligations set forth in Section 9 of this Agreement has not been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not been consummated by [●], 2021, this Agreement automatically shall terminate on that date, unless a later date is mutually agreed to by the Boards of the Acquiring Fund and the Target Fund.
(c) In the event of termination of this Agreement pursuant to the provisions hereof, the same shall become void and have no further effect, and there shall not be any liability on the part of any Fund or its respective directors, trustees, officers, agents or shareholders in respect of this Agreement other than with respect to Section 11 and payment by each Fund of its respective expenses incurred in connection with the Reorganization.
(d) At any time prior to the Closing Date, any of the terms or conditions of this Agreement may be waived by the Board of the Acquiring Fund or the Target Fund (whichever is entitled to the benefit thereof), if, in the judgment of such Board after consultation with its counsel, such action or waiver will not have a material adverse effect on the benefits intended under this Agreement to the shareholders of their respective Fund, on behalf of which such action is taken.
A-17
(e) The respective representations and warranties contained in Sections 1 and 2 of this Agreement shall expire with, and be terminated by, the consummation of the Reorganization, and neither the Funds, nor any of their respective officers, directors, trustees, agents or shareholders shall have any liability with respect to such representations or warranties after the Closing Date. This provision shall not protect any officer, director, trustee, agent or shareholder of either of the Funds against any liability to the entity for which that officer, director, trustee, agent or shareholder so acts or to its shareholders, to which that officer, director, trustee, agent or shareholder otherwise would be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of his or her duties in the conduct of such office.
(f) If any order or orders of the SEC with respect to this Agreement shall be issued prior to the Closing Date and shall impose any terms or conditions which are determined by action of the Boards of the Acquiring Fund and the Target Fund to be acceptable, such terms and conditions shall be binding as if a part of this Agreement without further vote or approval of the Target Fund Shareholders and the Acquiring Fund Shareholders unless such terms and conditions shall result in a change in the method of computing the number of Acquiring Fund Shares to be issued to the Target Fund Shareholders, in which event, unless such terms and conditions shall have been included in the proxy solicitation materials furnished to the Target Fund Shareholders prior to the meeting at which the Reorganization shall have been approved, this Agreement shall not be consummated and shall terminate unless the Target Fund promptly shall call a special meeting of the Target Fund Shareholders at which such conditions so imposed shall be submitted for approval.
11. |
INDEMNIFICATION. |
(a) Each party (an Indemnitor) shall indemnify and hold the other and its officers, directors, trustees, agents and persons controlled by or controlling any of them (each an Indemnified Party) harmless from and against any and all losses, damages, liabilities, claims, demands, judgments, settlements, deficiencies, taxes, assessments, charges, costs and expenses of any nature whatsoever (including reasonable attorneys fees) including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees reasonably incurred by such Indemnified Party in connection with the defense or disposition of any claim, action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which such Indemnified Party may be or may have been involved as a party or otherwise or with which such Indemnified Party may be or may have been threatened (collectively, the Losses) arising out of or related to any claim of a breach of any representation, warranty or covenant made herein by the Indemnitor; provided, however, that no Indemnified Party shall be indemnified hereunder against any Losses arising directly from such Indemnified Partys (i) willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless disregard of the duties involved in the conduct of such Indemnified Partys position.
(b) The Indemnified Party shall use its best efforts to minimize any liabilities, damages, deficiencies, claims, judgments, assessments, costs and expenses in respect of which indemnity may be sought hereunder. The Indemnified Party shall give written notice to Indemnitor within the earlier of ten (10) days of receipt of written notice to the Indemnified Party or thirty (30) days from discovery by the Indemnified Party of any matters which may give rise to a claim for indemnification or reimbursement under this Agreement. The failure to give such notice shall not affect the right of the Indemnified Party to indemnity hereunder unless such failure has materially and adversely affected the rights of the Indemnitor. At any time after ten (10) days from the giving of such notice, the Indemnified Party may, at its option, resist, settle or otherwise compromise, or pay such claim unless it shall have received notice from the Indemnitor that the Indemnitor intends, at the Indemnitors sole cost and expense, to assume the defense of any such matter, in which case the Indemnified Party shall have the right, at no cost or expense to the Indemnitor, to participate in such defense. If the Indemnitor does not assume the defense of such matter, and in any event until the Indemnitor states in writing that it will assume the defense, the Indemnitor shall pay all costs of the Indemnified Party arising out of the defense until the defense is assumed; provided, however, that the Indemnified Party shall consult with the Indemnitor and obtain indemnitors prior written consent to any payment or settlement of any such claim. The Indemnitor shall keep the Indemnified Party fully apprised at all times as to the status of the defense. If the Indemnitor does not assume the defense, the Indemnified Party shall keep the Indemnitor apprised at all times as to the status of the defense. Following indemnification as provided for hereunder, the Indemnitor shall be subrogated to all rights of the Indemnified Party with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made.
A-18
12. |
OTHER MATTERS. |
(a) All covenants, agreements, representations and warranties made under this Agreement and any certificates delivered pursuant to this Agreement shall be deemed to have been material and relied upon by each of the parties, notwithstanding any investigation made by them or on their behalf.
(b) All notices hereunder shall be sufficiently given for all purposes hereunder if in writing and delivered personally or sent by registered mail or certified mail, postage prepaid. Notice to the Target Fund shall be addressed to [Target Fund] c/o BlackRock Advisors, LLC, 40 East 52nd Street, New York, New York 10022, Attention: Janey Ahn, Secretary of the Target Fund or at such other address as the Target Fund may designate by written notice to the Acquiring Fund. Notice to the Acquiring Fund shall be addressed to BlackRock MuniHoldings Fund, Inc. c/o BlackRock Advisors, LLC, 40 East 52nd Street New York, New York 10022, Attention: Janey Ahn, Secretary of the Acquiring Fund, or at such other address and to the attention of such other person as the Acquiring Fund may designate by written notice to the Target Fund. Any notice shall be deemed to have been served or given as of the date such notice is delivered personally or mailed.
(c) This Agreement supersedes all previous correspondence and oral communications between the Funds regarding the Reorganization, constitutes the only understanding with respect to the Reorganization, may not be changed except by a letter of agreement signed by each Fund and shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in said state.
(d) This Agreement may be amended or modified by the parties hereto prior to the Closing Date, by action taken or authorized by their respective Boards at any time before or after adoption of this Agreement and approval of the Reorganization by the Target Fund Shareholders or the Acquiring Fund Shareholders, but, after any such adoption and approval, no amendment or modification shall be made which by law requires further approval by shareholders without such further approval. This Agreement may not be amended or modified except by an instrument in writing signed on behalf of each of the Funds.
(e) This Agreement is not intended to confer upon any person other than the parties hereto (or their respective successors and assigns) any rights, remedies, obligations or liabilities hereunder. If any provision of this Agreement shall be held or made invalid by statute rule, regulation, decision of a tribunal or otherwise, the remainder of this Agreement shall not be affected thereby and, to such extent, the provisions of this Agreement shall be deemed severable provided that this Agreement shall be deemed modified to give effect to the fullest extent permitted under applicable law to the intentions of the party as reflected by this Agreement prior to the invalidity of such provision.
(f) It is expressly agreed that the obligations of the Funds hereunder shall not be binding upon any of their respective directors, trustees, shareholders, nominees, officers, agents, or employees personally, but shall bind only the property of the respective Fund. The execution and delivery of this Agreement has been authorized by the Boards of the Acquiring Fund and the Target Fund and signed by an authorized officer of each of the Acquiring Fund and the Target Fund, acting as such, and neither such authorization by such Board nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the trust property of each Fund.
(g) This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be deemed to be an original but all such counterparts together shall constitute but one instrument.
[Remainder of Page Intentionally Left Blank]
A-19
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be executed and delivered by their duly authorized officers as of the day and year first written above.
BLACKROCK MUNIHOLDINGS FUND, INC. | ||
By: |
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Name: | ||
Title: | ||
[TARGET FUND] | ||
By: |
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Name: | ||
Title |
A-20
FUNDAMENTAL AND NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
Acquiring Fund, MUH and MUS
The following are fundamental investment restrictions of the Acquiring Fund, MUH and MUS and may not be changed without the approval of the holders of a majority of the Funds outstanding common shares and outstanding shares of VMTP Shares and any other preferred stock, voting together as a single class, and a majority of the outstanding shares of VMTP Shares and any other preferred stock, voting as a separate class (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the shares of each class of capital stock represented at a meeting at which more than 50% of the outstanding shares of each class of capital stock are represented or (ii) more than 50% of the outstanding shares of each class of capital stock). Each of the Acquiring Fund, MUH and MUS may not:
1. |
Make investments for the purpose of exercising control or management. |
2. |
Purchase or sell real estate, commodities or commodity contracts; provided, that the Fund may invest in securities secured by real estate or interests therein or issued by entities that invest in real estate or interests therein, and the Acquiring Fund may purchase and sell financial futures contracts and options thereon. |
3. |
Issue senior securities or borrow money except as permitted by Section 18 of the 1940 Act. |
4. |
Underwrite securities of other issuers except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933, as amended, in selling portfolio securities. |
5. |
Make loans to other persons, except that the Fund may purchase Municipal Bonds, Municipal Bonds and other debt securities and enter into repurchase agreements in accordance with its investment objective, policies and limitations. |
6. |
Invest more than 25% of its total assets (taken at market value at the time of each investment) in securities of issuers in a single industry; provided, that for purposes of this restriction, states, municipalities and their political subdivisions are not considered to be part of any industry. |
For purposes of restriction (6), the exception for states, municipalities and their political subdivisions applies only to tax-exempt securities issued by such entities.
Additional investment restrictions adopted by the Acquiring Fund, which may be changed by the Board of Directors without shareholder approval, provide that the Acquiring Fund may not:
a) |
Purchase securities of other investment companies, except to the extent that such purchases are permitted by applicable law. Applicable law currently prohibits the Acquiring Fund from purchasing the securities of other investment companies except if immediately thereafter not more than (i) 3% of the total outstanding voting stock of such company is owned by the Acquiring Fund, (ii) 5% of the Acquiring Funds total assets, taken at market value, would be invested in any one such company, (iii) 10% of the Acquiring Funds total assets, taken at market value, would be invested in such securities, and (iv) the Acquiring Fund, together with other investment companies having the same investment adviser and companies controlled by such companies, owns not more than 10% of the total outstanding stock of any one closed-end investment company. |
b) |
Mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any securities owned or held by the Acquiring Fund except as may be necessary in connection with borrowings mentioned in investment restriction (3) above or except as may be necessary in connection with transactions in financial futures contracts and options thereon. |
c) |
Purchase any securities on margin, except that the Acquiring Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities (the deposit or payment by the Acquiring Fund of initial or variation margin in connection with financial futures contracts and options thereon is not considered the purchase of a security on margin). |
B-1
d) |
Make short sales of securities or maintain a short position or invest in put, call, straddle or spread options, except that the Acquiring Fund may write, purchase and sell options and futures on New York Municipal Bonds, Municipal Bonds, U.S. Government obligations and related indices or otherwise in connection with bona fide hedging activities and may purchase and sell a New York Municipal Bond or Municipal Bond issuers rights to call all or a portion of such New York Municipal Bond or Municipal Bond for mandatory tender for purchase to require mandatory tender for the purchase of related New York Municipal Bonds and Municipal Bonds. |
If a percentage restriction on the investment or use of assets set forth above is adhered to at the time a transaction is effected, later changes in percentages resulting from changing values will not be considered a violation.
BAF
The following are fundamental investment restrictions of the Fund and may not be changed without the approval of the holders of a majority of the Funds outstanding Common Shares and outstanding Preferred Shares, voting together as a single class, and a majority of the outstanding Preferred Shares, voting as a separate class (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the shares of each class of shares represented at a meeting at which more than 50% of the outstanding shares of each class of shares are represented or (ii) more than 50% of the outstanding shares of each class of shares). The Fund may not:
1. |
invest 25% or more of the value of its Managed Assets in any one industry, provided that this limitation does not apply to municipal bonds other than those municipal bonds backed only by assets and revenues of non-governmental issuers; |
2. |
issue senior securities or borrow money other than as permitted by the 1940 Act or pledge its assets other than to secure such issuances or in connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies; |
3. |
make loans of money or property to any person, except through loans of portfolio securities, the purchase of fixed income securities consistent with the Funds investment objective and policies or the entry into repurchase agreements; |
4. |
underwrite the securities of other issuers, except to the extent that in connection with the disposition of portfolio securities or the sale of its own securities the Fund may be deemed to be an underwriter; |
5. |
purchase or sell real estate or interests therein other than municipal bonds secured by real estate or interests therein; provided that the Fund may hold and sell any real estate acquired in connection with its investment in portfolio securities; or |
6. |
purchase or sell commodities or commodity contracts for any purposes except as, and to the extent, permitted by applicable law without the Fund becoming subject to registration with the Commodity Futures Trading Commission as a commodity pool. |
For purposes of applying the limitation set forth in subparagraph (1) above, securities of the U.S. government, its agencies, or instrumentalities, and securities backed by the credit of a governmental entity are not considered to represent industries. However, obligations backed only by the assets and revenues of non-governmental issuers may for this purpose be deemed to be issued by such non-governmental issuers. Thus, the 25% limitation would apply to such obligations. It is nonetheless possible that the Fund may invest more than 25% of its Managed Assets in a broader economic sector of the market for municipal bonds, such as revenue obligations of hospitals and other health care facilities or electrical utility revenue obligations. The Fund reserves the right to invest more than 25% of its Managed Assets in industrial development bonds and private activity securities.
B-2
For the purpose of applying the limitation set forth in subparagraph (1) above, a non- governmental issuer will be deemed the sole issuer of a security when its assets and revenues are separate from other governmental entities and its securities are backed only by its assets and revenues. Similarly, in the case of a non-governmental issuer, such as an industrial corporation or a privately owned or operated hospital, if the security is backed only by the assets and revenues of the non-governmental issuer, then such non-governmental issuer would be deemed to be the sole issuer. Where a security is also backed by the enforceable obligation of a superior or unrelated governmental or other entity (other than a bond insurer), it will also be included in the computation of securities owned that are issued by such governmental or other entity. Where a security is guaranteed by a governmental entity or some other facility, such as a bank guarantee or letter of credit, such a guarantee or letter of credit would be considered a separate security and would be treated as an issue of such government, other entity or bank. When a municipal bond is insured by bond insurance, it will not be considered a security that is issued or guaranteed by the insurer; instead, the issuer of such municipal bond will be determined in accordance with the principles set forth above. The foregoing restrictions do not limit the percentage of the Funds assets that may be invested in municipal bonds insured by any given insurer.
As a fundamental policy, under normal market conditions, the Fund will invest at least 80% of its Managed Assets in Municipal Bonds, the interest of which is exempt from federal income tax, including the alternative minimum tax, and Florida intangible property tax.
The State of Florida repealed the Florida Intangible Tax as of January 2007. As a result, on September 12, 2008, the Board of Trustees of BAF voted unanimously to approve BAF investing in Municipal Bonds regardless of geographic location. If Florida were to reinstate the Florida Intangible Tax or adopt a state income tax, however, BAF would be required to realign its portfolio such that substantially all of its assets would be invested in Florida Municipal Bonds or obtain shareholder approval to amend BAFs fundamental investment objective to remove references to the Florida Intangible Tax.
In addition to the foregoing fundamental investment policies, the Fund is also subject to the following non-fundamental restrictions and policies, which may be changed by the Board of the Fund. The Fund may not:
1. |
make any short sale of securities except in conformity with applicable laws, rules and regulations and unless, after giving effect to such sale, the market value of all securities sold short does not exceed 25% of the value of the Funds Managed Assets and the Funds aggregate short sales of a particular class of securities does not exceed 25% of the then outstanding securities of that class. The Fund may also make short sales against the box without respect to such limitations. In this type of short sale, at the time of the sale, the Fund owns or has the immediate and unconditional right to acquire at no additional cost the identical security; |
2. |
purchase securities of open-end or closed-end investment companies except in compliance with the 1940 Act or any exemptive relief obtained thereunder; or |
3. |
purchase securities of companies for the purpose of exercising control. |
If a percentage restriction on the investment policies or the investment or use of assets set forth above is adhered to at the time a transaction is effected, later changes in percentage resulting from changing values will not be considered a violation.
BBK
The following are fundamental investment restrictions of the Fund and may not be changed without the approval of the holders of a majority of the Funds outstanding Common Shares and outstanding Preferred Shares, voting together as a single class, and a majority of the outstanding Preferred Shares, voting as a separate class (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the shares of each class of shares represented at a meeting at which more than 50% of the outstanding shares of each class of shares are represented or (ii) more than 50% of the outstanding shares of each class of shares). The Fund may not:
1. |
invest 25% or more of the value of its Managed Assets in any one industry, provided that this limitation does not apply to municipal bonds other than those municipal bonds backed only by assets and revenues of non-governmental issuers; |
B-3
2. |
with respect to 75% of its Managed Assets, invest more than 5% of the value of its Managed Assets in the securities of any single issuer or purchase more than 10% of the outstanding securities of any one issuer; |
3. |
issue senior securities or borrow money other than as permitted by the 1940 Act or pledge its assets other than to secure such issuances or in connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies; |
4. |
make loans of money or property to any person, except through loans of portfolio securities, the purchase of fixed income securities consistent with the Funds investment objective and policies or the entry into repurchase agreements; |
5. |
underwrite the securities of other issuers, except to the extent that in connection with the disposition of portfolio securities or the sale of its own securities the Fund may be deemed to be an underwriter; |
6. |
purchase or sell real estate or interests therein other than municipal bonds secured by real estate or interests therein; provided that the Fund may hold and sell any real estate acquired in connection with its investment in portfolio securities; or |
7. |
purchase or sell commodities or commodity contracts for any purposes except as, and to the extent, permitted by applicable law without the Fund becoming subject to registration with the Commodity Futures Trading Commission as a commodity pool. |
For purposes of applying the limitation set forth in subparagraph (1) above, securities of the U.S. government, its agencies, or instrumentalities, and securities backed by the credit of a governmental entity are not considered to represent industries. However, obligations backed only by the assets and revenues of non-governmental issuers may for this purpose be deemed to be issued by such non-governmental issuers. Thus, the 25% limitation would apply to such obligations. It is nonetheless possible that the Fund may invest more than 25% of its Managed Assets in a broader economic sector of the market for municipal bonds, such as revenue obligations of hospitals and other health care facilities or electrical utility revenue obligations. The Fund reserves the right to invest more than 25% of its Managed Assets in industrial development bonds and private activity securities.
For the purpose of applying the limitation set forth in subparagraph (1) above, a non- governmental issuer will be deemed the sole issuer of a security when its assets and revenues are separate from other governmental entities and its securities are backed only by its assets and revenues. Similarly, in the case of a non-governmental issuer, such as an industrial corporation or a privately owned or operated hospital, if the security is backed only by the assets and revenues of the non-governmental issuer, then such non-governmental issuer would be deemed to be the sole issuer. Where a security is also backed by the enforceable obligation of a superior or unrelated governmental or other entity (other than a bond insurer), it will also be included in the computation of securities owned that are issued by such governmental or other entity. Where a security is guaranteed by a governmental entity or some other facility, such as a bank guarantee or letter of credit, such a guarantee or letter of credit would be considered a separate security and would be treated as an issue of such government, other entity or bank. When a municipal bond is insured by bond insurance, it will not be considered a security that is issued or guaranteed by the insurer; instead, the issuer of such municipal bond will be determined in accordance with the principles set forth above. The foregoing restrictions do not limit the percentage of the Funds assets that may be invested in municipal bonds insured by any given insurer.
As a fundamental policy, under normal market conditions, the Fund will invest at least 80% of its Managed Assets in Municipal Bonds, the interest of which is exempt from regular federal income tax.
B-4
In addition to the foregoing fundamental investment policies, the Fund is also subject to the following non-fundamental restrictions and policies, which may be changed by the Board of each Fund. The Fund may not:
1. |
make any short sale of securities except in conformity with applicable laws, rules and regulations and unless, after giving effect to such sale, the market value of all securities sold short does not exceed 25% of the value of the Funds Managed Assets and the Funds aggregate short sales of a particular class of securities does not exceed 25% of the then outstanding securities of that class. The Fund may also make short sales against the box without respect to such limitations. In this type of short sale, at the time of the sale, the Fund owns or has the immediate and unconditional right to acquire at no additional cost the identical security; |
2. |
purchase securities of open-end or closed-end investment companies except in compliance with the 1940 Act or any exemptive relief obtained thereunder; or |
3. |
purchase securities of companies for the purpose of exercising control. |
If a percentage restriction on the investment policies or the investment or use of assets set forth above is adhered to at the time a transaction is effected, later changes in percentage resulting from changing values will not be considered a violation.
B-5
The information in this statement of additional information is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This statement of additional information is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 30, 2020
STATEMENT OF ADDITIONAL INFORMATION
BLACKROCK MUNIHOLDINGS FUND, INC.
BLACKROCK MUNICIPAL INCOME INVESTMENT QUALITY TRUST
BLACKROCK MUNICIPAL BOND TRUST
BLACKROCK MUNIHOLDINGS FUND II, INC.
BLACKROCK MUNIHOLDINGS QUALITY FUND, INC.
Dated [●], 2020
This Statement of Additional Information is available to the common shareholders of BlackRock Municipal Income Investment Quality Trust (NYSE Ticker: BAF) (BAF) and BlackRock Municipal Bond Trust (NYSE Ticker: BBK) (BBK) and BlackRock MuniHoldings Fund II, Inc. (NYSE Ticker: MUH) (MUH) and BlackRock MuniHoldings Quality Fund, Inc. (NYSE Ticker: MUS) (MUS), in connection with the Reorganization (each, a Reorganization and collectively, the Reorganizations) of each of BAF, BBK, MUH and MUS into BlackRock MuniHoldings Fund, Inc. (NYSE: MHD) (MHD or the Acquiring Fund, and collectively with BAF, BBK, MUH and MUS, the Funds, and each, a Fund), whereby the Acquiring Fund will acquire substantially all of the assets and assume substantially all of the liabilities of BAF, BBK, MUH and MUS in exchange solely for newly issued shares of the Acquiring Funds common stock, par value $0.10 per share and Variable Rate Muni Term Preferred Shares, par value $0.10 per share and with a liquidation preference of $100,000 per share (VMTP Shares and the holders thereof, VMTP Holders) (plus any accumulated and unpaid dividends that have accrued on the BAF, BBK, MUH and MUS VMTP Shares up to and including the day immediately preceding the Closing Date of the Reorganizations if such dividends have not been paid prior to such Closing Date), in the form of book-entry interests. The Acquiring Fund will list the newly issued common shares on the New York Stock Exchange (NYSE). BAF, BBK, MUH and MUS will then distribute the newly issued Acquiring Fund common shares and Acquiring Fund VMTP Shares to BAF, BBK, MUH and MUS common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively. BAF and BBK will then terminate their registration under the Investment Company Act of 1940, as amended (the 1940 Act), and liquidate, dissolve and terminate in accordance with, in the case of BAF and BBK, their respective Agreements and Declarations of Trust and Delaware law and, in the case of MUH and MUS, their charters and Maryland law, as applicable. The Acquiring Fund will continue to operate after the Reorganizations as a registered, diversified, closed-end management investment company with the investment objective, investment strategies, investment policies and restrictions described in the Joint Proxy Statement/Prospectus. Each of BAF, BBK, MUH and MUS may be referred to herein individually as a Target Fund or collectively as the Target Funds.
The aggregate net asset value (NAV) (not the market value) of the Acquiring Fund common shares received by the common shareholders of BAF, BBK, MUH and MUS in the Reorganizations will equal the aggregate NAV (not the market value) of the BAF, BBK, MUH or MUS common shares held by such common shareholders immediately prior to the Closing Date (although BAF, BBK, MUH and MUS common shareholders may receive cash for their fractional common shares). The aggregate NAV of each Fund immediately prior to the applicable Reorganization will reflect accrued expenses associated with such Reorganization. The value of each Funds net assets will be calculated net of the liquidation preference (including accumulated and unpaid dividends) of all outstanding VMTP Shares of such Fund. In connection with the Reorganizations, each outstanding VMTP Share of BAF, BBK, MUH and MUS will, without any action on the part of the holder thereof, be exchanged for one newly issued VMTP Share of the Acquiring Fund. The newly issued Acquiring Fund VMTP Shares will have terms that are substantially identical to the terms of the outstanding BAF, BBK, MUH and MUS VMTP Shares, including the same term redemption date of July 2, 2021. The terms of the Acquiring Fund VMTP Shares to be issued in connection with the Reorganizations will be
1
substantially identical to the terms of the outstanding Acquiring Fund VMTP Shares and will rank on parity with the Acquiring Funds outstanding VMTP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The Reorganizations will not result in any changes to the terms of the Acquiring Funds VMTP Shares currently outstanding. A copy of a form of the Agreement and Plan of Reorganization that will be entered into between each of BAF, BBK, MUH and MUS with the Acquiring Fund is attached as Appendix A to the Joint Proxy Statement/Prospectus. Unless otherwise defined herein, capitalized terms have the meanings given to them in the Joint Proxy Statement/Prospectus.
This Statement of Additional Information is not a prospectus and should be read in conjunction with the Joint Proxy Statement/Prospectus dated [●], 2020 relating to the Reorganizations. A copy of the Joint Proxy Statement/Prospectus may be obtained, without charge, by writing to the Funds at 1 University Square Drive, Princeton, New Jersey 08540-6455, or by calling (800) 882-0052.
The Acquiring Fund will provide, without charge, upon the written or oral request of any person to whom this Statement of Additional Information is delivered, a copy of any and all documents that have been incorporated by reference in the registration statement of which this Statement of Additional Information is a part.
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APPENDIX B PROXY VOTING POLICIES BLACKROCK CLOSED-END FUNDS |
B-1 |
3
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Acquiring Funds investment objective, policies and techniques that are described in the Joint Proxy Statement/Prospectus.
Environmental, Social and Governance (ESG) Integration. Although the Acquiring Fund does not seek to implement a specific ESG, impact or sustainability strategy, Acquiring Fund management will consider ESG characteristics as part of the investment process for actively managed funds such as the Acquiring Fund. These considerations will vary depending on a funds particular investment strategies and may include consideration of third-party research as well as consideration of proprietary research of the Investment Advisor across the ESG risks and opportunities regarding an issuer. Acquiring Fund management will consider those ESG characteristics it deems relevant or additive when making investment decisions for the Acquiring Fund. The ESG characteristics utilized in the Acquiring Funds investment process are anticipated to evolve over time and one or more characteristics may not be relevant with respect to all issuers that are eligible for investment.
ESG characteristics are not the sole considerations when making investment decisions for the Acquiring Fund. Further, investors can differ in their views of what constitutes positive or negative ESG characteristics. As a result, the Acquiring Fund may invest in issuers that do not reflect the beliefs and values with respect to ESG of any particular investor. ESG considerations may affect the Acquiring Funds exposure to certain companies or industries and the Acquiring Fund may forego certain investment opportunities. While Acquiring Fund management views ESG considerations as having the potential to contribute to the Acquiring Funds long-term performance, there is no guarantee that such results will be achieved.
ADDITIONAL RISK FACTORS AND SPECIAL CONSIDERATIONS
The following information supplements the discussion of the Acquiring Funds risk factors that are described in the Joint Proxy Statement/Prospectus.
Risk Factors in Strategic Transactions and Derivatives. The Acquiring Funds use of derivative instruments involves risks different from, and possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of risks such as credit risk, currency risk, leverage risk, liquidity risk, correlation risk, index risk and volatility as described below:
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Credit Riskthe risk that the counterparty in a derivative transaction will be unable to honor its financial obligation to the Acquiring Fund, or the risk that the reference entity in a derivative will not be able to honor its financial obligations. In particular, derivatives traded in over-the-counter (OTC) markets often are not guaranteed by an Exchange (as defined herein) or clearing corporation and often do not require payment of margin, and to the extent that the Acquiring Fund has unrealized gains in such instruments or has deposited collateral with its counterparties, the Acquiring Fund is at risk that its counterparties will become bankrupt or otherwise fail to honor their obligations. |
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Currency Riskthe risk that changes in the exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of an investment. |
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Leverage Riskthe risk associated with certain types of investments or trading strategies (such as, for example, borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain transactions in derivatives (such as futures transactions or sales of put options) involve substantial leverage risk and may expose the Acquiring Fund to potential losses that exceed the amount originally invested by the Acquiring Fund. When the Acquiring Fund engages in such a transaction, the Acquiring Fund will deposit in a segregated account, or earmark on its books and records, liquid assets with a value at least equal to the Acquiring Funds exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of the SEC). Such segregation or earmarking will ensure that the Acquiring Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Acquiring Funds exposure to loss. |
1
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Liquidity Riskthe risk that certain securities may be difficult or impossible to sell at the time that the Acquiring Fund would like or at the price that the Acquiring Fund as seller believes the security is currently worth. There can be no assurances that, at any specific time, either a liquid secondary market will exist for a derivative or the Acquiring Fund will otherwise be able to sell such instrument at an acceptable price. It may, therefore, not be possible to close a position in a derivative without incurring substantial losses, if at all. The absence of liquidity may also make it more difficult for the Acquiring Fund to ascertain a market value for such instruments. Although both OTC and exchange-traded derivatives markets may experience a lack of liquidity, certain derivatives traded in OTC markets, including indexed securities, swaps and OTC options, involve substantial illiquidity risk. The illiquidity of the derivatives markets may be due to various factors, including congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, and technical and operational or system failures. In addition, the liquidity of a secondary market in an exchange-traded derivative contract may be adversely affected by daily price fluctuation limits established by the exchanges which limit the amount of fluctuation in an exchange-traded contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days. If it is not possible to close an open derivative position entered into by the Acquiring Fund, the Acquiring Fund would continue to be required to make daily cash payments of variation margin in the event of adverse price movements. In such a situation, if the Acquiring Fund has insufficient cash, it may have to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. |
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Correlation Riskthe risk that changes in the value of a derivative will not match the changes in the value of the portfolio holdings that are being hedged or of the particular market or security to which the Acquiring Fund seeks exposure through the use of the derivative. There are a number of factors which may prevent a derivative instrument from achieving the desired correlation (or inverse correlation) with an underlying asset, rate or index, such as the impact of fees, expenses and transaction costs, the timing of pricing, and disruptions or illiquidity in the markets for such derivative instrument. |
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Index Riskif the derivative is linked to the performance of an index, it will be subject to the risks associated with changes in that index. If the index changes, the Acquiring Fund could receive lower interest payments or experience a reduction in the value of the derivative to below the price that the Acquiring Fund paid for such derivative. Certain indexed securities, including inverse securities (which move in an opposite direction to the index), may create leverage, to the extent that they increase or decrease in value at a rate that is a multiple of the changes in the applicable index. |
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Volatility Riskthe risk that the Acquiring Funds use of derivatives may reduce income or gain and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price over a defined time period. The Acquiring Fund could suffer losses related to its derivative positions as a result of unanticipated market movements, which losses are potentially unlimited. |
When a derivative is used as a hedge against a position that the Acquiring Fund holds, any loss generated by the derivative generally should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurances that the Acquiring Funds hedging transactions will be effective. The Acquiring Fund could also suffer losses related to its derivative positions as a result of unanticipated market movements, which losses are potentially unlimited. BlackRock Advisors, LLC (the Investment Advisor) may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the Acquiring Funds derivatives positions to lose value. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the Acquiring Fund to sell or otherwise close a derivatives position could expose the Acquiring Fund to losses and could make derivatives more difficult for the Acquiring Fund to value accurately.
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When engaging in a hedging transaction, the Acquiring Fund may determine not to seek to establish a perfect correlation between the hedging instruments utilized and the portfolio holdings being hedged. Such an imperfect correlation may prevent the Acquiring Fund from achieving the intended hedge or expose the Acquiring Fund to a risk of loss. The Acquiring Fund may also determine not to hedge against a particular risk because it does not regard the probability of the risk occurring to be sufficiently high as to justify the cost of the hedge or because it does not foresee the occurrence of the risk. It may not be possible for the Acquiring Fund to hedge against a change or event at attractive prices or at a price sufficient to protect the assets of the Acquiring Fund from the decline in value of the portfolio positions anticipated as a result of such change. The Acquiring Fund may also be restricted in its ability to effectively manage the portion of its assets that are segregated or earmarked to cover its obligations. In addition, it may not be possible to hedge at all against certain risks.
If the Acquiring Fund invests in a derivative instrument it could lose more than the principal amount invested. Moreover, derivatives raise certain tax, legal, regulatory and accounting issues that may not be presented by investments in securities, and there is some risk that certain issues could be resolved in a manner that could adversely impact the performance of the Acquiring Fund.
The Acquiring Fund is not required to use derivatives or other portfolio strategies to seek to increase return or to seek to hedge its portfolio and may choose not to do so. Also, suitable derivative transactions may not be available in all circumstances and there can be no assurances that the Acquiring Fund will engage in these transactions to reduce exposure to other risks when that would be beneficial. Although the Investment Advisor seeks to use derivatives to further the Acquiring Funds investment objective, there is no assurance that the use of derivatives will achieve this result.
Options Risk. There are several risks associated with transactions in options on securities and indexes. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objective. In addition, a liquid secondary market for particular options, whether traded OTC or on a recognized securities exchange (e.g., NYSE), separate trading boards of a securities exchange or through a market system that provides contemporaneous transaction pricing information (an exchange) may be absent for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an exchange; the facilities of an exchange or the Office of the Comptroller of the Currency (OCC) may not at all times be adequate to handle current trading volume; or one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by the OCC as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
Futures Transactions and Options Risk. The primary risks associated with the use of futures contracts and options are (a) the imperfect correlation between the change in market value of the instruments held by the Acquiring Fund and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Investment Advisors inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations.
Investment in futures contracts involves the risk of imperfect correlation between movements in the price of the futures contract and the price of the security being hedged. The hedge will not be fully effective when there is imperfect correlation between the movements in the prices of two financial instruments. For example, if the price of the futures contract moves more or less than the price of the hedged security, the Acquiring Fund will experience either a loss or gain on the futures contract which is not completely offset by movements in the price of the hedged securities. To compensate for imperfect correlations, the Acquiring Fund may purchase or sell futures contracts in a greater dollar amount than the hedged securities if the volatility of the hedged securities is historically greater than the volatility of the futures contracts. Conversely, the Acquiring Fund may purchase or sell fewer futures contracts if the volatility of the price of the hedged securities is historically lower than that of the futures contracts.
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The particular securities comprising the index underlying a securities index financial futures contract may vary from the securities held by the Acquiring Fund. As a result, the Acquiring Funds ability to hedge effectively all or a portion of the value of its securities through the use of such financial futures contracts will depend in part on the degree to which price movements in the index underlying the financial futures contract correlate with the price movements of the securities held by the Acquiring Fund. The correlation may be affected by disparities in the average maturity, ratings, geographical mix or structure of the Acquiring Funds investments as compared to those comprising the securities index and general economic or political factors. In addition, the correlation between movements in the value of the securities index may be subject to change over time as additions to and deletions from the securities index alter its structure. The correlation between futures contracts on U.S. Government securities and the securities held by the Acquiring Fund may be adversely affected by similar factors and the risk of imperfect correlation between movements in the prices of such futures contracts and the prices of securities held by the Acquiring Fund may be greater. The trading of futures contracts also is subject to certain market risks, such as inadequate trading activity, which could at times make it difficult or impossible to liquidate existing positions.
The Acquiring Fund may liquidate futures contracts it enters into through offsetting transactions on the applicable contract market. There can be no assurances, however, that a liquid secondary market will exist for any particular futures contract at any specific time. Thus, it may not be possible to close out a futures position. In the event of adverse price movements, the Acquiring Fund would continue to be required to make daily cash payments of variation margin. In such situations, if the Acquiring Fund has insufficient cash, it may be required to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. The inability to close out futures positions also could have an adverse impact on the Acquiring Funds ability to hedge effectively its investments in securities. The liquidity of a secondary market in a futures contract may be adversely affected by daily price fluctuation limits established by commodity exchanges which limit the amount of fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open futures positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days. The Acquiring Fund will enter into a futures position only if, in the judgement of the Investment Advisor, there appears to be an actively traded secondary market for such futures contracts.
The successful use of transactions in futures and related options also depends on the ability of the Investment Advisor to forecast correctly the direction and extent of interest rate movements within a given time frame. To the extent interest rates remain stable during the period in which a futures contract or option is held by the Acquiring Fund or such rates move in a direction opposite to that anticipated, the Acquiring Fund may realize a loss on the Strategic Transaction which is not fully or partially offset by an increase in the value of portfolio securities. As a result, the Acquiring Funds total return for such period may be less than if it had not engaged in the Strategic Transaction.
Because of low initial margin deposits made upon the opening of a futures position, futures transactions involve substantial leverage. As a result, relatively small movements in the price of the futures contracts can result in substantial unrealized gains or losses. There is also the risk of loss by the Acquiring Fund of margin deposits in the event of bankruptcy of a broker with which the Acquiring Fund has an open position in a financial futures contract. Because the Acquiring Fund will engage in the purchase and sale of futures contracts for hedging purposes or to seek to enhance the Acquiring Funds return, any losses incurred in connection therewith may, if the strategy is successful, be offset in whole or in part by increases in the value of securities held by the Acquiring Fund or decreases in the price of securities the Acquiring Fund intends to acquire.
The amount of risk the Acquiring Fund assumes when it purchases an option on a futures contract is the premium paid for the option plus related transaction costs. In addition to the correlation risks discussed above, the purchase of an option on a futures contract also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option purchased.
Over-the-Counter Trading Risk. The derivative instruments that may be purchased or sold by the Acquiring Fund may include instruments not traded on an exchange. The risk of nonperformance by the counterparty to an instrument may be greater than, and the ease with which the Acquiring Fund can dispose of or enter into closing transactions with respect to an instrument may be less than, the risk associated with an exchange traded instrument. In addition, significant disparities may exist between bid and asked prices for derivative instruments that are not traded on an exchange. Derivative instruments not traded on exchanges also are not subject to the same type of government
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regulation as exchange traded instruments, and many of the protections afforded to participants in a regulated environment may not be available in connection with the transactions. Because derivatives traded in OTC markets generally are not guaranteed by an exchange or clearing corporation, to the extent that the Acquiring Fund has unrealized gains in such instruments or has deposited collateral with its counterparties, the Acquiring Fund is at risk that its counterparties will become bankrupt or otherwise fail to honor its obligations.
Certain derivatives traded in OTC markets, including indexed securities, swaps and OTC options, involve substantial liquidity risk. The absence of liquidity may make it difficult or impossible for the Acquiring Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more difficult for the Acquiring Fund to ascertain a market value for such instruments. The Acquiring Fund will, therefore, acquire illiquid OTC instruments (i) if the agreement pursuant to which the instrument is purchased contains a formula price at which the instrument may be terminated or sold, or (ii) for which the Investment Advisor anticipates the Acquiring Fund can receive on each business day at least two independent bids or offers, unless a quotation from only one dealer is available, in which case that dealers quotation may be used. Because derivatives traded in OTC markets are not guaranteed by an exchange or clearing corporation and generally do not require payment of margin, to the extent that the Acquiring Fund has unrealized gains in such instruments or has deposited collateral with its counterparties the Acquiring Fund is at risk that its counterparties will become bankrupt or otherwise fail to honor its obligations. The Acquiring Fund will attempt to minimize these risks by engaging in transactions in derivatives traded in OTC markets only with financial institutions that have substantial capital or that have provided the Acquiring Fund with a third-party guaranty or other credit enhancement.
Dodd-Frank Act Risk. Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) (the Derivatives Title) imposed a substantially new regulatory structure on derivatives markets, with particular emphasis on swaps (which were subject to oversight by the CFTC) and security-based swaps (which were subject to oversight by the SEC). The regulatory framework covers a broad range of swap market participants, including banks, non-banks, credit unions, insurance companies, broker-dealers and investment advisers. Prudential regulators were granted authority to regulate margining of swaps and security-based swaps of banks and bank-related entities.
Although the CFTC and the prudential regulators have adopted and have begun implementing required regulations, the SEC rules were not finalized until December 2019 and firms have until October 2021 to come into compliance.
Current regulations for swaps require the mandatory central clearing and mandatory exchange trading of particular types of interest rate swaps and index credit default swaps (together, Covered Swaps). The Fund is required to clear its Covered Swaps through a clearing broker, which requires, among other things, posting initial margin and variation margin to the Funds clearing broker in order to enter into and maintain positions in Covered Swaps.
Covered Swaps generally are required to be executed through a swap execution facility (SEF), which can involve additional transaction fees.
Additionally, under the Dodd-Frank Act, swaps (and both swaps and security-based swaps entered into with banks) are subject to margin requirements and swap dealers are required to collect margin from the Fund and post variation margin to the Fund with respect to such derivatives. Specifically, regulations are now in effect that require swap dealers to post and collect variation margin (comprised of specified liquid instruments and subject to a required haircut) in connection with trading of OTC swaps with the Fund. Shares of investment companies (other than certain money market funds) may not be posted as collateral under these regulations. Requirements for posting of initial margin in connection with OTC swaps (as well as security-based swaps in addition to OTC swaps where the dealer is a bank or subsidiary of a bank holding company) will be phased-in through September 2021. The CFTC has not yet adopted capital requirements for swap dealers. As uncleared capital requirements for swap dealers and uncleared capital and margin requirements for security-based swaps are phased in and implemented, such requirements may make certain types of trades and/or trading strategies more costly. There may be market dislocations due to uncertainty during the implementation period of any new regulation and the Investment Advisor cannot know how the derivatives market will adjust to the CFTCs new capital regulations and to the new SEC regulations governing security-based swaps.
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In addition, regulations adopted by global prudential regulators that are now in effect require certain bank- regulated counterparties and certain of their affiliates to include in qualified financial contracts, including many derivatives contracts as well as repurchase agreements and securities lending agreements, terms that delay or restrict the rights of counterparties to terminate such contracts, foreclose upon collateral, exercise other default rights or restrict transfers of affiliate credit enhancements (such as guarantees) in the event that the bank-regulated counterparty and/or its affiliates are subject to certain types of resolution or insolvency proceedings.
Legal and Regulatory Risk. At any time after the date hereof, legislation or additional regulations may be enacted that could negatively affect the assets of the Acquiring Fund. Changing approaches to regulation may have a negative impact on the securities in which the Acquiring Fund invests. Legislation or regulation may also change the way in which the Acquiring Fund itself is regulated. There can be no assurance that future legislation, regulation or deregulation will not have a material adverse effect on the Acquiring Fund or will not impair the ability of the Acquiring Fund to achieve its investment objective. In addition, as new rules and regulations resulting from the passage of the Dodd-Frank Act are implemented and new international capital and liquidity requirements are introduced under the Basel III Accords, the market may not react the way the Investment Advisor expects. Whether the Acquiring Fund achieves its investment objective may depend on, among other things, whether the Investment Advisor correctly forecasts market reactions to this and other legislation. In the event the Investment Advisor incorrectly forecasts market reaction, the Acquiring Fund may not achieve its investment objective.
Regulation as a Commodity Pool. The Commodity Futures Trading Commission (CFTC) subjects advisers to registered investment companies to regulation by the CFTC if a fund that is advised by the investment adviser either (i) invests, directly or indirectly, more than a prescribed level of its liquidation value in CFTC-regulated futures, options and swaps (CFTC Derivatives), or (ii) markets itself as providing investment exposure to such instruments. To the extent the Acquiring Fund uses CFTC Derivatives, it intends to do so below such prescribed levels and will not market itself as a commodity pool or a vehicle for trading such instruments. Accordingly, the Investment Advisor has claimed an exclusion from the definition of the term commodity pool operator under the Commodity Exchange Act (CEA) pursuant to Rule 4.5 under the CEA. The Investment Advisor is not, therefore, subject to registration or regulation as a commodity pool operator under the CEA in respect of the Acquiring Fund.
Failure of Futures Commission Merchants and Clearing Organizations. The Acquiring Fund is required to deposit funds to margin open positions in cleared derivative instruments (both futures and swaps) with a clearing broker registered as a futures commission merchant (FCM). The CEA requires an FCM to segregate all funds received from customers with respect to any orders for the purchase or sale of U.S. domestic futures contracts and cleared swaps from the FCMs proprietary assets. Similarly, the CEA requires each FCM to hold in a separate secure account all funds received from customers with respect to any orders for the purchase or sale of foreign futures contracts and segregate any such funds from the funds received with respect to domestic futures contracts. However, all funds and other property received by an FCM from its customers are held by an FCM on a commingled basis in an omnibus account and amounts in excess of assets posted to the clearing organization may be invested by an FCM in certain instruments permitted under the applicable regulation. There is a risk that assets deposited by the Acquiring Fund with any FCM as margin for futures contracts or commodity options may, in certain circumstances, be used to satisfy losses of other clients of the Acquiring Funds FCM. In addition, the assets of the Acquiring Fund posted as margin against both swaps and futures contracts may not be fully protected in the event of the FCMs bankruptcy.
The Board of Trustees or Board of Directors and Officers
The Board of Trustees or Board of Directors, as applicable (the Board), of each Fund currently consists of ten individuals (each, a Board Member), eight of whom are not interested persons of each Fund as defined in the 1940 Act (the Independent Board Members). The registered investment companies advised by the Investment Advisor or its affiliates (the BlackRock-Advised Funds) are organized into one complex of closed-end funds and open-end non-index fixed-income funds (the BlackRock Fixed-Income Complex), one complex of open-end equity, multi-asset, index and money market funds (the BlackRock Multi-Asset Complex) and one complex of exchange-traded funds (each, a BlackRock Fund Complex). Each Fund is included in the BlackRock Fixed-Income Complex. The Board Members also oversee as Board members the operations of the other closed-end registered investment companies included in the BlackRock Fixed-Income Complex.
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Certain biographical and other information relating to the Board Members and officers of each Fund is set forth below, including their year of birth, their principal occupation for at least the last five years, the length of time served, the total number of investment companies overseen in the BlackRock Fund Complexes and any public directorships or trusteeships.
Please refer to the below table which identifies the Board Members and sets forth certain biographical information about the Board Members for each Fund.
Name and Year of Birth(1) |
Position(s) Held (Length of Service) (3) |
Principal Occupation(s) During Past Five Years |
Number of BlackRock- Advised Registered Investment Companies (RICs) Consisting of Investment Portfolios (Portfolios) Overseen(4) |
Other Public Company or Investment Company Directorships Held During Past Five Years(5) |
||||
Independent Board Members(2) |
||||||||
Richard E. Cavanagh
1946 |
Co-Chair of the Board and Board Member (Since 2007) | Director, The Guardian Life Insurance Company of America since 1998; Board Chair, Volunteers of America (a not-for-profit organization) from 2015 to 2018 (board member since 2009); Director, Arch Chemicals (chemical and allied products) from 1999 to 2011; Trustee, Educational Testing Service from 1997 to 2009 and Chairman thereof from 2005 to 2009; Senior Advisor, The Fremont Group since 2008 and Director thereof since 1996; Faculty Member/Adjunct Lecturer, Harvard University since 2007 and Executive Dean from 1987 to 1995; President and Chief Executive Officer, The Conference Board, Inc. (global business research organization) from 1995 to 2007. | 86 RICs consisting of 110 Portfolios | None | ||||
Karen P. Robards
1950 |
Co-Chair of the Board and Board Member (Since 2007) | Principal of Robards & Company, LLC (consulting and private investing) since 1987; Co-founder and Director of the Cooke Center for Learning and Development (a not-for-profit organization) since 1987; Director of Enable Injections, LLC (medical devices) since 2019; Investment Banker at Morgan Stanley from 1976 to 1987. | 86 RICs consisting of 110 Portfolios | Greenhill & Co., Inc.; AtriCure, Inc. (medical devices) from 2000 until 2017 | ||||
Michael J. Castellano
1946 |
Board Member (Since 2011) | Chief Financial Officer of Lazard Group LLC from 2001 to 2011; Chief Financial Officer of Lazard Ltd from 2004 to 2011; Director, Support Our Aging Religious (non-profit) from 2009 to June 2015 and since 2017; Director, National Advisory Board of Church Management at Villanova University since 2010; Trustee, Domestic Church Media Foundation since 2012; Director, CircleBlack Inc. (financial technology company) since 2015. | 86 RICs consisting of 110 Portfolios | None | ||||
Cynthia L. Egan
1955 |
Board Member (Since 2016) | Advisor, U.S. Department of the Treasury from 2014 to 2015; President, Retirement Plan Services, for T. Rowe Price Group, Inc. from 2007 to 2012; executive positions within Fidelity Investments from 1989 to 2007. | 86 RICs consisting of 110 Portfolios | Unum (insurance); The Hanover Insurance Group (insurance); Envestnet (investment platform) from 2013 until 2016 |
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Name and Year of Birth(1) |
Position(s) Held (Length of Service) (3) |
Principal Occupation(s) During Past Five Years |
Number of BlackRock- Advised Registered Investment Companies (RICs) Consisting of Investment Portfolios (Portfolios) Overseen(4) |
Other Public Company or Investment Company Directorships Held During Past Five Years(5) |
||||
Frank J. Fabozzi
1948 |
Board Member (Since 2007) | Editor of The Journal of Portfolio Management since 1986; Professor of Finance, EDHEC Business School (France) since 2011; Visiting Professor, Princeton University for the 2013 to 2014 academic year and Spring 2017 semester; Professor in the Practice of Finance, Yale University School of Management from 1994 to 2011 and currently a Teaching Fellow in Yales Executive Programs; Board Member, BlackRock Equity-Liquidity Funds from 2014 to 2016; affiliated professor Karlsruhe Institute of Technology from 2008 to 2011; Visiting Professor, Rutgers University for the Spring 2019 semester; Visiting Professor, New York University for the 2019 academic year. | 87 RICs consisting of 111 Portfolios | None | ||||
R. Glenn Hubbard
1958 |
Board Member (Since 2007) | Dean, Columbia Business School from 2004 to 2019; Faculty member, Columbia Business School since 1988. | 86 RICs consisting of 110 Portfolios | ADP (data and information services); Metropolitan Life Insurance Company (insurance); KKR Financial Corporation (finance) from 2004 until 2014 | ||||
W. Carl Kester
1951 |
Board Member (Since 2007) | George Fisher Baker Jr. Professor of Business Administration, Harvard Business School since 2008; Deputy Dean for Academic Affairs from 2006 to 2010; Chairman of the Finance Unit, from 2005 to 2006; Senior Associate Dean and Chairman of the MBA Program from 1999 to 2005; Member of the faculty of Harvard Business School since 1981. | 87 RICs consisting of 111 Portfolios | None | ||||
Catherine A. Lynch
1961 |
Board Member (Since 2016) | Chief Executive Officer, Chief Investment Officer and various other positions, National Railroad Retirement Investment Trust from 2003 to 2016; Associate Vice President for Treasury Management, The George Washington University from 1999 to 2003; Assistant Treasurer, Episcopal Church of America from 1995 to 1999. | 87 RICs consisting of 111 Portfolios | None | ||||
Interested Board Members(5) | ||||||||
Robert Fairbairn 1965 |
Board Member (Since 2018) | Vice Chairman of BlackRock, Inc. since 2019; Member of BlackRocks Global Executive and Global Operating Committees; Co-Chair of BlackRocks Human Capital Committee; Senior Managing Director of BlackRock, Inc. from 2010 to 2019; oversaw BlackRocks Strategic Partner Program and Strategic Product Management Group from 2012 to 2019; Member of the Board of Managers of BlackRock Investments, LLC from 2011 to 2018; Global Head of BlackRocks Retail and iShares® businesses from 2012 to 2016. | 119 RICs consisting of 266 Portfolios | None |
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Name and Year of Birth(1) |
Position(s) Held (Length of Service) (3) |
Principal Occupation(s) During Past Five Years |
Number of BlackRock- Advised Registered Investment Companies (RICs) Consisting of Investment Portfolios (Portfolios) Overseen(4) |
Other Public Company or Investment Company Directorships Held During Past Five Years(5) |
||||
John M. Perlowski
1964 |
Board Member (Since 2015), President and Chief Executive Officer (Since 2010) | Managing Director of BlackRock, Inc. since 2009; Head of BlackRock Global Accounting and Product Services since 2009; Advisory Director of Family Resource Network (charitable foundation) since 2009. | 120 RICs consisting of 267 Portfolios | None |
(1) |
The address of each Board Member is c/o BlackRock, Inc., 55 East 52nd Street, New York, NY 10055. |
(2) |
Each Independent Board Member holds office until his or her successor is elected and qualifies, or until his or her earlier death, resignation, retirement or removal, or until December 31 of the year in which he or she turns 75. Board Members who are interested persons, as defined in the 1940 Act, serve until their successor is elected and qualifies or until their earlier death, resignation, retirement or removal as provided by each Funds bylaws or statute, or until December 31 of the year in which they turn 72. The Board may determine to extend the terms of Independent Board Members on a case-by-case basis, as appropriate. |
(3) |
Date shown is the earliest date a person has served for the Funds covered by this Joint Proxy Statement/Prospectus. Following the combination of Merrill Lynch Investment Managers, L.P. (MLIM) and BlackRock, Inc. in September 2006, the various legacy MLIM and legacy BlackRock fund boards were realigned and consolidated into three new fund boards in 2007. Certain Independent Board Members first became members of the boards of other legacy MLIM or legacy BlackRock funds as follows: Richard E. Cavanagh, 1994; Frank J. Fabozzi, 1988; R. Glenn Hubbard, 2004; W. Carl Kester, 1995; and Karen P. Robards, 1998. Certain other Independent Board Members became members of the boards of the closed-end funds in the BlackRock Fixed-Income Complex as follows: Michael J. Castellano, 2011; Cynthia L. Egan, 2016; and Catherine A. Lynch, 2016. |
(4) |
Dr. Fabozzi, Dr. Kester, Ms. Lynch and Mr. Perlowski are also trustees of the BlackRock Credit Strategies Fund. |
(5) |
Mr. Fairbairn and Mr. Perlowski are both interested persons, as defined in the 1940 Act, of each Fund based on their positions with BlackRock, Inc. and its affiliates. Mr. Fairbairn and Mr. Perlowski are also board members of the BlackRock Multi-Asset Complex. |
Experience, Qualifications and Skills of the Board Members
The Independent Board Members have adopted a statement of policy that describes the experiences, qualifications, skills and attributes that are necessary and desirable for potential Independent Board Member candidates (the Statement of Policy). The Boards believe that each Independent Board Member satisfied, at the time he or she was initially elected or appointed a Board Member, and continues to satisfy, the standards contemplated by the Statement of Policy as well as the standards set forth in each Funds By-laws. Furthermore, in determining that a particular Board Member was and continues to be qualified to serve as a Board Member, the Boards have considered a variety of criteria, none of which, in isolation, was controlling. The Boards believe that, collectively, the Board Members have balanced and diverse experiences, skills, attributes and qualifications, which allow the Boards to operate effectively in governing the Funds and protecting the interests of shareholders. Among the attributes common to all Board Members is their ability to review critically, evaluate, question and discuss information provided to them, to interact effectively with the Funds Investment Advisor, other service providers, counsel and independent auditors, and to exercise effective business judgment in the performance of their duties as Board Members. Each Board Members ability to perform his or her duties effectively is evidenced by his or her educational background or professional training; business, consulting, public service or academic positions; experience from service as a board member of the Funds or the other funds in the BlackRock Fund Complexes (and any predecessor funds), other investment funds, public companies, or not-for-profit entities or other organizations; ongoing commitment and participation in Board and Committee meetings, as well as his or her leadership of standing and other committees of other BlackRock-advised funds throughout the years; or other relevant life experiences.
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The table below discusses some of the experiences, qualifications and skills of Board Members that support the conclusion that he or she should serve on the Boards.
Board Members |
Experience, Qualifications and Skills |
|
Independent Board Members | ||
Richard E. Cavanagh | Richard E. Cavanagh brings to the Boards a wealth of practical business knowledge and leadership as an experienced director/trustee of various public and private companies. In particular, because Mr. Cavanagh served for over a decade as President and Chief Executive Officer of The Conference Board, Inc., a global business research organization, he is able to provide the Boards with expertise about business and economic trends and governance practices. Mr. Cavanagh created the blue ribbon Commission on Public Trust and Private Enterprise in 2002, which recommended corporate governance enhancements. Mr. Cavanaghs service as a director of The Guardian Life Insurance Company of America and as a senior advisor and director of The Fremont Group provides added insight into investment trends and conditions. Mr. Cavanaghs long-standing service as a director/trustee/chair of the BlackRock Fixed-Income Complex also provides him with a specific understanding of the Funds, its operations, and the business and regulatory issues facing the Funds. Mr. Cavanagh is also an experienced board leader, having served as the lead independent director of a NYSE public company (Arch Chemicals) and as the Board Chairman of the Educational Testing Service. Mr. Cavanaghs independence from the Funds and the Investment Advisor enhances his service as Co-Chair of the Boards, Chair of the Executive Committee, and a member of the Compliance Committee, the Governance and Nominating Committee and the Performance Oversight Committee. | |
Karen P. Robards | The Boards benefit from Karen P. Robardss many years of experience in investment banking and the financial advisory industry where she obtained extensive knowledge of the capital markets and advised clients on corporate finance transactions, including mergers and acquisitions and the issuance of debt and equity securities. Ms. Robardss prior position as an investment banker at Morgan Stanley provides useful oversight of the Funds investment decisions and investment valuation processes. Additionally, Ms. Robardss experience as a director of publicly held and private companies allows her to provide the Boards with insight into the management and governance practices of other companies. Ms. Robardss long-standing service on the boards of directors/trustees of closed-end funds in the BlackRock Fixed-Income Complex also provides her with a specific understanding of the Funds, their operations, and the business and regulatory issues facing the Funds. Ms. Robardss knowledge of financial and accounting matters qualifies her to serve as Co-Chair of the Boards and a member of each Funds Audit Committee. Ms. Robardss independence from the Funds and the Investment Advisor enhances her service as a member of the Governance and Nominating Committee, the Performance Oversight Committee, and the Executive Committee. | |
Michael J. Castellano | The Boards benefit from Michael J. Castellanos career in accounting which spans over forty years. Mr. Castellano has served as Chief Financial Officer of Lazard Ltd. and as a Managing Director and Chief Financial Officer of Lazard Group. Prior to joining Lazard, Mr. Castellano held various senior management positions at Merrill Lynch & Co., including Senior Vice PresidentChief Control Officer for Merrill Lynchs capital markets businesses, Chairman of Merrill Lynch International Bank and Senior Vice PresidentCorporate Controller. Prior to joining Merrill Lynch & Co., Mr. Castellano was a partner with Deloitte & Touche where he served a number of investment banking clients over the course of his 24 years with the firm. Mr. Castellano currently serves as a director for CircleBlack Inc. Mr. Castellanos knowledge of financial and accounting matters qualifies him to serve as Chair of each Funds Audit |
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Board Members |
Experience, Qualifications and Skills |
|
Committee. Mr. Castellanos independence from the Funds and the Investment Advisor enhances his service as a member of the Governance and Nominating Committee and the Performance Oversight Committee. | ||
Cynthia L. Egan | Cynthia L. Egan brings to the Boards a broad and diverse knowledge of investment companies and the retirement industry as a result of her many years of experience as President, Retirement Plan Services, for T. Rowe Price Group, Inc. and her various senior operating officer positions at Fidelity Investments, including her service as Executive Vice President of FMR Co., President of Fidelity Institutional Services Company and President of the Fidelity Charitable Gift Fund. Ms. Egan has also served as an advisor to the U.S. Department of Treasury as an expert in domestic retirement security. Ms. Egan began her professional career at the Board of Governors of the Federal Reserve and the Federal Reserve Bank of New York. Ms. Egan is also a director of UNUM Corporation, a publicly traded insurance company providing personal risk reinsurance, and of The Hanover Group, a public property casualty insurance company. Ms. Egans independence from the Funds and the Investment Advisor enhances her service as Chair of the Compliance Committee, and a member of the Governance and Nominating Committee and the Performance Oversight Committee. | |
Frank J. Fabozzi | Frank J. Fabozzi has served for over 25 years on the boards of registered investment companies. Dr. Fabozzi holds the designations of Chartered Financial Analyst and Certified Public Accountant. Dr. Fabozzi was inducted into the Fixed Income Analysts Societys Hall of Fame and is the 2007 recipient of the C. Stewart Sheppard Award and the 2015 recipient of the James R. Vertin Award, both given by the CFA Institute. The Boards benefit from Dr. Fabozzis experiences as a professor and author in the field of finance. Dr. Fabozzis experience as a professor at various institutions, including EDHEC Business School, Yale, MIT, and Princeton, as well as Dr. Fabozzis experience as a Professor in the Practice of Finance and Becton Fellow at the Yale University School of Management and as editor of the Journal of Portfolio Management demonstrates his wealth of expertise in the investment management and structured finance areas. Dr. Fabozzi has authored and edited numerous books and research papers on topics in investment management and financial econometrics, and his writings have focused on fixed-income securities and portfolio management, many of which are considered standard references in the investment management industry. Dr. Fabozzis long-standing service on the boards of directors/trustees of the closed-end funds in the BlackRock Fixed-Income Complex also provides him with a specific understanding of the Funds, their operations and the business and regulatory issues facing the Funds. Moreover, Dr. Fabozzis knowledge of financial and accounting matters qualifies him to serve as a member of each Funds Audit Committee. Dr. Fabozzis independence from the Funds and the Investment Advisor enhances his service as Chair of the Performance Oversight Committee. | |
R. Glenn Hubbard | R. Glenn Hubbard has served in numerous roles in the field of economics, including as the Chairman of the U.S. Council of Economic Advisers of the President of the United States. Dr. Hubbard has served as the Dean of Columbia Business School, as a member of the Columbia Faculty and as a Visiting Professor at the John F. Kennedy School of Government at Harvard University, the Harvard Business School and the University of Chicago. Dr. Hubbards experience as an adviser to the President of the United States adds a dimension of balance to the Funds governance and provides perspective on economic issues. Dr. Hubbards service on the boards of ADP and Metropolitan Life Insurance Company provides the Boards with the benefit of his experience with the management practices of other financial companies. Dr. Hubbards long-standing service on the boards of directors/trustees of the closed-end funds in the BlackRock |
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Board Leadership Structure and Oversight
The Boards have overall responsibility for the oversight of the Funds. The Chair of the Boards and the Chief Executive Officer are two different people. Not only is each Co-Chair of the Boards an Independent Board Member, but also the Chair of each Board committee (each, a Committee) is an Independent Board Member. The Boards have five standing Committees: an Audit Committee, a Governance and Nominating Committee, a Compliance Committee, a Performance Oversight Committee and an Executive Committee.
The role of each Co-Chair of the Boards is to preside over all meetings of the Boards and to act as a liaison with service providers, officers, attorneys, and other Board Members between meetings. The Chair of each Committee performs a similar role with respect to the Committee. The Co-Chairs of the Boards or Chair of a Committee may also perform such other functions as may be delegated by the Boards or the Committee from time to time. The Independent Board Members meet regularly outside the presence of the Funds management, in executive sessions or with other service providers to the Funds. The Boards have regular in-person meetings five times a year, including a meeting to consider the approval of the Funds investment management agreements and, if necessary, may hold special meetings before their next regular meeting. Each Committee meets regularly to conduct the oversight functions delegated to that Committee by the Boards and reports its findings to the Boards. The Boards and each standing Committee conduct annual assessments of their oversight function and structure. The Boards have determined that the Boards leadership structure is appropriate because it allows the Boards to exercise independent judgment over management and to allocate areas of responsibility among Committees and the Boards to enhance oversight.
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The Boards decided to separate the roles of Chief Executive Officer from the Co-Chairs because they believe that having independent Co-Chairs: |
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increases the independent oversight of the Funds and enhances the Boards objective evaluation of the Chief Executive Officer; |
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allows the Chief Executive Officer to focus on the Funds operations instead of Board administration; |
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provides greater opportunities for direct and independent communication between shareholders and the Boards; and |
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provides an independent spokesman for the Funds. |
The Boards have engaged the Investment Advisor to manage the Funds on a day-to-day basis. Each Board is responsible for overseeing the Investment Advisor, other service providers, the operations of each Fund and associated risks in accordance with the provisions of the 1940 Act, state law, other applicable laws, each Funds charter, and each Funds investment objective(s) and strategies. The Boards review, on an ongoing basis, the Funds performance, operations, and investment strategies and techniques. The Boards also conduct reviews of the Investment Advisor and its role in running the operations of the Funds.
Day-to-day risk management with respect to the Funds is the responsibility of the Investment Advisor or other service providers (depending on the nature of the risk), subject to the supervision of the Investment Advisor. The Funds are subject to a number of risks, including investment, compliance, operational and valuation risks, among others. While there are a number of risk management functions performed by the Investment Advisor or other service providers, as applicable, it is not possible to eliminate all of the risks applicable to the Funds. Risk oversight is part of the Boards general oversight of the Funds and is addressed as part of various Board and Committee activities. The Boards, directly or through Committees, also review reports from, among others, management, the independent registered public accounting firm for the Funds, the Investment Advisor, and internal auditors for the Investment Advisor or its
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affiliates, as appropriate, regarding risks faced by the Funds and managements or the service providers risk functions. The Committee system facilitates the timely and efficient consideration of matters by the Board Members and facilitates effective oversight of compliance with legal and regulatory requirements and of the Funds activities and associated risks. The Boards have approved the appointment of a Chief Compliance Officer (the CCO), who oversees the implementation and testing of the Funds compliance program and reports regularly to the Boards regarding compliance matters for the Funds and their service providers. The Independent Board Members have engaged independent legal counsel to assist them in performing their oversight responsibilities.
During the calendar year 2019, the Board of each Fund met eight times. During the most recent full fiscal year for each Fund, the Board met the following number of times:
Fund Name |
Ticker | Fiscal Year End |
Number of
Board Meetings |
|||
BlackRock Municipal Income Investment Quality Trust |
BAF | August 31, 2020 | 8 | |||
BlackRock Municipal Bond Trust |
BBK | August 31, 2020 | 8 | |||
BlackRock MuniHoldings Fund II, Inc. |
MUH | April 30, 2020 | 7 | |||
BlackRock MuniHoldings Quality Fund, Inc. |
MUS | April 30, 2020 | 7 | |||
BlackRock MuniHoldings Fund, Inc. |
MHD | April 30, 2020 | 7 |
No incumbent Board Member attended less than 75% of the aggregate number of meetings of each Board and of each Committee on which the Board Member served during each Funds most recently completed fiscal year.
Audit Committee. Each Board has a standing Audit Committee composed of Michael J. Castellano (Chair), Frank J. Fabozzi, Catherine A. Lynch and Karen P. Robards, all of whom are Independent Board Members and all of whom have been determined by the Audit Committee and the Board to be Audit Committee Financial Experts. The principal responsibilities of the Audit Committee are to assist the Board in fulfilling its oversight responsibilities relating to the accounting and financial reporting policies and practices of the Fund. The Audit Committees responsibilities include, without limitation: (i) approving and recommending to the full Board for approval the selection, retention, termination and compensation of the Funds independent registered public accounting firm (the Independent Registered Public Accounting Firm) and evaluating the independence and objectivity of the Independent Registered Public Accounting Firm; (ii) approving all audit engagement terms and fees for the Fund; (iii) reviewing the conduct and results of each audit; (iv) reviewing any issues raised by the Funds Independent Registered Public Accounting Firm or management regarding the accounting or financial reporting policies and practices of the Fund, its internal controls, and, as appropriate, the internal controls of certain service providers and managements response to any such issues; (v) reviewing and discussing the Funds audited and unaudited financial statements and disclosure in the Funds shareholder reports relating to the Funds performance; (vi) assisting the Boards responsibilities with respect to the internal controls of the Fund and its service providers with respect to accounting and financial matters; and (vii) resolving any disagreements between the Funds management and the Funds Independent Registered Public Accounting Firm regarding financial reporting.
Each Board has adopted a written charter for such Boards Audit Committee. A copy of the Audit Committee Charter for each Fund can be found in the Corporate Governance section of the BlackRock Closed-End Fund website at https://www.blackrock.com/us/individual/education/closed-end-funds/corporate-governance.
Governance and Nominating Committee. Each Board has a standing Governance and Nominating Committee composed of R. Glenn Hubbard (Chair), Michael J. Castellano, Richard E. Cavanagh, Cynthia L. Egan and Karen P. Robards, all of whom are Independent Board Members.
The principal responsibilities of the Governance and Nominating Committee are: (i) identifying individuals qualified to serve as Independent Board Members and recommending Board nominees that are not interested persons of the Funds (as defined in the 1940 Act) for election by shareholders or appointment by the Board; (ii) advising the Board with respect to Board composition, procedures and Committees of the Board (other than the Audit Committee); (iii) overseeing periodic self-assessments of the Board and committees of the Board (other than the Audit Committee); (iv)
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reviewing and making recommendations with respect to Independent Board Member compensation; (v) monitoring corporate governance matters and making recommendations in respect thereof to the Board; (vi) acting as the administrative committee with respect to Board policies and procedures, committee policies and procedures (other than the Audit Committee) and codes of ethics as they relate to the Independent Board Members; and (vii) reviewing and making recommendations to the Board in respect of Fund share ownership by the Independent Board Members. Each Board has adopted a written charter for such Boards Governance and Nominating Committee.
The Governance and Nominating Committee of each Board seeks to identify individuals to serve on the Board who have a diverse range of viewpoints, qualifications, experiences, backgrounds and skill sets so that the Board will be better suited to fulfill its responsibility of overseeing the Funds activities. In so doing, the Governance and Nominating Committee reviews the size of the Board, the ages of the current Board Members and their tenure on the Board, and the skills, background and experiences of the Board Members in light of the issues facing the Fund in determining whether one or more new board members should be added to the Board. The Board as a group strives to achieve diversity in terms of gender, race and geographic location. The Governance and Nominating Committee believes that the Board Members as a group possess the array of skills, experiences and backgrounds necessary to guide the Fund. The Board Members biographies included herein highlight the diversity and breadth of skills, qualifications and expertise that the Board Members bring to the Fund.
Each Governance Committee may consider nominations for Board Members made by the Funds shareholders as it deems appropriate. Under each Funds By-laws, shareholders must follow certain procedures to nominate a person for election as a Board Member at an annual or special meeting, or to introduce an item of business at an annual meeting. Under these advance notice procedures, shareholders must submit the proposed nominee or item of business by delivering a notice to the Secretary of the Fund at its principal executive offices. Each Fund must receive notice of a shareholders intention to introduce a nomination or proposed item of business for an annual shareholder meeting not less than 120 days nor more than 150 days before the anniversary of the prior years annual shareholder meeting. Assuming that the 2021 annual shareholder meeting of each Fund is held within 25 days of July 27, 2021, the relevant Fund must receive notice pertaining to the 2021 annual meeting of shareholders no earlier than Saturday, February 27, 2021 and no later than Monday, March 29, 2021, in the case of each Fund. However, if a Fund holds its 2021 annual shareholder meeting on a date that is not within 25 days before or after July 27, 2021, such Fund must receive the notice of a shareholders intention to introduce a nomination or proposed item of business not later than the close of business on the tenth day following the day on which the notice of the date of the shareholder meeting was mailed or the public disclosure of the date of the shareholder meeting was made, whichever comes first.
Each Funds By-laws provide that notice of a proposed nomination must include certain information about the shareholder and the nominee, as well as a written consent of the proposed nominee to serve if elected. A notice of a proposed item of business must include a description of and the reasons for bringing the proposed business to the meeting, any material interest of the shareholder in the business, and certain other information about the shareholder.
Further, each Fund has adopted Board Member qualification requirements which can be found in each Funds By-laws and are applicable to all Board Members that may be nominated, elected, appointed, qualified or seated to serve as Board Members. The qualification requirements may include: (i) age limits; (ii) limits on service on other boards; (iii) restrictions on relationships with investment advisers other than BlackRock; and (iv) character and fitness requirements. In addition to not being an interested person of the Fund as defined under Section 2(a)(19) of the 1940 Act, each Independent Board Member may not be or have certain relationships with a shareholder owning five percent or more of the Funds voting securities or owning other percentage ownership interests in investment companies registered under the 1940 Act. Reference is made to each Funds By-laws for more details.
A copy of the Governance Committee Charter for each Fund can be found in the Corporate Governance section of the BlackRock Closed-End Fund website at https://www.blackrock.com/us/individual/education/closed-end-funds/corporate-governance.
Compliance Committee. The Boards have a Compliance Committee composed of Cynthia L. Egan (Chair), Richard E. Cavanagh, R. Glenn Hubbard and W. Carl Kester, all of whom are Independent Board Members. The Compliance Committees purpose is to assist the Board in fulfilling its responsibility with respect to the oversight of regulatory and fiduciary compliance matters involving the Fund, the fund-related activities of BlackRock, and any sub-advisor and the Funds other third-party service providers. The Compliance Committees responsibilities include, without
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limitation: (i) overseeing the compliance policies and procedures of the Fund and its service providers and recommending changes or additions to such policies and procedures; (ii) reviewing information on and, where appropriate, recommending policies concerning the Funds compliance with applicable law; (iii) reviewing information on any significant correspondence with or other actions by regulators or governmental agencies with respect to the Fund and any employee complaints or published reports that raise concerns regarding compliance matters; and (iv) reviewing reports from, overseeing the annual performance review of, and making certain recommendations in respect of the CCO, including, without limitation, determining the amount and structure of the CCOs compensation. Each Board has adopted a written charter for the Boards Compliance Committee.
Performance Oversight Committee. The Boards have a Performance Oversight Committee composed of Frank J. Fabozzi (Chair), Michael J. Castellano, Richard E. Cavanagh, Cynthia L. Egan, R. Glenn Hubbard, W. Carl Kester, Catherine A. Lynch and Karen P. Robards, all of whom are Independent Board Members. The Performance Oversight Committees purpose is to assist the Board in fulfilling its responsibility to oversee the Funds investment performance relative to the Funds investment objective(s), policies and practices. The Performance Oversight Committees responsibilities include, without limitation: (i) reviewing the Funds investment objective(s), policies and practices; (ii) recommending to the Board any required action in respect of changes in fundamental and non-fundamental investment restrictions; (iii) reviewing information on appropriate benchmarks and competitive universes; (iv) reviewing the Funds investment performance relative to such benchmarks; (v) reviewing information on unusual or exceptional investment matters; (vi) reviewing whether the Fund has complied with its investment policies and restrictions; and (vii) overseeing policies, procedures and controls regarding valuation of the Funds investments. Each Board has adopted a written charter for the Boards Performance Oversight Committee.
Executive Committee. The Boards have an Executive Committee composed of Richard E. Cavanagh (Chair) and Karen P. Robards, both of whom are Independent Board Members, and John M. Perlowski, who serves as an interested Board Member. The principal responsibilities of the Executive Committee include, without limitation: (i) acting on routine matters between meetings of the Board; (ii) acting on such matters as may require urgent action between meetings of the Board; and (iii) exercising such other authority as may from time to time be delegated to the Executive Committee by the Board. Each Board has adopted a written charter for the Boards Executive Committee.
Information about the specific experience, skills, attributes and qualifications of each Board Member, which in each case led to each Boards conclusion that the Board Member should serve (or continue to serve) as a Board Member of the Funds, is provided in Biographical Information of the Trustees.
Each Audit Committee, Governance Committee, Compliance Committee, Performance Oversight Committee and Executive Committee met the following number of times for each Funds most recent fiscal year:
Ticker |
Fiscal Year End |
Number of
Audit Committee Meetings |
Number of
Governance Committee Meetings |
Number of
Compliance Committee Meetings |
Number of
Performance Oversight Committee Meetings |
Number of
Executive Committee Meetings |
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BAF |
August 31, 2020 | 12 | 4 | 4 | 4 | 0 | ||||||
BBK |
August 31, 2020 | 12 | 4 | 4 | 4 | 0 | ||||||
MUH |
April 30, 2020 | 12 | 6 | 5 | 4 | 0 | ||||||
MUS |
April 30, 2020 | 12 | 6 | 5 | 4 | 0 | ||||||
Acquiring Fund (MHD) |
April 30, 2020 | 12 | 6 | 5 | 4 | 0 |
Compensation of the Board Members
Each Independent Board Member is paid an annual retainer of $330,000 per year for his or her services as a board member of the BlackRock-advised Funds, including each Fund, and each Board Member may also receive a $10,000 board meeting fee for special unscheduled meetings or meetings in excess of six Board meetings held in a calendar year, together with out-of-pocket expenses in accordance with a Board policy on travel and other business expenses relating to attendance at meetings. In addition, each Co-Chair of the Board is paid an additional annual retainer of
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$100,000. The Chairs of the Audit Committee, Performance Oversight Committee, Compliance Committee and Governance and Nominating Committee are paid an additional annual retainer of $45,000, $30,000, $45,000 and $20,000, respectively. Each of the members of the Audit Committee and Compliance Committee are paid an additional annual retainer of $30,000 and $25,000, respectively, for his or her service on such committee. Each Fund pays a pro rata portion quarterly (based on relative net assets) of the foregoing Board Member fees paid by the funds in the BlackRock Fixed-Income Complex.
The Independent Board Members have agreed that a maximum of 50% of each Independent Board Members total compensation paid by funds in the BlackRock Fixed-Income Complex may be deferred pursuant to the BlackRock Fixed-Income Complexs deferred compensation plan. Under the deferred compensation plan, deferred amounts earn a return for the Independent Board Members as though equivalent dollar amounts had been invested in shares of certain funds in the BlackRock Fixed-Income Complex selected by the Independent Board Members. This has approximately the same economic effect for the Independent Board Members as if they had invested the deferred amounts in such other funds in the BlackRock Fixed-Income Complex. The deferred compensation plan is not funded and obligations thereunder represent general unsecured claims against the general assets of a fund and are recorded as a liability for accounting purposes.
The following table sets forth the aggregate compensation, including deferred compensation amounts, paid to each Independent Board Member by each Fund during its most recently completed fiscal year and by all BlackRock-advised Funds for the calendar year ended December 31, 2019. Mr. Perlowski and Mr. Fairbairn serve without compensation from the Funds because of their affiliation with BlackRock, Inc. and the Investment Advisor.
Name1 |
Compensation
from BAF |
Compensation
from BBK |
Compensation
from MUH |
Compensation
from MUS |
Compensation
from the Acquiring Fund (MHD) |
Estimated
Annual Benefits upon Retirement |
Aggregate
Compensation from the Funds and Other BlackRock- Advised Funds2,3 |
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Independent Board Members: |
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Michael J. Castellano |
$ | 1,170 | $ | 1,460 | $ | 1,520 | $ | 1,534 | $ | 1,990 | None | $ | 405,000 | |||||||||||||||
Richard E. Cavanagh |
$ | 1,299 | $ | 1,627 | $ | 1,694 | $ | 1,710 | $ | 2,226 | None | $ | 455,000 | |||||||||||||||
Cynthia L. Egan |
$ | 1,157 | $ | 1,444 | $ | 1,502 | $ | 1,516 | $ | 1,967 | None | $ | 400,000 | |||||||||||||||
Frank J. Fabozzi |
$ | 1,131 | $ | 1,410 | $ | 1,467 | $ | 1,481 | $ | 1,920 | None | $ | 405,000 | |||||||||||||||
Henry Gabbay4 |
$ | 621 | $ | 773 | $ | 1,025 | $ | 1,034 | $ | 1,336 | None | $ | 360,000 | |||||||||||||||
R. Glenn Hubbard |
$ | 1,092 | $ | 1,360 | $ | 1,415 | $ | 1,428 | $ | 1,849 | None | $ | 375,000 | |||||||||||||||
W. Carl Kester |
$ | 1,041 | $ | 1,294 | $ | 1,345 | $ | 1,357 | $ | 1,755 | None | $ | 370,000 | |||||||||||||||
Catherine A. Lynch |
$ | 1,054 | $ | 1,311 | $ | 1,362 | $ | 1,375 | $ | 1,778 | None | $ | 375,000 | |||||||||||||||
Karen P. Robards |
$ | 1,311 | $ | 1,643 | $ | 1,712 | $ | 1,728 | $ | 2,250 | None | $ | 460,000 | |||||||||||||||
Interested Board Members: |
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Robert Fairbairn |
None | None | None | None | None | None | None | |||||||||||||||||||||
John M. Perlowski |
None | None | None | None | None | None | None |
1 |
For the number of BlackRock-advised Funds from which each Board Member receives compensation see the Biographical Information Chart beginning on page 7. |
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2 |
For the Independent Board Members, this amount represents the aggregate compensation earned from the funds in the BlackRock Fixed-Income Complex during the calendar year ended December 31, 2019. Of this amount, Mr. Castellano, Mr. Cavanagh, Dr. Fabozzi, Dr. Hubbard, Dr. Kester, Ms. Lynch and Ms. Robards deferred $120,528, $112,840, $0, $186,000, $49,600, $55,818 and $22,816, respectively, pursuant to the BlackRock Fixed-Income Complexs deferred compensation plan. |
3 |
Total amount of deferred compensation payable by the BlackRock Fixed-Income Complex to Mr. Castellano, Mr. Cavanagh, Dr. Fabozzi, Dr. Hubbard, Dr. Kester, Ms. Lynch and Ms. Robards is $1,053,110, $1,638,381, $905,955, $2,751,743, $1,394,527, $209,827 and $1,021,994, respectively, as of December 31, 2019. Ms. Egan and Mr. Gabbay did not participate in the deferred compensation plan as of December 31, 2019. |
4 |
Mr. Gabbay resigned as a Board Member of each Fund effective February 19, 2020. |
Information relating to each Board Members share ownership in each Fund and in the other funds in the BlackRock Fixed-Income Complex that are overseen by the respective director (Supervised Funds) as of December 31, 2019 is set forth in the chart below:
Name of Board Member |
Aggregate Dollar
Range of Common Shares in BAF |
Aggregate Dollar
Range of Common Shares in BBK |
Aggregate Dollar
Range of Common Shares in MUH |
Aggregate Dollar
Range of Common Shares in MUS |
Aggregate Dollar
Range of Common Shares in the Acquiring Fund (MHD) |
Aggregate Dollar
Range of Common Shares in Supervised Funds* |
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Independent Board Members |
|
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Michael J. Castellano |
$ | 1-$10,000 | None | $ | 10,001-$50,000 | $ | 10,001-$50,000 | $ | 10,001-$50,000 | Over $ | 100,000 | |||||||||||||
Richard E. Cavanagh |
$ | 1-$10,000 | $ | 1-$10,000 | $ | 1-$10,000 | $ | 1-$10,000 | $ | 1-$10,000 | Over $ | 100,000 | ||||||||||||
Cynthia L. Egan |
None | None | None | None | None | Over $ | 100,000 | |||||||||||||||||
Frank J. Fabozzi |
None | $ | 1-$10,000 | $ | 1-$10,000 | $ | 1-$10,000 | $ | 1-$10,000 | Over $ | 100,000 | |||||||||||||
R. Glenn Hubbard |
None | $ | 1-$10,000 | None | None | None | Over $ | 100,000 | ||||||||||||||||
W. Carl Kester |
$ | 1-$10,000 | None | None | $ | 1-$10,000 | None | Over $ | 100,000 | |||||||||||||||
Catherine A. Lynch |
None | None | None | None | None | Over $ | 100,000 | |||||||||||||||||
Karen P. Robards |
None | None | None | None | None | Over $ | 100,000 | |||||||||||||||||
Interested Board Members |
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John M. Perlowski |
None | None | None | None | None | Over $ | 100,000 | |||||||||||||||||
Robert Fairbairn |
None | None | None | None | None | Over $ | 100,000 |
* |
Includes share equivalents owned under the deferred compensation plan in the Supervised Funds by certain Independent Board Members who have participated in the deferred compensation plan of the Supervised Funds. |
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As of December 31, 2019, none of the Independent Board Members of each Fund or their immediate family members owned beneficially or of record any securities of BlackRock or any affiliate of BlackRock or underwriter or any person controlling, controlled by or under common control with any such entities nor did any Independent Board Member of each Fund or their immediate family member have any material interest in any transaction, or series of similar transactions, during the most recently completed two calendar years involving each Fund, BlackRock or any affiliate of BlackRock or underwriter or any person controlling, controlled by or under common control with any such entities.
Independent Board Member Ownership of Securities
As of December 31, 2019, the Independent Board Members (and their respective immediate family members) did not beneficially own securities of the Investment Advisor, or an entity controlling, controlled by or under common control with the Investment Advisor (not including registered investment companies).
Information Pertaining to the Officers
Certain biographical and other information relating to the officers of the Funds who are not Board Members is set forth below, including their address and year of birth, principal occupations for at least the last five years and length of time served. With the exception of the Chief Compliance Officer (CCO), executive officers receive no compensation from the Funds. The Acquiring Fund compensates the CCO for his services as its CCO.
Each executive officer is an interested person of the Funds (as defined in the 1940 Act) by virtue of that individuals position with BlackRock or its affiliates described in the table below.
Name, Address(1),(2) and Year of Birth |
Position(s) Held (Length of Service) |
Principal Occupations(s)
|
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Jonathan Diorio
1980 |
Vice President (Since 2015) |
Managing Director of BlackRock since 2015; Director of BlackRock, Inc. from 2011 to 2015. | ||
Neal J. Andrews
1966 |
Chief Financial Officer (Since 2007) |
Chief Financial Officer of the iShares® exchange traded funds from 2019 to 2020; Managing Director of BlackRock, Inc. since 2006 | ||
Jay M. Fife
1970 |
Treasurer (Since 2007) |
Managing Director of BlackRock, Inc. since 2007. | ||
Charles Park
1967 |
Chief Compliance Officer (Since 2014) |
Anti-Money Laundering Compliance Officer for certain BlackRock-advised Funds from 2014 to 2015; Chief Compliance Officer of BlackRock Advisors, LLC and the BlackRock-advised Funds in the BlackRock Multi-Asset Complex and the BlackRock Fixed-Income Complex since 2014; Principal of and Chief Compliance Officer for iShares® Delaware Trust Sponsor LLC since 2012 and BlackRock Fund Advisors (BFA) since 2006; Chief Compliance Officer for the BFA-advised iShares® exchange traded funds since 2006; Chief Compliance Officer for BlackRock Asset Management International Inc. since 2012. | ||
Janey Ahn
1975 |
Secretary (Since 2012) |
Managing Director of BlackRock, Inc. since 2018; Director of BlackRock, Inc. from 2009 to 2017. |
(1) |
The address of each executive officer is c/o BlackRock, Inc., 55 East 52nd Street, New York, NY 10055. |
(2) |
Officers of the Funds service at the pleasure of the Board. |
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Indemnification of Board Members and Officers
The governing documents of each Fund generally provide that, to the extent permitted by applicable law, the Fund will indemnify its Board Members and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Fund unless they engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices. In addition, the Fund will not indemnify Board Members with respect to any matter as to which Board Members did not act in good faith in the reasonable belief that his or her action was in the best interest of the Fund or, in the case of any criminal proceeding, as to which Board Members had reasonable cause to believe that the conduct was unlawful. Indemnification provisions contained in a Funds governing documents are subject to any limitations imposed by applicable law.
The funds in the BlackRock Fixed-Income Complex, including the Funds, have also entered into a separate indemnification agreement with the Board Members of each Board (the Indemnification Agreement). The Indemnification Agreement (i) extends the indemnification provisions contained in a Funds governing documents to Board Members who leave that Funds Board and serve on an advisory board of a different fund in the BlackRock Fixed-Income Complex; (ii) sets in place the terms of the indemnification provisions of a Funds governing documents once a director retires from a Board; and (iii) in the case of Board Members who left the Board of a Fund in connection with or prior to the board consolidation that occurred in 2007 as a result of the merger of BlackRock and Merrill Lynch & Co., Inc.s investment management business, clarifies that such Fund continues to indemnify the director for claims arising out of his or her past service to that Fund.
INVESTMENT MANAGEMENT AGREEMENTS
Investment Management Agreements
The Investment Management Agreement between each Fund and the Investment Advisor was approved by such Funds Board, including a majority of the Independent Board Members. The Investment Advisor is responsible for the management of each Funds portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operation of the Funds. The Investment Advisor, located at 100 Bellevue Parkway, Wilmington, Delaware 19809, is a wholly-owned subsidiary of BlackRock.
The Investment Management Agreement of each Fund is in effect for a one year term ending June 30, 2021 and will continue in effect for successive periods of 12 months thereafter, provided that each continuance is specifically approved at least annually by both (1) the vote of a majority of such Funds Board or the vote of a majority of the securities of such Fund at the time outstanding and entitled to vote (as such term is defined in the 1940 Act) and (2) by the vote of a majority of the Board Members of such Fund who are not interested persons (as such term is defined in the 1940 Act) to the Investment Management Agreement or interested persons of any party to the Investment Management Agreement, cast in person at a meeting called for the purpose of voting on such approval.
The Investment Management Agreement of each Fund may be terminated at any time, without the payment of any penalty, by such Fund (upon the vote of a majority of such Funds Board or a majority of the outstanding voting securities of such Fund) or by the Investment Advisor, upon 60 days written notice by either party to the other which can be waived by the non-terminating party. The Investment Management Agreement of each Fund will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act and the rules thereunder).
The Investment Management Agreement of each Fund provides that the Investment Advisor will not be liable for any error of judgment or mistake of law or for any loss suffered by such Fund in connection with the performance of such Funds Investment Management Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith or gross negligence on the Investment Advisors part in the performance of its duties or from reckless disregard by the Investment Advisor of its duties under the Investment Management Agreement. The Investment Management Agreement of each Fund also provides for indemnification by such Fund of the Investment Advisor, its Board Members, officers, employees, agents and control persons for liabilities incurred by them in connection with their services to such Fund, subject to certain limitations and conditions.
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The Investment Advisor will devote such time and effort to the business of each Fund as is reasonably necessary to perform its duties to such Fund. However, the services of the Investment Advisor are not exclusive, and the Investment Advisor provides similar services to other investment companies and other clients and may engage in other activities.
In addition to the fees paid to the Investment Advisor, each Fund pays all other costs and expenses of its respective operations, including compensation of its Board Members (other than those affiliated with the Investment Advisor), custodian, leveraging expenses, transfer and dividend disbursing agent expenses, legal fees, rating agency fees, listing fees and expenses, expenses of independent auditors, expenses of repurchasing shares, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies and taxes, if any.
Each Fund and the Investment Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement), pursuant to which the Investment Advisor has contractually agreed to waive the management fee with respect to any portion of each Funds assets attributable to investments in any equity and fixed-income mutual funds and exchange traded funds (ETFs) managed by the Investment Advisor or its affiliates that have a contractual fee, through June 30, 2022. In addition, effective December 1, 2019, pursuant to the Fee Waiver Agreement, the Investment Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees each Fund pays to the Investment Advisor indirectly through its investment in money market funds advised by the Investment Advisor or its affiliates, through June 30, 2022. The Fee Waiver Agreement may be continued from year to year thereafter, provided that such continuance is specifically approved by the Investment Advisor and each Fund (including by a majority of the Independent Board Members). Neither the Investment Advisor nor the Funds are obligated to extend the Fee Waiver Agreement. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by each Fund (upon the vote of a majority of the Independent Board Members or a majority of the outstanding voting securities of each Fund), upon 90 days written notice by each Fund to the Investment Advisor. Prior to December 1, 2019, such agreement to waive a portion of each Funds management fee in connection with each Funds investment in affiliated money market funds was voluntary.
Advisory Fees Paid to the Investment Advisor
BlackRock Advisors, LLC acts as the investment adviser for each Fund. The tables below set forth information about the total advisory fees paid by each Fund to the Investment Advisor and any amounts waived by the Investment Advisor with respect to each Fund during each Funds previous three fiscal years.
21
MUS |
||||||||
For the Fiscal Year Ended |
Paid to the
Investment
Advisor |
Waived by the
Investment
Advisor |
||||||
April 30, 2020 |
$ | 1,619,350 | $ | 105,395 | ||||
April 30, 2019 |
$ | 1,554,248 | $ | 96,934 | ||||
April 30, 2018 |
$ | 1,632,619 | $ | 105,932 | ||||
Acquiring Fund (MHD) |
||||||||
For the Fiscal Year Ended |
Paid to the Investment
Advisor |
Waived by the Investment
Advisor |
||||||
April 30, 2020 |
$ | 2,044,900 | $ | 7,606 | ||||
April 30, 2019 |
$ | 2,055,135 | $ | 3,099 | ||||
April 30, 2018 |
$ | 2,125,137 | $ | 3,248 |
Accounting Services Provider
State Street Bank and Trust Company provides certain administration and accounting services to the Funds pursuant to an Administration and Fund Accounting Services Agreement. The following table sets forth the amounts paid by each Fund to State Street Bank and Trust Company during each Funds previous three fiscal years.
BAF |
||||
For the Fiscal Year Ended |
Administrative Services Fees Paid | |||
August 31, 2020 |
$ | 50,672 | ||
August 31, 2019 |
$ | 47,455 | ||
August 31, 2018 |
$ | 37,892 | ||
BBK |
||||
For the Fiscal Year Ended |
Administrative Services Fees Paid | |||
August 31, 2020 |
$ | 57,682 | ||
August 31, 2019 |
$ | 53,535 | ||
August 31, 2018 |
$ | 42,958 | ||
MUH |
||||
For the Fiscal Year Ended |
Administrative Services Fees Paid | |||
April 30, 2020 |
$ | 56,023 | ||
April 30, 2019 |
$ | 53,272 | ||
April 30, 2018 |
$ | 45,783 | ||
MUS |
||||
For the Fiscal Year Ended |
Administrative Services Fees Paid | |||
April 30, 2020 |
$ | 57,222 | ||
April 30, 2019 |
$ | 52,951 | ||
April 30, 2018 |
$ | 47,804 |
22
Acquiring Fund (MHD) |
||||
For the Fiscal Year Ended |
Paid to the Investment Advisor | |||
April 30, 2020 |
$ | 66,305 | ||
April 30, 2019 |
$ | 64,123 | ||
April 30, 2018 |
$ | 58,710 |
Other Accounts Managed by the Portfolio Managers
The tables below set forth information about the other accounts managed by each Funds portfolio managers as of August 31, 2020 for each BAF and BBK and April 30, 2020 for each of MUH, MUS and the Acquiring Fund.
BAF: |
||||||||||||||||||||||||
Number of Other Accounts Managed
and
Assets by Account Type |
Number of Other Accounts and Assets
for Which Advisory Fee is Performance-Based |
|||||||||||||||||||||||
Name of Portfolio Manager |
Other
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
Other
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
||||||||||||||||||
Michael Perilli, CFA |
21 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$ | 6.71 Billion | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Theodore R. Jaeckel, Jr., CFA |
33 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$ | 27.30 Billion | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Phillip Soccio |
15 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$ | 6.17 Billion | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
BBK: |
||||||||||||||||||||||||
Number of Other Accounts Managed and
Assets by Account Type |
Number of Other Accounts and Assets
for Which Advisory Fee is Performance-Based |
|||||||||||||||||||||||
Name of Portfolio Manager |
Other
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
Other
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
||||||||||||||||||
Walter OConnor, CFA |
29 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$ | 29.69 Billion | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Theodore R. Jaeckel, Jr., CFA |
33 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$ | 27.26 Billion | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Christian Romaglino |
12 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$ | 5.81 Billion | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Kevin Maloney |
10 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$ | 3.60 Billion | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
23
MUH: |
||||||||||||||||||||||||
Number of Other Accounts Managed and
Assets by Account Type |
Number of Other Accounts and Assets
for Which Advisory Fee is Performance-Based |
|||||||||||||||||||||||
Name of Portfolio Manager |
Other
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
Other
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
||||||||||||||||||
Theodore R. Jaeckel, Jr., CFA |
33 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$ | 27.98 Billion | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Walter OConnor, CFA |
29 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$ | 25.20 Billion | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Christian Romaglino |
12 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$ | 5.58 Billion | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
MUS: |
||||||||||||||||||||||||
Number of Other Accounts Managed and
Assets by Account Type |
Number of Other Accounts and Assets
for Which Advisory Fee is Performance-Based |
|||||||||||||||||||||||
Name of Portfolio Manager |
Other
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
Other
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
||||||||||||||||||
Phillip Soccio |
15 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$ | 5.88 Billion | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Theodor R. Jaeckel, Jr., CFA |
33 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$
|
27.97
Billion |
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
Christian Romaglino |
12 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$ | 5.57 Billion | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
The Acquiring Fund (MHD): |
||||||||||||||||||||||||
Number of Other Accounts Managed and
Assets by Account Type |
Number of Other Accounts and Assets
for Which Advisory Fee is Performance-Based |
|||||||||||||||||||||||
Name of Portfolio Manager |
Other
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
Other
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
||||||||||||||||||
Theodore R. Jaeckel, Jr., CFA |
33 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$ | 27.92 Billion | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Walter OConnor, CFA |
29 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
$ | 25.14 Billion | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
Potential Material Conflicts of Interest
BlackRock has built a professional working environment, firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor one account over another. BlackRock has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, BlackRock furnishes investment management and advisory services to numerous clients in addition to the Fund, and BlackRock may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts which are hedge funds or have
24
performance or higher fees paid to BlackRock, or in which portfolio managers have a personal interest in the receipt of such fees), which may be the same as or different from those made to the Fund. In addition, BlackRock, Inc., its affiliates and significant shareholders and any officer, director, shareholder or employee may or may not have an interest in the securities whose purchase and sale BlackRock recommends to the Fund. BlackRock, Inc., or any of its affiliates or significant shareholders, or any officer, director, shareholder, employee or any member of their families may take different actions than those recommended to the Fund by BlackRock with respect to the same securities. Moreover, BlackRock may refrain from rendering any advice or services concerning securities of companies of which any of BlackRock, Inc.s (or its affiliates or significant shareholders) officers, directors or employees are directors or officers, or companies as to which BlackRock, Inc. or any of its affiliates or significant shareholders or the officers, directors and employees of any of them has any substantial economic interest or possesses material non-public information. Certain portfolio managers also may manage accounts whose investment strategies may at times be opposed to the strategy utilized for a fund. It should also be noted that a portfolio manager may be managing hedge fund and/or long only accounts, or may be part of a team managing hedge fund and/or long only accounts, subject to incentive fees. Such portfolio managers may therefore be entitled to receive a portion of any incentive fees earned on such accounts. Currently, the portfolio managers of the Funds are not entitled to receive a portion of incentive fees of other accounts.
As a fiduciary, BlackRock owes a duty of loyalty to its clients and must treat each client fairly. When BlackRock purchases or sells securities for more than one account, the trades must be allocated in a manner consistent with its fiduciary duties. BlackRock attempts to allocate investments in a fair and equitable manner among client accounts, with no account receiving preferential treatment. To this end, BlackRock, Inc. has adopted policies that are intended to ensure reasonable efficiency in client transactions and provide BlackRock with sufficient flexibility to allocate investments in a manner that is consistent with the particular investment discipline and client base, as appropriate.
Portfolio Manager Compensation Overview
The discussion below describes the portfolio managers compensation as of each Funds most recent fiscal year end (August 31, 2020 for BAF and BBK and April 30, 2020 for MUH, MUS and the Acquiring Fund).
BlackRocks financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation include a base salary, a performance-based discretionary bonus, participation in various benefits programs and one or more of the incentive compensation programs established by BlackRock.
Generally, portfolio managers receive base compensation based on their position with the firm.
Discretionary Incentive Compensation
Discretionary incentive compensation is a function of several components: the performance of BlackRock, Inc., the performance of the portfolio managers group within BlackRock, the investment performance, including risk-adjusted returns, of the firms assets under management or supervision by that portfolio manager relative to predetermined benchmarks, and the individuals performance and contribution to the overall performance of these portfolios and BlackRock. In most cases, these benchmarks are the same as the benchmark or benchmarks against which the performance of the Funds or other accounts managed by the portfolio managers are measured. Among other things, BlackRocks Chief Investment Officers make a subjective determination with respect to each portfolio managers compensation based on the performance of the Funds and other accounts managed by each portfolio manager relative to the various benchmarks. Performance of fixed income funds is measured on a pre-tax and/or after-tax basis over various time periods including 1-, 3- and 5- year periods, as applicable. With respect to these portfolio managers, such benchmarks for the Fund and other accounts are: a combination of market-based indices (e.g., Standard & Poors Municipal Bond Index), certain customized indices and certain fund industry peer groups.
25
Distribution of Discretionary Incentive Compensation
Discretionary incentive compensation is distributed to portfolio managers in a combination of cash, deferred BlackRock, Inc. stock awards, and/or deferred cash awards that notionally track the return of certain BlackRock investment products.
Portfolio managers receive their annual discretionary incentive compensation in the form of cash. Portfolio managers whose total compensation is above a specified threshold also receive deferred BlackRock, Inc. stock awards annually as part of their discretionary incentive compensation. Paying a portion of discretionary incentive compensation in the form of deferred BlackRock, Inc. stock puts compensation earned by a portfolio manager for a given year at risk based on BlackRocks ability to sustain and improve its performance over future periods. In some cases, additional deferred BlackRock, Inc. stock may be granted to certain key employees as part of a long-term incentive award to aid in retention, align interests with long-term shareholders and motivate performance. Deferred BlackRock, Inc. stock awards are generally granted in the form of BlackRock, Inc. restricted stock units that vest pursuant to the terms of the applicable plan and, once vested, settle in BlackRock, Inc. common stock. The portfolio managers of these Funds have deferred BlackRock, Inc. stock awards.
For certain portfolio managers, a portion of the discretionary incentive compensation is also distributed in the form of deferred cash awards that notionally track the returns of select BlackRock investment products they manage, which provides direct alignment of portfolio manager discretionary incentive compensation with investment product results. Deferred cash awards vest ratably over a number of years and, once vested, settle in the form of cash. Only portfolio managers who manage specified products and whose total compensation is above a specified threshold are eligible to participate in the deferred compensation program.
In addition to base salary and discretionary incentive compensation, portfolio managers may be eligible to receive or participate in one or more of the following:
Incentive Savings PlansBlackRock, Inc. has created a variety of incentive savings plans in which BlackRock, Inc. employees are eligible to participate, including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP), and the BlackRock Employee Stock Purchase Plan (ESPP). The employer contribution components of the RSP include a company match equal to 50% of the first 8% of eligible pay contributed to the plan capped at $5,000 per year, and a company retirement contribution equal to 3-5% of eligible compensation up to the Internal Revenue Service limit ($285,000 for 2020). The RSP offers a range of investment options, including registered investment companies and collective investment funds managed by the firm. BlackRock, Inc. contributions follow the investment direction set by participants for their own contributions or, absent participant investment direction, are invested into a target date fund that corresponds to, or is closest to, the year in which the participant attains age 65. The ESPP allows for investment in BlackRock, Inc. common stock at a 5% discount on the fair market value of the stock on the purchase date. Annual participation in the ESPP is limited to the purchase of 1,000 shares of common stock or a dollar value of $25,000 based on its fair market value on the purchase date. All of the eligible portfolio managers are eligible to participate in these plans.
26
Securities Ownership of Portfolio Managers as of August 31, 2020 for each of BAF and BBK and April 30, 2020 for each of MUH, MUS and the Acquiring Fund, each Funds most recent fiscal year end
Portfolio Manager |
Dollar
Range of Equity Securities of BAF Beneficially Owned |
Dollar Range
of Equity Securities of BBK Beneficially Owned |
Dollar Range
of Equity Securities of MUH Beneficially Owned |
Dollar Range
of Equity Securities of MUS Beneficially Owned |
Dollar Range
of Equity Securities of the Acquiring Fund (MHD) Beneficially Owned |
|||||
Walter OConnor, CFA |
N/A | None | None | N/A | None | |||||
Michael Perilli, CFA |
None | N/A | N/A | N/A | N/A | |||||
Theodore Jaeckel, CFA |
None | None | $10,001-$50,000 | None | None | |||||
Phillip Soccio |
None | N/A | N/A | None | N/A | |||||
Christian Romaglino |
N/A | None | None | None | N/A | |||||
Kevin Maloney |
N/A | None | N/A | N/A | N/A |
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
Subject to policies established by the Board, the Investment Advisor is primarily responsible for the execution of each Funds portfolio transactions and the allocation of brokerage. The Investment Advisor does not execute transactions through any particular broker or dealer, but seeks to obtain the best net results for each Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, operational facilities of the firm and the firms risk and skill in positioning blocks of securities. While the Investment Advisor generally seeks reasonable trade execution costs, the Funds do not necessarily pay the lowest spread or commission available, and payment of the lowest commission or spread is not necessarily consistent with obtaining the best price and execution in particular transactions. Subject to applicable legal requirements, the Investment Advisor may select a broker based partly upon brokerage or research services provided to the Investment Advisor and its clients, including the Funds. In return for such services, the Investment Advisor may cause the Funds to pay a higher commission than other brokers would charge if the Investment Advisor determines in good faith that the commission is reasonable in relation to the services provided.
In selecting brokers or dealers to execute portfolio transactions, the Investment Advisor seeks to obtain the best price and most favorable execution for each Fund, taking into account a variety of factors including: (i) the size, nature and character of the security or instrument being traded and the markets in which it is purchased or sold; (ii) the desired timing of the transaction; (iii) the Investment Advisors knowledge of the expected commission rates and spreads currently available; (iv) the activity existing and expected in the market for the particular security or instrument, including any anticipated execution difficulties; (v) the full range of brokerage services provided; (vi) the brokers or dealers capital; (vii) the quality of research and research services provided; (viii) the reasonableness of the commission, dealer spread or its equivalent for the specific transaction; and (ix) the Investment Advisors knowledge of any actual or apparent operational problems of a broker or dealer.
The securities in which the Funds invest are traded primarily in the OTC market. Each Fund intends to deal directly with the dealers who make a market in the particular securities, except in those circumstances in which better prices and execution are available elsewhere. Under the 1940 Act, persons affiliated with the Funds and persons who are affiliated with such affiliated persons are prohibited from dealing with the Funds as principals in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the SEC. Since transactions in the OTC market usually involve transactions with the dealers acting as principal for their own accounts, the Funds will not deal with affiliated persons, in connection with such transactions. However, an affiliated person of a Fund may serve as its broker in OTC transactions conducted on an agency basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with comparable transactions.
27
OTC issues, including most fixed income securities such as municipal bonds, corporate debt and U.S. Government securities, are normally traded on a net basis without a stated commission, through dealers acting for their own account and not as brokers. The Funds will primarily engage in transactions with these dealers or deal directly with the issuer unless a better price or execution could be obtained by using a broker. Prices paid to a dealer with respect to both foreign and domestic securities will generally include a spread, which is the difference between the prices at which the dealer is willing to purchase and sell the specific security at the time, and includes the dealers normal profit.
Purchases of money market instruments by the Funds are made from dealers, underwriters and issuers. The Funds do not currently expect to incur any brokerage commission expense on such transactions because money market instruments are generally traded on a net basis with dealers acting as principal for their own accounts without a stated commission. The price of the security, however, usually includes a profit to the dealer.
Section 28(e) of the Exchange Act (Section 28(e)) permits an investment adviser, under certain circumstances, to cause an account to pay a broker or dealer a commission for effecting a transaction that exceeds the amount another broker or dealer would have charged for effecting the same transaction in recognition of the value of brokerage and research services provided by that broker or dealer. This includes commissions paid on riskless principal transactions under certain conditions. Brokerage and research services include: (1) furnishing advice as to the value of securities, including pricing and appraisal advice, credit analysis, risk measurement analysis, performance and other analysis, as well as the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental to securities transactions (such as clearance, settlement, and custody). The Investment Advisor believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to the Funds.
The Investment Advisor may participate in client commission arrangements under which the Investment Advisor may execute transactions through a broker-dealer and request that the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research to the Investment Advisor. The Investment Advisor believes that research services obtained through soft dollar or commission sharing arrangements enhance its investment decision-making capabilities, thereby increasing the prospects for higher investment returns. The Investment Advisor will engage only in soft dollar or commission sharing transactions that comply with the requirements of Section 28(e). The Investment Advisor regularly evaluates the soft dollar products and services utilized, as well as the overall soft dollar and commission sharing arrangements to ensure that trades are executed by firms that are regarded as best able to execute trades for client accounts, while at the same time providing access to the research and other services the Investment Advisor views as impactful to its trading results.
The Investment Advisor may utilize soft dollars and related services, including research (whether prepared by the broker-dealer or prepared by a third-party and provided to the Investment Advisor by the broker-dealer) and execution or brokerage services within applicable rules and the Investment Advisors policies to the extent that such permitted services do not compromise the Investment Advisors ability to seek to obtain best execution. In this regard, the portfolio management investment and/or trading teams may consider a variety of factors, including the degree to which the broker-dealer: (a) provides access to company management; (b) provides access to their analysts; (c) provides meaningful/insightful research notes on companies or other potential investments; (d) facilitates calls on which meaningful or insightful ideas about companies or potential investments are discussed; (e) facilitates conferences at which meaningful or insightful ideas about companies or potential investments are discussed; or (f) provides research tools such as market data, financial analysis, and other third party related research and brokerage tools that aid in the investment process.
Research-oriented services for which the Investment Advisor might pay with fund commissions may be in written form or through direct contact with individuals and may include information as to particular companies or industries and securities or groups of securities, as well as market, economic, or institutional advice and statistical information, political developments and technical market information that assists in the valuation of investments. Except as noted
28
immediately below, research services furnished by brokers may be used in servicing some or all client accounts and not all services may be used in connection with the Funds or account that paid commissions to the broker providing such services. In some cases, research information received from brokers by investment company management personnel, or personnel principally responsible for the Investment Advisors individually managed portfolios, is not necessarily shared by and between such personnel. Any investment advisory or other fees paid by the Funds to the Investment Advisor are not reduced as a result of the Investment Advisors receipt of research services. In some cases, the Investment Advisor may receive a service from a broker that has both a research and a non-research use. When this occurs the Investment Advisor makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Investment Advisor will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Investment Advisor faces a potential conflict of interest, but the Investment Advisor believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
Payments of commissions to brokers who are affiliated persons of the Funds will be made in accordance with Rule 17e-1 under the 1940 Act.
From time to time, Funds may purchase new issues of securities in a fixed price offering. In these situations, the broker may be a member of the selling group that will, in addition to selling securities, provide the Investment Advisor with research services. The Financial Industry Regulatory Authority, Inc. has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the broker will provide research credits in these situations at a rate that is higher than that available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
The Investment Advisor does not consider sales of shares of the investment companies it advises as a factor in the selection of brokers or dealers to execute portfolio transactions for the Funds; however, whether or not a particular broker or dealer sells shares of the investment companies advised by the Investment Advisor neither qualifies nor disqualifies such broker or dealer to execute transactions for those investment companies.
Securities purchased in underwritten offerings include a fixed amount of compensation to the underwriter, generally referred to as the underwriters concession or discount. When securities are purchased or sold directly from or to an issuer, no commissions or discounts are paid.
The Investment Advisor may seek to obtain an undertaking from issuers of commercial paper or dealers selling commercial paper to consider the repurchase of such securities from the Funds prior to maturity at their original cost plus interest (sometimes adjusted to reflect the actual maturity of the securities), if it believes that the Funds respective anticipated need for liquidity makes such action desirable. Any such repurchase prior to maturity reduces the possibility that the Funds would incur a capital loss in liquidating commercial paper, especially if interest rates have risen since acquisition of such commercial paper.
Investment decisions for the Funds and for other investment accounts managed by the Investment Advisor are made independently of each other in light of differing conditions. The Investment Advisor allocates investments among client accounts in a fair and equitable manner. A variety of factors will be considered in making such allocations. These factors include: (i) investment objectives or strategies for particular accounts, including sector, industry, country or region and capitalization weightings, (ii) tax considerations of an account, (iii) risk or investment concentration parameters for an account, (iv) supply or demand for a security at a given price level, (v) size of available investment, (vi) cash availability and liquidity requirements for accounts, (vii) regulatory restrictions, (viii) minimum investment size of an account, (ix) relative size of account, and (x) such other factors as may be approved by the Investment Advisors general counsel. Moreover, investments may not be allocated to one client account over another based on any of the following considerations: (i) to favor one client account at the expense of another, (ii) to generate higher fees paid by one client account over another or to produce greater performance compensation to the Investment Advisor, (iii) to develop or enhance a relationship with a client or prospective client, (iv) to compensate a client for past services or benefits rendered to the Investment Advisor or to induce future services or benefits to be rendered to the Investment Advisor, or (v) to manage or equalize investment performance among different client accounts.
29
Equity securities will generally be allocated among client accounts within the same investment mandate on a pro rata basis. This pro-rata allocation may result in the Funds receiving less of a particular security than if pro-ration had not occurred. All allocations of equity securities will be subject, where relevant, to share minimums established for accounts and compliance constraints.
Initial public offerings of securities may be over-subscribed and subsequently trade at a premium in the secondary market. When the Investment Advisor is given an opportunity to invest in such an initial offering or new or hot issue, the supply of securities available for client accounts is often less than the amount of securities the accounts would otherwise take. In order to allocate these investments fairly and equitably among client accounts over time, each portfolio manager or a member of his or her respective investment team will indicate to the Investment Advisors trading desk their level of interest in a particular offering with respect to eligible clients accounts for which that team is responsible. Initial public offerings of U.S. equity securities will be identified as eligible for particular client accounts that are managed by portfolio teams who have indicated interest in the offering based on market capitalization of the issuer of the security and the investment mandate of the client account and in the case of international equity securities, the country where the offering is taking place and the investment mandate of the client account. Generally, shares received during the initial public offering will be allocated among participating client accounts within each investment mandate on a pro rata basis. In situations where supply is too limited to be allocated among all accounts for which the investment is eligible, portfolio managers may rotate such investment opportunities among one or more accounts so long as the rotation system provides for fair access for all client accounts over time. Other allocation methodologies that are considered by the Investment Advisor to be fair and equitable to clients may be used as well.
Because different accounts may have differing investment objectives and policies, the Investment Advisor may buy and sell the same securities at the same time for different clients based on the particular investment objectives, guidelines and strategies of those accounts. For example, the Investment Advisor may decide that it may be entirely appropriate for a growth fund to sell a security at the same time a value fund is buying that security. To the extent that transactions on behalf of more than one client of the Investment Advisor or its affiliates during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. For example, sales of a security by the Investment Advisor on behalf of one or more of its clients may decrease the market price of such security, adversely impacting other clients of the Investment Advisor that still hold the security. If purchases or sales of securities arise for consideration at or about the same time that would involve the Funds or other clients or funds for which the Investment Advisor or an affiliate act as investment manager, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all.
In certain instances, the Investment Advisor may find it efficient for purposes of seeking to obtain best execution, to aggregate or bunch certain contemporaneous purchases or sale orders of its advisory accounts. In general, all contemporaneous trades for client accounts under management by the same portfolio manager or investment team will be bunched in a single order if the trader believes the bunched trade would provide each client with an opportunity to achieve a more favorable execution at a potentially lower execution cost. The costs associated with a bunched order will be shared pro rata among the clients in the bunched order. Generally, if an order for a particular portfolio manager or management team is filled at several different prices through multiple trades, all accounts participating in the order will receive the average price except in the case of certain international markets where average pricing is not permitted. While in some cases this practice could have a detrimental effect upon the price or value of the security as far as the Funds are concerned, in other cases it could be beneficial to the Funds. Transactions effected by the Investment Advisor on behalf of more than one of its clients during the same period may increase the demand for securities being purchased or the supply of securities being sold, causing an adverse effect on price. The trader will give the bunched order to the broker dealer that the trader has identified as being able to provide the best execution of the order. Orders for purchase or sale of securities will be placed within a reasonable amount of time of the order receipt and bunched orders will be kept bunched only long enough to execute the order.
The Funds will not purchase securities during the existence of any underwriting or selling group relating to such securities of which the Investment Advisor or any affiliated person (as defined in the 1940 Act) thereof is a member except pursuant to procedures adopted by the Board in accordance with Rule 10f-3 under the 1940 Act. In no instance will portfolio securities be purchased from or sold to the Investment Advisor or any affiliated person of the foregoing entities except as permitted by SEC exemptive order or by applicable law.
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While the Funds generally do not expect to engage in trading for short-term gains, they will effect portfolio transactions without regard to any holding period if, in the Investment Advisors judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular industry or in general market, economic or financial conditions. The portfolio turnover rate is calculated by dividing the lesser of each Funds annual sales or purchases of portfolio securities (exclusive of purchases or sales of U.S. Government Securities and all other securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the securities in the portfolio during the year. A high rate of portfolio turnover results in certain tax consequences, such as increased capital gain dividends and/or ordinary income dividends, and in correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions, which are borne directly by the Funds.
Each Fund paid no brokerage commissions, including to affiliated broker-dealers, during the three most recent fiscal years.
Each Fund paid no security lending agent fees to the security lending agent during its previous three fiscal years.
The Acquiring Fund, MUH and MUS held no securities of its regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) during the fiscal year ended April 30, 2020. BAF and BBK held no securities of its regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) during the fiscal year ended August 31,.
Certain activities of BlackRock, Inc., the Investment Advisor and the other subsidiaries of BlackRock, Inc. (collectively referred to in this section as BlackRock) and their respective directors, officers or employees, with respect to each Fund and/or other accounts managed by BlackRock, may give rise to actual or perceived conflicts of interest such as those described below.
BlackRock is one of the worlds largest asset management firms. BlackRock, its subsidiaries and their respective directors, officers and employees, including the business units or entities and personnel who may be involved in the investment activities and business operations of a Fund, are engaged worldwide in businesses, including managing equities, fixed income securities, cash and alternative investments, and other financial services, and have interests other than that of managing a Fund. These are considerations of which investors in a Fund should be aware, and which may cause conflicts of interest that could disadvantage a Fund and its shareholders. These businesses and interests include potential multiple advisory, transactional, financial and other relationships with, or interests in companies and interests in securities or other instruments that may be purchased or sold by a Fund.
BlackRock has proprietary interests in, and may manage or advise with respect to, accounts or funds (including separate accounts and other funds and collective investment vehicles) that have investment objectives similar to those of the Funds and/or that engage in transactions in the same types of securities, currencies and instruments as the Funds. BlackRock is also a major participant in the global currency, equities, swap and fixed income markets, in each case, for the accounts of clients and, in some cases, on a proprietary basis. As such, BlackRock is or may be actively engaged in transactions in the same securities, currencies, and instruments in which each Fund invests. Such activities could affect the prices and availability of the securities, currencies, and instruments in which each Fund invests, which could have an adverse impact on a Funds performance. Such transactions, particularly in respect of most proprietary accounts or client accounts, will be executed independently of a Funds transactions and thus at prices or rates that may be more or less favorable than those obtained by such Fund.
When BlackRock seeks to purchase or sell the same assets for managed accounts, including the Funds, the assets actually purchased or sold may be allocated among the accounts on a basis determined in its good faith discretion to be equitable. In some cases, this system may adversely affect the size or price of the assets purchased or sold for a Fund. In addition, transactions in investments by one or more other accounts managed by BlackRock may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of a Fund, particularly, but not limited to, with respect to small capitalization, emerging market or less liquid strategies. This may occur with respect to BlackRock-advised accounts when investment decisions regarding a Fund are based on research or other
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information that is also used to support decisions for other accounts. When BlackRock implements a portfolio decision or strategy on behalf of another account ahead of, or contemporaneously with, similar decisions or strategies for a Fund, market impact, liquidity constraints, or other factors could result in a Fund receiving less favorable trading results and the costs of implementing such decisions or strategies could be increased or a Fund could otherwise be disadvantaged. BlackRock may, in certain cases, elect to implement internal policies and procedures designed to limit such consequences, which may cause a Fund to be unable to engage in certain activities, including purchasing or disposing of securities, when it might otherwise be desirable for it to do so. Conflicts may also arise because portfolio decisions regarding a Fund may benefit other accounts managed by BlackRock. For example, the sale of a long position or establishment of a short position by a Fund may impair the price of the same security sold short by (and therefore benefit) BlackRock or its other accounts or funds, and the purchase of a security or covering of a short position in a security by a Fund may increase the price of the same security held by (and therefore benefit) BlackRock or its other accounts or funds. In addition, to the extent permitted by applicable law, a Fund may invest its assets in other funds advised by BlackRock, including funds that are managed by one or more of the same portfolio managers, which could result in conflicts of interest relating to asset allocation, timing of Fund purchases and redemptions, and increased remuneration and profitability for BlackRock and/or its personnel, including portfolio managers.
In certain circumstances, BlackRock, on behalf of a Fund, may seek to buy from or sell securities to another fund or account advised by BlackRock. BlackRock may (but is not required to) effect purchases and sales between BlackRock clients (cross trades), including such Fund, if BlackRock believes such transactions are appropriate based on each partys investment objectives and guidelines, subject to applicable law and regulation. There may be potential conflicts of interest or regulatory issues relating to these transactions which could limit BlackRocks decision to engage in these transactions for a Fund. BlackRock may have a potentially conflicting division of loyalties and responsibilities to the parties in such transactions.
BlackRock and its clients may pursue or enforce rights with respect to an issuer in which a Fund has invested, and those activities may have an adverse effect on such Fund. As a result, prices, availability, liquidity and terms of a Funds investments may be negatively impacted by the activities of BlackRock or its clients, and transactions for a Fund may be impaired or effected at prices or terms that may be less favorable than would otherwise have been the case.
The results of a Funds investment activities may differ significantly from the results achieved by BlackRock for its proprietary accounts or other accounts (including investment companies or collective investment vehicles) which it manages or advises. It is possible that one or more accounts managed or advised by BlackRock and such other accounts will achieve investment results that are substantially more or less favorable than the results achieved by a Fund. Moreover, it is possible that a Fund will sustain losses during periods in which one or more proprietary or other accounts managed or advised by BlackRock achieve significant profits. The opposite result is also possible.
From time to time, a Fund may be restricted from purchasing or selling securities, or from engaging in other investment activities because of regulatory, legal or contractual requirements applicable to BlackRock or other accounts managed or advised by BlackRock, and/or the internal policies of BlackRock designed to comply with such requirements. As a result, there may be periods, for example, when BlackRock will not initiate or recommend certain types of transactions in certain securities or instruments with respect to which BlackRock is performing services or when position limits have been reached. For example, the investment activities of BlackRock for its proprietary accounts and accounts under its management may limit the investment opportunities for a Fund in certain emerging and other markets in which limitations are imposed upon the amount of investment, in the aggregate or in individual issuers, by affiliated foreign investors.
In connection with its management of a Fund, BlackRock may have access to certain fundamental analysis and proprietary technical models developed by BlackRock. BlackRock will not be under any obligation, however, to effect transactions on behalf of a Fund in accordance with such analysis and models. In addition, BlackRock will not have any obligation to make available any information regarding its proprietary activities or strategies, or the activities or strategies used for other accounts managed by them, for the benefit of the management of a Fund and it is not anticipated that BlackRock will have access to such information for the purpose of managing such Fund. The proprietary activities or portfolio strategies of BlackRock, or the activities or strategies used for accounts managed by BlackRock or other client accounts could conflict with the transactions and strategies employed by BlackRock in managing a Fund.
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In addition, certain principals and certain employees of a Funds investment adviser are also principals or employees of other business units or entities within BlackRock. As a result, these principals and employees may have obligations to such other business units or entities or their clients and such obligations to other business units or entities or their clients may be a consideration of which investors in a Fund should be aware.
BlackRock may enter into transactions and invest in securities, instruments and currencies on behalf of a Fund in which clients of BlackRock, or, to the extent permitted by the SEC and applicable law, BlackRock, serves as the counterparty, principal or issuer. In such cases, such partys interests in the transaction will be adverse to the interests of a Fund, and such party may have no incentive to assure that such Fund obtains the best possible prices or terms in connection with the transactions. In addition, the purchase, holding and sale of such investments by a Fund may enhance the profitability of BlackRock.
BlackRock may also create, write or issue derivatives for clients, the underlying securities, currencies or instruments of which may be those in which a Fund invests or which may be based on the performance of such Fund. BlackRock has entered into an arrangement with Markit Indices Limited, the index provider for underlying fixed-income indexes used by certain iShares ETFs, related to derivative fixed-income products that are based on such iShares ETFs. BlackRock will receive certain payments for licensing intellectual property belonging to BlackRock and for facilitating provision of data in connection with such derivative products, which may include payments based on the trading volumes of, or revenues generated by, the derivative products. A Fund and other accounts managed by BlackRock may from time to time transact in such derivative products where permitted by a Funds investment strategy, which could contribute to the viability of such derivative products by making them more appealing to funds and accounts managed by third parties, and in turn lead to increased payments to BlackRock. Trading activity in these derivative products could also potentially lead to greater liquidity for such products, increased purchase activity with respect to these iShares ETFs and increased assets under management for BlackRock.
A Fund may, subject to applicable law, purchase investments that are the subject of an underwriting or other distribution by BlackRock and may also enter into transactions with other clients of BlackRock where such other clients have interests adverse to those of such Fund. At times, these activities may cause business units or entities within BlackRock to give advice to clients that may cause these clients to take actions adverse to the interests of such Fund. To the extent such transactions are permitted, such Fund will deal with BlackRock on an arms-length basis.
To the extent authorized by applicable law, BlackRock may act as broker, dealer, agent, lender or adviser or in other commercial capacities for a Fund. It is anticipated that the commissions, mark-ups, mark-downs, financial advisory fees, underwriting and placement fees, sales fees, financing and commitment fees, brokerage fees, other fees, compensation or profits, rates, terms and conditions charged by BlackRock will be in its view commercially reasonable, although BlackRock, including its sales personnel, will have an interest in obtaining fees and other amounts that are favorable to BlackRock and such sales personnel, which may have an adverse effect on a Fund.
Subject to applicable law, BlackRock (and its personnel and other distributors) will be entitled to retain fees and other amounts that they receive in connection with their service to a Fund as broker, dealer, agent, lender, adviser or in other commercial capacities. No accounting to a Fund or its shareholders will be required, and no fees or other compensation payable by a Fund or its shareholders will be reduced by reason of receipt by BlackRock of any such fees or other amounts.
When BlackRock acts as broker, dealer, agent, adviser or in other commercial capacities in relation to a Fund, BlackRock may take commercial steps in its own interests, which may have an adverse effect on such Fund.
A Fund will be required to establish business relationships with its counterparties based on such Funds own credit standing. BlackRock will not have any obligation to allow its credit to be used in connection with a Funds establishment of its business relationships, nor is it expected that a Funds counterparties will rely on the credit of BlackRock in evaluating such Funds creditworthiness.
BlackRock Investment Management, LLC (BIM), an affiliate of BlackRock, pursuant to SEC exemptive relief, acts as securities lending agent to, and receives a share of securities lending revenues from, a Fund. BIM may receive compensation for managing the reinvestment of the cash collateral from securities lending. There are potential conflicts of interests in managing a securities lending program, including but not limited to: (i) BIM as securities
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lending agent may have an incentive to increase or decrease the amount of securities on loan or to lend particular securities in order to generate additional risk-adjusted revenue for BIM and its affiliates; and (ii) BIM as securities lending agent may have an incentive to allocate loans to clients that would provide more revenue to BIM. As described further below, BIM seeks to mitigate this conflict by providing its securities lending clients with equal lending opportunities over time in order to approximate pro rata allocation.
As part of its securities lending program, BlackRock indemnifies certain clients and/or funds against a shortfall in collateral in the event of borrower default. RQA calculates, on a regular basis, BlackRocks potential dollar exposure to the risk of collateral shortfall upon counterparty default (shortfall risk) under the securities lending program for both indemnified and non-indemnified clients. On a periodic basis, RQA also determines the maximum amount of potential indemnified shortfall risk arising from securities lending activities (indemnification exposure limit) and the maximum amount of counterparty-specific credit exposure (credit limits) BlackRock is willing to assume as well as the programs operational complexity. RQA oversees the risk model that calculates projected shortfall values using loan-level factors such as loan and collateral type and market value as well as specific borrower counterparty credit characteristics. When necessary, RQA may further adjust other securities lending program attributes by restricting eligible collateral or reducing counterparty credit limits. As a result, the management of the indemnification exposure limit may affect the amount of securities lending activity BlackRock may conduct at any given point in time and impact indemnified and non-indemnified clients by reducing the volume of lending opportunities for certain loans (including by asset type, collateral type and/or revenue profile).
BlackRock uses a predetermined systematic process in order to approximate pro rata allocation over time. In order to allocate a loan to a portfolio: (i) BlackRock as a whole must have sufficient lending capacity pursuant to the various program limits (i.e. indemnification exposure limit and counterparty credit limits); (ii) the lending portfolio must hold the asset at the time a loan opportunity arrives; and (iii) the lending portfolio must also have enough inventory, either on its own or when aggregated with other portfolios into one single market delivery, to satisfy the loan request. In doing so, BlackRock seeks to provide equal lending opportunities for all portfolios, independent of whether BlackRock indemnifies the portfolio. Equal opportunities for lending portfolios does not guarantee equal outcomes. Specifically, short and long-term outcomes for individual clients may vary due to asset mix, asset/liability spreads on different securities, and the overall limits imposed by the firm.
Purchases and sales of securities and other assets for a Fund may be bunched or aggregated with orders for other BlackRock client accounts, including with accounts that pay different transaction costs solely due to the fact that they have different research payment arrangements. BlackRock, however, is not required to bunch or aggregate orders if portfolio management decisions for different accounts are made separately, or if they determine that bunching or aggregating is not practicable or required, or in cases involving client direction.
Prevailing trading activity frequently may make impossible the receipt of the same price or execution on the entire volume of securities purchased or sold. When this occurs, the various prices may be averaged, and a Fund will be charged or credited with the average price. Thus, the effect of the aggregation may operate on some occasions to the disadvantage of a Fund. In addition, under certain circumstances, a Fund will not be charged the same commission or commission equivalent rates in connection with a bunched or aggregated order.
As discussed in the section entitled Portfolio Transactions and Brokerage in this SAI, BlackRock, unless prohibited by applicable law, may cause a Fund or account to pay a broker or dealer a commission for effecting a transaction that exceeds the amount another broker or dealer would have charged for effecting the same transaction in recognition of the value of brokerage and research services provided by that broker or dealer.
Subject to applicable law, BlackRock may select brokers that furnish BlackRock, a Fund, other BlackRock client accounts or personnel, directly or through correspondent relationships, with research or other appropriate services which provide, in BlackRocks view, appropriate assistance to BlackRock in the investment decision-making process (including with respect to futures, fixed-price offerings and OTC transactions). Such research or other services may include, to the extent permitted by law, research reports on companies, industries and securities; economic and financial data; financial publications; proxy analysis; trade industry seminars; computer data bases; research-oriented software and other services and products.
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Research or other services obtained in this manner may be used in servicing any or all of a Fund and other BlackRock client accounts, including in connection with BlackRock client accounts other than those that pay commissions to the broker relating to the research or other service arrangements. Such products and services may disproportionately benefit other BlackRock client accounts relative to a Fund based on the amount of brokerage commissions paid by such Fund and such other BlackRock client accounts. For example, research or other services that are paid for through one clients commissions may not be used in managing that clients account. In addition, other BlackRock client accounts may receive the benefit, including disproportionate benefits, of economies of scale or price discounts in connection with products and services that may be provided to a Fund and to such other BlackRock client accounts. To the extent that BlackRock uses soft dollars, it will not have to pay for those products and services itself.
BlackRock, unless prohibited by applicable law, may endeavor to execute trades through brokers who, pursuant to such arrangements, provide research or other services in order to ensure the continued receipt of research or other services BlackRock believes are useful in its investment decision-making process. BlackRock may from time to time choose not to engage in the above described arrangements to varying degrees. BlackRock, unless prohibited by applicable law, may also enter into commission sharing arrangements under which BlackRock may execute transactions through a broker-dealer and request that the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research to BlackRock. To the extent that BlackRock engages in commission sharing arrangements, many of the same conflicts related to traditional soft dollars may exist.
BlackRock may utilize certain electronic crossing networks (ECNs) (including, without limitation, ECNs in which BlackRock has an investment or other interest, to the extent permitted by applicable law) in executing client securities transactions for certain types of securities. These ECNs may charge fees for their services, including access fees and transaction fees. The transaction fees, which are similar to commissions or markups/markdowns, will generally be charged to clients and, like commissions and markups/markdowns, would generally be included in the cost of the securities purchased. Access fees may be paid by BlackRock even though incurred in connection with executing transactions on behalf of clients, including a Fund. In certain circumstances, ECNs may offer volume discounts that will reduce the access fees typically paid by BlackRock. BlackRock will only utilize ECNs consistent with its obligation to seek to obtain best execution in client transactions.
BlackRock has adopted policies and procedures designed to prevent conflicts of interest from influencing proxy voting decisions that it makes on behalf of advisory clients, including a Fund, and to help ensure that such decisions are made in accordance with BlackRocks fiduciary obligations to its clients. Nevertheless, notwithstanding such proxy voting policies and procedures, actual proxy voting decisions of BlackRock may have the effect of favoring the interests of other clients or businesses of other divisions or units of BlackRock, provided that BlackRock believes such voting decisions to be in accordance with its fiduciary obligations. For a more detailed discussion of these policies and procedures, see Appendix B.
It is possible that a Fund may invest in securities of, or engage in transactions with, companies in which BlackRock has significant debt or equity investments or other interests. A Fund may also invest in issuances (such as structured notes) by entities for which BlackRock provides and is compensated for cash management services relating to the proceeds from the sale of such issuances. In making investment decisions for a Fund, BlackRock is not permitted to obtain or use material non-public information acquired by any unit of BlackRock, in the course of these activities. In addition, from time to time, the activities of BlackRock may limit a Funds flexibility in purchases and sales of securities. As indicated below, BlackRock may engage in transactions with companies in which BlackRock-advised funds or other clients of BlackRock have an investment.
BlackRock and Chubb Limited (Chubb), a public company whose securities are held by BlackRock-advised funds and other accounts, partially funded the creation of a re-insurance company (Re Co) pursuant to which each has approximately a 9.9% ownership interest and each has representation on the board of directors. Certain employees and executives of BlackRock have a less than 1/2 of 1% ownership interest in Re Co. BlackRock manages the investment portfolio of Re Co, which is held in a wholly-owned subsidiary. Re Co participates as a reinsurer with reinsurance contracts underwritten by subsidiaries of Chubb.
BlackRock may provide valuation assistance to certain clients with respect to certain securities or other investments and the valuation recommendations made for such clients accounts may differ from the valuations for the same securities or investments assigned by a Funds pricing vendors, especially if such valuations are based on broker-
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dealer quotes or other data sources unavailable to a Funds pricing vendors. While BlackRock will generally communicate its valuation information or determinations to a Funds pricing vendors and/or fund accountants, there may be instances where a Funds pricing vendors or fund accountants assign a different valuation to a security or other investment than the valuation for such security or investment determined or recommended by BlackRock.
As disclosed in more detail in Net Asset Value in the Joint Proxy Statement/Prospectus, when market quotations are not readily available or are believed by BlackRock to be unreliable, a Funds investments are valued at fair value by BlackRock, in accordance with procedures adopted by a Funds Board of Directors. When determining a fair value price, BlackRock seeks to determine the price that a Fund might reasonably expect to receive from the current sale of that asset or liability in an arms-length transaction. The price generally may not be determined based on what a Fund might reasonably expect to receive for selling an asset or liability at a later time or if it holds the asset or liability to maturity. While fair value determinations will be based upon all available factors that BlackRock deems relevant at the time of the determination, and may be based on analytical values determined by BlackRock using proprietary or third-party valuation models, fair value represents only a good faith approximation of the value of an asset or liability. The fair value of one or more assets or liabilities may not, in retrospect, be the price at which those assets or liabilities could have been sold during the period in which the particular fair values were used in determining a Funds NAV. As a result, a Funds sale or repurchase of its shares at NAV, at a time when a holding or holdings are valued by BlackRock (pursuant to Board-adopted procedures) at fair value, may have the effect of diluting or increasing the economic interest of existing shareholders and may affect the amount of revenue received by BlackRock with respect to services for which it receives an asset-based fee.
To the extent permitted by applicable law, a Fund may invest all or some of its short-term cash investments in any money market fund or similarly-managed private fund advised or managed by BlackRock. In connection with any such investments, a Fund, to the extent permitted by the 1940 Act, may pay its share of expenses of a money market fund or other similarly-managed private fund in which it invests, which may result in a Fund bearing some additional expenses.
BlackRock and its directors, officers and employees, may buy and sell securities or other investments for their own accounts and may have conflicts of interest with respect to investments made on behalf of a Fund. As a result of differing trading and investment strategies or constraints, positions may be taken by directors, officers and employees of BlackRock that are the same, different from or made at different times than positions taken for a Fund. To lessen the possibility that a Fund will be adversely affected by this personal trading, a Fund and the Investment Advisor each have adopted a Code of Ethics in compliance with Section 17(j) of the 1940 Act that restricts securities trading in the personal accounts of investment professionals and others who normally come into possession of information regarding a Funds portfolio transactions. Each Code of Ethics is also available on the EDGAR Database on the SECs Internet site at http://www.sec.gov, and copies may be obtained, after paying a duplicating fee, by e-mail at publicinfo@sec.gov.
BlackRock will not purchase securities or other property from, or sell securities or other property to, a Fund, except that such Fund may in accordance with rules or guidance adopted under the 1940 Act engage in transactions with accounts that are affiliated with a Fund as a result of common officers, directors, or investment advisers or pursuant to exemptive orders granted to such Fund and/or BlackRock by the Commission. These transactions would be effected in circumstances in which BlackRock determined that it would be appropriate for a Fund to purchase and another client of BlackRock to sell, or such Fund to sell and another client of BlackRock to purchase, the same security or instrument on the same day. From time to time, the activities of a Fund may be restricted because of regulatory requirements applicable to BlackRock and/or BlackRocks internal policies designed to comply with, limit the applicability of, or otherwise relate to such requirements. A client not advised by BlackRock would not be subject to some of those considerations. There may be periods when BlackRock may not initiate or recommend certain types of transactions, or may otherwise restrict or limit its advice in certain securities or instruments issued by or related to companies for which BlackRock is performing advisory or other services or has proprietary positions. For example, when BlackRock is engaged to provide advisory or risk management services for a company, BlackRock may be prohibited from or limited in purchasing or selling securities of that company on behalf of a Fund, particularly where such services result in BlackRock obtaining material non-public information about the company (e.g., in connection with participation in a creditors committee). Similar situations could arise if personnel of BlackRock serve as directors of companies the securities of which a Fund wishes to purchase or sell. However, if permitted by applicable law, and where consistent with BlackRocks policies and procedures (including the necessary implementation of appropriate
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information barriers), a Fund may purchase securities or instruments that are issued by such companies, are the subject of an advisory or risk management assignment by BlackRock, or where personnel of BlackRock are directors or officers of the issuer.
The investment activities of BlackRock for its proprietary accounts and for client accounts may also limit the investment strategies and rights of a Fund. For example, in certain circumstances where a Fund invests in securities issued by companies that operate in certain regulated industries, in certain emerging or international markets, or are subject to corporate or regulatory ownership restrictions, or invest in certain futures and derivative transactions, there may be limits on the aggregate amount invested by BlackRock for its proprietary accounts and for client accounts (including a Fund) that may not be exceeded without the grant of a license or other regulatory or corporate consent, or, if exceeded, may cause BlackRock, a Fund or other client accounts to suffer disadvantages or business restrictions. If certain aggregate ownership thresholds are reached or certain transactions undertaken, the ability of BlackRock on behalf of clients (including a Fund) to purchase or dispose of investments, or exercise rights or undertake business transactions, may be restricted by regulation or otherwise impaired. As a result, BlackRock on behalf of its clients (including a Fund) may limit purchases, sell existing investments, or otherwise restrict, forgo or limit the exercise of rights (including transferring, outsourcing or limiting voting rights or forgoing the right to receive dividends) when BlackRock, in its sole discretion, deems it appropriate in light of potential regulatory or other restrictions on ownership or other consequences resulting from reaching investment thresholds.
In those circumstances where ownership thresholds or limitations must be observed, BlackRock seeks to allocate limited investment opportunities equitably among clients (including a Fund), taking into consideration benchmark weight and investment strategy. When ownership in certain securities nears an applicable threshold, BlackRock may limit purchases in such securities to the issuers weighting in the applicable benchmark used by BlackRock to manage a Fund. If client (including a Fund) holdings of an issuer exceed an applicable threshold and BlackRock is unable to obtain relief to enable the continued holding of such investments, it may be necessary to sell down these positions to meet the applicable limitations. In these cases, benchmark overweight positions will be sold prior to benchmark positions being reduced to meet applicable limitations.
In addition to the foregoing, other ownership thresholds may trigger reporting requirements to governmental and regulatory authorities, and such reports may entail the disclosure of the identity of a client or BlackRocks intended strategy with respect to such security or asset.
BlackRock may maintain securities indices. To the extent permitted by applicable laws, a Fund may seek to license and use such indices as part of their investment strategy. Index based funds that seek to track the performance of securities indices also may use the name of the index or index provider in the fund name. Index providers, including BlackRock (to the extent permitted by applicable law), may be paid licensing fees for use of their index or index name. BlackRock is not obligated to license its indices to a Fund and such Fund is under no obligation to use BlackRock indices. A Fund cannot be assured that the terms of any index licensing agreement with BlackRock will be as favorable as those terms offered to other licensees.
BlackRock may not serve as an Authorized Participant in the creation and redemption of BlackRock-advised ETFs.
BlackRock may enter into contractual arrangements with third-party service providers to a Fund (e.g., custodians, administrators and index providers) pursuant to which BlackRock receives fee discounts or concessions in recognition of BlackRocks overall relationship with such service providers. To the extent that BlackRock is responsible for paying these service providers out of its management fee, the benefits of any such fee discounts or concessions may accrue, in whole or in part, to BlackRock.
BlackRock owns or has an ownership interest in certain trading, portfolio management, operations and/or information systems used by a Funds service providers. These systems are, or will be, used by a Fund service provider in connection with the provision of services to accounts managed by BlackRock and funds managed and sponsored by BlackRock, including a Fund, that engage the service provider (typically the custodian). A Funds service provider remunerates BlackRock for the use of the systems. A Funds service providers payments to BlackRock for the use of these systems may enhance the profitability of BlackRock.
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BlackRocks receipt of fees from a service provider in connection with the use of systems provided by BlackRock may create an incentive for BlackRock to recommend that a Fund enter into or renew an arrangement with the service provider.
In recognition of a BlackRock clients overall relationship with BlackRock, BlackRock may offer special pricing arrangements for certain services provided by BlackRock. Any such special pricing arrangements will not apply to the clients investment in a Fund.
Present and future activities of BlackRock (including BlackRock Advisors, LLC) and its directors, officers and employees, in addition to those described in this section, may give rise to additional conflicts of interest.
Each Fund and the Investment Advisor has adopted a code of ethics (the Code of Ethics) in compliance with Section 17(j) of the 1940 Act and Rule 17j-1 thereunder. Each Code of Ethics establishes procedures for personal investing and restricts certain transactions. Employees subject to a Code of Ethics may invest in securities for their personal investment accounts, including making investments in securities that may be purchased or held by a Fund. The Codes of Ethics are available on the EDGAR Database on the SECs website at www.sec.gov.
Copies of the Codes of Ethics may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov.
The Board of each Fund has delegated the voting of proxies for its Funds securities to the Investment Advisor pursuant to the Investment Advisors proxy voting guidelines. Under these guidelines, the Investment Advisor will vote proxies related to Fund securities in the best interests of the Funds and their shareholders. From time to time, a vote may present a conflict between the interests of a Funds shareholders, on the one hand, and those of the Investment Advisor, or any affiliated person of such Fund or the Investment Advisor, on the other. In such event, provided that the Investment Advisors Equity Investment Policy Oversight Committee, or a sub-committee thereof (the Committee) is aware of the real or potential conflict, if the matter to be voted on represents a material, non-routine matter and if the Committee does not reasonably believe it is able to follow its general voting guidelines (or if the particular proxy matter is not addressed in the guidelines) and vote impartially, the Committee may retain an independent fiduciary to advise the Committee on how to vote or to cast votes on behalf of the Investment Advisors clients. If the Investment Advisor determines not to retain an independent fiduciary, or does not desire to follow the advice of such independent fiduciary, the Committee shall determine how to vote the proxy after consulting with the Investment Advisors Portfolio Management Group and/or the Investment Advisors Legal & Compliance Department and concluding that the vote cast is in its clients best interest notwithstanding the conflict. A copy of the Funds Proxy Voting Policy and Procedures is included as Appendix B to this Statement of Additional Information. Information on how a Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge, (i) at www.blackrock.com and (ii) on the SECs website at http://www.sec.gov.
The financial statements of the Acquiring Fund for the fiscal year ended April 30, 2020 are incorporated by reference herein to the Acquiring Funds annual report filed on Form N-CSR on July 2, 2020.
The financial statements of BAF for the fiscal year ended August 31, 2020 are incorporated by reference herein to BAFs annual report filed on Form N-CSR on October 30, 2020.
The financial statements of BBK for the fiscal year ended August 31, 2020 are incorporated by reference herein to BBKs annual report filed on Form N-CSR on October 30, 2020.
38
The financial statements of MUH for the fiscal year ended April 30, 2020 are incorporated by reference herein to MUHs annual report filed on Form N-CSR on July 2, 2020.
The financial statements of MUS for the fiscal year ended April 30, 2020 are incorporated by reference herein to MUSs annual report filed on Form N-CSR on July 2, 2020.
PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma financial information set forth herein is for informational purposes only and does not purport to be indicative of the financial condition that actually would have resulted if the Reorganizations had been consummated. The closing of each Reorganization is contingent upon certain conditions being satisfied, including that shareholders of each Target Fund must approve the Agreement and Plan of Reorganization between the respective Target Fund and the Acquiring Fund and that shareholders of the Acquiring Fund must approve the issuance of additional Acquiring Fund common shares in connection with each Reorganization. These pro forma numbers have been estimated in good faith based on information regarding each Fund as of August 31, 2020.
The unaudited pro forma information provided herein should be read in conjunction with the Annual Report of each of MUH, MUS and the Acquiring Fund dated April 30, 2020 and the Annual Report of each of BAF and BBK dated August 31, 2020, each of which is on file with the SEC and are available at no charge. Further information on obtaining the Annual Report may be found on page v of the Joint Proxy Statement/Prospectus.
The Reorganizations are intended to consolidate the Target Funds with a similar fund advised by the Investment Advisor.
The Funds have the same investment adviser, transfer agent, accounting services agent and custodian. Each of such service providers has entered into an agreement with each Fund, which governs the provision of services to that Fund. Such agreements contain the same terms with respect to each Fund except for the Investment Management Agreement. Each Fund entered into an Investment Management Agreement with the Investment Advisor to provide investment advisory services.
BAF currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average weekly managed assets. BBK currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.65% of its average weekly managed assets. For purposes of calculating these fees, managed assets means the total assets of the relevant Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of its accrued liabilities (other than money borrowed for investment purposes, including liabilities represented by tender option bond (TOB) leverage and the liquidation preference of the Funds VMTP Shares). Each of MUH, MUS and the Acquiring Fund currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average daily net assets. For purposes of calculating these fees, net assets means the Acquiring Funds total assets minus the sum of the Acquiring Funds accrued liabilities (which does not include liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares).
If any of the Reorganizations are consummated, the annual contractual investment management fee rate of the Acquiring Fund will be the annual contractual investment management fee rate of the Combined Fund, which will be 0.55% of the average daily net assets of the Combined Fund. If any of the Reorganizations are consummated, the Investment Advisor has contractually agreed to waive a portion of its investment management fee equal to an annual rate of 0.01% of the average daily net assets (as defined above) of the Combined Fund through June 30, 2022 (the Combined Fund Contractual Waiver). The Combined Fund Contractual Waiver may be terminated prior to June 30, 2022 only by action of a majority of the Independent Board Members or by a vote of the Combined Funds outstanding voting securities.
The unaudited pro forma information set forth below as of August 31, 2020 is intended to present supplemental data as if the Reorganizations had been consummated on August 31, 2020.
39
As of August 31, 2020, the net assets of (i) BAF were approximately $133.5 million, (ii) BBK were approximately $172.8 million, (iii) MUH were approximately $177.4 million, (iv) MUS were approximately $181.0 million and (v) the Acquiring Fund were approximately $238.7 million. The net assets of the Combined Fund as of August 31, 2020 would have been approximately $898.8 million on a pro forma basis. In the Reorganizations, the outstanding common shares of each Target Fund will be exchanged for newly issued common shares of the Acquiring Fund, par value $0.10 per share. The aggregate net asset value (not the market value) of Acquiring Fund common shares received by the shareholders of the Target Fund in a Reorganization will equal the aggregate net asset value (not the market value) of Target Fund common shares held by such shareholders immediately prior to such Reorganization, less the direct costs of such Reorganization and the distribution of undistributed net investment income, as applicable (although shareholders may receive cash for their fractional common shares). The aggregate NAV of each Fund immediately prior to the applicable Reorganization will reflect accrued expenses associated with such Reorganization. The amount of increased common shares of 39,313,564 was calculated based on net asset value of the Acquiring Fund common shares of $16.79 in exchange for common shares of each Target Fund.
Each Reorganization is not contingent upon the approval of the other Reorganization. If a Reorganization is not consummated, then the respective Target Fund will continue to operate as a standalone Delaware statutory trust or a Maryland corporation, as applicable, and the Acquiring Fund will continue to operate as a standalone Maryland corporation. Both the Target Fund and the Acquiring Fund will continue to be advised by the Investment Advisor. If a Reorganization is not consummated, the Investment Advisor may recommend alternative proposals to the Board of each Fund for which such Reorganization was not consummated.
Upon the closing of the Reorganization, the Target Funds VMTP Holders will receive on a one-for-one basis one newly issued Acquiring Fund VMTP Share, par value $0.10 per share and with a liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on such Target Fund VMTP Share up to and including the day immediately preceding the Closing Date if such dividends have not been paid prior to the Closing Date), in exchange for each Target Fund VMTP Share held by such Target Fund VMTP Holder immediately prior to the Closing Date. The newly issued Acquiring Fund VMTP Share may be of the same series as the Acquiring Funds Series W-7 VMTP Shares or a substantially identical series. No fractional Acquiring Fund VMTP Shares will be issued. Target Fund VMTP Holders will receive the same number of Acquiring Fund VMTP Shares, with terms substantially identical to the outstanding Target Fund VMTP Shares, held by such holders immediately prior to the closing of the Reorganizations.
The Acquiring Fund VMTP Shares to be issued in connection with the Reorganizations will have terms that are substantially identical to the terms of the currently outstanding Acquiring Fund VMTP Shares and will rank on parity with the Acquiring Funds outstanding VMTP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The Reorganizations will not result in any changes to the terms of the Acquiring Funds VMTP Shares currently outstanding. The terms of the Acquiring Funds VMTP Shares may change from time to time, subject to Board approval.
The terms of the outstanding Target Fund VMTP Shares are substantially identical to the terms of the outstanding Acquiring Fund VMTP Shares. The Funds VMTP Shares have the same $100,000 per share liquidation preference, dividend period, dividend payment date, voting rights, redemption provisions, transfer restrictions and covenants with respect to effective leverage, asset coverage and eligible investments.
The Funds VMTP Shares also have the same mechanism for determining the applicable dividend rate and maximum rate, and the same redemption and paying agent.
The unaudited pro forma information set forth below for the period ended August 31, 2020 is intended to present ratios and supplemental data as if each Reorganization had been consummated at September 1, 2019.
On a pro forma basis for the twelve months ended August 31, 2020, the proposed Reorganizations would result in a decrease of $284,495 in the investment advisory fees charged, a decrease in other operating expenses (including custody, legal, accounting and audit fees) of $748,872 and a decrease in investment advisory fee waivers of $172,779 on a pro forma basis for the twelve months ended August 31, 2020.
40
On a pro forma basis for the twelve months ended August 31, 2020, the net expense ratio (including interest expenses) for BAF was 2.34%, for BBK was 2.34%, for the Acquiring Fund was 1.80%, for MUH was 1.89% and for MUS was 2.07%. With respect to BBK, the Investment Advisor voluntarily agreed to waive a portion of the investment advisory fees or other expenses of BBK equal to an annual rate of 0.075% of BBKs average weekly managed assets (the BBK Voluntary Waiver). With respect to MUS, the Investment Advisor has agreed to voluntarily waive its investment advisory fee on the proceeds of the VMTP Shares and TOB trusts that exceed 35% of total assets minus the sum of its accrued liabilities (which does not include liabilities represented by TOB trusts and the liquidation preference of any outstanding VMTP Shares) (the MUS Voluntary Waiver and together with the BBK Voluntary Waiver, the Voluntary Waivers). The Voluntary Waivers may be reduced or discontinued at any time. Assuming each Reorganization is consummated, the Combined Funds pro forma net annual portfolio operating expense ratio (including interest expenses and after giving effect to the Combined Fund Contractual Waiver) are expected to be 1.69%.
On a pro forma basis for the twelve months ended August 31, 2020, the net expense ratio (excluding interest expense and after giving effect to the MUS Voluntary Waiver and, with respect to the Acquiring Fund, the Affiliated Money Market Fund Fee Waiver) of the Acquiring Fund was 0.99%, for MUH was 1.07%, for MUS was 1.03%, for BAF was 1.17% and for BBK was 1.14%, and the total annual portfolio operating expenses (excluding interest expense and without giving effect to the MUS Voluntary Waiver or, with respect to the Acquiring Fund, the Affiliated Money Market Fee Waiver) for the Acquiring Fund was 1.00%, MUH was 1.07%, MUS was 1.09%, BAF was 1.17% and BBK was 1.27%. Assuming each Reorganization is consummated, the Combined Funds pro forma net annual portfolio operating expense ratio (excluding interest expenses and after giving effect to the Combined Fund Contractual Waiver) is expected to be 0.91%.
No significant accounting policies will change as a result of the proposed Reorganizations, specifically, policies regarding valuation and Subchapter M compliance. As of August 31, 2020, all the securities held by the Target Funds comply with the compliance guidelines and/or investment restrictions of the Acquiring Fund. It is not anticipated that the Acquiring Fund will sell any securities of a Target Fund acquired in the Reorganizations other than in the ordinary course of business.
Each Reorganization is expected to be tax free for federal income tax purposes. This means that no gain or loss will be recognized by each Target Fund or its shareholders as a result of the Reorganizations. The aggregate tax basis of the Acquiring Fund Shares received by the shareholders of each Target Fund will be the same as the aggregate tax basis the shareholders of each Target Fund held in its shares of the Target Fund immediately before the Reorganizations.
Accounting Survivor: The Acquiring Fund is deemed to be the accounting survivor in connection with the Reorganizations.
Cost of Reorganization: Regardless of whether the Reorganizations are completed, the costs associated with the proposed Reorganizations, including the costs associated with the stockholder meetings, will be borne directly by the respective Fund incurring the expense, except that the Investment Advisor has agreed to bear a portion of the costs of the Reorganizations of each of MUS and the Acquiring Fund. The estimated expenses of the Reorganizations attributable to each Fund, which include the amount to be paid by the Investment Advisor, as applicable, are as follows:
Estimated Reorganization Expenses |
||||||||
Target Fund (BAF) |
Target Fund (BBK) |
Target Fund (MUH) |
Target Fund (MUS) |
Acquiring Fund (MHD) |
||||
$223,500 |
$242,000 | $229,900 | $228,000 | $253,400 |
Undistributed Net Investment Income: If the Reorganizations are approved by shareholders, then the greater of (1) substantially all of the undistributed net investment income, if any, or (2) the monthly distribution of each Fund is expected to be declared to such Funds common shareholders prior to the Closing Date. As of August 31, 2020, the amount of undistributed net investment income for each Fund was as follows:
Undistributed Net Investment Income |
||||||||
Target Fund (BAF) |
Target Fund (BBK) |
Target Fund (MUH) |
Target Fund (MUS) |
Acquiring Fund (MHD) |
||||
$439,904 |
$1,200,925 | $1,081,190 | $990,707 | $4,687 |
41
Capital Loss Carryforwards: As of August 31, 2020, the Funds unused capital loss carryforwards, which have no expiration date and may be carried forward indefinitely, were as follows:
Capital Loss Carryforward Amount |
||||||||
Target Fund (BAF) |
Target Fund (BBK) |
Target Fund (MUH) |
Target Fund (MUS) |
Acquiring Fund (MHD) |
||||
$6,215,759 |
$3,339,636 | $3,613,794 | $10,779,281 | $4,750,576 |
42
RATINGS OF INVESTMENTS
A Description of Moodys Investors Service, Inc.s (Moodys) Global Rating Scales
Ratings assigned on Moodys global long-term and short-term rating scales are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.
Description of Moodys Long-Term Obligation Ratings
Aaa |
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk. |
Aa |
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk. |
A |
Obligations rated A are judged to be upper-medium grade and are subject to low credit risk. |
Baa |
Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics. |
Ba |
Obligations rated Ba are judged to be speculative and are subject to substantial credit risk. |
B |
Obligations rated B are considered speculative and are subject to high credit risk. |
Caa |
Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk. |
Ca |
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest. |
C |
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest. |
Note: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Hybrid Indicator (hyb)
The hybrid indicator (hyb) is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms. By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
A-1
Description of Short-Term Obligation Ratings
Moodys employs the following designations to indicate the relative repayment ability of rated issuers:
P-1 |
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations. |
P-2 |
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations. |
P-3 |
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations. |
NP |
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories. |
Description of Moodys US Municipal Short-Term Obligation Ratings
The Municipal Investment Grade (MIG) scale is used to rate US municipal bond anticipation notes of up to three years maturity. Municipal notes rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity. MIG ratings expire at the maturity of the obligation, and the issuers long-term rating is only one consideration in assigning the MIG rating. MIG ratings are divided into three levelsMIG 1 through MIG 3while speculative grade short-term obligations are designated SG.
MIG 1 |
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing. |
MIG 2 |
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group. |
MIG 3 |
This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established. |
SG |
This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection. |
Description of Moodys Demand Obligation Ratings
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned: a long or short-term debt rating and a demand obligation rating. The first element represents Moodys evaluation of risk associated with scheduled principal and interest payments. The second element represents Moodys evaluation of risk associated with the ability to receive purchase price upon demand (demand feature). The second element uses a rating from a variation of the MIG scale called the Variable Municipal Investment Grade (VMIG) scale.
VMIG 1 |
This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand. |
VMIG 2 |
This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand. |
VMIG 3 |
This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand. |
SG |
This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have an investment grade short-term rating or may lack the structural and/or legal protections necessary to ensure the timely payment of purchase price upon demand. |
A-2
Description of S&P Global Ratings (S&P), a Division of S&P Global Inc., Issue Credit Ratings
A S&P issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects S&Ps view of the obligors capacity and willingness to meet its financial commitments as they come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 daysincluding commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based, in varying degrees, on S&Ps analysis of the following considerations:
|
Likelihood of paymentcapacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; |
|
Nature of and provisions of the obligation, and the promise we impute; |
|
Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors rights. |
Long-Term Issue Credit Ratings*
AAA | An obligation rated AAA has the highest rating assigned by S&P. The obligors capacity to meet its financial commitment on the obligation is extremely strong. | |
AA | An obligation rated AA differs from the highest-rated obligations only to a small degree. The obligors capacity to meet its financial commitment on the obligation is very strong. | |
A | An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligors capacity to meet its financial commitment on the obligation is still strong. | |
BBB | An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. | |
BB; B; CCC; CC; and C | Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions. | |
BB | An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligors inadequate capacity to meet its financial commitment on the obligation. |
B |
An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligors capacity or willingness to meet its financial commitment on the obligation. |
A-3
CCC |
An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. |
CC |
An obligation rated CC is currently highly vulnerable to nonpayment. The CC rating is used when a default has not yet occurred, but S&P expects default to be a virtual certainty, regardless of the anticipated time to default. |
C |
An obligation rated C is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared to obligations that are rated higher. |
D |
An obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used when payments on an obligation are not made on the date due, unless S&P believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The D rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligations rating is lowered to D if it is subject to a distressed exchange offer. |
NR |
This indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or that S&P does not rate a particular obligation as a matter of policy. |
* The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
Short-Term Issue Credit Ratings
A-1 |
A short-term obligation rated A-1 is rated in the highest category by S&P. The obligors capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligors capacity to meet its financial commitment on these obligations is extremely strong. |
A-2 |
A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligors capacity to meet its financial commitment on the obligation is satisfactory. |
A-3 |
A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. |
B |
A short-term obligation rated B is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties which could lead to the obligors inadequate capacity to meet its financial commitments. |
C |
A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. |
A-4
D |
A short-term obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used when payments on an obligation are not made on the date due, unless S&P believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligations rating is lowered to D if it is subject to a distressed exchange offer. |
Description of S&Ps Municipal Short-Term Note Ratings
A S&P U.S. municipal note rating reflects S&Ps opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, S&Ps analysis will review the following considerations:
|
Amortization schedulethe larger the final maturity relative to other maturities, the more likely it will be treated as a note; and |
|
Source of paymentthe more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note. |
S&Ps municipal short-term note rating symbols are as follows:
SP-1 |
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation. |
SP-2 |
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. |
SP-3 |
Speculative capacity to pay principal and interest. |
Description of Fitch Ratings (Fitchs) Credit Ratings Scales
Fitchs credit ratings provide an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. Credit ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested.
Fitchs credit ratings do not directly address any risk other than credit risk. In particular, ratings do not deal with the risk of a market value loss on a rated security due to changes in interest rates, liquidity and other market considerations. However, in terms of payment obligation on the rated liability, market risk may be considered to the extent that it influences the ability of an issuer to pay upon a commitment. Ratings nonetheless do not reflect market risk to the extent that they influence the size or other conditionality of the obligation to pay upon a commitment (for example, in the case of index-linked bonds).
In the default components of ratings assigned to individual obligations or instruments, the agency typically rates to the likelihood of non-payment or default in accordance with the terms of that instruments documentation. In limited cases, Fitch may include additional considerations (i.e., rate to a higher or lower standard than that implied in the obligations documentation). In such cases, the agency will make clear the assumptions underlying the agencys opinion in the accompanying rating commentary.
The terms investment grade and speculative grade have established themselves over time as shorthand to describe the categories AAA to BBB (investment grade) and BB to D (speculative grade). The terms investment grade and speculative grade are market conventions, and do not imply any recommendation or endorsement of a specific security for investment purposes. Investment grade categories indicate relatively low to moderate credit risk, while ratings in the speculative categories either signal a higher level of credit risk or that a default has already occurred.
A-5
A designation of Not Rated or NR is used to denote securities not rated by Fitch where Fitch has rated some, but not all, securities comprising an issuance capital structure.
Description of Fitchs Long-Term Corporate Finance Obligations Rating Scales
Fitch long-term obligations rating scales are as follows:
AAA |
Highest credit quality. AAA ratings denote the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. |
AA |
Very high credit quality. AA ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. |
A |
High credit quality. A ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings. |
BBB |
Good credit quality. BBB ratings indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity. |
BB |
Speculative. BB ratings indicate an elevated vulnerability to credit risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial alternatives may be available to allow financial commitments to be met. |
B |
Highly speculative. B ratings indicate that material credit risk is present. |
CCC |
Substantial credit risk. CCC ratings indicate that substantial credit risk is present. |
CC |
Very high levels of credit risk. CC ratings indicate very high levels of credit risk. |
C |
Exceptionally high levels of credit risk. C indicates exceptionally high levels of credit risk. |
Defaulted obligations typically are not assigned RD or D ratings, but are instead rated in the B to C rating categories, depending upon their recovery prospects and other relevant characteristics. This approach better aligns obligations that have comparable overall expected loss but varying vulnerability to default and loss.
Notes: The modifiers + or - may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the AAA obligation rating category, or to corporate finance obligation ratings in the categories below CCC.
The subscript emr is appended to a rating to denote embedded market risk which is beyond the scope of the rating. The designation is intended to make clear that the rating solely addresses the counterparty risk of the issuing bank. It is not meant to indicate any limitation in the analysis of the counterparty risk, which in all other respects follows published Fitch criteria for analyzing the issuing financial institution. Fitch does not rate these instruments where the principal is to any degree subject to market risk.
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Description of Fitchs Short-Term Ratings
A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity or security stream and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-Term Ratings are assigned to obligations whose initial maturity is viewed as short term based on market convention. Typically, this means up to 13 months for corporate, sovereign, and structured obligations and up to 36 months for obligations in U.S. public finance markets.
Fitch short-term ratings are as follows:
F1 |
Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added + to denote any exceptionally strong credit feature. |
F2 |
Good short-term credit quality. Good intrinsic capacity for timely payment of financial commitments. |
F3 |
Fair short-term credit quality. The intrinsic capacity for timely payment of financial commitments is adequate. |
B |
Speculative short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions. |
C |
High short-term default risk. Default is a real possibility. |
RD |
Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Typically applicable to entity ratings only. |
D |
Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation. |
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PROXY VOTING POLICIES BLACKROCK CLOSED-END FUNDS
Effective Date: October 1, 2020
Applies to the following types of Funds registered under the 1940 Act:
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Open-End Mutual Funds (including money market funds) |
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Money Market Funds Only |
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iShares ETFs |
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Closed-End Funds |
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Other |
The Boards of Trustees/Directors (the Directors) of the closed-end funds advised by BlackRock Advisors, LLC (BlackRock) (the Funds) have the responsibility for the oversight of voting proxies relating to portfolio securities of the Funds, and have determined that it is in the best interests of the Funds and their shareholders to delegate that responsibility to BlackRock as part of BlackRocks authority to manage, acquire and dispose of account assets, all as contemplated by the Funds respective investment management agreements.
BlackRock has adopted guidelines and procedures (together and as from time to time amended, the BlackRock Proxy Voting Guidelines) governing proxy voting by accounts managed by BlackRock. BlackRock will cast votes on behalf of each of the Funds on specific proxy issues in respect of securities held by each such Fund in accordance with the BlackRock Proxy Voting Guidelines; provided, however, that in the case of underlying closed-end funds (including business development companies and other similarly-situated asset pools) held by the Funds that have, or are proposing to adopt, a classified board structure, BlackRock will typically (a) vote in favor of proposals to adopt classification and against proposals to eliminate classification, and (b) not vote against directors as a result of their adoption of a classified board structure.
BlackRock will report on an annual basis to the Directors on (1) a summary of all proxy votes that BlackRock has made on behalf of the Funds in the preceding year together with a representation that all votes were in accordance with the BlackRock Proxy Voting Guidelines (as modified pursuant to the immediately preceding paragraph), and (2) any changes to the BlackRock Proxy Voting Guidelines that have not previously been reported.
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BlackRock Investment Stewardship
Global Corporate Governance & Engagement Principles
January 2020
BlackRock
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Contents
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Capital structure, mergers, asset sales and other special transactions |
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General corporate governance matters and shareholder protections |
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BlackRocks oversight of its investment stewardship activities |
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If you would like additional information, please contact:
ContactStewardship@blackrock.com
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BlackRocks purpose is to help more and more people experience financial well-being. As a fiduciary to our clients, we provide the investment and technology solutions they need when planning for their most important goals. We manage assets on behalf of institutional and individual clients, across a full spectrum of investment strategies, asset classes and regions. Our client base includes pension plans, endowments, foundations, charities, official institutions, insurers and other financial institutions, as well as individuals around the world.
PHILOSOPHY ON CORPORATE GOVERNANCE
BlackRock Investment Stewardship (BIS) activities are focused on maximizing long-term value for our clients. BIS does this through engagement with boards and management of investee companies and, for those clients who have given us authority, through voting at shareholder meetings.
We believe that there are certain fundamental rights attached to shareholding. Companies and their boards should be accountable to shareholders and structured with appropriate checks and balances to ensure that they operate in shareholders best interests. Effective voting rights are central to the rights of ownership and there should be one vote for one share. Shareholders should have the right to elect, remove and nominate directors, approve the appointment of the auditor and to amend the corporate charter or by-laws. Shareholders should be able to vote on matters that are material to the protection of their investment, including but not limited to, changes to the purpose of the business, dilution levels and pre-emptive rights, and the distribution of income and capital structure. In order to make informed decisions, we believe that shareholders have the right to sufficient and timely information.
Our primary focus is on the performance of the board of directors. As the agent of shareholders, the board should set the companys strategic aims within a framework of prudent and effective controls, which enables risk to be assessed and managed. The board should provide direction and leadership to management and oversee managements performance. Our starting position is to be supportive of boards in their oversight efforts on shareholders behalf and we would generally expect to support the items of business they put to a vote at shareholder meetings. Votes cast against or withheld from resolutions proposed by the board are a signal that we are concerned that the directors or management have either not acted in the best interests of shareholders or have not responded adequately to shareholder concerns. We assess voting matters on a case-by-case basis and in light of each companys unique circumstances taking into consideration regional best practices and long-term value creation.
These principles set out our approach to engaging with companies, provide guidance on our position on corporate governance and outline how our views might be reflected in our voting decisions. Corporate governance practices can vary internationally, so our expectations in relation to individual companies are based on the legal and regulatory framework of each local market. However, we believe there are overarching principles of corporate governance that apply globally and provide a framework for more detailed, market-specific assessments.
We believe BlackRock has a responsibility in relation to monitoring and providing feedback to companies, sometimes known as stewardship. These ownership responsibilities include engaging with management or board members on corporate governance matters, voting proxies in the best long-term economic interests of our clients, and engaging with regulatory bodies to ensure a sound policy framework consistent with promoting long-term shareholder value creation. We also believe in the responsibility to our clients to have appropriate resources and oversight structures. Our approach is set out in the section below titled BlackRocks oversight of its investment stewardship activities and is further detailed in a team profile on our website.
CORPORATE GOVERNANCE, ENGAGEMENT AND VOTING
We recognize that accepted standards of corporate governance differ between markets, but we believe there are sufficient common threads globally to identify an overarching set of principles. The objective of our investment stewardship activities is the protection and enhancement of the value of our clients investments in public corporations. Thus, these principles focus on practices and structures that we consider to be supportive of long-term value creation. We discuss below the principles under six key themes. In our regional and market-specific voting guidelines we explain how these principles inform our voting decisions in relation to specific resolutions that may appear on the agenda of a shareholder meeting in the relevant market.
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The six key themes are:
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Boards and directors |
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Auditors and audit-related issues |
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Capital structure, mergers, asset sales and other special transactions |
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Compensation and benefits |
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Environmental and social issues |
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General corporate governance matters and shareholder protections |
At a minimum, we expect companies to observe the accepted corporate governance standards in their domestic market or to explain why doing so is not in the interests of shareholders. Where company reporting and disclosure is inadequate or the approach taken is inconsistent with our view of what is in the best interests of shareholders, we will engage with the company and/or use our vote to encourage a change in practice. In making voting decisions, we perform independent research and analysis, such as reviewing relevant information published by the company and apply our voting guidelines to achieve the outcome we believe best protects our clients long-term economic interests. We also work closely with our active portfolio managers, and may take into account internal and external research.
BlackRock views engagement as an important activity; engagement provides us with the opportunity to improve our understanding of the challenges and opportunities that investee companies are facing and their governance structures. Engagement also allows us to share our philosophy and approach to investment and corporate governance with companies to enhance their understanding of our objectives. Our engagements often focus on providing our feedback on company disclosures, particularly where we believe they could be enhanced. There are a range of approaches we may take in engaging companies depending on the nature of the issue under consideration, the company and the market.
BlackRocks engagements emphasize direct dialogue with corporate leadership on the governance issues identified in these principles that have a material impact on financial performance. These engagements enable us to cast informed votes aligned with clients long-term economic interests. We generally prefer to engage in the first instance where we have concerns and give management time to address or resolve the issue. As a long-term investor, we are patient and persistent in working with our portfolio companies to have an open dialogue and develop mutual understanding of governance matters, to promote the adoption of best practices and to assess the merits of a companys approach to its governance. We monitor the companies in which we invest and engage with them constructively and privately where we believe doing so helps protect shareholders interests. We do not try to micro-manage companies, or tell management and boards what to do. We present our views as a long-term shareholder and listen to companies responses. The materiality and immediacy of a given issue will generally determine the level of our engagement and whom we seek to engage at the company, which could be management representatives or board directors.
The performance of the board is critical to the economic success of the company and to the protection of shareholders interests. Board members serve as agents of shareholders in overseeing the strategic direction and operation of the company. For this reason, BlackRock focuses on directors in many of our engagements and sees the election of directors as one of our most important responsibilities in the proxy voting context.
We expect the board of directors to promote and protect shareholder interests by:
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establishing an appropriate corporate governance structure |
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supporting and overseeing management in setting long-term strategic goals, applicable measures of value-creation and milestones that will demonstrate progress, and steps taken if any obstacles are anticipated or incurred |
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ensuring the integrity of financial statements |
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making independent decisions regarding mergers, acquisitions and disposals |
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establishing appropriate executive compensation structures |
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addressing business issues, including environmental and social issues, when they have the potential to materially impact company reputation and performance |
There should be clear definitions of the role of the board, the committees of the board and senior management such that the responsibilities of each are well understood and accepted. Companies should report publicly the approach taken to governance (including in relation to board structure) and why this approach is in the best interest of shareholders. We will seek to engage with the appropriate directors where we have concerns about the performance of the board or the company, the broad strategy of the company, or the performance of individual board members. We believe that when a company is not effectively addressing a material issue, its directors should be held accountable.
BlackRock believes that directors should stand for re-election on a regular basis. We assess directors nominated for election or re-election in the context of the composition of the board as a whole. There should be detailed disclosure of the relevant credentials of the individual directors in order for shareholders to assess the caliber of an individual nominee. We expect there to be a sufficient number of independent directors on the board to ensure the protection of the interests of all shareholders. Common impediments to independence may include but are not limited to:
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current or former employment at the company or a subsidiary within the past several years |
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being, or representing, a shareholder with a substantial shareholding in the company |
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interlocking directorships |
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having any other interest, business or other relationship which could, or could reasonably be perceived to, materially interfere with the directors ability to act in the best interests of the company |
BlackRock believes that the operation of the board is enhanced when there is a clearly independent, senior non-executive director to chair it or, where the chairman is also the CEO (or is otherwise not independent), an independent lead director. The role of this director is to enhance the effectiveness of the independent members of the board through shaping the agenda, ensuring adequate information is provided to the board and encouraging independent participation in board deliberations. The lead independent board director should be available to shareholders in those situations where a director is best placed to explain and justify a companys approach.
To ensure that the board remains effective, regular reviews of board performance should be carried out and assessments made of gaps in skills or experience amongst the members. BlackRock believes it is beneficial for new directors to be brought onto the board periodically to refresh the groups thinking and to ensure both continuity and adequate succession planning. In identifying potential candidates, boards should take into consideration the multiple dimensions of diversity, including personal factors such as gender, ethnicity, and age; as well as professional characteristics, such as a directors industry, area of expertise, and geographic location. The board should review these dimensions of the current directors and how they might be augmented by incoming directors. We believe that directors are in the best position to assess the optimal size for the board, but we would be concerned if a board seemed too small to have an appropriate balance of directors or too large to be effective.
There are matters for which the board has responsibility that may involve a conflict of interest for executives or for affiliated directors. BlackRock believes that shareholders interests are best served when the board forms committees of fully independent directors to deal with such matters. In many markets, these committees of the board specialize in audit, director nominations and compensation matters. An ad hoc committee might also be formed to decide on a special transaction, particularly one with a related party or to investigate a significant adverse event.
Auditors and audit-related issues
Comprehensive disclosure provides investors with a sense of the companys long-term operational risk management practices and, more broadly, the quality of the boards oversight. In the absence of robust disclosures, we may reasonably conclude that companies are not adequately managing risk.
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BlackRock recognizes the critical importance of financial statements, which should provide a true and fair picture of a companys financial condition. We will hold the members of the audit committee or equivalent responsible for overseeing the management of the audit function. We take particular note of cases involving significant financial restatements or ad hoc notifications of material financial weakness.
The integrity of financial statements depends on the auditor being free of any impediments to being an effective check on management. To that end, we believe it is important that auditors are, and are seen to be, independent. Where the audit firm provides services to the company in addition to the audit, the fees earned should be disclosed and explained. Audit committees should have in place a procedure for assessing annually the independence of the auditor.
Capital structure, mergers, asset sales and other special transactions
The capital structure of a company is critical to its owners, the shareholders, as it impacts the value of their investment and the priority of their interest in the company relative to that of other equity or debt investors. Pre-emptive rights are a key protection for shareholders against the dilution of their interests.
Effective voting rights are central to the rights of ownership and we believe strongly in one vote for one share as a guiding principle that supports good corporate governance. Shareholders, as the residual claimants, have the strongest interest in protecting company value, and voting power should match economic exposure.
We are concerned that the creation of a dual share class may result in an over-concentration of power in the hands of a few shareholders, thus disenfranchising other shareholders and amplifying the potential conflict of interest, which the one share, one vote principle is designed to mitigate. However, we recognize that in certain circumstances, companies may have a valid argument for dual-class listings, at least for a limited period of time. We believe that such companies should review these dual-class structures on a regular basis or as company circumstances change. Additionally, they should receive shareholder approval of their capital structure on a periodic basis via a management proposal in the companys proxy. The proposal should give unaffiliated shareholders the opportunity to affirm the current structure or establish mechanisms to end or phase out controlling structures at the appropriate time, while minimizing costs to shareholders.
In assessing mergers, asset sales or other special transactions, BlackRocks primary consideration is the long-term economic interests of shareholders. Boards proposing a transaction need to clearly explain the economic and strategic rationale behind it. We will review a proposed transaction to determine the degree to which it enhances long-term shareholder value. We would prefer that proposed transactions have the unanimous support of the board and have been negotiated at arms length. We may seek reassurance from the board that executives and/or board members financial interests in a given transaction have not adversely affected their ability to place shareholders interests before their own. Where the transaction involves related parties, we would expect the recommendation to support it to come from the independent directors and it is good practice to be approved by a separate vote of the non-conflicted shareholders.
BlackRock believes that shareholders have a right to dispose of company shares in the open market without unnecessary restriction. In our view, corporate mechanisms designed to limit shareholders ability to sell their shares are contrary to basic property rights. Such mechanisms can serve to protect and entrench interests other than those of the shareholders. We believe that shareholders are broadly capable of making decisions in their own best interests. We expect any so-called shareholder rights plans proposed by a board to be subject to shareholder approval upon introduction and periodically thereafter for continuation.
BlackRock expects a companys board of directors to put in place a compensation structure that incentivizes and rewards executives appropriately and is aligned with shareholder interests, particularly generating sustainable long-term shareholder returns. We would expect the compensation committee to take into account the specific circumstances of the company and the key individuals the board is trying to incentivize. We encourage companies to ensure that their compensation plans incorporate appropriate and challenging performance conditions consistent with corporate strategy and market practice. We use third-party research, in addition to our own analysis, to evaluate existing and proposed compensation structures. We hold members of the compensation committee or equivalent board members accountable for poor compensation practices or structures.
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BlackRock believes that there should be a clear link between variable pay and company performance that drives shareholder returns. We are not supportive of one-off or special bonuses unrelated to company or individual performance. We acknowledge that the use of peer group evaluation by compensation committees can help ensure competitive pay; however, we are concerned when increases in total compensation at a company are justified solely on peer benchmarking rather than outperformance. We support incentive plans that foster the sustainable achievement of results relative to competitors. The vesting timeframes associated with incentive plans should facilitate a focus on long-term value creation. We believe consideration should be given to building claw back provisions into incentive plans such that executives would be required to forgo rewards when they are not justified by actual performance. Compensation committees should guard against contractual arrangements that would entitle executives to material compensation for early termination of their contract. Finally, pension contributions and other deferred compensation arrangements should be reasonable in light of market practice.
Non-executive directors should be compensated in a manner that is commensurate with the time and effort expended in fulfilling their professional responsibilities. Additionally, these compensation arrangements should not risk compromising their independence or aligning their interests too closely with those of the management, whom they are charged with overseeing.
Environmental and social issues
Our fiduciary duty to clients is to protect and enhance their economic interest in the companies in which we invest on their behalf. It is within this context that we undertake our corporate governance activities. We believe that well -managed companies will deal effectively with the material environmental and social (E&S) factors relevant to their businesses. Robust disclosure is essential for investors to effectively gauge companies business practices and planning related to E&S risks and opportunities.
BlackRock expects companies to issue reports aligned with the recommendations of the Task Force on Climate -related Financial Disclosures (TCFD) and the standards put forward by the Sustainability Accounting Standards Board (SASB). We view the SASB and TCFD frameworks as complementary in achieving the goal of disclosing more financially material information, particularly as it relates to industry -specific metrics and target setting. TCFDs recommendations provide an overarching framework for disclosure on the business implications of climate change, and potentially other E&S factors. We find SASBs industry-specific guidance (as identified in its materiality map) beneficial in helping companies identify and discuss their governance, risk assessments, and performance against these key performance indicators (KPIs). Any global standards adopted, peer group benchmarking undertaken, and verification processes in place should also be disclosed and discussed in this context.
BlackRock has been engaging with companies for several years on disclosure of material E&S factors. Given the increased understanding of sustainability risks and opportunities, and the need for better information to assess them, we specifically ask companies to:
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publish a disclosure in line with industry-specific SASB guidelines by year-end, if they have not already done so, or disclose a similar set of data in a way that is relevant to their particular business; and |
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disclose climate-related risks in line with the TCFDs recommendations, if they have not already done so. This should include the companys plan for operating under a scenario where the Paris Agreements goal of limiting global warming to less than two degrees is fully realized, as expressed by the TCFD guidelines. |
See our commentary on our approach to engagement on TCFD and SASB aligned reporting for greater detail of our expectations.
We will use these disclosures and our engagements to ascertain whether companies are properly managing and overseeing these risks within their business and adequately planning for the future. In the absence of robust disclosures, investors, including BlackRock, will increasingly conclude that companies are not adequately managing risk.
We believe that when a company is not effectively addressing a material issue, its directors should be held accountable. We will generally engage directly with the board or management of a company when we identify issues. We may vote against the election of directors where we have concerns that a company might not be dealing with E&S factors
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appropriately. Sometimes we may reflect such concerns by supporting a shareholder proposal on the issue, where there seems to be either a significant potential threat or realized harm to shareholders interests caused by poor management of material E&S factors.
In deciding our course of action, we will assess the companys disclosures and the nature of our engagement with the company on the issue over time, including whether:
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The company has already taken sufficient steps to address the concern |
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The company is in the process of actively implementing a response |
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There is a clear and material economic disadvantage to the company in the near-term if the issue is not addressed in the manner requested by the shareholder proposal |
We do not see it as our role to make social or political judgments on behalf of clients. Our consideration of these E&S factors is consistent with protecting the long-term economic interest of our clients assets. We expect investee companies to comply, at a minimum, with the laws and regulations of the jurisdictions in which they operate. They should explain how they manage situations where local laws or regulations that significantly impact the companys operations are contradictory or ambiguous to global norms.
Within the framework laid out above, as well as our guidance on How BlackRock Investment Stewardship engages on climate risk, we believe that climate presents significant investment risks and opportunities that may impact the long - term financial sustainability of companies. We believe that the reporting frameworks developed by TCFD and SASB provide useful guidance to companies on identifying, managing, and reporting on climate -related risks and opportunities.
We expect companies to help their investors understand how the company may be impacted by climate risk, in the context of its ability to realize a long-term strategy and generate value over time. We expect companies to convey their governance around this issue through their corporate disclosures aligned with TCFD and SASB. For companies in sectors that are significantly exposed to climate-related risk, we expect the whole board to have demonstrable fluency in how climate risk affects the business and how management approaches assessing, adapting to, and mitigating that risk.
Where a company receives a shareholder proposal related to climate risk, in addition to the factors laid out above, our assessment will take into account the robustness of the companys existing disclosures as well as our understanding of its management of the issues as revealed through our engagements with the company and board members over time. In certain instances, we may disagree with the details of a climate-related shareholder proposal but agree that the company in question has not made sufficient progress on climate-related disclosures. In these instances, we may not support the proposal, but may vote against the election of relevant directors.
General corporate governance matters and shareholder protections
BlackRock believes that shareholders have a right to timely and detailed information on the financial performance and viability of the companies in which they invest. In addition, companies should also publish information on the governance structures in place and the rights of shareholders to influence these. The reporting and disclosure provided by companies help shareholders assess whether their economic interests have been protected and the quality of the boards oversight of management. We believe shareholders should have the right to vote on key corporate governance matters, including changes to governance mechanisms, to submit proposals to the shareholders meeting and to call special meetings of shareholders.
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BLACKROCKS OVERSIGHT OF ITS INVESTMENT STEWARDSHIP ACTIVITIES
We hold ourselves to a very high standard in our investment stewardship activities, including proxy voting. This function is executed by a team called BlackRock Investment Stewardship (BIS) which is comprised of BlackRock employees who do not have other responsibilities other than their roles in BIS. BIS is considered an investment function. The team does not have sales responsibilities.
BlackRock maintains three regional advisory committees (Stewardship Advisory Committees) for (a) the Americas; (b) Europe, the Middle East and Africa (EMEA); and (c) Asia-Pacific, generally consisting of senior BlackRock investment professionals and/or senior employees with practical boardroom experience. The regional Stewardship Advisory Committees review and advise on amendments to the proxy voting guidelines covering markets within each respective region (Guidelines).
In addition to the regional Stewardship Advisory Committees, the Investment Stewardship Global Oversight Committee (Global Committee) is a risk-focused committee, comprised of senior representatives from various BlackRock investment teams, BlackRocks Deputy General Counsel, the Global Head of Investment Stewardship (Global Head), and other senior executives with relevant experience and team oversight.
The Global Head has primary oversight of the activities of BIS, including voting in accordance with the Guidelines, which require the application of professional judgment and consideration of each companys unique circumstances. The Global Committee reviews and approves amendments to these Global Corporate Governance & Engagement Principles. The Global Committee also reviews and approves amendments to the regional Guidelines, as proposed by the regional Stewardship Advisory Committees.
In addition, the Global Committee receives and reviews periodic reports regarding the votes cast by BIS, as well as regular updates on material process issues, procedural changes and other risk oversight considerations. The Global Committee reviews these reports in an oversight capacity as informed by the BIS corporate governance engagement program and Guidelines.
BIS carries out engagement with companies, monitors and executes proxy votes, and conducts vote operations (including maintaining records of votes cast) in a manner consistent with the relevant Guidelines. BIS also conducts research on corporate governance issues and participates in industry discussions to keep abreast of important developments in the corporate governance field. BIS may utilize third parties for certain of the foregoing activities and performs oversight of those third parties. BIS may raise complicated or particularly controversial matters for internal discussion with the relevant investment teams and/or refer such matters to the appropriate regional Stewardship Advisory Committees for review, discussion and guidance prior to making a voting decision.
We carefully consider proxies submitted to funds and other fiduciary account(s) (Fund or Funds) for which we have voting authority. BlackRock votes (or refrains from voting) proxies for each Fund for which we have voting authority based on our evaluation of the best long-term economic interests of shareholders, in the exercise of our independent business judgment, and without regard to the relationship of the issuer of the proxy (or any shareholder proponent or dissident shareholder) to the Fund, the Funds affiliates (if any), BlackRock or BlackRocks affiliates, or BlackRock employees (see Conflicts management policies and procedures, below).
When exercising voting rights, BlackRock will normally vote on specific proxy issues in accordance with the Guidelines for the relevant market. The Guidelines are reviewed regularly and are amended consistent with changes in the local market practice, as developments in corporate governance occur, or as otherwise deemed advisable by BlackRocks Stewardship Advisory Committees. BIS may, in the exercise of their professional judgment, conclude that the Guidelines do not cover the specific matter upon which a proxy vote is required or that an exception to the Guidelines would be in the best long-term economic interests of BlackRocks clients.
In the uncommon circumstance of there being a vote with respect to fixed income securities or the securities of privately held issuers, the decision generally will be made by a Funds portfolio managers and/or BIS based on their assessment of the particular transactions or other matters at issue.
In certain markets, proxy voting involves logistical issues which can affect BlackRocks ability to vote such proxies, as well as the desirability of voting such proxies. These issues include but are not limited to: (i) untimely notice of
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shareholder meetings; (ii) restrictions on a foreigners ability to exercise votes; (iii) requirements to vote proxies in person; (iv) share-blocking (requirements that investors who exercise their voting rights surrender the right to dispose of their holdings for some specified period in proximity to the shareholder meeting); (v) potential difficulties in translating the proxy; (vi) regulatory constraints; and (vii) requirements to provide local agents with unrestricted powers of attorney to facilitate voting instructions. We are not supportive of impediments to the exercise of voting rights such as shareblocking or overly burdensome administrative requirements.
As a consequence, BlackRock votes proxies on a best-efforts basis. In addition, BIS may determine that it is generally in the best interests of BlackRocks clients not to vote proxies if the costs (including but not limited to opportunity costs associated with shareblocking constraints) associated with exercising a vote are expected to outweigh the benefit the client would derive by voting on the proposal.
Portfolio managers have full discretion to vote the shares in the Funds they manage based on their analysis of the economic impact of a particular ballot item. Portfolio managers may from time to time reach differing views on how best to maximize economic value with respect to a particular investment. Therefore, portfolio managers may, and sometimes do, vote shares in the Funds under their management differently from one another. However, because BlackRocks clients are mostly long-term investors with long-term economic goals, ballots are frequently cast in a uniform manner.
Conflicts management policies and procedures
BIS maintains the following policies and procedures that seek to prevent undue influence on BlackRocks proxy voting activity. Such influence might stem from any relationship between the investee company (or any shareholder proponent or dissident shareholder) and BlackRock, BlackRocks affiliates, a Fund or a Funds affiliates, or BlackRock employees. The following are examples of sources of perceived or potential conflicts of interest:
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BlackRock clients who may be issuers of securities or proponents of shareholder resolutions |
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BlackRock business partners or third parties who may be issuers of securities or proponents of shareholder resolutions |
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BlackRock employees who may sit on the boards of public companies held in Funds managed by BlackRock |
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Significant BlackRock, Inc. investors who may be issuers of securities held in Funds managed by BlackRock |
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Securities of BlackRock, Inc. or BlackRock investment funds held in Funds managed by BlackRock |
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BlackRock, Inc. board members who serve as senior executives of public companies held in Funds managed by BlackRock |
BlackRock has taken certain steps to mitigate perceived or potential conflicts including, but not limited to, the following:
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Adopted the Guidelines which are designed to protect and enhance the economic value of the companies in which BlackRock invests on behalf of clients. |
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Established a reporting structure that separates BIS from employees with sales, vendor management or business partnership roles. In addition, BlackRock seeks to ensure that all engagements with corporate issuers, dissident shareholders or shareholder proponents are managed consistently and without regard to BlackRocks relationship with such parties. Clients or business partners are not given special treatment or differentiated access to BIS. BIS prioritizes engagements based on factors including but not limited to our need for additional information to make a voting decision or our view on the likelihood that an engagement could lead to positive outcome(s) over time for the economic value of the company. Within the normal course of business, BIS may engage directly with BlackRock clients, business partners and/or third parties, and/or with employees with sales, vendor management or business partnership roles, in discussions regarding our approach to stewardship, general corporate governance matters, client reporting needs, and/or to otherwise ensure that proxy-related client service levels are met. |
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Determined to engage, in certain instances, an independent fiduciary to vote proxies as a further safeguard to avoid potential conflicts of interest, to satisfy regulatory compliance requirements, or as may be otherwise required by applicable law. In such circumstances, the independent fiduciary provides BlackRocks proxy voting agent with instructions, in accordance with the Guidelines, as to how to vote such proxies, and BlackRocks proxy voting agent votes the proxy in accordance with the independent fiduciarys determination. BlackRock uses an independent fiduciary to vote proxies of (i) any company that is affiliated with BlackRock, Inc., (ii) any public company that includes BlackRock employees on its board of directors, (iii) The PNC Financial Services Group, Inc., (iv) any public company of which a BlackRock, Inc. board member serves as a senior executive, and (v) companies when legal or regulatory requirements compel BlackRock to use an independent fiduciary. In selecting an independent fiduciary, we assess several characteristics, including but not limited to: independence, an ability to analyze proxy issues and vote in the best economic interest of our clients, reputation for reliability and integrity, and operational capacity to accurately deliver the assigned votes in a timely manner. We may engage more than one independent fiduciary, in part in order to mitigate potential or perceived conflicts of interest at an independent fiduciary. The Global Committee appoints and reviews the performance of the independent fiduciar(ies), generally on an annual basis. |
When so authorized, BlackRock acts as a securities lending agent on behalf of Funds. With regard to the relationship between securities lending and proxy voting, BlackRocks approach is driven by our clients economic interests. The decision whether to recall securities on loan to vote is based on a formal analysis of the revenue producing value to clients of loans, against the assessed economic value of casting votes. Generally, we expect that the likely economic value to clients of casting votes would be less than the securities lending income, either because, in our assessment, the resolutions being voted on will not have significant economic consequences or because the outcome would not be affected by BlackRock recalling loaned securities in order to vote. BlackRock also may, in our discretion, determine that the value of voting outweighs the cost of recalling shares, and thus recall shares to vote in that instance.
Periodically, BlackRock reviews our process for determining whether to recall securities on loan in order to vote and may modify it as necessary.
The issue-specific Guidelines published for each region/country in which we vote are intended to summarize BlackRocks general philosophy and approach to issues that may commonly arise in the proxy voting context in each market where we invest. These Guidelines are not intended to be exhaustive. BIS applies the Guidelines on a case-by-case basis, in the context of the individual circumstances of each company and the specific issue under review. As such, these Guidelines do not indicate how BIS will vote in every instance. Rather, they share our view about corporate governance issues generally, and provide insight into how we typically approach issues that commonly arise on corporate ballots.
Reporting and vote transparency
We inform clients about our engagement and voting policies and activities through direct communication and through disclosure on our website. Each year we publish an annual report, an annual engagement and voting statistics report, and our full voting record to our website. On a quarterly basis, we publish regional reports which provide an overview of our investment stewardship engagement and voting activities during the quarter, including market developments, speaking engagements, and engagement and voting statistics. Additionally, we make public our market-specific voting guidelines for the benefit of clients and companies with whom we engage.
This document is provided for information purposes only and must not be relied upon as a forecast, research, or investment advice. BlackRock is not making any recommendation or soliciting any action based upon the information contained herein and nothing in this document should be construed as constituting an offer to sell, or a solicitation of any offer to buy, securities in any jurisdiction to any person. This information provided herein does not constitute financial, tax, legal or accounting advice, you should consult your own advisers on such matters.
The information and opinions contained in this document are as of January 2020 unless it is stated otherwise and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Although such information is believed to be reliable for the purposes used herein,
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BlackRock does not assume any responsibility for the accuracy or completeness of such information. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein represents or is based upon forward-looking statements or information. BlackRock and its affiliates believe that such statements and information are based upon reasonable estimates and assumptions. However, forward-looking statements are inherently uncertain, and factors may cause events or results to differ from those projected. Therefore, undue reliance should not be placed on such forward-looking statements and information.
Prepared by BlackRock, Inc.
©2020 BlackRock, Inc. All rights reserved.
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BlackRock Investment Stewardship
Corporate governance and proxy voting guidelines for U.S. securities
January 2020
BlackRock
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Contents
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If you would like additional information, please contact:
ContactStewardship@blackrock.com
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These guidelines should be read in conjunction with the BlackRock Investment Stewardship Global Corporate Governance Guidelines & Engagement Principles.
BlackRock, Inc. and its subsidiaries (collectively, BlackRock) seek to make proxy voting decisions in the manner most likely to protect and enhance the economic value of the securities held in client accounts. The following issue-specific proxy voting guidelines (the Guidelines) are intended to summarize BlackRock Investment Stewardships general philosophy and approach to corporate governance issues that most commonly arise in proxy voting for U.S. securities. These Guidelines are not intended to limit the analysis of individual issues at specific companies and are not intended to provide a guide to how BlackRock will vote in every instance. Rather, they share our view about corporate governance issues generally, and provide insight into how we typically approach issues that commonly arise on corporate ballots, as well as our expectations of boards of directors. They are applied with discretion, taking into consideration the range of issues and facts specific to the company and the individual ballot item.
These guidelines are divided into eight key themes which group together the issues that frequently appear on the agenda of annual and extraordinary meetings of shareholders:
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Boards and directors |
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Auditors and audit-related issues |
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Capital structure |
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Mergers, asset sales, and other special transactions |
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Executive compensation |
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Environmental and social issues |
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General corporate governance matters |
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Shareholder protections |
Director elections
In general, BlackRock supports the election of directors as recommended by the board in uncontested elections. However, we believe that when a company is not effectively addressing a material issue, its directors should be held account able. We may withhold votes from directors or members of particular board committees in certain situations, as indicated below.
Independence
We expect a majority of the directors on the board to be independent. In addition, all members of key committees, including audit, compensation, and nominating / governance committees, should be independent. Our view of independence may vary slightly from listing standards.
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In particular, common impediments to independence in the U.S. may include:
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Employment as a senior executive by the company or a subsidiary within the past five years |
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An equity ownership in the company in excess of 20% |
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Having any other interest, business, or relationship which could, or could reasonably be perceived to, materially interfere with the directors ability to act in the best interests of the company |
We may vote against directors serving on key committees that we do not consider to be independent.
When evaluating controlled companies, as defined by the U.S. stock exchanges, we will only vote against insiders or affiliates who sit on the audit committee, but not other key committees.
Oversight
We expect the board to exercise appropriate oversight over management and business activities of the company. We will consider voting against committee members and / or individual directors in the following circumstances:
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Where the board has failed to exercise oversight with regard to accounting practices or audit oversight, we will consider voting against the current audit committee, and any other members of the board who may be responsible. For example, this may apply to members of the audit committee during a period when the board failed to facilitate quality, independent auditing if substantial accounting irregularities suggest insufficient oversight by that committee |
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Members of the compensation committee during a period in which executive compensation appears excessive relative to performance and peers, and where we believe the compensation committee has not already substantially addressed this issue |
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The chair of the nominating / governance committee, or where no chair exists, the nominating / governance committee member with the longest tenure, where the board is not comprised of a majority of independent directors. However, this would not apply in the case of a controlled company |
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Where it appears the director has acted (at the company or at other companies) in a manner that compromises his / her reliability to represent the best long-term economic interests of shareholders |
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Where a director has a pattern of poor attendance at combined board and applicable key committee meetings. Excluding exigent circumstances, BlackRock generally considers attendance at less than 75% of the combined board and applicable key committee meetings by a board member to be poor attendance |
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Where a director serves on an excess number of boards, which may limit his / her capacity to focus on each boards requirements. The following illustrates the maximum number of boards on which a director may serve, before he / she is considered to be over-committed: |
Public Company CEO | # Outside Public Boards* | Total # of Public Boards | ||||
Director A |
✓ | 1 | 2 | |||
Director B |
3 | 4 |
* |
In addition to the company under review |
Responsiveness to shareholders
We expect a board to be engaged and responsive to its shareholders. Where we believe a board has not substantially addressed shareholder concerns, we may vote against the appropriate committees and / or
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individual directors. The following illustrates common circumstances:
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The independent chair or lead independent director, members of the nominating / governance committee, and / or the longest tenured director(s), where we observe a lack of board responsiveness to shareholders, evidence of board entrenchment, and / or failure to promote adequate board succession planning |
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The chair of the nominating / governance committee, or where no chair exists, the nominating / governance committee member with the longest tenure, where board member(s) at the most recent election of directors have received withhold votes from more than 30% of shares voted and the board has not taken appropriate action to respond to shareholder concerns. This may not apply in cases where BlackRock did not support the initial withhold vote |
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The independent chair or lead independent director and / or members of the nominating / governance committee, where a board fails to implement shareholder proposals that receive a majority of votes cast at a prior shareholder meeting, and the proposals, in our view, have a direct and substantial impact on shareholders fundamental rights or long-term economic interests |
Shareholder rights
We expect a board to act with integrity and to uphold governance best practices. Where we believe a board has not acted in the best interests of its shareholders, we may vote against the appropriate committees and / or individual directors. The following illustrates common circumstances:
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The independent chair or lead independent director and members of the governance committee, where a board implements or renews a poison pill without shareholder approval |
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The independent chair or lead independent director and members of the governance committee, where a board amends the charter / articles / bylaws such that the effect may be to entrench directors or to significantly reduce shareholder rights |
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Members of the compensation committee where the company has repriced options without shareholder approval |
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If a board maintains a classified structure, it is possible that the director(s) with whom we have a particular concern may not be subject to election in the year that the concern arises. In such situations, if we have a concern regarding a committee or committee chair that is not up for re-election, we will generally register our concern by withholding votes from all available members of the relevant committee. |
Board composition and effectiveness
We encourage boards to periodically renew their membership to ensure relevant skills and experience within the boardroom. To this end, regular performance reviews and skills assessments should be conducted by the nominating / governance committee.
Furthermore, we expect boards to be comprised of a diverse selection of individuals who bring their personal and professional experiences to bear in order to create a constructive debate of competing views and opinions in the boardroom. We recognize that diversity has multiple dimensions. In identifying potential candidates, boards should take into consideration the full breadth of diversity including personal factors, such as gender, ethnicity, and age; as well as professional characteristics, such as a directors industry, area of expertise, and geographic location. In addition to other elements of diversity, we encourage companies to have at least two women directors on their board. Our publicly available commentary explains our approach to engaging on board diversity.
We encourage boards to disclose their views on:
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The mix of competencies, experience, and other qualities required to effectively oversee and guide management in light of the stated long-term strategy of the company |
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The process by which candidates are identified and selected, including whether professional firms or other sources outside of incumbent directors networks have been engaged to identify and / or assess candidates |
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The process by which boards evaluate themselves and any significant outcomes of the evaluation process, without divulging inappropriate and / or sensitive details |
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The consideration given to board diversity, including, but not limited to, gender, ethnicity, race, age, experience, geographic location, skills, and perspective in the nomination process |
While we support regular board refreshment, we are not opposed in principle to long-tenured directors, nor do we believe that long board tenure is necessarily an impediment to director independence. A variety of director tenures within the boardroom can be beneficial to ensure board quality and continuity of experience.
Our primary concern is that board members are able to contribute effectively as corporate strategy evolves and business conditions change, and that all directors, regardless of tenure, demonstrate appropriate responsiveness to shareholders. We acknowledge that no single person can be expected to bring all relevant skill sets to a board; at the same time, we generally do not believe it is necessary or appropriate to have any particular director on the board solely by virtue of a singular background or specific area of expertise.
Where boards find that age limits or term limits are the most efficient and objective mechanism for ensuring periodic board refreshment, we generally defer to the boards determination in setting such limits.
To the extent that we believe that a company has not adequately accounted for diversity in its board composition within a reasonable timeframe, we may vote against the nominating / governance committee for an apparent lack of commitment to board effectiveness.
Board size
We typically defer to the board in setting the appropriate size and believe directors are generally in the best position to assess the optimal board size to ensure effectiveness. However, we may oppose boards that appear too small to allow for effective shareholder representation or too large to function efficiently.
CEO and management succession planning
There should be a robust CEO and senior management succession plan in place at the board level that is reviewed and updated on a regular basis. We expect succession planning to cover both long-term planning consistent with the strategic direction of the company and identified leadership needs over time, as well as short-term planning in the event of an unanticipated executive departure. We encourage the company to explain its executive succession planning process, including where accountability lies within the boardroom for this task, without prematurely divulging sensitive information commonly associated with this exercise.
Classified board of directors / staggered terms
We believe that directors should be re-elected annually and that classification of the board generally limits shareholders rights to regularly evaluate a boards performance and select directors. While we will typically support proposals requesting board de-classification, we may make exceptions, should the board articulate an appropriate strategic rationale for a classified board structure, such as when a company needs consistency and stability during a time of transition, e.g. newly public companies or companies undergoing a strategic restructuring. A classified board structure may also be justified at non-operating companies in certain circumstances. We would, however, expect boards with a classified structure to periodically review the rationale for such structure and consider when annual elections might be appropriate.
Without a voting mechanism to immediately address concerns of a specific director, we may choose to vote against or withhold votes from the available slate of directors by default (see Shareholder rights for additional detail).
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Contested director elections
The details of contested elections, or proxy contests, are assessed on a case-by-case basis. We evaluate a number of factors, which may include: the qualifications of the dissident and management candidates; the validity of the concerns identified by the dissident; the viability of both the dissidents and managements plans; the likelihood that the dissidents solutions will produce the desired change; and whether the dissident represents the best option for enhancing long -term shareholder value.
Cumulative voting
We believe that a majority vote standard is in the best long -term interest of shareholders. It ensures director accountability via the requirement to be elected by more than half of the votes cast. As such, we will generally oppose proposals requesting the adoption of cumulative voting, which may disproportionately aggregate votes on certain issues or director candidates.
Director compensation and equity programs
We believe that compensation for directors should be structured to attract and retain the best possible directors, while also aligning their interests with those of shareholders. We believe director compensation packages that are based on the companys long-term value creation and include some form of long-term equity compensation are more likely to meet this goal. In addition, we expect directors to build meaningful share ownership over time.
Majority vote requirements
BlackRock believes that directors should generally be elected by a majority of the shares voted and will normally support proposals seeking to introduce bylaws requiring a majority vote standard for director elections. Majority voting standards assist in ensuring that directors who are not broadly supported by shareholders are not elected to serve as their representatives. Some companies with a plurality voting standard have adopted a resignation policy for directors who do not receive support from at least a majority of votes cast. Where we believe that the company already has a sufficiently robust majority voting process in place, we may not support a shareholder proposal seeking an alternative mechanism.
Risk oversight
Companies should have an established process for identifying, monitoring, and managing key risks. Independent directors should have ready access to relevant management information and outside advice, as appropriate, to ensure they can properly oversee risk management. We encourage companies to provide transparency around risk measurement, mitigation, and reporting to the board. We are particularly interested in understanding how risk oversight processes evolve in response to changes in corporate strategy and / or shifts in the business and related risk environment. Comprehensive disclosure provides investors with a sense of the companys long -term operational risk management practices and, more broadly, the quality of the boards oversight. In the absence of robust disclosures, we may reasonably conclude that companies are not adequately managing risk.
Separation of chairman and CEO
We believe that independent leadership is important in the boardroom. In the U.S. there are two commonly accepted structures for independent board leadership: 1) an independent chairman; or 2) a lead independent director when the roles of chairman and CEO are combined.
In the absence of a significant governance concern, we defer to boards to designate the most appropriate leadership structure to ensure adequate balance and independence.
In the event that the board chooses a combined chair / CEO model, we generally support the designation of a lead independent director if they have the power to: 1) provide formal input into board meeting agendas; 2) call meetings of the independent directors; and 3) preside at meetings of independent directors. Furthermore, while we anticipate that most directors will be elected annually, we believe an element of continuity is important for this role for an extended period of time to provide appropriate leadership balance to the chair / CEO.
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The following table illustrates examples of responsibilities under each board leadership model:
Combined Chair / CEO Model |
Separate Chair Model |
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Chair / CEO |
Lead Director |
Chair |
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Board Meetings |
Authority to call full meetings of the board of directors |
Attends full meetings of the board of directors
Authority to call meetings of independent directors
Briefs CEO on issues arising from executive sessions |
Authority to call full meetings of the board of directors | |||
Agenda |
Primary responsibility for shaping board agendas, consulting with the lead director | Collaborates with chair / CEO to set board agenda and board information | Primary responsibility for shaping board agendas, in conjunction with CEO | |||
Board Communications |
Communicates with all directors on key issues and concerns outside of full board meetings | Facilitates discussion among independent directors on key issues and concerns outside of full board meetings, including contributing to the oversight of CEO and management succession planning | Facilitates discussion among independent directors on key issues and concerns outside of full board meetings, including contributing to the oversight of CEO and management succession planning |
AUDITORS AND AUDIT-RELATED ISSUES
BlackRock recognizes the critical importance of financial statements to provide a complete and accurate portrayal of a companys financial condition. Consistent with our approach to voting on boards of directors, we seek to hold the audit committee of the board responsible for overseeing the management of the audit function at a company, and may withhold votes from the audit committee members where the board has failed to facilitate quality, independent auditing. We look to the audit committee report for insight into the scope of the audit committee responsibilities, including an overview of audit committee processes, issues on the audit committee agenda, and key decisions taken by the audit committee. We take particular note of cases involving significant financial restatements or material weakness disclosures, and we expect timely disclosure and remediation of accounting irregularities.
The integrity of financial statements depends on the auditor effectively fulfilling its role. To that end, we favor an independent auditor. In addition, to the extent that an auditor fails to reasonably identify and address issues that eventually lead to a significant financial restatement, or the audit firm has violated standards of practice that protect the interests of shareholders, we may also vote against ratification.
From time to time, shareholder proposals may be presented to promote auditor independence or the rotation of audit firms. We may support these proposals when they are consistent with our views as described above.
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Equal voting rights
BlackRock believes that shareholders should be entitled to voting rights in proportion to their economic interests. We believe that companies that look to add or already have dual or multiple class share structures should review these structures on a regular basis or as company circumstances change. Companies should receive shareholder approval of their capital structure on a periodic basis via a management proposal on the companys proxy. The proposal should give unaffiliated shareholders the opportunity to affirm the current structure or establish mechanisms to end or phase out controlling structures at the appropriate time, while minimizing costs to shareholders.
Blank check preferred stock
We frequently oppose proposals requesting authorization of a class of preferred stock with unspecified voting, conversion, dividend distribution, and other rights (blank check preferred stock) because they may serve as a transfer of authority from shareholders to the board and as a possible entrenchment device. We generally view the boards discretion to establish voting rights on a when-issued basis as a potential anti-takeover device, as it affords the board the ability to place a block of stock with an investor sympathetic to management, thereby foiling a takeover bid without a shareholder vote.
Nonetheless, we may support the proposal where the company:
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Appears to have a legitimate financing motive for requesting blank check authority |
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Has committed publicly that blank check preferred shares will not be used for anti-takeover purposes |
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Has a history of using blank check preferred stock for financings |
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Has blank check preferred stock previously outstanding such that an increase would not necessarily provide further anti-takeover protection but may provide greater financing flexibility |
Increase in authorized common shares
BlackRock considers industry-specific norms in our analysis of these proposals, as well as a companys history with respect to the use of its common shares. Generally, we are predisposed to support a company if the board believes additional common shares are necessary to carry out the firms business. The most substantial concern we might have with an increase is the possibility of use of common shares to fund a poison pill plan that is not in the economic interests of shareholders.
Increase or issuance of preferred stock
We generally support proposals to increase or issue preferred stock in cases where the company specifies the voting, dividend, conversion, and other rights of such stock where the terms of the preferred stock appear reasonable.
Stock splits
We generally support stock splits that are not likely to negatively affect the ability to trade shares or the economic value of a share. We generally support reverse stock splits that are designed to avoid delisting or to facilitate trading in the stock, where the reverse split will not have a negative impact on share value (e.g. one class is reduced while others remain at pre- split levels). In the event of a proposal for a reverse split that would not also proportionately reduce the companys authorized stock, we apply the same analysis we would use for a proposal to increase authorized stock.
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MERGERS, ASSET SALES, AND OTHER SPECIAL TRANSACTIONS
BlackRocks primary concern is the best long-term economic interests of shareholders. While merger, asset sales, and other special transaction proposals vary widely in scope and substance, we closely examine certain salient features in our analyses, such as:
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The degree to which the proposed transaction represents a premium to the companys trading price. We consider the share price over multiple time periods prior to the date of the merger announcement. In most cases, business combinations should provide a premium. We may consider comparable transaction analyses provided by the parties financial advisors and our own valuation assessments. For companies facing insolvency or bankruptcy, a premium may not apply |
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There should be clear strategic, operational, and / or financial rationale for the combination |
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Unanimous board approval and arms-length negotiations are preferred. We will consider whether the transaction involves a dissenting board or does not appear to be the result of an arms-length bidding process. We may also consider whether executive and / or board members financial interests in a given transaction appear likely to affect their ability to place shareholders interests before their own |
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We prefer transaction proposals that include the fairness opinion of a reputable financial advisor assessing the value of the transaction to shareholders in comparison to recent similar transactions |
Poison pill plans
Where a poison pill is put to a shareholder vote by management, our policy is to examine these plans individually. Although we oppose most plans, we may support plans that include a reasonable qualifying offer clause. Such clauses typically require shareholder ratification of the pill and stipulate a sunset provision whereby the pill expires unless it is renewed.
These clauses also tend to specify that an all cash bid for all shares that includes a fairness opinion and evidence of financing does not trigger the pill, but forces either a special meeting at which the offer is put to a shareholder vote, or the board to seek the written consent of shareholders where shareholders could rescind the pill at their discretion. We may also support a pill where it is the only effective method for protecting tax or other economic benefits that may be associated with limiting the ownership changes of individual shareholders.
We generally vote in favor of shareholder proposals to rescind poison pills.
Reimbursement of expenses for successful shareholder campaigns
We generally do not support shareholder proposals seeking the reimbursement of proxy contest expenses, even in situations where we support the shareholder campaign. We believe that introducing the possibility of such reimbursement may incentivize disruptive and unnecessary shareholder campaigns.
We note that there are both management and shareholder proposals related to executive compensation. We generally vote on these proposals as described below, except that we typically oppose shareholder proposals on issues where the company already has a reasonable policy in place that we believe is sufficient to address the issue. We may also oppose a shareholder proposal regarding executive compensation if the companys history suggests that the issue raised is not likely to present a problem for that company.
Advisory resolutions on executive compensation (Say on Pay)
In cases where there is a Say on Pay vote, BlackRock will respond to the proposal as informed by our evaluation of compensation practices at that particular company and in a manner that appropriately addresses the specific question
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posed to shareholders. In a commentary on our website, entitled BlackRock Investment Stewardships approach to executive compensation, we explain our beliefs and expectations related to executive compensation practices, our Say on Pay analysis framework, and our typical approach to engagement and voting on Say on Pay.
Advisory votes on the frequency of Say on Pay resolutions
BlackRock will generally support triennial pay frequency votes, but we defer to the board to determine the appropriate timeframe upon which pay should be reviewed. In evaluating pay, we believe that the compensation committee is responsible for constructing a plan that appropriately incentivizes executives for long-term value creation, utilizing relevant metrics and structure to ensure overall pay and performance alignment. In a similar vein, we defer to the board to establish the most appropriate timeframe for review of pay structure, absent a change in strategy that would suggest otherwise.
However, we may support an annual pay frequency vote in some situations, for example, where we conclude that a company has failed to align pay with performance. In these circumstances, we will also consider voting against the compensation committee members.
Claw back proposals
We generally favor recoupment from any senior executive whose compensation was based on faulty financial reporting or deceptive business practices. In addition to fraudulent acts, we also favor recoupment from any senior executive whose behavior caused direct financial harm to shareholders, reputational risk to the company, or resulted in a criminal investigation, even if such actions did not ultimately result in a material restatement of past results. This includes, but is not limited to, settlement agreements arising from such behavior and paid for directly by the company. We typically support shareholder proposals on these matters unless the company already has a robust claw back policy that sufficiently addresses our concerns.
Employee stock purchase plans
We believe these plans can provide performance incentives and help align employees interests with those of shareholders. The most common form of employee stock purchase plan (ESPP) qualifies for favorable tax treatment under Section 423 of the Internal Revenue Code. We will typically support qualified ESPP proposals.
Equity compensation plans
BlackRock supports equity plans that align the economic interests of directors, managers, and other employees with those of shareholders. We believe that boards should establish policies prohibiting the use of equity awards in a manner that could disrupt the intended alignment with shareholder interests (e.g. the use of stock as collateral for a loan; the use of stock in a margin account; the use of stock [or an unvested award] in hedging or derivative transactions). We may support shareholder proposals requesting the establishment of such policies.
Our evaluation of equity compensation plans is based on a companys executive pay and performance relative to peers and whether the plan plays a significant role in a pay-for-performance disconnect. We generally oppose plans that contain evergreen provisions, which allow for the unlimited increase of shares reserved without requiring further shareholder approval after a reasonable time period. We also generally oppose plans that allow for repricing without shareholder approval. We may also oppose plans that provide for the acceleration of vesting of equity awards even in situations where an actual change of control may not occur. We encourage companies to structure their change of control provisions to require the termination of the covered employee before acceleration or special payments are triggered.
Golden parachutes
We generally view golden parachutes as encouragement to management to consider transactions that might be beneficial to shareholders. However, a large potential pay-out under a golden parachute arrangement also presents the risk of motivating a management team to support a sub-optimal sale price for a company.
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When determining whether to support or oppose an advisory vote on a golden parachute plan, we normally support the plan unless it appears to result in payments that are excessive or detrimental to shareholders. In evaluating golden parachute plans, BlackRock may consider several factors, including:
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Whether we believe that the triggering event is in the best interest of shareholders |
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Whether management attempted to maximize shareholder value in the triggering event |
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The percentage of total premium or transaction value that will be transferred to the management team, rather than shareholders, as a result of the golden parachute payment |
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Whether excessively large excise tax gross-up payments are part of the pay-out |
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Whether the pay package that serves as the basis for calculating the golden parachute payment was reasonable in light of performance and peers |
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Whether the golden parachute payment will have the effect of rewarding a management team that has failed to effectively manage the company |
It may be difficult to anticipate the results of a plan until after it has been triggered; as a result, BlackRock may vote against a golden parachute proposal even if the golden parachute plan under review was approved by shareholders when it was implemented.
We may support shareholder proposals requesting that implementation of such arrangements require shareholder approval. We generally support proposals requiring shareholder approval of plans that exceed 2.99 times an executives current salary and bonus, including equity compensation.
Option exchanges
We believe that there may be legitimate instances where underwater options create an overhang on a companys capital structure and a repricing or option exchange may be warranted. We will evaluate these instances on a case -by-case basis. BlackRock may support a request to reprice or exchange underwater options under the following circumstances:
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The company has experienced significant stock price decline as a result of macroeconomic trends, not individual company performance |
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Directors and executive officers are excluded; the exchange is value neutral or value creative to shareholders; tax, accounting, and other technical considerations have been fully contemplated |
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There is clear evidence that absent repricing, the company will suffer serious employee incentive or retention and recruiting problems |
BlackRock may also support a request to exchange underwater options in other circumstances, if we determine that the exchange is in the best interest of shareholders.
Pay-for-Performance plans
In order for executive compensation exceeding $1 million USD to qualify for federal tax deductions, related to Section 162(m) of the Internal Revenue Code of 1986, the Omnibus Budget Reconciliation Act (OBRA) requires companies to link compensation for the companys top five executives to disclosed performance goals and submit the plans for shareholder approval. The law further requires that a compensation committee comprised solely of outside directors administer these plans. Because the primary objective of these proposals is to preserve the deductibility of such compensation, we generally favor approval in order to preserve net income.
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Supplemental executive retirement plans
BlackRock may support shareholder proposals requesting to put extraordinary benefits contained in Supplemental Executive Retirement Plans (SERP) agreements to a shareholder vote unless the companys executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.
ENVIRONMENTAL AND SOCIAL ISSUES
Our fiduciary duty to clients is to protect and enhance their economic interest in the companies in which we invest on their behalf. It is within this context that we undertake our corporate governance activities. We believe that well -managed companies will deal effectively with the material environmental and social (E&S) factors relevant to their businesses.
Robust disclosure is essential for investors to effectively gauge companies business practices and planning related to E&S risks and opportunities.
BlackRock expects companies to issue reports aligned with the recommendations of the Task Force on Climate -related Financial Disclosures (TCFD) and the standards put forward by the Sustainability Accounting Standards Board (SASB). We view the SASB and TCFD frameworks as complementary in achieving the goal of disclosing more financially material information, particularly as it relates to industry -specific metrics and target setting. TCFDs recommendations provide an overarching framework for disclosure on the business implications of climate change, and potentially other E&S factors. We find SASBs industry-specific guidance (as identified in its materiality map) beneficial in helping companies identify and discuss their governance, risk assessments, and performance against these key performance indicators (KPIs). Any global standards adopted, peer group benchmarking undertaken, and verification process in place should also be disclosed and discussed in this context.
BlackRock has been engaging with companies for several years on disclosure of material E&S factors. Given the increased understanding of sustainability risks and opportunities, and the need for better information to assess them, we specifically ask companies to:
1) |
Publish disclosures in line with industry specific SASB guidelines by year-end, if they have not already done so, or disclose a similar set of data in a way that is relevant to their particular business; and |
2) |
Disclose climate-related risks in line with the TCFDs recommendations, if they have not already done so. This should include the companys plan for operating under a scenario where the Paris Agreements goal of limiting global warming to less than two degrees is fully realized, as expressed by the TCFD guidelines. |
See our commentary on our approach to engagement on TCFD and SASB aligned reporting for greater detail of our expectations.
We will use these disclosures and our engagements to ascertain whether companies are properly managing and overseeing these risks within their business and adequately planning for the future. In the absence of robust disclosures, investors, including BlackRock, will increasingly conclude that companies are not adequately managing risk.
We believe that when a company is not effectively addressing a material issue, its directors should be held accountable. We will generally engage directly with the board or management of a company when we identify issues. We may vote against the election of directors where we have concerns that a company might not be dealing with E&S factors appropriately. Sometimes we may reflect such concerns by supporting a shareholder proposal on the issue, where there seems to be either a significant potential threat or realized harm to shareholders interests caused by poor management of material E&S factors. In deciding our course of action, we will assess the nature of our engagement with the company on the issue over time, including whether:
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The company has already taken sufficient steps to address the concern |
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The company is in the process of actively implementing a response |
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There is a clear and material economic disadvantage to the company in the near-term if the issue is not addressed in the manner requested by the shareholder proposal |
We do not see it as our role to make social, ethical, or political judgments on behalf of clients, but rather, to protect their long-term economic interests as shareholders. We expect investee companies to comply, at a minimum, with the laws and regulations of the jurisdictions in which they operate. They should explain how they manage situations where such laws or regulations are contradictory or ambiguous.
Climate risk
Within the framework laid out above, as well as our guidance on How BlackRock Investment Stewardship engages on climate risk, we believe that climate presents significant investment risks and opportunities that may impact the long-term financial sustainability of companies. We believe that the reporting frameworks developed by TCFD and SASB provide useful guidance to companies on identifying, managing, and reporting on climate-related risks and opportunities.
We expect companies to help their investors understand how the company may be impacted by climate risk, in the context of its ability to realize a long-term strategy and generate value over time. We expect companies to convey their governance around this issue through their corporate disclosures aligned with TCFD and SASB. For companies in sectors that are significantly exposed to climate-related risk, we expect the whole board to have demonstrable fluency in how climate risk affects the business and how management approaches assessing, adapting to, and mitigating that risk.
Where a company receives a shareholder proposal related to climate risk, in addition to the factors laid out above, our assessment will take into account the robustness of the companys existing disclosures as well as our understanding of its management of the issues as revealed through our engagements with the company and board members over time. In certain instances, we may disagree with the details of a climate-related shareholder proposal but agree that the company in question has not made sufficient progress on climate-related disclosures. In these instances, we may not support the proposal, but may vote against the election of relevant directors.
Corporate political activities
Companies may engage in certain political activities, within legal and regulatory limits, in order to influence public policy consistent with the companies values and strategies, and thus serve shareholders best long-term economic interests. These activities can create risks, including: the potential for allegations of corruption; the potential for reputational issues associated with a candidate, party, or issue; and risks that arise from the complex legal, regulatory, and compliance considerations associated with corporate political activity. We believe that companies which choose to engage in political activities should develop and maintain robust processes to guide these activities and to mitigate risks, including a level of board oversight.
When presented with shareholder proposals requesting increased disclosure on corporate political activities, we may consider the political activities of that company and its peers, the existing level of disclosure, and our view regarding the associated risks. We generally believe that it is the duty of boards and management to determine the appropriate level of disclosure of all types of corporate activity, and we are generally not supportive of proposals that are overly prescriptive in nature. We may decide to support a shareholder proposal requesting additional reporting of corporate political activities where there seems to be either a significant potential threat or actual harm to shareholders interests, and where we believe the company has not already provided shareholders with sufficient information to assess the companys management of the risk.
Finally, we believe that it is not the role of shareholders to suggest or approve corporate political activities; therefore we generally do not support proposals requesting a shareholder vote on political activities or expenditures.
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GENERAL CORPORATE GOVERNANCE MATTERS
Adjourn meeting to solicit additional votes
We generally support such proposals unless the agenda contains items that we judge to be detrimental to shareholders best long-term economic interests.
Bundled proposals
We believe that shareholders should have the opportunity to review substantial governance changes individually without having to accept bundled proposals. Where several measures are grouped into one proposal, BlackRock may reject certain positive changes when linked with proposals that generally contradict or impede the rights and economic interests of shareholders.
Exclusive forum provisions
BlackRock generally supports proposals to seek exclusive forum for certain shareholder litigation. In cases where a board unilaterally adopts exclusive forum provisions that we consider unfavorable to the interests of shareholders, we will vote against the independent chair or lead independent director and members of the governance committee.
Multi-jurisdictional companies
Where a company is listed on multiple exchanges or incorporated in a country different from its primary listing, we will seek to apply the most relevant market guideline(s) to our analysis of the companys governance structure and specific proposals on the shareholder meeting agenda. In doing so, we typically consider the governance standards of the companys primary listing, the market standards by which the company governs itself, and the market context of each specific proposal on the agenda. If the relevant standards are silent on the issue under consideration, we will use our professional judgment as to what voting outcome would best protect the long-term economic interests of investors. We expect that companies will disclose the rationale for their selection of primary listing, country of incorporation, and choice of governance structures, in particular where there is conflict between relevant market governance practices.
Other business
We oppose giving companies our proxy to vote on matters where we are not given the opportunity to review and understand those measures and carry out an appropriate level of shareholder oversight.
Reincorporation
Proposals to reincorporate from one state or country to another are most frequently motivated by considerations of anti - takeover protections, legal advantages, and / or cost savings. We will evaluate, on a case-by-case basis, the economic and strategic rationale behind the companys proposal to reincorporate. In all instances, we will evaluate the changes to shareholder protection under the new charter / articles / bylaws to assess whether the move increases or decreases shareholder protections. Where we find that shareholder protections are diminished, we may support reincorporation if we determine that the overall benefits outweigh the diminished rights.
IPO governance
We expect boards to consider and disclose how the corporate governance structures adopted upon initial public offering (IPO) are in shareholders best long-term interests. We also expect boards to conduct a regular review of corporate governance and control structures, such that boards might evolve foundational corporate governance structures as company circumstances change, without undue costs and disruption to shareholders. In our letter on unequal voting structures, we articulate our view that one vote for one share is the preferred structure for publicly-traded companies. We also recognize the potential benefits of dual class shares to newly public companies as they establish themselves; however, we believe that these structures should have a specific and limited duration. We will generally engage new companies on topics such as classified boards and supermajority vote provisions to amend bylaws, as we believe that such arrangements may not be in the best interest of shareholders in the long-term.
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We will typically apply a one-year grace period for the application of certain director-related guidelines (including, but not limited to, director independence and over-boarding considerations), during which we expect boards to take steps to bring corporate governance standards in line with our expectations.
Further, if a company qualifies as an emerging growth company (an EGC) under the Jumpstart Our Business Startups Act of 2012 (the JOBS Act), we will give consideration to the NYSE and NASDAQ governance exemptions granted under the JOBS Act for the duration such a company is categorized as an EGC. We expect an EGC to have a totally independent audit committee by the first anniversary of its IPO, with our standard approach to voting on auditors and audit -related issues applicable in full for an EGC on the first anniversary of its IPO.
Amendment to charter / articles / bylaws
We believe that shareholders should have the right to vote on key corporate governance matters, including on changes to governance mechanisms and amendments to the charter / articles / bylaws. We may vote against certain directors where changes to governing documents are not put to a shareholder vote within a reasonable period of time, in particular if those changes have the potential to impact shareholder rights (see Director elections herein). In cases where a boards unilateral adoption of changes to the charter / articles / bylaws promotes cost and operational efficiency benefits for the company and its shareholders, we may support such action if it does not have a negative effect on shareholder rights or the companys corporate governance structure.
When voting on a management or shareholder proposal to make changes to the charter / articles / bylaws, we will consider in part the companys and / or proponents publicly stated rationale for the changes, the companys governance profile and history, relevant jurisdictional laws, and situational or contextual circumstances which may have motivated the proposed changes, among other factors. We will typically support changes to the charter / articles / bylaws where the benefits to shareholders, including the costs of failing to make those changes, demonstrably outweigh the costs or risks of making such changes.
Proxy access
We believe that long-term shareholders should have the opportunity, when necessary and under reasonable conditions, to nominate directors on the companys proxy card.
In our view, securing the right of shareholders to nominate directors without engaging in a control contest can enhance shareholders ability to meaningfully participate in the director election process, stimulate board attention to shareholder interests, and provide shareholders an effective means of directing that attention where it is lacking. Proxy access mechanisms should provide shareholders with a reasonable opportunity to use this right without stipulating overly restrictive or onerous parameters for use, and also provide assurances that the mechanism will not be subject to abuse by short-term investors, investors without a substantial investment in the company, or investors seeking to take control of the board.
In general, we support market-standardized proxy access proposals, which allow a shareholder (or group of up to 20 shareholders) holding three percent of a companys outstanding shares for at least three years the right to nominate the greater of up to two directors or 20% of the board. Where a standardized proxy access provision exists, we will generally oppose shareholder proposals requesting outlier thresholds.
Right to act by written consent
In exceptional circumstances and with sufficiently broad support, shareholders should have the opportunity to raise issues of substantial importance without having to wait for management to schedule a meeting. We therefore believe that shareholders should have the right to solicit votes by written consent provided that: 1) there are reasonable requirements to initiate the consent solicitation process (in order to avoid the waste of corporate resources in
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addressing narrowly supported interests); and 2) shareholders receive a minimum of 50% of outstanding shares to effectuate the action by written consent. We may oppose shareholder proposals requesting the right to act by written consent in cases where the proposal is structured for the benefit of a dominant shareholder to the exclusion of others, or if the proposal is written to discourage the board from incorporating appropriate mechanisms to avoid the waste of corporate resources when establishing a right to act by written consent. Additionally, we may oppose shareholder proposals requesting the right to act by written consent if the company already provides a shareholder right to call a special meeting that we believe offers shareholders a reasonable opportunity to raise issues of substantial importance without having to wait for management to schedule a meeting.
Right to call a special meeting
In exceptional circumstances and with sufficiently broad support, shareholders should have the opportunity to raise issues of substantial importance without having to wait for management to schedule a meeting. We therefore believe that shareholders should have the right to call a special meeting in cases where a reasonably high proportion of shareholders (typically a minimum of 15% but no higher than 25%) are required to agree to such a meeting before it is called, in order to avoid the waste of corporate resources in addressing narrowly supported interests. However, we may oppose this right in cases where the proposal is structured for the benefit of a dominant shareholder to the exclusion of others. We generally believe that a right to act via written consent is not a sufficient alternative to the right to call a special meeting.
Simple majority voting
We generally favor a simple majority voting requirement to pass proposals. Therefore, we will support the reduction or the elimination of supermajority voting requirements to the extent that we determine shareholders ability to protect their economic interests is improved. Nonetheless, in situations where there is a substantial or dominant shareholder, supermajority voting may be protective of public shareholder interests and we may support supermajority requirements in those situations.
This document is provided for information or educational purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
The information and opinions contained in this document are as of January 2020 unless it is stated otherwise and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy.
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PART C: OTHER INFORMATION
ITEM 15. Indemnification |
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Article V of the Registrants Amended and Restated Articles of Incorporation, a copy of which was filed as an exhibit to the Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 on April 3, 1997, and Article IV of the Registrants Amended and Restated Bylaws, a copy of which was filed as an exhibit to the Registrants 8-K filed on September 21, 2010, provides for indemnification, as set forth below:
Article V (Provisions for Defining, Limiting and Regulating Certain Powers of the Corporation and of the Directors and Stockholders) of the Registrants Amended and Restated Articles of Incorporation provides as follows:
(4) Each director and each officer of the Corporation shall be indemnified and advanced expenses by the Corporation to the full extent permitted by the General Laws of the State of Maryland now or hereafter in force, including the advance of expenses under the procedures and to the full extent permitted by law subject to the requirements of the Investment Company Act. The foregoing rights of indemnification shall not be exclusive of any other rights to which those seeking indemnification may be entitled. No amendment of these Articles of Incorporation or repeal of any provision hereof shall limit or eliminate the benefits provided to directors and officers under this provision in connection with any act or omission that occurred prior to such amendment or repeal.
(5) To the fullest extent permitted by the General Laws of the State of Maryland or decisional law, as amended or interpreted, subject to the requirements of the Investment Company Act, no director or officer of the Corporation shall be personally liable to the Corporation or its security holders for money damages. No amendment of these Articles of Incorporation or repeal of any provision hereof shall limit or eliminate the benefits provided to directors and officers under this provision in connection with any act or omission that occurred prior to such amendment or repeal.
Article IV of the Registrants Amended and Restated Bylaws provides as follows:
Section 1. No Personal Liability of Directors or Officers. No Director, advisory board member or officer of the Fund shall be subject in such capacity to any personal liability whatsoever to any Person, save only liability to the Fund or its shareholders arising from bad faith, willful misfeasance, gross negligence or reckless disregard for his or her duty to such Person; and, subject to the foregoing exception, all such Persons shall look solely to the assets of the Fund for satisfaction of claims of any nature arising in connection with the affairs of the Fund. If any Director, advisory board member or officer, as such, of the Fund, is made a party to any suit or proceeding to enforce any such liability, subject to the foregoing exception, such person shall not, on account thereof, be held to any personal liability. Any repeal or modification of the Charter or this Article IV Section 1 shall not adversely affect any right or protection of a Director, advisory board member or officer of the Fund existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.
Section 2. Mandatory Indemnification.
(a) The Fund hereby agrees to indemnify each person who is or was a Director, advisory board member or officer of the Fund (each such person being an Indemnitee) to the full extent permitted under the Charter. In addition, the Fund may provide greater but not lesser rights to indemnification pursuant to a contract approved by at least a majority of Directors between the Fund and any Indemnitee. Notwithstanding the foregoing, no Indemnitee shall be indemnified hereunder against any liability to any person or any expense of such Indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence, or (iv) reckless disregard of the duties involved in the conduct of the Indemnitees position (the conduct referred to in such clauses (i) through (iv) being sometimes referred to herein as Disabling Conduct). Furthermore, with respect to any action, suit or other proceeding voluntarily prosecuted by any Indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such Indemnitee (A) was authorized by a majority of the Directors or (B) was instituted by the Indemnitee to enforce his or her rights to indemnification hereunder in a case in which the Indemnitee is found to be entitled to such indemnification.
(b) Notwithstanding the foregoing, unless otherwise provided in any agreement relating to indemnification between an Indemnitee and the Fund, no indemnification shall be made hereunder unless there has been a determination (i) by a final decision on the merits by a court or other body of competent jurisdiction before whom the issue of entitlement
to indemnification hereunder was brought that such Indemnitee is entitled to indemnification hereunder or, (ii) in the absence of such a decision, by (A) a majority vote of a quorum of those Directors who are both Independent Directors and not parties to the proceeding (Independent Non-Party Directors), that the Indemnitee is entitled to indemnification hereunder, or (B) if such quorum is not obtainable or even if obtainable, if such majority so directs, a Special Counsel in a written opinion concludes that the Indemnitee should be entitled to indemnification hereunder.
(c) Subject to any limitations provided by the 1940 Act and the Charter, the Fund shall have the power and authority to indemnify and provide for the advance payment of expenses to employees, agents and other Persons providing services to the Fund or serving in any capacity at the request of the Fund to the full extent permitted for corporations organized under the corporations laws of the state in which the Fund was formed, provided that such indemnification has been approved by a majority of the Directors.
(d) Any repeal or modification of the Charter or Section 2 of this Article IV shall not adversely affect any right or protection of a Director, advisory board member or officer of the Fund existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.
Section 3. Good Faith Defined; Reliance on Experts. For purposes of any determination under this Article IV, a person shall be deemed to have acted in good faith and in a manner such person reasonably believed to be in the best interests of the Fund, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe such persons conduct was unlawful, if such persons action is based on the records or books of account of the Fund, or on information supplied to such person by the officers of the Fund in the course of their duties, or on the advice of legal counsel for the Fund or on information or records given or reports made to the Fund by an independent certified public accountant or by an appraiser or other expert or agent selected with reasonable care by the Fund. The provisions of this Article IV Section 3 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in this Article IV. Each Director and officer or employee of the Fund shall, in the performance of his or her duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Fund, upon an opinion of counsel selected by the Board of Directors or a committee of the Directors, or upon reports made to the Fund by any of the Funds officers or employees or by any advisor, administrator, manager, distributor, dealer, accountant, appraiser or other expert or consultant selected with reasonable care by the Board of Directors or a committee of the Directors, officers or employees of the Fund, regardless of whether such counsel or expert may also be a Director.
Section 4. Survival of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article IV shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person.
Section 5. Insurance. The Directors may maintain insurance for the protection of the Funds property, the shareholders, Directors, officers, employees and agents in such amount as the Directors shall deem adequate to cover possible tort liability, and such other insurance as the Directors in their sole judgment shall deem advisable or is required by the 1940 Act.
Section 6. Subrogation. In the event of payment by the Fund to an Indemnitee under the Charter or these Bylaws, the Fund shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute such documents and do such acts as the Fund may reasonably request to secure such rights and to enable the Fund effectively to bring suit to enforce such rights.
The Registrant has also entered into an agreement with directors and officers of the Registrant entitled to indemnification under the charter of the Registrant pursuant to which the Registrant has agreed to advance expenses and costs incurred by the indemnitee in connection with any matter in respect of which indemnification might be sought pursuant to the charter of the Registrant to the maximum extent permitted by law.
Reference is also made to Sections 10 and 11 of the Registrants Investment Management Agreement.
Additionally, the Registrant and the other funds in the BlackRock Fixed-Income Complex jointly maintain, at their own expense, E&O/D&O insurance policies for the benefit of its Directors, officers and certain affiliated persons. The Registrant pays a pro rata portion of the premium on such insurance policies.
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Insofar as indemnification for liabilities arising under the Securities Act may be permitted to trustees, officers and controlling persons of the Registrant, pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
ITEM 16. Exhibits |
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The agreements included or incorporated by reference as exhibits to this registration statement contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of materiality that are different from materiality under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement. The Registrant acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this registration statement not misleading.
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ITEM 17. Undertakings |
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(1) The undersigned Registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, as amended [17 CFR 230.145c], the reoffering prospectus will contain the information called for by the applicable registration form for the reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the Registration Statement and will not be used until the amendment is effective, and that, in determining any liability under the Securities Act of 1933, as amended, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees to file, by post-effective amendment, opinions of counsel supporting the tax consequences of the Reorganizations within a reasonably prompt time after receipt of such opinions.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and the State of New York on the 30th day of October, 2020.
BLACKROCK MUNIHOLDINGS FUND, INC. |
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BY: | /S/ JOHN M. PERLOWSKI | |
Name: | John M. Perlowski | |
Title: | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated and on the 30th day of October, 2020.
Signature |
Title |
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/S/ JOHN M. PERLOWSKI John M. Perlowski |
Director, President and Chief Executive Officer (Principal Executive Officer) |
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/S/ NEAL J. ANDREWS Neal J. Andrews |
Chief Financial Officer (Principal Financial and Accounting Officer) |
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MICHAEL J. CASTELLANO* Michael J. Castellano |
Director |
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RICHARD E. CAVANAGH* Richard E. Cavanagh |
Director |
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CYNTHIA L. EGAN* Cynthia L. Egan |
Director |
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FRANK J. FABOZZI* Frank J. Fabozzi |
Director |
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R. GLENN HUBBARD* R. Glenn Hubbard |
Director |
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W. CARL KESTER* W. Carl Kester |
Director |
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CATHERINE A. LYNCH* Catherine A. Lynch |
Director |
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KAREN P. ROBARDS* Karen P. Robards |
Director |
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ROBERT FAIRBAIRN* Robert Fairbairn |
Director |
*By: |
/S/ JANEY AHN (Janey Ahn, Attorney-In-Fact) |
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EXHIBIT INDEX
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Exhibit (1)(b)
MUNIHOLDINGS FUND, INC.
ARTICLES OF AMENDMENT
MuniHoldings Fund, Inc. a Maryland corporation (the Corporation), does hereby certify to the State Department of Assessments and Taxation of Maryland that:
FIRST: The name of the corporation is MuniHoldings Fund, Inc.
SECOND: The charter of the Corporation is hereby amended by deleting Article I thereof in its entirety and inserting the following in lieu thereof:
ARTICLE I
NAME
The name of the Corporation is
BlackRock MuniHoldings Fund, Inc.
THIRD: These Articles of Amendment have been approved by a majority of the entire Board of Directors of the Corporation and are limited to a change expressly authorized by Section 2-605 of the Maryland General Corporation Law and are therefore made without action by the stockholders.
FOURTH: The authorized capital stock of the Corporation has not been increased by these Articles of Amendment.
FIFTH: As amended hereby, the Corporations charter shall remain in full force and effect.
SIXTH: These Articles of Amendment shall be effective as of the 29th day of September, 2006.
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IN WITNESS WHEREOF, MuniHoldings Fund, Inc. has caused these presents to be signed in its name and on its behalf by its Vice President and witnessed by its Secretary as of the 14th day of September, 2006.
MUNIHOLDINGS FUND, INC. |
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By: |
/s/ Donald C. Burke | |||
Name: | Donald C. Burke, Vice President |
Witness: |
/s/ Alice A. Pellegrino |
Alice A. Pellegrino, Secretary |
THE UNDERSIGNED, Vice President of the Corporation, who executed on behalf of the Corporation the foregoing Articles of Amendment of which this certificate is made a part, hereby acknowledges in the name and on behalf of the Corporation the foregoing Articles of Amendment to be the corporate act of the Corporation and further certifies, as to all of the matters and fact required to be verified under oath, that to the best of his knowledge, information and belief, the matter and facts set forth herein are true in all material respects, under the penalties of perjury.
/s/ Donald C. Burke |
Donald C. Burke, Vice President |
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Exhibit (1)(d)
BLACKROCK MUNIHOLDINGS FUND, INC.
ARTICLES OF AMENDMENT
AMENDING THE ARTICLES SUPPLEMENTARY ESTABLISHING
AND FIXING THE RIGHTS AND PREFERENCES OF
VARIABLE RATE MUNI TERM PREFERRED SHARES
This is to certify that
First: The charter of BlackRock MuniHoldings Fund, Inc., a Maryland corporation (the Corporation), is amended by these Articles of Amendment, which amend the Articles Supplementary Establishing and Fixing the Rights and Preferences of Variable Rate Muni Term Preferred Shares, dated as of December 15, 2011 (the Articles Supplementary).
Second: The charter of the Corporation is hereby amended by deleting Section 10(b)(i)(A) and replacing it with the following:
(i) (A) Term Redemption. The Corporation shall redeem, out of funds legally available therefor and otherwise in accordance with Applicable Law, all Outstanding VMTP Preferred Shares on the Term Redemption Date at the Redemption Price; provided, however, the Corporation shall have the right, exercisable at any time no earlier than 9 months prior to the Term Redemption Date, to request that the Total Holders extend the term of the Term Redemption Date for an additional period as may be agreed upon by the Corporation and the Total Holders, which request may conditioned upon terms and conditions that are different from the terms and conditions herein. Each Holder shall, no later than the deadline specified in such request, which shall not be less than 30 days after such Holders receipt of such request unless otherwise agreed to by such Holder, notify the Corporation of its acceptance or rejection of such request, which acceptance by any such Holder may be a Conditional Acceptance conditioned upon terms and conditions which are different from the terms and conditions herein or the terms and conditions proposed by the Corporation in making an extension request. If any Holder fails to notify the Corporation of its acceptance or rejection of the Corporations request for extension by the deadline specified in such request, the Corporation may either deem such failure to respond as a rejection of such request or extend the deadline for such request with respect to such Holder, provided, however, in all cases any acceptance by a Holder of a request to extend, if any, shall be made pursuant to an affirmative written acceptance by the Total Holders. If the Total Holders (or any thereof) provide a Conditional Acceptance, then the Corporation shall, no later than the deadline specified in the Conditional Acceptance, which shall not be less than 30 days after the Corporations receipt of the Conditional Acceptance unless otherwise agreed to by the Corporation, notify the Total Holders of its acceptance or rejection of the terms and conditions specified in the Conditional Acceptance. If the Corporation fails to notify the Total Holders by the deadline specified in the Conditional Acceptance, the Total Holders may either deem such failure to respond as a rejection of the terms and conditions specified in the Conditional Acceptance or extend the deadline for such response by the Corporation, provided, however, in all cases any acceptance by a Holder of a request to extend, if any, shall be made pursuant to an affirmative written acceptance by the Total Holders.
Each Holder may grant or deny any request for extension of the Term Redemption Date in its sole and absolute discretion.
Third: These Articles of Amendment shall be effective as of June 30, 2015.
Fourth: The amendment to the charter of the Corporation as set forth above in these Articles of Amendment has been duly advised by the board of directors of the Corporation and approved by the stockholders of the Corporation as and to the extent required by law and in accordance with the charter of the Corporation.
[Signature Page Follows]
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IN WITNESS WHEREOF, BlackRock MuniHoldings Fund, Inc. has caused these Articles of Amendment to be signed as of June 26, 2015 in its name and on its behalf by the person named below who acknowledges that these Articles of Amendment are the act of the Corporation and, to the best of such persons knowledge, information and belief and under penalties for perjury, all matters and facts contained in these Articles of Amendment are true in all material respects.
BLACKROCK MUNIHOLDINGS FUND, INC. | ||||
By: |
/s/ Robert W. Crothers |
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Name: | Robert W. Crothers | |||
Title: | Vice President |
ATTEST: | ||
/s/ Janey Ahn | ||
Name: | Janey Ahn | |
Title: | Secretary |
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Exhibit (3)
Execution Copy
VOTING TRUST AGREEMENT
THIS VOTING TRUST AGREEMENT (this Agreement) is made and entered into effective for all purposes and in all respects as of December 16, 2011 by and among Lord Securities Corporation, as trustee (the Trustee or any successor thereto), JPMorgan Chase Bank, National Association, a national banking association, including its successors and assigns by operation of law (JPMorgan or the Purchaser) and Institutional Shareholder Services Inc. (the Voting Consultant or any successor thereto).
WHEREAS, the Purchaser is the legal and Beneficial Owner of 837 shares of Variable Rate Muni Term Preferred Shares (VMTP Preferred Shares) of BlackRock MuniHoldings Fund, Inc. (the Fund) pursuant to the terms of the purchase agreement, dated as of December 16, 2011, by and between the Purchaser and the Fund (the Purchase Agreement);
WHEREAS, the Purchaser desires to transfer and assign irrevocably to the Trustee, and the Trustee desires to accept such transfer and assignment of, the right to vote and consent for the Purchaser in connection with all of its voting and consent rights and responsibilities, as set forth in Section 1 below, as a Beneficial Owner of (i) VMTP Preferred Shares acquired by the Purchaser pursuant to the Purchase Agreement (such VMTP Preferred Shares, when owned by the Purchaser, the Subject Shares) and (ii) any additional shares of VMTP Preferred Shares or capital stock of any class or series of the Fund having voting powers of which an Affiliate of JPMorgan is the Beneficial Owner or that the Purchaser becomes the Beneficial Owner of during the term of this Agreement (any such additional shares of capital stock of the Fund having voting powers being Additional Shares and when so acquired will become a part of the Subject Shares covered by this Agreement);
WHEREAS, the Voting Consultant shall analyze any matters requiring the owner of Subject Shares, to vote or consent in its capacity as an equity holder (whether at a meeting or via a consent solicitation, and shall provide a recommendation to the Trustee of how to vote or consent with respect to such voting or consent matters;
WHEREAS, the Voting Consultant and the Trustee are Independent of the Purchaser; and
WHEREAS, the parties hereto desire to set forth in writing their understandings and agreements.
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises hereinafter set forth and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending legally and equitably to be bound, hereby agree as follows:
1. |
Creation of Trust |
The Purchaser hereby irrevocably transfers and assigns to the Trustee, and the Trustee hereby accepts the transfer and assignment of, the right to vote and consent for the Purchaser in connection with all of its voting and consent rights and responsibilities as Beneficial Owner of the Subject Shares with respect to the following matters (collectively, the Voting Matters):
(a) the election of the two members of the Board of Directors that holders of VMTP Preferred Shares are exclusively entitled to vote on under Section 18(a)(2)(C) of the Investment Company Act of 1940, as amended (the 1940 Act) and all other rights given to holders of VMTP Preferred Shares with respect to the election of Board of Directors of the Fund;
(b) the conversion of the Fund from a closed-end management investment company to an open-end fund, or to change the Funds classification from diversified to non-
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diversified, each pursuant to Section 13(a)(1) of the 1940 Act (any of the foregoing, a Conversion), together with any additional voting or consent right under the Articles Supplementary that relates solely to any action or amendment to the Articles Supplementary that is so closely related to the Conversion that it would be impossible to give effect to the Conversion without implicating such additional voting or consent right; provided that any such additional voting or consent right shall not include any voting or consent right related to satisfying any additional term, condition or agreement upon which the Conversion is conditioned upon or subject to;
(c) the deviation from a policy in respect of concentration of investments in any particular industry or group of industries as recited in the Funds registration statement, pursuant to Section 13(a)(3) of the 1940 Act (a Deviation), together with any additional voting or consent right under the Articles Supplementary that relates solely to any action or amendment to the Articles Supplementary that is so closely related to the Deviation that it would be impossible to give effect to the Deviation without implicating such additional voting or consent right; provided that any such additional voting or consent right shall not include any voting or consent right related to satisfying any additional term, condition or agreement upon which the Deviation is conditioned upon or subject to; and
(d) borrowing money, issuing senior securities, underwriting securities issued by other persons, purchasing or selling real estate or commodities or making loans to other persons other than in accordance with the recitals of policy with respect thereto in the Funds registration statement, pursuant to Section 13(a)(2) of the 1940 Act (and of the foregoing, a Policy Change), together with any additional voting or consent right under the Articles Supplementary that relates solely to any action or amendment to the Articles Supplementary that is so closely related to the Policy Change that it would be impossible to give effect to the Policy Change without implicating such additional voting or consent right; provided that any such additional voting or consent right shall not include any voting or consent right related to satisfying any additional term, condition or agreement upon which the Policy Change is conditioned upon or subject to.
In order to effect the transfer of voting and consent rights with respect to the Voting Matters, JPMorgan hereby irrevocably appoints and constitutes, and will cause each of its Affiliates who are Beneficial Owners of any Subject Shares to irrevocably appoint and constitute, the Trustee as its attorney-in-fact and agrees, and agrees to cause each of such Affiliates, to grant the Trustee one or more irrevocable proxies with respect to the Voting Matters and further agrees to renew any such proxies that may lapse by their terms while the Subject Shares are still subject to the Voting Trust Agreement.
JPMorgan will retain all other voting rights under the Related Documents and will also be the registered owner of the VMTP Preferred Shares. If any dividend or other distribution in respect of the Subject Shares is paid, such dividend or distribution will be paid directly to JPMorgan; provided, that, any Additional Shares will become part of the Subject Shares covered by this Agreement.
2. |
Definitions |
Affiliate means, with respect to a Person, (i) any other Person who, directly or indirectly, is in control of, or controlled by, or is under common control with, such Person or (ii) any other Person who is a director, officer, employee or general partner (a) of such Person, (b) of any subsidiary or parent company of such Person or (c) of any Person described in clause (i) above. For the purposes of this definition, control of a Person shall mean the power, direct or indirect, (x) to vote more than 25% of the securities having ordinary voting power for the election of directors of such Persons or (y) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise.
Articles Supplementary means the Funds Articles Supplementary Establishing and Fixing the Rights and Preferences of the Variable Rate Muni Term Preferred Shares.
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Beneficial Owner means, any Person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares (i) voting power which includes the power to vote, or to direct the voting of, securities and/or (ii) investment power which includes the power to dispose, or to direct the disposition of, securities.
Board of Directors means the Board of Directors of the Fund or any duly authorized committee thereof.
Excluded Transfer means any transfer (1) to a tender option bond trust, (2) in connection with a repurchase financing transaction, (3) relating to a collateral pledge arrangement or (4) to a person who, after giving effect to such transfer, together with any affiliated person (as defined in the 1940 Act) of such person will own, hold or control with power to vote, not more than 25% of the Outstanding VMTP Preferred Shares.
Independent means, as to any Person, any other Person who (i) does not have and is not committed to acquire any material direct or any material indirect financial interest in such Person, (ii) is not connected with such Person as an officer, employee, promoter, underwriter, partner, director or Person performing similar functions and (iii) is not otherwise subject to the undue influence or control of such other Person. For purposes of this definition, no Person will fail to be Independent solely because such Person acts as a voting consultant or trustee in respect of property owned by another Person or its Affiliates pursuant to this Agreement or any other agreement. With respect to item (i) above, material direct or material indirect financial interest means, (1) as to any Person, owning directly or indirectly (as principal for such Persons own account) at least 5% of any class of the outstanding equity or debt securities issued by any other Person or (2) with respect to a Person (the Investor) owning directly or indirectly (as principal for the Investors own account) outstanding equity or debt securities of any other Person in an amount at least equal to 5% of the total consolidated shareholders equity of the Investor (measured in accordance with U.S. generally accepted accounting principals).
Each capitalized term used herein and not otherwise defined herein shall have the meaning provided therefor (including by incorporation by reference) in the Articles Supplementary.
3. |
Right to Transfer |
The Purchaser shall have the right to sell or otherwise transfer the Subject Shares at any time in its sole discretion, subject to the transfer restrictions contained in Section 2.02 of the Purchase Agreement. Upon the transfer of the Subject Shares by the Purchaser to any third party (other than a transfer to an Affiliate of the Purchaser in which case such Subject Shares shall remain subject to this Agreement) such Subject Shares shall no longer be subject to this Agreement; provided, however, in connection with an Excluded Transfer:
(a) of the type specified in clause (1) of the definition of Excluded Transfer, the Subject Shares shall remain subject to this Agreement until such time as the Fund enters into a voting arrangement of the type specified in Section 12(d)(1)(E)(iii) of the 1940 Act;
(b) of the type specified in clauses (2) or (3) of the definition of Excluded Transfer, to the extent the Purchaser retains the right to vote or direct voting in connection with such transactions, the Subject Shares shall be subject to this Agreement until such time as there is a default by the Purchaser under such repurchase transaction or collateral pledge arrangement; and
(c) of the type specified in clauses (2) or (3) of the definition of Excluded Transfer, to the extent the Purchaser does not retain the right to vote or direct voting of such Subject Shares in such transactions, such transactions do not permit the removal of the Subject Shares rights transferred to the Voting Trust pursuant to this Agreement within the first 60 days of closing of such transferee becoming the Beneficial Owner of such Subject Shares unless there is a default by the Purchaser under such repurchase transaction or collateral pledge arrangement.
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4. |
Trustee |
(a) Rights And Powers Of Trustee. With respect to Subject Shares where the Purchaser is the Beneficial Owner, the Trustee shall, in person or by nominees, agents, attorneys-in-fact, or proxies, have the right and the obligation to exercise its discretion with respect to all Voting Matters requiring holders of VMTP Preferred Shares to vote or consent with respect to and including voting or consenting to any corporate or shareholder action of any kind whatsoever, subject to the terms of this Agreement. The Trustee shall be obligated to vote any Voting Matter in accordance with the provisions of this Agreement.
(b) Liability Of Trustee. In exercising the rights and powers of the Trustee, the Trustee will exercise any rights and powers in the Trustees best judgment; provided, however, the Trustee shall not be liable for any action taken by such Trustee or the Trustees agent, except for liability arising from the Trustees bad faith, wilful misconduct or gross negligence. The Trustee shall not be required to give any bond or other security for the discharge of the Trustees duties.
(c) Resignation of and Successor Trustee. The Trustee may at any time resign the Trustees position as Trustee by delivering a resignation in writing to the Purchaser and the Voting Consultant to become effective 90 days after the date of such delivery, but in any event such notice shall not become effective prior to the acceptance of a successor Trustee. The Trustee shall nominate a successor Trustee acceptable to the Purchaser, who shall have all rights, powers and obligations of the resigning Trustee as set forth in this Agreement, and all rights, powers and obligations of the resigning Trustee hereunder shall immediately terminate upon the acceptance by the successor Trustee of such nomination and the execution of this Agreement by the successor Trustee as Trustee hereunder. No such resignation shall become effective until such time as a successor Trustee has been appointed and such appointment has been accepted. The fact that any Trustee has resigned such Trustees position as a Trustee shall not act, or be construed to act, as a release of any Subject Shares from the terms and provisions of this Agreement.
(d) Removal. The Trustee may be removed by the Purchaser upon 30 days prior written notice upon either (i) a material breach by the Trustee of its obligations hereunder or (ii) any action or inaction of the Trustee which constitutes bad faith, negligence or wilful misconduct in the performance of its obligations hereunder.
(e) Independent. The Trustee represents that it is Independent of JPMorgan.
5. |
Voting Consultant |
(a) Liability Of Voting Consultant. In providing its voting recommendations on Voting Matters hereunder, the Voting Consultant will provide such recommendations in the Voting Consultants best judgment with respect to the Voting Matters for the VMTP Preferred Shares; provided, however, the Voting Consultant shall not be liable for any action taken by such Voting Consultant or the Voting Consultants agent, except for liability arising from the Voting Consultants bad faith, wilful misconduct or gross negligence. For the avoidance of doubt, the Voting Consultants maximum liability shall be limited to an amount not to exceed the total amounts of the fees the Voting Consultant receives from the Purchaser under the Master Agreement in any one year period for any and all claims made within that one year period; provided that if a breach of Section 5(e) is determined to have occurred, the sole remedy shall be the Immediate removal of the Voting Consultant by the Purchaser in the Purchasers sole discretion and no monetary damages shall be due or payable. In addition, the Voting Consultant shall not be liable for any action taken by the Trustee contrary to the recommendations provided by the Voting Consultant.
(b) Resignation of and Successor Voting Consultant. The Voting Consultant may at any time resign the Voting Consultants position as Voting Consultant by delivering a resignation in writing to the Purchaser and to the Trustee to become effective 90 days after the date of such delivery. Upon receipt of the Voting Consultants written resignation, the Purchaser shall use commercially reasonable efforts to appoint a successor Voting Consultant which has been consented to by the Trustee, such consent not to be unreasonably withheld. If the Voting Consultant shall resign
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but a successor Voting Consultant has not assumed all of the Voting Consultants duties and obligations within 90 days of such resignation, the Voting Consultant may petition any court of competent jurisdiction for the appointment of a successor Voting Consultant. No such resignation shall become effective until such time as a successor Voting Consultant has been appointed and such appointment has been accepted.
(c) Removal. The Voting Consultant may be removed by the Purchaser upon 30 days prior written notice upon either (i) a material breach by the Voting Consultant of its obligations hereunder or (ii) any action or inaction of the Voting Consultant which constitutes bad faith, gross negligence or wilful misconduct in the performance of its obligations hereunder.
(d) Contract. A separate contract, that certain Master Services Agreement No. (109730) by and between the Voting Consultant and the Purchaser, as may be amended from time to time with the prior written consent of the parties thereto (the Master Agreement), sets forth additional details, including fees, pursuant to which the Voting Consultant is providing the services contemplated hereunder.
(e) Independent. The Voting Consultant represents that it is Independent of JPMorgan; provided, however, if the Voting Consultant becomes aware that the Voting Consultant is no longer Independent of the Purchaser, the Voting Consultant shall promptly, and in no event later than two Business Days after becoming aware, notify the Purchaser and shall abstain from making voting recommendations during any period of time during which the Voting Consultant is not Independent of the Purchaser. If the Voting Consultant notifies the Purchaser that it is no longer Independent of the Purchaser, the Purchaser shall use commercially reasonable efforts to identify and appoint a replacement voting consultant.
6. |
Amount of Subject Shares Notification |
On any and each date that the Purchaser sells or otherwise transfers any Subject Shares to another Beneficial Owner, the Purchaser shall promptly notify the Trustee of such occurrence and the number of VMTP Preferred Shares that the Purchaser then owns.
7. |
Voting Communications |
The Purchaser shall notify the Trustee and the Voting Consultant as soon as possible, and in any event, not later than two Business Days after receipt of notice that a vote of the holders of VMTP Preferred Shares has been requested or permitted on any Voting Matter and the Purchaser shall, within such same time frame, forward any information sent to the Purchaser in connection with such vote to the Trustee and the Voting Consultant by Electronic Means.
The Voting Consultant shall analyze and provide a voting or consent recommendation to the Trustee with respect to each Voting Matter in respect of the Subject Shares. The Trustee is obligated to act in accordance with the voting or consent recommendation made by the Voting Consultant in its voting or consent direction to the Purchaser. In all Voting Matters, the Trustee shall use the proxies granted to it by the Purchaser to vote or consent the Subject Shares in accordance with the voting or consent recommendation made by the Voting Consultant and the Purchaser shall not exercise any voting or consent rights in such matters.
8. |
Indemnification |
(a) Of the Trustee and the Voting Consultant. The Purchaser shall indemnify and hold the Trustee and the Voting Consultant and such Trustees and such Voting Consultants agents harmless from and against any and all liabilities, obligations, losses, damages, penalties, taxes, claims, actions, suits, reasonable costs, reasonable expenses or disbursements (including reasonable legal fees and expenses) of any kind and nature whatsoever in connection with or growing out of (i) with respect to the Trustee, the administration of the voting trust created by this Agreement or (ii) with respect to the Trustee and the Voting Consultant, the exercise of any powers or the performance of any duties by the Trustee or the Voting Consultant as herein provided or contemplated, including,
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without limitation, any action taken or omitted to be taken, except, with respect to the Trustee and the Voting Consultant separately, such as may arise from the bad faith, willful misconduct or gross negligence of the Trustee or the Voting Consultant, respectively. In no event shall the Purchaser be liable for special, incidental, indirect or consequential damages.
(b) Of the Purchaser and the Voting Consultant. The Trustee shall indemnify and hold the Purchaser and the Voting Consultant and the Purchasers and the Voting Consultants agents harmless from and against any and all liabilities, obligations, losses, damages, penalties, taxes, claims, actions, suits, reasonable costs, reasonable expenses or disbursements (including reasonable legal fees and expenses) of any kind and nature whatsoever in connection with or growing out of (i) with respect to the Purchaser, the administration of the voting trust created by this Agreement or (ii) with respect to the Purchaser and the Voting Consultant, the exercise of any powers or the performance of any duties by the Purchaser or the Voting Consultant as herein provided or contemplated, Including, without limitation, any action taken or omitted to be taken, except, with respect to the Purchaser and the Voting Consultant separately, such as may arise from the wilful misconduct or gross negligence of the Purchaser or the Voting Consultant, respectively. In no event shall the Trustee be liable for special, incidental, indirect or consequential damages.
(c) Of the Purchaser and the Trustee. The Voting Consultant shall indemnify and hold the Purchaser and the Trustee and the Purchasers and the Trustees agents harmless from and against any and all liabilities, obligations, losses, damages, penalties, taxes, claims, actions, suits, reasonable costs, reasonable expenses or disbursements (including reasonable legal fees and expenses) of any kind and nature whatsoever which may be imposed, incurred or asserted against the Purchaser or the Trustee in connection with the wilful misconduct or gross negligence of the Voting Consultant in connection with the exercise of any powers or the performance of any duties by the Voting Consultant as herein provided or contemplated, including, without limitation, any action taken or omitted to be taken, except, with respect to the Purchaser and the Trustee separately, such as may arise from the wilful misconduct or gross negligence of the Purchaser or the Trustee, respectively; provided, however, that the Voting Consultants maximum liability under this Section 8(c) shall be limited to an amount not to exceed the total amount of the fees the Voting Consultant receives from the Purchaser under the Master Agreement in any one year period for any and all claims made within that one year period. In no event shall the Voting Consultant be liable for special, incidental, indirector consequential damages.
(d) Conditions to Indemnification. An indemnified party must give the other party(ies) prompt written notice of any claim and allow the indemnifying party to defend or settle the claim as a condition to indemnification. No settlement shall bind any party without such partys written consent.
9. |
Termination of Agreement |
(a) This Agreement and the voting trust created hereby shall terminate with respect to all of the Subject Shares (i) at the option of JPMorgan, upon the non-payment of dividends on the VMTP Preferred Shares for two years, (ii) at the option of JPMorgan, upon JPMorgan and its Affiliates owning less than 20% of the Outstanding VMTP Preferred Shares or (iii) as provided with respect to certain transfers of Subject Shares in Section 3 above.
(b) Upon the termination of this Agreement with respect to the Subject Shares, the voting trust created pursuant to Section 1 hereof shall cease to have any effect with respect to the Subject Shares, and the parties hereto shall have no further rights or obligations under this Agreement with respect to the Subject Shares.
10. |
Trustees Compensation |
The Trustee shall be entitled to the compensation set forth in the letter agreement between the Purchaser and the Trustee dated as of December 16, 2011, as may be amended from time to time.
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11. |
Voting Consultants Compensation |
The Voting Consultant shall be entitled to the compensation pursuant to the Master Agreement.
12. |
Tax Treatment |
It is the intention of the parties hereto that for all federal, state and local income and other tax purposes the Purchaser or the applicable Beneficial Owner, as the case may be, shall be treated as the owner of the Subject Shares and, except as otherwise required by law, no party shall take a contrary position in any tax return or report or otherwise act in a contrary manner.
13. |
Notices |
All notices, requests and other communications to the Purchaser, the Trustee or the Voting Consultant shall be in writing (Including telecopy, electronic mail or similar writing), except in the case of notices and other communications permitted to be given by telephone, and shall be given to such party at its address or telecopy number or email address set forth below or to such other Person and/or such other address or telecopy number or email address as such party may hereafter specify for the purpose by notice to the other party. Each such notice, request or other communication shall be effective (i) if given by mail, five days after such communication is deposited in the mail, return receipt requested, addressed as aforesaid, or (ii) if given by any other means, when delivered at the address specified in this Section. The notice address for each party is specified below:
if to the Purchaser:
JPMorgan Chase Bank, National Association
383 Madison Avenue, Floor 8
New York, New York 10179
Attention: Paul Palmeri
Telephone: (212) 834-7182
Email: Paul.n.palmeri@jpmorgan.com
if to the Trustee:
Lord Securities Corporation
48 Wall Street
New York, New York 10005
Attention: Orlando Figueroa
Telephone: (212) 346-9007
Email: Orlando.Figueroa@lordspv.com
if to the Voting Consultant:
Institutional Shareholder Services Inc.
One Chase Manhattan Plaza, 44th Floor
New York, New York 10005
Attention: Lorraine Kelly, Executive Director
Telephone: (212) 354-5443
Email: lorraine.kelly@issgovernance.com
with a copy to:
Institutional Shareholder Services Inc.
One Chase Manhattan Plaza, 44th Floor
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13:24\December 13, 2011\NEWYORK\371517.01
New York, New York 10005
Attention: General Counsel
Telephone: (212) 804-2930
Email: frederick.bogdan@msci.com
14. |
Modification |
No modification of this Agreement shall be effective unless in writing and signed by all of the parties hereto. Without the prior written consent of the Fund (in its sole discretion), the Purchaser will not agree or consent to any amendment, supplement, modification or repeal of this Agreement, nor waive any provision hereof; provided, that in the case of any proposed amendment, supplement, modification or repeal of this Agreement which is a result of a change in law or regulation, the consent of the Fund shall not be unreasonably withheld or delayed.
15. |
Benefit and Burden |
This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their legatees, distributees, estates, executors or administrators, personal and legal representatives, successors and assigns.
16. |
Severability |
The invalidity of any particular provision of this Agreement shall not affect the validity of the remainder hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted.
17. |
Headings |
The section headings herein are for convenience of reference only, and shall not affect the construction, or limit or otherwise affect the meaning hereof.
18. |
Applicable Law |
This Agreement shall be construed and enforced in accordance with the law of the State of New York.
THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF FEDERAL AND NEW YORK STATE COURTS OF COMPETENT JURISDICTION LOCATED IN NEW YORK COUNTY, NEW YORK IN CONNECTION WITH ANY DISPUTE RELATED TO THIS AGREEMENT OR ANY MATTERS CONTEMPLATED HEREBY.
19. |
Waiver |
THE PURCHASER, THE TRUSTEE AND THE VOTING CONSULTANT HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY OF THE PARTIES HERETO AGAINST THE OTHER(S) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT.
20. |
Assignment |
None of the parties hereto may assign or otherwise transfer any of its rights or obligations under this Agreement without the prior written consent of the other parties; provided that, without the consent of either the Trustee or the Voting Consultant, the Purchaser may assign its rights and obligations under this Agreement (i) to an Affiliate, (ii) to a successor entity following a consolidation, amalgamation with, or merger with or into or (iii) to a transferee that acquires all or substantially all of the Purchasers assets. Any assignment other than in accordance with this section shall be void.
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21. |
Conflicts with Other Documents |
In the event that this Agreement requires any action to be taken with respect to any matter and the Master Agreement requires that a different action be taken with respect to such matter, and such actions are mutually exclusive, the provisions of this Agreement in respect thereof shall control.
22. |
Counterparts |
This Agreement may be executed by the parties hereto in any number of separate counterparts, each of which shall be deemed to be an original, and all of which taken together shall be deemed to constitute one and the same instrument.
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Dec-15-2011 10:45 AM JPMorgan Chase & Co 212-270-1884 | 4/45 |
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above.
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, as Purchaser | ||||
By: |
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Name: Paul N. Palmeri | ||||
Title: Managing Director | ||||
LORD SECURITIES CORPORATION, as Trustee | ||||
By: |
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Name: | ||||
Title: | ||||
INSTITUTIONAL SHAREHOLDER SERVICES INC., as Voting Consultant | ||||
By: |
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Name: | ||||
Title: |
Voting Trust Agreement
MHD Signature Page
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above.
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, as Purchaser
By: |
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Name: | ||||
Title: | ||||
LORD SECURITIES CORPORATION, as Trustee | ||||
By: |
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Name: Orlando C. Figueroa | ||||
Title: Managing Director | ||||
INSTITUTIONAL SHAREHOLDER SERVICES INC., as Voting Consultant | ||||
By: |
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Name: | ||||
Title: |
Voting Trust Agreement
MHD Signature Page
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above.
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, as Purchaser |
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By: |
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Name: |
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Title: |
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LORD SECURITIES CORPORATION, as Trustee |
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By: |
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Name: |
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Title: |
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INSTITUTIONAL SHAREHOLDER SERVICES INC., as Voting Consultant |
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By: |
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Name: Steve Harvey |
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Title: Head of ISS |
Voting Trust Agreement
MHD Signature Page
Dec-15-2011 10:37 AM JPMorgan Chase & Co 212-270-1884 | 1/4 |
ADDENDUM NO. (GOVS_00058859.0-11/30/2011)
Incorporating Master Service Agreement (MSA) No. (109730)
between Subscriber and Institutional Shareholder Services Inc. (Provider)
Subscriber: |
JP Morgan Chase Bank, N.A. |
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Term: |
in respect of a Voting Trust Agreement (as defined below), the period commencing on December 16, 2011 and ending on the earlier of (a) the termination of such Voting Trust Agreement, (b) a breach of Section 5(e) of such Voting Trust Agreement is determined to have occurred, or (c) the effectiveness of Providers resignation under such Voting Trust Agreement. |
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Fee: |
as calculated in accordance with Schedule 1 attached hereto for each 12 month period of the Term commencing on December 16 (Subscriber and Provider acknowledge and agree that, for the 12 month period commencing on December 16, 2011, the Fee shall be $193,750.00) |
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Payment Schedule: |
Annually to be paid in advance by Subscriber at the beginning of each twelve month period of the Term |
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Services: |
As described on Schedule 2 attached hereto. |
* Amounts pre-paid for any twelve month period during the Term will not be refunded unless Provider resigns in accordance with the terms of the Voting Trust Agreement (in which event Provider will issue a pro-rata refund of any pre-paid Fee).
Provider, Subscriber and Lord Securities Corporation (Trustee) have entered into those certain Voting Trust Agreements dated December 16, 2011 with respect to the funds that are set forth in Schedule 3 attached hereto (each such agreement, a Voting Trust Agreement). Provider and Subscriber acknowledge and agree that, although JPMorgan Chase Bank, N.A. is the Subscriber under this Addendum, the actual user of the Services will be Trustee.
Subscriber Information:
Information sent to:
Name: Paul Palmeri | ||
Title; Managing Director | ||
Street Address: 383 Madison Avenue - 8th Floor, New York, NY, 10179 | ||
Tel: (212) 834-7182 | Fax: (212) 834-6737 | |
E-mail: paul.palmeri@jpmorgan.com |
ACCEPTED:
JP Morgan Chase Bank, N.A.
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Institutional Shareholder Services Inc.
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Signature:
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Signature:
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Name: Paul. N. Palmeri | Name: Stephen Harvey | |
Title: Managing Director | Title: Head ISS | |
Date: | Date: 12.13.11 | |
Address: 38 Madison Avenue, 8th Floor New York, NY 10179 |
Address: 2099 Gaither Road, Suite 501 Rockville, MD 20850-4045 |
1
ADDENDUM NO. (GOVS_00058859.0-11/30/2011)
Incorporating Master Service Agreement (MSA) No. (109730)
between Subscriber and Institutional Shareholder Services Inc. (Provider)
Subscriber: |
JP Morgan Chase Bank, N.A. |
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Term: |
in respect of a Voting Trust Agreement (as defined below), the period commencing on December 16, 2011 and ending on the earlier of (a) the termination of such Voting Trust Agreement, (b) a breach of Section 5(e) of such Voting Trust Agreement is determined to have occurred, or (c) the effectiveness of Providers resignation under such Voting Trust Agreement. |
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Fee: |
as calculated in accordance with Schedule 1 attached hereto for each 12 month period of the Term commencing on December 16 (Subscriber and Provider acknowledge and agree that, for the 12 month period commencing on December 16, 2011, the Fee shall be $193,750.00) |
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Payment Schedule: |
Annually to be paid in advance by Subscriber at the beginning of each twelve month period of the Term |
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Services: |
As described on Schedule 2 attached hereto. |
* Amounts pre-paid for any twelve month period during the Term will not be refunded unless Provider resigns in accordance with the terms of the Voting Trust Agreement (in which event Provider will issue a pro-rata refund of any pre-paid Fee).
Provider, Subscriber and Lord Securities Corporation (Trustee) have entered into those certain Voting Trust Agreements dated December 16, 2011 with respect to the funds that are set forth in Schedule 3 attached hereto (each such agreement, a Voting Trust Agreement). Provider and Subscriber acknowledge and agree that, although JPMorgan Chase Bank, N.A. is the Subscriber under this Addendum, the actual user of the Services will be Trustee.
Subscriber Information:
Information sent to:
Name: Paul Palmeri | ||
Title: Managing Director | ||
Street Address: 383 Madison Avenue - 8th Floor, New York, NY, 10179 | ||
Tel: (212) 834-7182 | Fax: (212) 834-6737 | |
E-mail: paul.palmeri@jpmorgan.com |
ACCEPTED:
JP Morgan Chase Bank, N.A. | Institutional Shareholder Services Inc. | |
Signature: |
Signature:
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Name: | Name: Stephen Harvey | |
Title: | Title: Head ISS | |
Date: | Date: 12.13.11 | |
Address: 38 Madison Avenue, 8th Floor New York, NY 10179 |
Address: 2099 Gaither Road, Suite 501 Rockville, MD 20850-4045 |
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Schedule 1
Pricing
Number of Funds | Price per Fund | |
<5 | $15,000.00 | |
6 to 10 | $12,750.00 | |
11 to 15 | $11,000.00 | |
>16 | $10,000.00 |
For the avoidance of doubt, the price per fund set forth above is not cumulative. For example, if there are 15 funds in total, the total Fee would be $193,750.00 because (i) the first 5 funds would be $15,000 each (and 5 x $15,000 is $45,000), (ii) the next 5 funds would be $12,750 each (and 5 x $12,750 is $63,750), and (iii) the last 5 funds would be $11,000 each (and 5 x $11,000 is $55,000).
Note: This pricing applies only to the funds covered by a Voting Trust Agreement.
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Schedule 2
Services
Subject to and in accordance with each applicable Voting Trust Agreement, Provider will give proxy vote recommendations to Trustee for securities in Subscribers accounts where voting authority for those securities has been assigned to Trustee as a trustee, which securities shall be identified to Provider by Subscriber or Trustee.
Subject to and in accordance with each applicable Voting Trust Agreement, Subscriber or Trustee shall notify Provider of (i) any pending vote or consent (whether at a meeting or via consent solicitation) relating to the securities described above, (ii) the CUSIP or other security identifier for the voting event, and (iii) the source materials reasonably needed for the vote or consent recommendation to be made by Provider.
The Services include the provision of vote recommendations for the shares of the securities over which the Trustee has voting authority.
For purposes of the Addendum only, the following provisions shall apply:
1. |
Section 5 of the MSA shall be amended hereby to allow the Subscriber and the Trustee to use the Information in connection with each Voting Trust Agreement. |
2. |
Section 8 of the MSA shall be deemed deleted and replaced by Section 8 of each Voting Trust Agreement |
3. |
Section 9 of the MSA shall be deemed deleted and replaced by Section 9 of each Voting Trust Agreement. |
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Schedule 3
Funds
No. | Ticker | Fund | ||
1 | BFK | BlackRock Municipal Income Trust | ||
2 | MVF | BlackRock MuniVest Fund, Inc. | ||
3 | BLE | BlackRock Municipal Income Trust II | ||
4 | MVT | BlackRock MuniVest Fund II, Inc. | ||
5 | BYM | BlackRock Municipal Income Quality Trust | ||
6 | MUE | BlackRock MuniHoldings Quality Fund II, Inc. | ||
7 | BKN | The BlackRock Investment Quality Municipal Trust Inc. | ||
8 | MQT | BlackRock MuniYield Quality Fund II, Inc. | ||
9 | MUS | BlackRock MuniHoldings Quality Fund, Inc. | ||
10 | MHD | Blackrock MuniHoldings Fund, Inc. | ||
11 | BBK | BlackRock Municipal Bond Trust | ||
12 | MFT | BlackRock MuniYield Quality Investment Fund | ||
13 | MUH | BlackRock MuniHoldings Fund II, Inc. | ||
14 | BSD | The BlackRock Strategic Municipal Trust | ||
15 | BAF | BlackRock Municipal Income Investment Quality Trust |
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Exhibit (6)(a)
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT, dated September 29, 2006, between BlackRock MuniHoldings Fund, Inc. (the Fund), a Maryland corporation, and BlackRock Advisors, LLC (the Advisor), a Delaware limited liability company.
WHEREAS, the Advisor has agreed to furnish investment advisory services to the Fund, a closed-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act); and
WHEREAS, this Agreement has been approved in accordance with the provisions of the 1940 Act, and the Advisor is willing to furnish such services upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual premises and covenants herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is agreed by and between the parties hereto as follows:
1. In General. The Advisor agrees, all as more fully set forth herein, to act as investment advisor to the Fund with respect to the investment of the Funds assets and to supervise and arrange for the day to day operations of the Fund and the purchase of securities for and the sale of securities held in the investment portfolio of the Fund.
2. Duties and Obligations of the Advisor with Respect to Investment of Assets of the Fund. Subject to the succeeding provisions of this section and subject to the direction and control of the Funds Board of Directors, the Advisor shall (i) act as investment advisor for and supervise and manage the investment and reinvestment of the Funds assets and in connection therewith have complete discretion in purchasing and selling securities and other assets for the Fund and in voting, exercising consents and exercising all other rights appertaining to such securities and other assets on behalf of the Fund; (ii) supervise continuously the investment program of the Fund and the composition of its investment portfolio; (iii) arrange, subject to the provisions of paragraph 4 hereof, for the purchase and sale of securities and other assets held in the investment portfolio of the Fund; and (iv) provide investment research to the Fund.
3. Duties and Obligations of Advisor with Respect to the Administration of the Fund. The Advisor also agrees to furnish office facilities and equipment and clerical, bookkeeping and administrative services (other than such services, if any, provided by the Funds Custodian, Transfer Agent and Dividend Disbursing Agent and other service providers) for the Fund. To the extent requested by the Fund, the Advisor agrees to provide the following administrative services:
(a) Oversee the determination and publication of the Funds net asset value in accordance with the Funds policy as adopted from time to time by the Board of Directors;
(b) Oversee the maintenance by the Funds Custodian and Transfer Agent and Dividend Disbursing Agent of certain books and records of the Fund as required under Rule
31a1(b)(4) of the 1940 Act and maintain (or oversee maintenance by such other persons as approved by the Board of Directors) such other books and records required by law or for the proper operation of the Fund;
(c) Oversee the preparation and filing of the Funds federal, state and local income tax returns and any other required tax returns;
(d) Review the appropriateness of and arrange for payment of the Funds expenses;
(e) Prepare for review and approval by officers of the Fund financial information for the Funds semiannual and annual reports, proxy statements and other communications with shareholders required or otherwise to be sent to Fund shareholders, and arrange for the printing and dissemination of such reports and communications to shareholders;
(f) Prepare for review by an officer of the Fund the Funds periodic financial reports required to be filed with the Securities and Exchange Commission (SEC) on Form NSAR, Form NCSR, Form NPX, Form NQ, and such other reports, forms and filings, as may be mutually agreed upon;
(g) Prepare such reports relating to the business and affairs of the Fund as may be mutually agreed upon and not otherwise appropriately prepared by the Funds custodian, counsel or auditors;
(h) Prepare such information and reports as may be required by any stock exchange or exchanges on which the Funds shares are listed;
(i) Make such reports and recommendations to the Board of Directors concerning the performance of the independent accountants as the Board of Directors may reasonably request or deems appropriate;
(j) Make such reports and recommendations to the Board of Directors concerning the performance and fees of the Funds Custodian and Transfer and Dividend Disbursing Agent as the Board of Directors may reasonably request or deems appropriate;
(k) Oversee and review calculations of fees paid to the Funds service providers;
(l) Oversee the Funds portfolio and perform necessary calculations as required under Section 18 of the 1940 Act;
(m) Consult with the Funds officers, independent accountants, legal counsel, custodian, accounting agent and transfer and dividend disbursing agent in establishing the accounting policies of the Fund and monitor financial and shareholder accounting services;
(n) Review implementation of any share purchase programs authorized by the Board of Directors;
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(o) Determine the amounts available for distribution as dividends and distributions to be paid by the Fund to its shareholders; prepare and arrange for the printing of dividend notices to shareholders; and provide the Funds dividend disbursing agent and custodian with such information as is required for such parties to effect the payment of dividends and distributions and to implement the Funds dividend reinvestment plan;
(p) Prepare such information and reports as may be required by any banks from which the Fund borrows funds;
(q) Provide such assistance to the Custodian and the Funds counsel and auditors as generally may be required to properly carry on the business and operations of the Fund;
(r) Assist in the preparation and filing of Forms 3, 4, and 5 pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, and Section 30(h) of the 1940 Act for the officers and Directors of the Fund, such filings to be based on information provided by those persons;
(s) Respond to or refer to the Funds officers or transfer agent, shareholder (including any potential shareholder) inquiries relating to the Fund;
(t) Supervise any other aspects of the Funds administration as may be agreed to by the Fund and the Advisor; and
All services are to be furnished through the medium of any directors, officers or employees of the Advisor or its affiliates as the Advisor deems appropriate in order to fulfill its obligations hereunder.
The Fund will reimburse the Advisor or its affiliates for all out of pocket expenses incurred by them in connection with the performance of the administrative services described in this paragraph 3. The Fund will reimburse the Advisor and its affiliates for their costs in providing accounting services to the Fund.
4. Covenants. In the performance of its duties under this Agreement, the Advisor shall at all times conform to, and act in accordance with, any requirements imposed by: (i) the provisions of the 1940 Act and the Investment Advisers Act of 1940, as amended, and all applicable Rules and Regulations of the Securities and Exchange Commission; (ii) any other applicable provision of law; (iii) the provisions of the Charter and By Laws of the Fund, as such documents are amended from time to time; (iv) the investment objectives and policies of the Fund as set forth in its Registration Statement on Form N-2 and/or the resolutions of the Board of Directors; and any policies and determinations of the Board of Directors of the Fund and
(a) In addition, the Advisor will:
(i) place orders either directly with the issuer or with any broker or dealer. Subject to the other provisions of this paragraph, in placing orders with brokers and dealers, the Advisor will attempt to obtain the best price and the most favorable execution of its orders. In placing orders, the Advisor will consider the experience and skill of the firms
3
securities traders as well as the firms financial responsibility and administrative efficiency. Consistent with this obligation, the Advisor may select brokers on the basis of the research, statistical and pricing services they provide to the Fund and other clients of the Advisor. Information and research received from such brokers will be in addition to, and not in lieu of, the services required to be performed by the Advisor hereunder. A commission paid to such brokers may be higher than that which another qualified broker would have charged for effecting the same transaction, provided that the Advisor determines in good faith that such commission is reasonable in terms either of the transaction or the overall responsibility of the Advisor to the Fund and its other clients and that the total commissions paid by the Fund will be reasonable in relation to the benefits to the Fund over the long term. Subject to the foregoing and the provisions of the 1940 Act, the Securities Exchange Act of 1934, as amended, and other applicable provisions of law, the Advisor may select brokers and dealers with which it or the Fund is affiliated;
(ii) maintain a policy and practice of conducting its investment advisory services hereunder independently of the commercial banking operations of its affiliates. When the Advisor makes investment recommendations for the Fund, its investment advisory personnel will not inquire or take into consideration whether the issuer of securities proposed for purchase or sale for the Funds account are customers of the commercial department of its affiliates; and
(iii) treat confidentially and as proprietary information of the Fund all records and other information relative to the Fund, and the Funds prior, current or potential shareholders, and will not use such records and information for any purpose other than performance of its responsibilities and duties hereunder, except after prior notification to and approval in writing by the Fund, which approval shall not be unreasonably withheld and may not be withheld where the Advisor may be exposed to civil or criminal contempt proceedings for failure to comply, when requested to divulge such information by duly constituted authorities, or when so requested by the Fund.
5. Services Not Exclusive. Nothing in this Agreement shall prevent the Advisor or any officer, employee or other affiliate thereof from acting as investment advisor for any other person, firm or corporation, or from engaging in any other lawful activity, and shall not in any way limit or restrict the Advisor or any of its officers, employees or agents from buying, selling or trading any securities for its or their own accounts or for the accounts of others for whom it or they may be acting; provided, however, that the Advisor will undertake no activities which, in its judgment, will adversely affect the performance of its obligations under this Agreement.
6. Sub-Advisors. The Advisor may from time to time, in its sole discretion to the extent permitted by applicable law, appoint one or more sub-advisors, including, without limitation, affiliates of the Advisor, to perform investment advisory services with respect to the Fund. The Advisor may terminate any or all sub-advisors in its sole discretion at any time to the extent permitted by applicable law.
7. Books and Records. In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Advisor hereby agrees that all records which it maintains for the Fund are the property of the Fund and further agrees to surrender promptly to the Fund any such records upon
4
the Funds request. The Advisor further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act.
8. Expenses. During the term of this Agreement, the Advisor will bear all costs and expenses of its employees and any overhead incurred in connection with its duties hereunder and shall bear the costs of any salaries or directors fees of any officers or directors of the Fund who are affiliated persons (as defined in the 1940 Act) of the Advisor; provided that the Board of Directors of the Fund may approve reimbursement to the Advisor of the pro rata portion of the salaries, bonuses, health insurance, retirement benefits and all similar employment costs for the time spent on Fund operations, (including, without limitation, compliance matters) (other than the provision of investment advice and administrative services required to be provided hereunder) of all personnel employed by the Advisor who devote substantial time to Fund operations or the operations of other investment companies advised by the Advisor.
9. Compensation of the Advisor. (a) The Fund agrees to pay to the Advisor and the Advisor agrees to accept as full compensation for all services rendered by the Advisor as such, a monthly fee (the Investment Advisory Fee) in arrears at an annual rate equal to the amount set forth in Schedule A hereto of the average daily value of the Funds Net Assets. Net Assets means the total assets of the Fund minus the sum of the accrued liabilities. It is understood that the liquidation preference of any outstanding preferred stock (other than accumulated dividends) is not considered a liability in determining the Funds Net Asset Value. For any period less than a month during which this Agreement is in effect, the fee shall be prorated according to the proportion which such period bears to a full month of 28, 29, 30 or 31 days, as the case may be.
(b) For purposes of this Agreement, the net assets of the Funds shall be calculated pursuant to the procedures adopted by resolutions of the Directors of the Fund for calculating the value of the Funds assets or delegating such calculations to third parties.
10. Indemnity. (a) The Fund may, in the discretion of the Board of Directors of the Fund, indemnify the Advisor, and each of the Advisors directors, officers, employees, agents, associates and controlling persons and the directors, partners, members, officers, employees and agents thereof (including any individual who serves at the Advisors request as director, officer, partner, member, trustee or the like of another entity) (each such person being an Indemnitee) against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees (all as provided in accordance with applicable state law) reasonably incurred by such Indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which such Indemnitee may be or may have been involved as a party or otherwise or with which such Indemnitee may be or may have been threatened, while acting in any capacity set forth herein or thereafter by reason of such Indemnitee having acted in any such capacity, except with respect to any matter as to which such Indemnitee shall have been adjudicated not to have acted in good faith in the reasonable belief that such Indemnitees action was in the best interest of the Fund and furthermore, in the case of any criminal proceeding, so long as such Indemnitee had no reasonable cause to believe that the conduct was unlawful; provided, however, that (1) no Indemnitee shall be indemnified hereunder against any liability to the Fund or its shareholders or any expense of such Indemnitee arising by
5
reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless disregard of the duties involved in the conduct of such Indemnitees position (the conduct referred to in such clauses (i) through (iv) being sometimes referred to herein as disabling conduct), (2) as to any matter disposed of by settlement or a compromise payment by such Indemnitee, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless there has been a determination that such settlement or compromise is in the best interests of the Fund and that such Indemnitee appears to have acted in good faith in the reasonable belief that such Indemnitees action was in the best interest of the Fund and did not involve disabling conduct by such Indemnitee and (3) with respect to any action, suit or other proceeding voluntarily prosecuted by any Indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such Indemnitee was authorized by a majority of the full Board of Directors of the Fund.
(b) The Fund may make advance payments in connection with the expenses of defending any action with respect to which indemnification might be sought hereunder if the Fund receives a written affirmation of the Indemnitees good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to reimburse the Fund unless it is subsequently determined that such Indemnitee is entitled to such indemnification and if the Directors of the Fund determine that the facts then known to them would not preclude indemnification. In addition, at least one of the following conditions must be met: the Indemnitee shall provide security for such Indemnitee undertaking, the Fund shall be insured against losses arising by reason of any unlawful advance, or a majority of a quorum consisting of Directors of the Fund who are neither interested persons of the Fund (as defined in Section 2(a)(19) of the 1940 Act) nor parties to the proceeding (Disinterested Non Party Directors) or an independent legal counsel in a written opinion, shall determine, based on a review of readily available facts (as opposed to a full trial type inquiry), that there is reason to believe that the Indemnitee ultimately will be found entitled to indemnification.
(c) All determinations with respect to the standards for indemnification hereunder shall be made (1) by a final decision on the merits by a court or other body before whom the proceeding was brought that such Indemnitee is not liable or is not liable by reason of disabling conduct, or (2) in the absence of such a decision, by (i) a majority vote of a quorum of the Disinterested Non Party Directors of the Fund, or (ii) if such a quorum is not obtainable or, even if obtainable, if a majority vote of such quorum so directs, independent legal counsel in a written opinion. All determinations that advance payments in connection with the expense of defending any proceeding shall be authorized and shall be made in accordance with the immediately preceding clause (2) above.
The rights accruing to any Indemnitee under these provisions shall not exclude any other right to which such Indemnitee may be lawfully entitled.
11. Limitation on Liability. (a) The Advisor will not be liable for any error of judgment or mistake of law or for any loss suffered by Advisor or by the Fund in connection with the performance of this Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from
6
reckless disregard by it of its duties under this Agreement. As used in this Section 11(a), the term Advisor shall include any affiliates of the Advisor performing services for the Fund contemplated hereby and partners, directors, officers and employees of the Advisor and of such affiliates.
12. Duration and Termination. This Agreement shall become effective as of the date hereof and, unless sooner terminated with respect to the Fund as provided herein, shall continue in effect for a period of two years. Thereafter, if not terminated, this Agreement shall continue in effect with respect to the Fund for successive periods of 12 months, provided such continuance is specifically approved at least annually by both (a) the vote of a majority of the Funds Board of Directors or the vote of a majority of the outstanding voting securities of the Fund at the time outstanding and entitled to vote, and (b) by the vote of a majority of the Directors who are not parties to this Agreement or interested persons of any party to this Agreement, cast in person at a meeting called for the purpose of voting on such approval. Notwithstanding the foregoing, this Agreement may be terminated by the Fund at any time, without the payment of any penalty, upon giving the Advisor 60 days notice (which notice may be waived by the Advisor), provided that such termination by the Fund shall be directed or approved by the vote of a majority of the Directors of the Fund in office at the time or by the vote of the holders of a majority of the voting securities of the Fund at the time outstanding and entitled to vote, or by the Advisor on 60 days written notice (which notice may be waived by the Fund). This Agreement will also immediately terminate in the event of its assignment. (As used in this Agreement, the terms majority of the outstanding voting securities, interested person and assignment shall have the same meanings of such terms in the 1940 Act.)
13. Notices. Any notice under this Agreement shall be in writing to the other party at such address as the other party may designate from time to time for the receipt of such notice and shall be deemed to be received on the earlier of the date actually received or on the fourth day after the postmark if such notice is mailed first class postage prepaid.
14. Amendment of this Agreement. This Agreement may be amended by the parties only if such amendment is specifically approved by the vote of the Board of Directors of the Fund, including a majority of those Directors who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval and, where required by the 1940 Act, by a vote of a majority of the outstanding voting securities of the Fund.
15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York for contracts to be performed entirely therein without reference to choice of law principles thereof and in accordance with the applicable provisions of the 1940 Act. To the extent that the applicable laws of the State of New York, or any of the provisions, conflict with the applicable provisions of the 1940 Act, the latter shall control.
16. Use of the Name BlackRock. The Advisor has consented to the use by the Fund of the name or identifying word BlackRock in the name of the Fund. Such consent is conditioned upon the employment of the Advisor as the investment advisor to the Fund. The name or identifying word BlackRock may be used from time to time in other connections and
7
for other purposes by the Advisor and any of its affiliates. The Advisor may require the Fund to cease using BlackRock in the name of the Fund if the Fund ceases to employ, for any reason, the Advisor, any successor thereto or any affiliate thereof as investment advisor of the Fund.
17. Miscellaneous. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding on, and shall inure to the benefit of the parties hereto and their respective successors.
18. Counterparts. This Agreement may be executed in counterparts by the parties hereto, each of which shall constitute an original counterpart, and all of which, together, shall constitute one Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers, all as of the day and the year first above written.
BLACKROCK MUNIHOLDINGS FUND, INC. | ||||
By: | /s/ Donald C. Burke | |||
Name: | Donald C. Burke | |||
Title: | Vice President | |||
BLACKROCK ADVISORS, LLC | ||||
By: | /s/ Donald C. Burke | |||
Name: | Donald C. Burke | |||
Title: | Managing Director |
9
Schedule A
Investment Advisory Fee
0.55% of average daily Net Assets of the Fund.
10
Exhibit (6)(b)
Amended and Restated Master Advisory Fee Waiver Agreement
This AMENDED AND RESTATED MASTER ADVISORY FEE WAIVER AGREEMENT (this Agreement) is made as of December 1, 2019, by and among BlackRock Advisors, LLC (the Adviser) and each investment company listed on Schedule A attached hereto (each, a Fund).
WHEREAS, each Fund is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a closed-end management company, and is organized as a statutory trust under the laws of the State of Delaware, a business trust under the laws of the Commonwealth of Massachusetts or a corporation under the laws of the State of Maryland;
WHEREAS, the Adviser and each Fund are parties to investment advisory agreements (the Advisory Agreements), pursuant to which the Adviser provides investment advisory services to each Fund in consideration of compensation as set forth in each Advisory Agreement (the Advisory Fee);
WHEREAS, the Adviser has determined that it is appropriate and in the best interests of each Fund and its interestholders to waive part of each Funds Advisory Fee as set forth in Schedule B attached hereto (the Fee Waiver). Each Fund and the Adviser, therefore, have entered into this Agreement in order to effect the Fee Waiver for each Fund at the level specified in Schedule B attached hereto on the terms and conditions set forth in this Agreement; and
WHEREAS, effective December 1, 2019, this Agreement replaces the Master Advisory Fee Waiver Agreement, dated as of December 2, 2016.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows:
1. Contractual Fee Waiver. During the Term (as defined in Section 3 below), the Adviser shall waive a portion of its Advisory Fee with respect to each Fund as set forth in Schedule B attached hereto.
2. Voluntary Fee Waiver/Expense Reimbursement. Nothing herein shall preclude an Adviser from contractually waiving other fees and/or reimbursing expenses of any Fund, voluntarily waiving Advisory Fees it is entitled to from any Fund or voluntarily reimbursing expenses of any Fund as the Adviser, in its discretion, deems reasonable or appropriate. Any such voluntary waiver or voluntary expense reimbursement may be modified or terminated by the Adviser at any time in its sole and absolute discretion without the approval of the Funds Board of Trustees or Board of Directors, as the case may be.
3. Term; Termination.
3.1 Term. This Agreement shall continue in effect with respect to each Fund until the close of business on the date set forth on Schedule A (or such other date as agreed to in writing between the Adviser and the Fund) unless the Fee Waiver is earlier terminated in accordance with
1
Section 3.2. The Term of the Fee Waiver with respect to a Fund may be continued from year to year thereafter provided that each such continuance is specifically approved by the Adviser and the Fund (including with respect to the Fund, a majority of the Funds Trustees or Directors, as the case may be, who are not interested persons, as defined in the 1940 Act, of the Fund (the Non-Interested Directors)). Neither the Adviser nor a Fund shall be obligated to extend the Fee Waiver with respect to the Fund.
3.2 Termination. This Agreement may be terminated prior to expiration by any Fund with respect to such Fund without payment of any penalty, upon 90 days prior written notice to the Adviser at its principal place of business (or at an earlier date as may be agreed to by both parties); provided that, such action shall be authorized by resolution of a majority of the Non-Interested Directors of such Fund or by a vote of a majority of the outstanding voting securities of such Fund.
4. Miscellaneous.
4.1 Captions. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect.
4.2 Interpretation. Nothing herein contained shall be deemed to require a Fund to take any action contrary to the Funds Declaration of Trust or Articles of Incorporation, as the case may be, or Bylaws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Funds Board of Trustees or Board of Directors, as the case may be, of its responsibility for and control of the conduct of the affairs of the Fund.
4.3 Limitation of Liability. The obligations and expenses incurred, contracted for or otherwise existing with respect to a Fund shall be enforced against the assets of such Fund and not against the assets of any other Fund.
4.4 Definitions. Any question of interpretation of any term or provision of this Agreement, including but not limited to the computations of average daily net assets or of any Advisory Fee, and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the relevant Advisory Agreement between the Adviser and the Fund or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act, as applicable, and to interpretations thereof, if any, by the United States Courts or in the absence of any controlling decision of any such Court, by rules, regulations or orders of the Securities and Exchange Commission (SEC) issued pursuant to the 1940 Act. In addition, if the effect of a requirement of the 1940 Act reflected in any provision of this Agreement is revised by rule, regulation or order of the SEC, that provision will be deemed to incorporate the effect of that rule, regulation or order. Otherwise the provisions of this Agreement will be interpreted in accordance with the substantive laws of the State of New York.
4.5 Business Trusts. With respect to a Fund which is a business trust, this Agreement is executed by or on behalf of the trustees of the Fund solely in their capacity as such trustees, and shall not constitute their personal obligation either jointly or severally in their individual
2
capacities. In accordance with the Funds charter, no trustee, shareholder, officer, employee or agent of the Fund shall be held to any personal liability, nor shall resort be had to their private property for the satisfaction of any obligation or claim or otherwise under this Agreement and the Fund shall be solely liable therefor; all parties hereto shall look solely to the Fund property for the payment of any claim, or the performance of any obligation, hereunder.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the day and year first above written.
EACH OF THE FUNDS LISTED ON SCHEDULE A ATTACHED HERETO | ||||
By: |
/s/ John M. Perlowski |
|||
Name: | John M. Perlowski | |||
Title: | President and Chief Executive Officer | |||
BLACKROCK ADVISORS, LLC | ||||
By: |
/s/ Neal J. Andrews |
|||
Name: | Neal J. Andrews | |||
Title: | Managing Director |
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SCHEDULE A
Amended and Restated
Master Advisory Fee Waiver Agreement
(Dated as of December 1, 2019)
TICKER |
FUND |
EXPIRATION
DATE |
||||
1. | BBN | BlackRock Taxable Municipal Bond Trust | June 30, 2021 | |||
2. | BFZ | BlackRock California Municipal Income Trust | June 30, 2021 | |||
3. | BHK | BlackRock Core Bond Trust | June 30, 2021 | |||
4. | HYT | BlackRock Corporate High Yield Fund, Inc. | June 30, 2021 | |||
5. | BTZ | BlackRock Credit Allocation Income Trust | June 30, 2021 | |||
6. | DSU | BlackRock Debt Strategies Fund, Inc. | June 30, 2021 | |||
7. | BGR | BlackRock Energy and Resources Trust | June 30, 2021 | |||
8. | CII | BlackRock Enhanced Capital and Income Fund, Inc. | June 30, 2021 | |||
9. | BDJ | BlackRock Enhanced Equity Dividend Trust | June 30, 2021 | |||
10. | EGF | BlackRock Enhanced Government Fund, Inc. | June 30, 2021 | |||
11. | FRA | BlackRock Floating Rate Income Strategies Fund, Inc. | June 30, 2021 | |||
12. | BGT | BlackRock Floating Rate Income Trust | June 30, 2021 | |||
13. | BFO | BlackRock Florida Municipal 2020 Term Trust | June 30, 2021 | |||
14. | BOE | BlackRock Enhanced Global Dividend Trust | June 30, 2021 | |||
15. | BME | BlackRock Health Sciences Trust | June 30, 2021 | |||
16. | BKT | BlackRock Income Trust, Inc. | June 30, 2021 | |||
17. | BGY | BlackRock Enhanced International Dividend Trust | June 30, 2021 | |||
18. | BKN | BlackRock Investment Quality Municipal Trust, Inc. | June 30, 2021 | |||
19. | BLW | BlackRock Limited Duration Income Trust | June 30, 2021 | |||
20. | BTA | BlackRock Long-Term Municipal Advantage Trust | June 30, 2021 | |||
21. | BZM | BlackRock Maryland Municipal Bond Trust | June 30, 2021 | |||
22. | MHE | BlackRock Massachusetts Tax-Exempt Trust | June 30, 2021 |
5
TICKER |
FUND |
EXPIRATION
DATE |
||||
23. | BIT | BlackRock Multi-Sector Income Trust | June 30, 2021 | |||
24. | MUI | BlackRock Muni Intermediate Duration Fund, Inc. | June 30, 2021 | |||
25. | MNE | BlackRock Muni New York Intermediate Duration Fund, Inc. | June 30, 2021 | |||
26. | MUA | BlackRock MuniAssets Fund, Inc. | June 30, 2021 | |||
27. | BKK | BlackRock Municipal 2020 Term Trust | June 30, 2021 | |||
28. | BBK | BlackRock Municipal Bond Trust | June 30, 2021 | |||
29. | BAF | BlackRock Municipal Income Investment Quality Trust | June 30, 2021 | |||
30. | BBF | BlackRock Municipal Income Investment Trust | June 30, 2021 | |||
31. | BYM | BlackRock Municipal Income Quality Trust | June 30, 2021 | |||
32. | BFK | BlackRock Municipal Income Trust | June 30, 2021 | |||
33. | BLE | BlackRock Municipal Income Trust II | June 30, 2021 | |||
34. | BTT | BlackRock Municipal 2030 Target Term Trust | June 30, 2021 | |||
35. | MEN | BlackRock MuniEnhanced Fund, Inc. | June 30, 2021 | |||
36. | MUC | BlackRock MuniHoldings California Quality Fund, Inc. | June 30, 2021 | |||
37. | MUH | BlackRock MuniHoldings Fund II, Inc. | June 30, 2021 | |||
38. | MHD | BlackRock MuniHoldings Fund, Inc. | June 30, 2021 | |||
39. | MFL | BlackRock MuniHoldings Investment Quality Fund | June 30, 2021 | |||
40. | MUJ | BlackRock MuniHoldings New Jersey Quality Fund, Inc. | June 30, 2021 | |||
41. | MHN | BlackRock MuniHoldings New York Quality Fund, Inc. | June 30, 2021 | |||
42. | MUE | BlackRock MuniHoldings Quality Fund II, Inc. | June 30, 2021 | |||
43. | MUS | BlackRock MuniHoldings Quality Fund, Inc. | June 30, 2021 | |||
44. | MVT | BlackRock MuniVest Fund II, Inc. | June 30, 2021 | |||
45. | MVF | BlackRock MuniVest Fund, Inc. | June 30, 2021 | |||
46. | MZA | BlackRock MuniYield Arizona Fund, Inc. | June 30, 2021 | |||
47. | MYC | BlackRock MuniYield California Fund, Inc. | June 30, 2021 | |||
48. | MCA | BlackRock MuniYield California Quality Fund, Inc. | June 30, 2021 | |||
49. | MYD | BlackRock MuniYield Fund, Inc. | June 30, 2021 | |||
50. | MYF | BlackRock MuniYield Investment Fund | June 30, 2021 | |||
51. | MFT | BlackRock MuniYield Investment Quality Fund | June 30, 2021 | |||
52. | MIY | BlackRock MuniYield Michigan Quality Fund, Inc. | June 30, 2021 | |||
53. | MYJ | BlackRock MuniYield New Jersey Fund, Inc. | June 30, 2021 | |||
54. | MYN | BlackRock MuniYield New York Quality Fund, Inc. | June 30, 2021 |
6
TICKER |
FUND |
EXPIRATION
DATE |
||||
55. | MPA | BlackRock MuniYield Pennsylvania Quality Fund | June 30, 2021 | |||
56. | MQT | BlackRock MuniYield Quality Fund II, Inc. | June 30, 2021 | |||
57. | MYI | BlackRock MuniYield Quality Fund III, Inc. | June 30, 2021 | |||
58. | MQY | BlackRock MuniYield Quality Fund, Inc. | June 30, 2021 | |||
59. | BQH | BlackRock New York Municipal Bond Trust | June 30, 2021 | |||
60. | BSE | BlackRock New York Municipal Income Quality Trust | June 30, 2021 | |||
61. | BNY | BlackRock New York Municipal Income Trust | June 30, 2021 | |||
62. | BFY | BlackRock New York Municipal Income Trust II | June 30, 2021 | |||
63. | BCX | BlackRock Resources & Commodities Strategy Trust | June 30, 2021 | |||
64. | BST | BlackRock Science and Technology Trust | June 30, 2021 | |||
65. | BUI | BlackRock Utilities, Infrastructure & Power Opportunities Trust | June 30, 2021 | |||
66. | BHV | BlackRock Virginia Municipal Bond Trust | June 30, 2021 | |||
67. | BSD | The BlackRock Strategic Municipal Trust | June 30, 2021 | |||
68. | BGIO | BlackRock 2022 Global Income Opportunity Trust | June 30, 2021 | |||
69. | | BlackRock Multi-Sector Opportunities Trust | June 30, 2021 | |||
70. | | BlackRock Multi-Sector Opportunities Trust II | June 30, 2021 | |||
71. | | BlackRock Credit Strategies Fund | June 30, 2021 | |||
72. | BSTZ | BlackRock Science and Technology Trust II | June 30, 2021 |
7
Schedule B
Amended and Restated Master Advisory Fee Waiver Agreement
(Dated as of December 1, 2019)
BlackRock Advisors, LLC will waive its investment advisory fees with respect to any portion of the Funds assets estimated to be attributable to investments in equity and fixed-income mutual funds and exchange-traded funds managed by BlackRock Advisors, LLC or its affiliates.
In addition, BlackRock Advisors, LLC will waive its investment advisory fees by the amount of investment advisory fees the Fund pays to BlackRock Advisors, LLC or its affiliates indirectly through its investment in money market funds advised by BlackRock Advisors, LLC or its affiliates.
8
Exhibit (6)(c)
Amendment No. 1 to Amended and Restated Master Advisory Fee Waiver Agreement
This AMENDMENT NO. 1 (this Amendment) to the Amended and Restated Master Advisory Fee Waiver Agreement dated December 1, 2019 (the Agreement) is made as of this 24th day of January, 2020, by and among BlackRock Advisors, LLC (the Adviser) and each investment company listed on Schedule A attached hereto (each, a Fund).
WHEREAS, each Fund is registered under the Investment Company Act of 1940, as amended, as a closed-end management company;
WHEREAS, each Fund that is currently party to the Agreement is organized as a statutory trust under the laws of the State of Delaware, a business trust under the laws of the Commonwealth of Massachusetts or a corporation under the laws of the State of Maryland;
WHEREAS, BlackRock Health Sciences Trust II (the New Fund) is a newly organized statutory trust under the laws of the State of Maryland and desires to be added as a party to the Agreement; and
WHEREAS, the Adviser and the Funds desire to amend and restate Schedule A to the Agreement to reflect the addition of the New Fund as a party to the Agreement.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows:
1. Schedule A to the Agreement is hereby deleted in its entirety and replaced with Schedule A attached hereto.
2.
(a) Except as expressly amended and provided herein, the Agreement shall remain in full force and effect. In the event of a conflict between the terms of this Amendment with respect to the New Fund and the terms of the Agreement, this Amendment shall control.
(b) This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties have caused this Amendment to be signed by their respective officers as of the day and year first above written.
EACH OF THE FUNDS LISTED ON SCHEDULE A ATTACHED HERETO | ||
By: |
/s/ Neal J. Andrews |
|
Name: Neal J. Andrews | ||
Title: Chief Financial Officer | ||
BLACKROCK ADVISORS, LLC | ||
By: |
/s/ Neal J. Andrews |
|
Name: Neal J. Andrews | ||
Title: Managing Director |
[Signature Page to Amendment No. 1 to Amended and Restated Master Advisory Fee Waiver Agreement]
AMENDED AND RESTATED SCHEDULE A
Amended and Restated Master Advisory Fee Waiver Agreement
(Dated as of January 24, 2020)
TICKER |
FUND |
EXPIRATION
DATE |
||||
1. | BBN | BlackRock Taxable Municipal Bond Trust | June 30, 2021 | |||
2. | BFZ | BlackRock California Municipal Income Trust | June 30, 2021 | |||
3. | BHK | BlackRock Core Bond Trust | June 30, 2021 | |||
4. | HYT | BlackRock Corporate High Yield Fund, Inc. | June 30, 2021 | |||
5. | BTZ | BlackRock Credit Allocation Income Trust | June 30, 2021 | |||
6. | DSU | BlackRock Debt Strategies Fund, Inc. | June 30, 2021 | |||
7. | BGR | BlackRock Energy and Resources Trust | June 30, 2021 | |||
8. | CII | BlackRock Enhanced Capital and Income Fund, Inc. | June 30, 2021 | |||
9. | BDJ | BlackRock Enhanced Equity Dividend Trust | June 30, 2021 | |||
10. | EGF | BlackRock Enhanced Government Fund, Inc. | June 30, 2021 | |||
11. | FRA | BlackRock Floating Rate Income Strategies Fund, Inc. | June 30, 2021 | |||
12. | BGT | BlackRock Floating Rate Income Trust | June 30, 2021 | |||
13. | BFO | BlackRock Florida Municipal 2020 Term Trust | June 30, 2021 | |||
14. | BOE | BlackRock Enhanced Global Dividend Trust | June 30, 2021 | |||
15. | BME | BlackRock Health Sciences Trust | June 30, 2021 | |||
16. | BKT | BlackRock Income Trust, Inc. | June 30, 2021 | |||
17. | BGY | BlackRock Enhanced International Dividend Trust | June 30, 2021 | |||
18. | BKN | BlackRock Investment Quality Municipal Trust, Inc. | June 30, 2021 | |||
19. | BLW | BlackRock Limited Duration Income Trust | June 30, 2021 | |||
20. | BTA | BlackRock Long-Term Municipal Advantage Trust | June 30, 2021 |
A-1
TICKER |
FUND |
EXPIRATION
DATE |
||||
21. | BZM | BlackRock Maryland Municipal Bond Trust | June 30, 2021 | |||
22. | MHE | BlackRock Massachusetts Tax-Exempt Trust | June 30, 2021 | |||
23. | BIT | BlackRock Multi-Sector Income Trust | June 30, 2021 | |||
24. | MUI | BlackRock Muni Intermediate Duration Fund, Inc. | June 30, 2021 | |||
25. | MNE | BlackRock Muni New York Intermediate Duration Fund, Inc. | June 30, 2021 | |||
26. | MUA | BlackRock MuniAssets Fund, Inc. | June 30, 2021 | |||
27. | BKK | BlackRock Municipal 2020 Term Trust | June 30, 2021 | |||
28. | BBK | BlackRock Municipal Bond Trust | June 30, 2021 | |||
29. | BAF | BlackRock Municipal Income Investment Quality Trust | June 30, 2021 | |||
30. | BBF | BlackRock Municipal Income Investment Trust | June 30, 2021 | |||
31. | BYM | BlackRock Municipal Income Quality Trust | June 30, 2021 | |||
32. | BFK | BlackRock Municipal Income Trust | June 30, 2021 | |||
33. | BLE | BlackRock Municipal Income Trust II | June 30, 2021 | |||
34. | BTT | BlackRock Municipal 2030 Target Term Trust | June 30, 2021 | |||
35. | MEN | BlackRock MuniEnhanced Fund, Inc. | June 30, 2021 | |||
36. | MUC | BlackRock MuniHoldings California Quality Fund, Inc. | June 30, 2021 | |||
37. | MUH | BlackRock MuniHoldings Fund II, Inc. | June 30, 2021 | |||
38. | MHD | BlackRock MuniHoldings Fund, Inc. | June 30, 2021 | |||
39. | MFL | BlackRock MuniHoldings Investment Quality Fund | June 30, 2021 | |||
40. | MUJ | BlackRock MuniHoldings New Jersey Quality Fund, Inc. | June 30, 2021 | |||
41. | MHN | BlackRock MuniHoldings New York Quality Fund, Inc. | June 30, 2021 | |||
42. | MUE | BlackRock MuniHoldings Quality Fund II, Inc. | June 30, 2021 |
A-2
TICKER |
FUND |
EXPIRATION
DATE |
||||
43. | MUS | BlackRock MuniHoldings Quality Fund, Inc. | June 30, 2021 | |||
44. | MVT | BlackRock MuniVest Fund II, Inc. | June 30, 2021 | |||
45. | MVF | BlackRock MuniVest Fund, Inc. | June 30, 2021 | |||
46. | MZA | BlackRock MuniYield Arizona Fund, Inc. | June 30, 2021 | |||
47. | MYC | BlackRock MuniYield California Fund, Inc. | June 30, 2021 | |||
48. | MCA | BlackRock MuniYield California Quality Fund, Inc. | June 30, 2021 | |||
49. | MYD | BlackRock MuniYield Fund, Inc. | June 30, 2021 | |||
50. | MYF | BlackRock MuniYield Investment Fund | June 30, 2021 | |||
51. | MFT | BlackRock MuniYield Investment Quality Fund | June 30, 2021 | |||
52. | MIY | BlackRock MuniYield Michigan Quality Fund, Inc. | June 30, 2021 | |||
53. | MYJ | BlackRock MuniYield New Jersey Fund, Inc. | June 30, 2021 | |||
54. | MYN | BlackRock MuniYield New York Quality Fund, Inc. | June 30, 2021 | |||
55. | MPA | BlackRock MuniYield Pennsylvania Quality Fund | June 30, 2021 | |||
56. | MQT | BlackRock MuniYield Quality Fund II, Inc. | June 30, 2021 | |||
57. | MYI | BlackRock MuniYield Quality Fund III, Inc. | June 30, 2021 | |||
58. | MQY | BlackRock MuniYield Quality Fund, Inc. | June 30, 2021 | |||
59. | BQH | BlackRock New York Municipal Bond Trust | June 30, 2021 | |||
60. | BSE | BlackRock New York Municipal Income Quality Trust | June 30, 2021 | |||
61. | BNY | BlackRock New York Municipal Income Trust | June 30, 2021 | |||
62. | BFY | BlackRock New York Municipal Income Trust II | June 30, 2021 | |||
63. | BCX | BlackRock Resources & Commodities Strategy Trust | June 30, 2021 | |||
64. | BST | BlackRock Science and Technology Trust | June 30, 2021 |
A-3
TICKER |
FUND |
EXPIRATION
DATE |
||||
65. | BUI | BlackRock Utilities, Infrastructure & Power Opportunities Trust | June 30, 2021 | |||
66. | BHV | BlackRock Virginia Municipal Bond Trust | June 30, 2021 | |||
67. | BSD | The BlackRock Strategic Municipal Trust | June 30, 2021 | |||
68. | BGIO | BlackRock 2022 Global Income Opportunity Trust | June 30, 2021 | |||
69. | | BlackRock Multi-Sector Opportunities Trust | June 30, 2021 | |||
70. | | BlackRock Multi-Sector Opportunities Trust II | June 30, 2021 | |||
71. | | BlackRock Credit Strategies Fund | June 30, 2021 | |||
72. | BSTZ | BlackRock Science and Technology Trust II | June 30, 2021 | |||
73. | BMEZ | BlackRock Health Sciences Trust II | June 30, 2021 |
A-4
Exhibit (6)(d)
Amendment No. 2 to Amended and Restated Master Advisory Fee Waiver Agreement
This AMENDMENT NO. 2 (this Amendment) to the Amended and Restated Master Advisory Fee Waiver Agreement dated December 1, 2019 (the Agreement) is made as of this 18th day of September, 2020, by and among BlackRock Advisors, LLC (the Adviser) and each investment company listed on Schedule A attached hereto (each, a Fund).
WHEREAS, each Fund is registered under the Investment Company Act of 1940, as amended, as a closed-end management company;
WHEREAS, each Fund that is currently party to the Agreement is organized as a statutory trust under the laws of the State of Delaware, a business trust under the laws of the Commonwealth of Massachusetts, a corporation under the laws of the State of Maryland or a statutory trust under the laws of the State of Maryland;
WHEREAS, BlackRock Capital Allocation Trust (the New Fund) is a newly organized statutory trust under the laws of the State of Maryland and desires to be added as a party to the Agreement; and
WHEREAS, the Adviser and the Funds desire to amend and restate Schedule A to the Agreement to reflect the addition of the New Fund as a party to the Agreement.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows:
1. Schedule A to the Agreement is hereby deleted in its entirety and replaced with Schedule A attached hereto.
2.
(a) |
Except as expressly amended and provided herein, the Agreement shall remain in full force and effect. In the event of a conflict between the terms of this Amendment with respect to the New Fund and the terms of the Agreement, this Amendment shall control. |
(b) |
This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. |
[Signature Page Follows]
IN WITNESS WHEREOF, the parties have caused this Amendment to be signed by their respective officers as of the day and year first above written.
EACH OF THE FUNDS LISTED ON SCHEDULE A ATTACHED HERETO | ||
By: |
/s/ Neal J. Andrews |
|
Name: Neal J. Andrews | ||
Title: Chief Financial Officer | ||
BLACKROCK ADVISORS, LLC |
||
By: |
/s/ Neal J. Andrews |
|
Name: Neal J. Andrews | ||
Title: Managing Director |
[Signature Page to Amendment No. 2 to Amended and Restated Master Advisory Fee Waiver Agreement]
AMENDED AND RESTATED SCHEDULE A
Closed-End Fund Master Advisory Fee Waiver Agreement
(Dated as of September 18, 2020)
TICKER | FUND |
EXPIRATION
DATE |
||||
1. |
BBN | BlackRock Taxable Municipal Bond Trust | June 30, 2022 | |||
2. |
BFZ | BlackRock California Municipal Income Trust | June 30, 2022 | |||
3. |
BHK | BlackRock Core Bond Trust | June 30, 2022 | |||
4. |
HYT | BlackRock Corporate High Yield Fund, Inc. | June 30, 2022 | |||
5. |
BTZ | BlackRock Credit Allocation Income Trust | June 30, 2022 | |||
6. |
DSU | BlackRock Debt Strategies Fund, Inc. | June 30, 2022 | |||
7. |
BGR | BlackRock Energy and Resources Trust | June 30, 2022 | |||
8. |
CII | BlackRock Enhanced Capital and Income Fund, Inc. | June 30, 2022 | |||
9. |
BDJ | BlackRock Enhanced Equity Dividend Trust | June 30, 2022 | |||
10. |
EGF | BlackRock Enhanced Government Fund, Inc. | June 30, 2022 | |||
11. |
FRA | BlackRock Floating Rate Income Strategies Fund, Inc. | June 30, 2022 | |||
12. |
BGT | BlackRock Floating Rate Income Trust | June 30, 2022 | |||
13. |
BFO | BlackRock Florida Municipal 2020 Term Trust | June 30, 2022 | |||
14. |
BOE | BlackRock Enhanced Global Dividend Trust | June 30, 2022 | |||
15. |
BME | BlackRock Health Sciences Trust | June 30, 2022 | |||
16. |
BKT | BlackRock Income Trust, Inc. | June 30, 2022 | |||
17. |
BGY | BlackRock Enhanced International Dividend Trust | June 30, 2022 | |||
18. |
BKN | BlackRock Investment Quality Municipal Trust, Inc. | June 30, 2022 | |||
19. |
BLW | BlackRock Limited Duration Income Trust | June 30, 2022 |
A-1
TICKER | FUND |
EXPIRATION
DATE |
||||
20. |
BTA | BlackRock Long-Term Municipal Advantage Trust | June 30, 2022 | |||
21. |
BZM | BlackRock Maryland Municipal Bond Trust | June 30, 2022 | |||
22. |
MHE | BlackRock Massachusetts Tax-Exempt Trust | June 30, 2022 | |||
23. |
BIT | BlackRock Multi-Sector Income Trust | June 30, 2022 | |||
24. |
MUI | BlackRock Muni Intermediate Duration Fund, Inc. | June 30, 2022 | |||
25. |
MUA | BlackRock MuniAssets Fund, Inc. | June 30, 2022 | |||
26. |
BKK | BlackRock Municipal 2020 Term Trust | June 30, 2022 | |||
27. |
BBK | BlackRock Municipal Bond Trust | June 30, 2022 | |||
28. |
BAF | BlackRock Municipal Income Investment Quality Trust | June 30, 2022 | |||
29. |
BBF | BlackRock Municipal Income Investment Trust | June 30, 2022 | |||
30. |
BYM | BlackRock Municipal Income Quality Trust | June 30, 2022 | |||
31. |
BFK | BlackRock Municipal Income Trust | June 30, 2022 | |||
32. |
BLE | BlackRock Municipal Income Trust II | June 30, 2022 | |||
33. |
BTT | BlackRock Municipal 2030 Target Term Trust | June 30, 2022 | |||
34. |
MEN | BlackRock MuniEnhanced Fund, Inc. | June 30, 2022 | |||
35. |
MUC | BlackRock MuniHoldings California Quality Fund, Inc. | June 30, 2022 | |||
36. |
MUH | BlackRock MuniHoldings Fund II, Inc. | June 30, 2022 | |||
37. |
MHD | BlackRock MuniHoldings Fund, Inc. | June 30, 2022 | |||
38. |
MFL | BlackRock MuniHoldings Investment Quality Fund | June 30, 2022 | |||
39. |
MUJ | BlackRock MuniHoldings New Jersey Quality Fund, Inc. | June 30, 2022 | |||
40. |
MHN | BlackRock MuniHoldings New York Quality Fund, Inc. | June 30, 2022 | |||
41. |
MUE | BlackRock MuniHoldings Quality Fund II, Inc. | June 30, 2022 |
A-2
TICKER | FUND |
EXPIRATION
DATE |
||||
42. |
MUS | BlackRock MuniHoldings Quality Fund, Inc. | June 30, 2022 | |||
43. |
MVT | BlackRock MuniVest Fund II, Inc. | June 30, 2022 | |||
44. |
MVF | BlackRock MuniVest Fund, Inc. | June 30, 2022 | |||
45. |
MZA | BlackRock MuniYield Arizona Fund, Inc. | June 30, 2022 | |||
46. |
MYC | BlackRock MuniYield California Fund, Inc. | June 30, 2022 | |||
47. |
MCA | BlackRock MuniYield California Quality Fund, Inc. | June 30, 2022 | |||
48. |
MYD | BlackRock MuniYield Fund, Inc. | June 30, 2022 | |||
49. |
MYF | BlackRock MuniYield Investment Fund | June 30, 2022 | |||
50. |
MFT | BlackRock MuniYield Investment Quality Fund | June 30, 2022 | |||
51. |
MIY | BlackRock MuniYield Michigan Quality Fund, Inc. | June 30, 2022 | |||
52. |
MYJ | BlackRock MuniYield New Jersey Fund, Inc. | June 30, 2022 | |||
53. |
MYN | BlackRock MuniYield New York Quality Fund, Inc. | June 30, 2022 | |||
54. |
MPA | BlackRock MuniYield Pennsylvania Quality Fund | June 30, 2022 | |||
55. |
MQT | BlackRock MuniYield Quality Fund II, Inc. | June 30, 2022 | |||
56. |
MYI | BlackRock MuniYield Quality Fund III, Inc. | June 30, 2022 | |||
57. |
MQY | BlackRock MuniYield Quality Fund, Inc. | June 30, 2022 | |||
58. |
BLJ | BlackRock New Jersey Municipal Bond Trust | June 30, 2022 | |||
59. |
BNJ | BlackRock New Jersey Municipal Income Trust | June 30, 2022 | |||
60. |
BQH | BlackRock New York Municipal Bond Trust | June 30, 2022 | |||
61. |
BSE | BlackRock New York Municipal Income Quality Trust | June 30, 2022 | |||
62. |
BNY | BlackRock New York Municipal Income Trust | June 30, 2022 | |||
63. |
BFY | BlackRock New York Municipal Income Trust II | June 30, 2022 |
A-3
TICKER | FUND |
EXPIRATION
DATE |
||||
64. |
BCX | BlackRock Resources & Commodities Strategy Trust | June 30, 2022 | |||
65. |
BST | BlackRock Science and Technology Trust | June 30, 2022 | |||
66. |
BUI | BlackRock Utilities, Infrastructure & Power Opportunities Trust | June 30, 2022 | |||
67. |
BHV | BlackRock Virginia Municipal Bond Trust | June 30, 2022 | |||
68. |
BSD | The BlackRock Strategic Municipal Trust | June 30, 2022 | |||
69. |
BGIO | BlackRock 2022 Global Income Opportunities Trust | June 30, 2022 | |||
70. |
| BlackRock Multi-Sector Opportunities Trust | June 30, 2022 | |||
71. |
| BlackRock Multi-Sector Opportunities Trust II | June 30, 2022 | |||
72. |
| BlackRock Credit Strategies Fund | June 30, 2022 | |||
73. |
BSTZ | BlackRock Science and Technology Trust II | June 30, 2022 | |||
74. |
BMEZ | BlackRock Health Sciences Trust II | June 30, 2022 | |||
75. |
BCAT | BlackRock Capital Allocation Trust | June 30, 2022 |
A-4
Exhibit (8)
THE BLACKROCK FUND COMPLEX
THIRD AMENDED AND RESTATED DEFERRED COMPENSATION PLAN
(Effective as of January 1, 2019)
The purpose of the BlackRock Fund Complex Third Amended and Restated Deferred Compensation Plan (the Plan) is to provide eligible trustees of Participating Funds the opportunity to defer the receipt of all or a portion of the amounts payable to them as compensation for services rendered as members of the Board of the respective funds. The terms and conditions applicable to Deferred Compensation that is not Grandfathered Deferred Compensation shall be governed by the terms of Appendix A attached hereto.
1. |
DEFINITIONS |
1.1 Definitions. Unless a different meaning is plainly implied by the context, the following terms as used in the Plan shall have the following meanings:
The term Administrator shall mean BlackRock Advisors, LLC, in its capacity as the administrator of the Plan on behalf of the Participating Funds; provided, that, BlackRock Advisors, LLC may hire consultants or other third parties to provide administrative services in connection with the Plan.
The term Advisor shall mean BlackRock Advisors, LLC and its affiliates.
The term Board shall mean the Board of Trustees or Board of Directors of each respective Participating Fund.
The term Deferral Share Account shall mean a book entry account maintained to reflect the number and value of shares of Eligible Investments that the Administrator determines could have been purchased with an Eligible Trustees Deferred Compensation as provided in this Plan and any earnings thereon.
The term Eligible Investment shall mean a fund managed by the Advisor and designated by the Participating Funds from time to time as an investment medium in which such Trustees Deferred Compensation shall be deemed to be invested.
The term Eligible Trustee shall mean a member of the Board who is not an interested person of a Participating Fund or the Adviser, as such term is defined under Section 2(a)(19) of the Investment Company Act of 1940, as amended (the 1940 Act).
The term Exchange shall mean the principal stock exchange on which common shares of an Eligible Investment that is a closed-end fund trade.
The term Fair Market Value shall mean, with respect to a date, on a per share basis, (a) for an Eligible Investment that is a listed closed-end fund, the closing price of such Eligible Investment, as reported on the consolidated tape of the Exchange on such date or, if the Exchange is closed on such date, the next succeeding date on which it is open and (b) for an Eligible Investment that is an open-end fund, the net asset value as determined at the close of business on the New York Stock Exchange (NYSE) (generally 4:00 p.m. Eastern time) or, if the NYSE is closed, the next succeeding date on which it is open.
The term Grandfather Deferred Compensation shall mean all Deferred Compensation amounts which were earned and vested under the Plan as of December 31, 2004. For the avoidance of doubt, neither this amendment and restatement nor any prior amendments or restatements to the Plan are intended to constitute a material modification with respect to any amount of Grandfathered Deferred Compensation for purposes of Section 409A of the Internal Revenue Code of 1986, as amended.
The term Participating Funds shall mean those registered management investment companies for which the Advisor serves or will serve in the future as investment manager, whether existing at the time of adoption of the Plan
or established at a later date, designated by each respective Board as a fund from which compensation may be deferred by an Eligible Trustee. Participating Funds shall be listed on Schedule A to the Plan from time to time, provided that failure to list a Participating Fund on Schedule A shall not affect its status as a Participating Fund.
The term Valuation Date shall mean the last business day of each calendar quarter and any other day upon which the Participating Fund makes valuations of the Deferral Share Accounts.
1.2 Trustees and Directors. Where appearing in the Plan, Trustee shall also refer to Director and Board of Trustees shall also refer to Board of Directors.
1.3 Separate Plan for each Participating Fund. The Plan is drafted, and shall be construed, as a separate Plan between each Eligible Trustee and each Participating Fund.
2. |
DEFERRALS |
2.1 Deferral Elections.
(a) An Eligible Trustee that elects to participate in the Plan (a Participant) may defer receipt of up to 50% of all annual compensation (including fees for attending meetings) earned by such Eligible Trustee for serving as a member of the Board or as a member of any committee (or subcommittee of such committee) of the Board of which such Eligible Trustee from time to time may be a member (the Deferred Compensation). Expenses of attending meetings of the Board, committees of the Board or subcommittees of such committees or other reimbursable expenses may not be deferred.
(b) Deferred Compensation shall be withheld from each payment of compensation by the Participating Fund to the Participant based upon the percentage amount elected by the Participant under Section 2.3 hereof and pursuant to the Participants Election Form.
2.2 Manner of Election.
(a) An Eligible Trustee shall elect to participate in the Plan and defer compensation by completing, signing and filing with the Participating Funds an election to defer in such written form as may be prescribed (the Election). The Election shall include:
(i) The percentage of compensation to be deferred;
(ii) The method of payment of Deferred Compensation (i.e., in a lump sum or the number of installments);
(iii) The time or times of payment of the Deferred Compensation; and
(iv) Any beneficiary(ies) designated by the Participant pursuant to Section 3.2 of the Plan.
(b) Each Participants receipt of compensation shall be deferred until the first to occur of any of the following events:
(i) The date which such Participant ceases to be a Trustee of the Participating Fund;
(ii) A date selected by such Participant as specified on the Participants Election;
(iii) A date on which some future event occurs which is not within the Participants control, as specified on the Participants Election;
(iv) Upon the death of the Participant;
(v) In the sole discretion of the Participating Fund, upon disability or financial hardship of the Participant;
(vi) The effective date of the sale or liquidation of the Participating Fund or to comply with applicable law; or
(vii) Upon termination of the Plan in accordance with Section 4.5 hereof.
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2.3 |
Period of Deferrals. |
(a) Any Election by an Eligible Trustee pursuant to the Plan shall be irrevocable from and after the date on which such Election is filed with the Participating Fund and shall be effective to defer compensation of an Eligible Trustee as follows:
(i) As to any Eligible Trustee in office on the original effective date of the Plan (prior to any amendments or restatements) who files an Election no later than thirty (30) days after such effective date, such Election shall be effective to defer any compensation which is earned by the Eligible Trustee after the date of the filing of the Election, or such effective date of the Plan, if later;
(ii) As to any individual who becomes an Eligible Trustee after the original effective date of the Plan and who files an Election within thirty (30) days of becoming an Eligible Trustee, such Election shall be effective to defer any compensation which is earned by the Eligible Trustee after the date of the filing of the Election, or the effective date of the Plan, if later;
(iii) As to any other Eligible Trustee, the Election shall be effective to defer any compensation that is earned from and after the first day of the calendar year next succeeding the calendar year in which the Election is filed; and
(iv) Any Elections in effect on the date this Plan is amended and restated shall remain in effect so that a Participant need not execute new a Election.
(b) A Participant may revoke such Participants Election at any time by filing a written notice of termination with the Participating Fund. Any compensation earned by the Participant after receipt of the notice by the Participating Fund shall be paid currently and no longer deferred as provided in the Plan.
(c) A Participant who has filed a notice to terminate deferral of compensation may thereafter again file a new Election pursuant to Section 2.2(a) hereof effective for any calendar year subsequent to the calendar year in which the new Election is filed.
2.4 |
Valuation of Deferral Share Account. |
(a) Deferred Compensation will be deferred on the date it otherwise would have been paid to a Participant (the Deferral Date). Participating Funds from which Compensation will be deferred will establish a Deferral Share Account for each Participant that will be credited with all or a portion of the Participants Deferred Compensation from time to time in accordance with this Plan. The specific Participating Funds that maintain Deferral Share Accounts will be determined by the Administrator in its sole discretion. The amount initially credited to a Participants Deferral Share Account in connection with each Deferred Compensation amount shall be determined by reference to the number of whole shares of Eligible Investments that the Deferred Compensation could have purchased at the Fair Market Value per share of such Eligible Investments on a date on or about the Deferral Date (less any brokerage fees payable upon the acquisition of shares of such Eligible Investment in the open market). Deferred Compensation shall be credited to the Deferral Share Account as soon as reasonably practicable after the Deferral Date, as determined by the Administrator in its sole discretion. Deferred Compensation not credited to the Deferral Share Account on or about the Deferral Date (e.g., because the remaining amount is not sufficient to purchase an additional whole share of Eligible Investments or for any other reason) shall be credited to the Deferral Share Account as soon as reasonably practicable, as determined by the Administrator in its sole discretion (i.e., as soon as such amount, when taken together with other uncredited amounts, is sufficient to purchase a whole share of an Eligible Investment).
(b) On each Valuation Date, each Deferral Share Account will be credited or debited with the amount of gain or loss that would have been recognized had the Deferral Share Account been invested in the Eligible Investments. If applicable, each Deferral Share Account will be credited with the Fair Market Value of shares that would have been acquired through reinvestment of dividends and capital gains distributed as if the amount of Deferred Compensation represented by such Deferral Share Account had been invested and reinvested in shares of the Eligible Investments. Each Participating Fund shall, from time to time, further adjust the Participants Deferral Share Account to reflect the value which would have been earned as if the amount of Deferred Compensation credited to such Deferral Share Account had been invested and reinvested in shares of the Eligible Investments, as determined by the Administrator in its sole discretion in accordance with this Plan.
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(c) The Deferral Share Account shall be debited to reflect any distributions as of the date such distributions are made in accordance with Section 3 of the Plan.
2.5 |
Investment of Deferral Share Account. |
(a) The Participating Funds shall from time to time designate one or more funds eligible for investment. A Participants deferred amounts shall be allocated among the Eligible Investments in accordance with the allocation percentages set forth on Schedule B to the Plan. If, as the result of the requirement that notional purchases of Eligible Investments be made in whole shares as set forth in Section 2.4 or for any other reason, not all of a Participants Deferred Compensation has been credited to the Deferral Share Account, the cash balance of such Deferred Compensation shall be held until the next Valuation Date on which the Administrator determines, in its sole discretion, that it is reasonably practicable to make a notional purchase (debiting the cash balance of the Participants Deferred Compensation) of one or more Eligible Investments.
(b) The Participating Funds may, from time to time, remove any fund from or add any fund to the list of Eligible Investments or amend the applicable allocation percentages set forth on Schedule B to the Plan. If the Participating Funds discontinue an Eligible Investment, the Administrator will redirect amounts deferred in the discontinued Eligible Investment to other Eligible Investments currently in effect.
3. |
DISTRIBUTIONS FROM DEFERRAL SHARE ACCOUNT |
3.1 |
Distribution Election. |
The aggregate value of a Participants Deferral Share Account and any Deferred Compensation held in cash and not yet credited to a Participants Deferral Share Account will be paid in a lump sum or in ten (10) or fewer annual installments, as specified in the Participants Election (or Elections). Distributions will be made as of the first business day of January of the calendar year following the calendar year in which the Participant ceases being a Trustee or on such other dates as the Participant may specify in such Election (or Elections), which shall not be earlier than six (6) months following the Election.
(a) If a Participant elects installment payments, the unpaid balance in the Participants Deferral Share Account shall continue to accrue earnings and dividend equivalents (as applicable), computed in accordance with the provisions of Section 2.4, and shall be prorated and paid over the installment period. The amount of the first payment shall be a fraction of the then Fair Market Value of such Participants Deferral Share Account, the numerator of which is one, and the denominator of which is the total number of installments; provided that cash not yet credited to a Participants Deferral Share Account, if any, will be added to such amount as a part of the first payment. The amount of each subsequent payment shall be a fraction of the then Fair Market Value of the Participants Deferral Share Account remaining after the prior payment, the numerator of which is one and the denominator of which is the total number of installments elected minus the number of installments previously paid.
(b) All payments shall be in cash; provided, however, if a lump sum payment is elected, the Participant may elect to receive payment in full and fractional shares of the Eligible Investments at Fair Market Value at the time of payment of the amounts credited to the Participants Deferral Share Account; provided, further, that any Deferred Compensation held in cash will be distributed in cash. Any such election shall be filed in writing by the Participant with the Participating Fund at least ten (10) business days prior to the date which such payment is to be made.
(c) A Participant may at any time, and from time to time, change any distribution election applicable to such Participants Deferral Share Account, provided that no election to change the timing of any distribution shall be effective unless it is made in writing and received by the Participating Fund at least six (6) months prior to the earlier of (i) the time at which the Participant ceases to be a Trustee or (ii) the time such distribution shall commence.
3.2 Death Prior to Complete Distribution. In the event of a Participants death prior to distribution of all amounts in such Participants Deferral Share Account, notwithstanding any Election made by the Participant and notwithstanding any other provision set forth herein, the value of such Deferral Share Account plus any Deferred
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Compensation held in cash shall be paid in a lump sum in accordance with the provisions of the Plan as soon as reasonably possible to the Participants designated beneficiary(ies) (the Beneficiary) or, if such Beneficiary(ies) does not survive the Participant or no beneficiary is designated, to such Participants estate. Any Beneficiary(ies) so designated by a Participant may be changed at any time by notice in writing from such Participant to the Participating Fund. All payments under this Section 3.2 shall otherwise be paid in accordance with Section 3.1 hereof.
3.3 |
Payment in Discretion of Participating Funds. |
Amounts deferred hereunder, based on the then adjusted value of the Participants Deferral Share Account as of the Valuation Date next following plus any Deferred Compensation held in cash, may become payable to the Participant in the discretion of the Participating Fund:
(a) Disability. If the Participating Fund finds on the basis of medical evidence satisfactory to it that the Participant is prevented from engaging in any suitable gainful employment or occupation and that such disability will be permanent and continuous during the remainder of such Participants life, the Participating Fund shall distribute the amounts in the Participants Deferral Share Account plus any Deferred Compensation held in cash in a lump sum or in the number of installments previously selected by the Participant.
(b) Financial Hardship. If the Participant requests and if the Participant provides evidence of financial hardship, the Participating Fund may, in its sole and absolute discretion, permit a distribution of all or a portion of the Participants Deferral Share Account plus any Deferred Compensation held in cash prior to the date on which payments would have commenced under Section 3.1.
3.4 |
Acceleration of Payments. |
(a) In the event of the liquidation, dissolution or winding up of a Participating Fund or the distribution of all or substantially all of a Participating Funds assets and property to its shareholders (for this purpose a sale, conveyance or transfer of a Participating Funds assets to a trust, partnership, association or another corporation in exchange for cash, shares or other securities with the transfer being made subject to, or with the assumption by the transferee of, the liabilities of such Participating Fund shall not be deemed a termination of such Participating Fund or such a distribution), the entire unpaid balance of the Participants Deferral Share Account plus any Deferred Compensation held in cash of such Participating Fund shall be paid in a lump sum as of the effective date thereof.
(b) The Participating Funds are empowered to accelerate the payment of deferred amounts to all Participants and Beneficiaries in the event that there is a change in law which would have the effect of adversely affecting such persons rights and benefits under the Plan if acceleration did not occur.
4. |
MISCELLANEOUS |
4.1 |
Statements of Account. |
The Participating Funds will furnish each Participant with a statement setting forth the value of such Participants Deferral Share Account plus any Deferred Compensation held in cash as of the end of each calendar year and all credits and debits of such Deferral Share Account or to any Deferred Compensation held in cash during such year. Such statements will be furnished no later than sixty (60) days after the end of each calendar year.
4.2 |
Rights in Deferral Share Account. |
Credits to the Deferral Share Accounts or to any Deferred Compensation held in cash shall (i) remain part of the general assets of the Participating Funds, (ii) at all times be the sole and absolute property of the Participating Funds and (iii) in no event be deemed to constitute a fund, trust or collateral security for the payment of the Deferred Compensation to which Participants are entitled. The right of the Participant or any Beneficiary or estate to receive future payment of Deferred Compensation under the provisions of the Plan shall be an unsecured claim against the general assets of the Participating Funds, if any, available at the time of payment. A Participating Fund shall not reserve or set aside funds for the payment of its obligations hereunder by any form of trust, escrow, or similar arrangement. The arrangement described in this Plan shall be unfunded for U.S. federal income tax purposes and for purposes of the Employee Retirement Security Income Act of 1974, as amended.
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4.3 |
Non-Assignability. |
The rights and benefits of Participants under the Plan and any other person or persons to whom payments may be made pursuant to the Plan shall not be subject to alienation, assignment, pledge, transfer or other disposition, except as otherwise provided by law.
4.4 |
Interpretation and Administration. |
The Participating Funds shall have the general authority to interpret, construe and implement provisions of the Plan and to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as shall be from time to time, deemed advisable. Any determination by the Participating Funds shall be final and conclusive.
4.5 |
Amendment and Termination. |
The Participating Funds may in their sole discretion amend or terminate the Plan at any time. No amendment or termination shall adversely affect any then existing deferred amounts or rights under the Plan. Upon termination of the Plan, the remaining balance of the Participants Deferral Share Account plus any Deferred Compensation held in cash shall be paid to the Participant (or to a beneficiary, as the case may be), in a lump sum as soon as practicable but no more than thirty (30) days following termination of the Plan.
4.6 |
Incapacity. |
If the Participating Funds shall receive satisfactory evidence that the Participant or any Beneficiary entitled to receive any benefit under the Plan is, at the time when such benefit becomes payable, a minor, or is physically or mentally incompetent to receive such benefit and to give a valid release therefor, and that another person or an institution is then maintaining or has custody of the Participant or Beneficiary and that no guardian, committee or other representative of the estate of the Participant or Beneficiary shall have been duly appointed, the Participating Funds may make payment of such benefit otherwise payable to the Participant or Beneficiary to such other person or institution and the release of such other person or institution shall be a valid and complete discharge for the payment of such benefit.
4.7 |
Payments Due Missing Persons. |
The Participating Funds shall make a reasonable effort to locate all persons entitled to benefits under the Plan. However, notwithstanding any provisions of the Plan to the contrary, if, after a period of five (5) years from the date such benefit shall be due, any such persons entitled to benefits have not been located, their rights under the Plan shall stand suspended. Before this provision becomes operative, the Participating Funds shall send a certified letter to all such persons to their last known address advising them that their benefits under the Plan shall be suspended. Any such suspended amounts shall be held by the Participating Funds for a period of three (3) additional years (or a total of eight (8) years from the time the benefits first become payable) and thereafter, if unclaimed, such amounts shall be forfeited, subject to applicable laws in the jurisdiction in which the respective Participating Fund is organized.
4.8 |
Agents. |
The Participating Funds may employ agents and provide for such clerical, legal, actuarial, accounting, advisory or other services as they deem necessary to perform their duties under the Plan. The Participating Funds shall bear the cost of such services and all other expenses incurred in connection with the administration of the Plan.
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4.9 |
Governing Law. |
All matters concerning the validity, construction and administration of the Plan shall be governed by the laws of the state in which the respective Participating Fund is organized.
4.10 Non-Guarantee |
of Status. |
Nothing contained in the Plan shall be construed as a contract or guarantee of the right of the Participant to be, or remain as, a Trustee of any of the Participating Funds or to receive any, or any particular rate of, compensation from any of the Participating Funds.
4.11 Counsel. |
|
The Participating Funds may consult with legal counsel with respect to the meaning or construction of the Plan, their obligations or duties hereunder or with respect to any action or proceeding or any question of law, and they shall be fully protected with respect to any action taken or omitted by them in good faith pursuant to the advice of legal counsel.
4.12 Entire |
Plan. |
The Plan contains the entire understanding between the Participating Funds and the Participant with respect to the payment of non-qualified elective deferred compensation by the Participating Funds to the Participant.
4.13 Non-liability |
of Administrator and Participating Funds. |
Interpretations of, and determinations (including factual determinations) related to, the Plan made by the Administrator or Participating Funds in good faith, including any determinations of the amounts of the Deferral Share Accounts, shall be conclusive and binding upon all parties; and the Administrator, the Participating Funds and their officers and Trustees shall not incur any liability to the Participant for any such interpretation or determination so made or for any other action taken by it in connection with the Plan in good faith.
4.14 Successors |
and Assigns. |
The Plan shall be binding upon, and shall inure to the benefit of, the Participating Funds and their successors and assigns and to the Participants and their heirs, executors, administrators and personal representatives.
4.15 Severability. |
|
In the event any one or more provisions of the Plan are held to be invalid or unenforceable, such illegality or unenforceability shall not affect the validity or enforceability of the other provisions hereof and such other provisions shall remain in full force and effect unaffected by such invalidity or unenforceability.
4.16 Rule |
16b-3 Compliance. |
It is the intention of the Participating Funds that all transactions under the Plan be exempt from liability imposed by Section 16(b) of the Securities Exchange Act of 1934, as amended. Therefore, if any transaction under the Plan is found not to be in compliance with Section 16(b), the provision of the Plan governing such transaction shall be deemed amended so that the transaction does so comply and is so exempt, to the extent permitted by law and deemed advisable by the Participating Fund, and in all events the Plan shall be construed in favor of its meeting the requirements of an exemption.
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IN WITNESS WHEREOF, each Participating Fund has caused this Plan to be executed by one of its duly authorized officers, as of this day of 2018, to be effective as of January 1, 2019.
By: |
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Name: | ||
Title: |
Witness: |
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Name: | ||
Title: |
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SCHEDULE A
BLACKROCK FUND COMPLEX
THIRD AMENDED AND RESTATED DEFERRED COMPENSATION PLAN
PARTICIPATING FUNDS
Each registered management investment company advised by BlackRock Advisors, LLC and governed by the Board is a Participating Fund except as set forth below:
None
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SCHEDULE B
(Effective as of January 1, 2019)
ELIGIBLE INVESTMENTS
Equities (20% of Total; 10% to Each Eligible Investment)
1. |
BlackRock Enhanced Equity Dividend Trust (NYSE: BDJ) |
2. |
BlackRock Enhanced Capital and Income Fund, Inc. (NYSE: CII) |
Fixed Income (80% of Total; 16% to Each Eligible Investment)
1. |
BlackRock Credit Allocation Income Trust (NYSE: BTZ) |
2. |
BlackRock Limited Duration Income Trust (NYSE: BLW) |
3. |
BlackRock Total Return Fund, a series of BlackRock Bond Fund, Inc. |
4. |
BlackRock Strategic Income Opportunities Portfolio, a series of BlackRock Funds V |
5. |
BlackRock High Yield Bond Portfolio, a series of BlackRock Funds V |
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BLACKROCK FUND COMPLEX
THIRD AMENDED AND RESTATED DEFERRED COMPENSATION PLAN
Deferral Election Form
This Deferral Election Form applies to any amounts deferred for the calendar year beginning January 1, 2019.
☐ The undersigned hereby elects to participate in the BlackRock Fund Complex Third Amended and Restated Deferred Compensation Plan (Plan) in accordance with the elections made in this Deferral Election Form (Form). I understand that the percentage of my compensation set forth below will be deferred under the Plan and invested in the funds that are Eligible Investments (as defined in the Plan) in accordance with the allocation percentages set forth on Schedule B to the Plan.
☐ I do not wish to participate in the Plan. (If you checked this box, please stop here.)
1. |
Initial Enrollment in Deferred Compensation Plan |
a. |
Amount Deferred |
I hereby elect to defer up to % (not more than 50%) of the annual compensation I earn as a Director/Trustee of the Participating Funds (as defined in the Plan) in respect of the calendar year beginning January 1, 2019.
b. |
Time of Payment |
I hereby elect for amounts deferred pursuant to this Form, in respect of the calendar year beginning January 1, 2019, to be paid as follows:
☐ On the last business day in January of the calendar year following the calendar year in which I cease to be a Director/Trustee; or
☐ On the following other date:
c. |
Number of Payments |
I hereby elect to receive payment for amounts deferred pursuant to this Form, in respect of the calendar year beginning January 1, 2019:
☐ Entire amount in a lump sum; or
☐ In annual installments (not to exceed 10).
d. |
Designation of Beneficiary |
I hereby:
☐ Designate the beneficiaries reflected in Appendix A hereto; or
☐ I do not wish to designate any beneficiary.
***
I hereby relinquish and release any and all rights to receive payment of the deferred amounts except in accordance with the Plan. I hereby direct and authorize the Administrator (as defined in the Plan) to make payments of deferral amounts as it deems necessary or desirable to facilitate administration of the Plan; provided, that such payments shall be made in accordance with the Plan and the foregoing elections.
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Executed this day of , 2018.
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Print Name | ||
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Directors/Trustees Signature |
Received and accepted by each of the Eligible Investments (as defined in the Plan):
By: |
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Date: |
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BLACKROCK FUND COMPLEX
THIRD AMENDED AND RESTATED DEFERRED COMPENSATION PLAN
Deferral Election Form
This Deferral Election Form applies to any amounts deferred for the calendar year beginning January 1, 2019.
☐ The undersigned hereby elects to participate in the BlackRock Fund Complex Third Amended and Restated Deferred Compensation Plan (Plan) in accordance with the elections made in this Deferral Election Form (Form). I understand that the percentage of my compensation set forth below will be deferred under the Plan and invested in the funds that are Eligible Investments (as defined in the Plan) in accordance with the allocation percentages set forth on Schedule B to the Plan.
☐ I do not wish to participate in the Plan. (If you checked this box, please stop here.)
1. |
Continuation of Past Elections |
A copy of my Deferral Election Form from last year is attached hereto and noted below. With respect to the boxes checked below, I would like to continue with the same elections from the prior year.
☐ Amount Deferred (X%)
☐ Time of Payment (January of the calendar year following the calendar year in which I cease to be a Trustee)
☐ Number of Payments (Lump Sum Payment or Installment Payments)
☐ Designation of Beneficiary:
Primary:
Secondary:
(For any category not checked above, please complete the applicable portion of this Form below to reflect your new elections.)
2. |
Change Elections |
a. |
Amount Deferred |
I hereby elect to defer up to % (not more than 50%) of the annual compensation I earn as a Director/Trustee of the Participating Funds (as defined in the Plan) in respect of the calendar year beginning January 1, 2019.
b. |
Time of Payment |
I hereby elect for amounts deferred pursuant to this Form, in respect of the calendar year beginning January 1, 2019, to be paid as follows:
☐ On the last business day in January of the calendar year following the calendar year in which I cease to be a Director/Trustee; or
☐ On the following other date:
c. |
Number of Payments |
I hereby elect to receive payment for amounts deferred pursuant to this Form, in respect of the calendar year beginning January 1, 2019:
☐ Entire amount in a lump sum; or
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☐ In annual installments (not to exceed 10).
d. |
Designation of Beneficiary |
I hereby:
☐ Designate the beneficiaries reflected in Appendix A hereto; or
☐ I do not wish to designate any beneficiary.
***
I hereby relinquish and release any and all rights to receive payment of the deferred amounts except in accordance with the Plan. I hereby direct and authorize the Administrator (as defined in the Plan) to make payments of deferral amounts as it deems necessary or desirable to facilitate administration of the Plan; provided, that such payments shall be made in accordance with the Plan and the foregoing elections.
Executed this day of , 2018.
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Print Name | ||
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Directors/Trustees Signature |
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Received and accepted by each of the Eligible Investments (as defined in the Plan):
By: |
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Date: |
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BLACKROCK FUND COMPLEX
THIRD AMENDED AND RESTATED DEFERRED COMPENSATION PLAN
Designation of Beneficiary
The undersigned hereby designates the person or persons named below as the beneficiary(ies) of any benefits which may become due according to the terms and conditions of the BlackRock Fund Complex Third Amended and Restated Deferred Compensation Plan (the Plan) in the event of my death.
☐ To my Estate: or | ||
☐ To the following beneficiaries: | ||
Primary: |
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(Name, address and relationship) if living, or if not living at my death, to | ||
Secondary: |
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(Name, address and relationship) if living, or if not living at my death, to my Estate. |
I hereby revoke all prior beneficiary designation(s) made under the terms of the Plan by execution of this form.
Executed this day of , .
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Trustees Signature |
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Exhibit (9)
MASTER CUSTODIAN AGREEMENT
Between
Each BlackRock Entity Listed in Appendix A
And
State Street Bank and Trust Company
Dated as of December 31, 2018
TABLE OF CONTENTS
Page | ||||||
1. |
DEFINITIONS | 3 | ||||
2. |
EMPLOYMENT OF CUSTODIAN | 4 | ||||
3. |
ACTIVITIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY HELD IN THE UNITED STATES | 5 | ||||
4. |
PROVISIONS RELATING TO RULES 17F-5 AND 17F-7 | 6 | ||||
5. |
ACTIVITIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY HELD OUTSIDE THE UNITED STATES | 8 | ||||
6. |
FOREIGN EXCHANGE | 10 | ||||
7. |
TAX SERVICES | 12 | ||||
8. |
PAYMENT FOR SALES OR REDEMPTIONS OF PORTFOLIO INTERESTS | 13 | ||||
9. |
PROPER INSTRUCTIONS | 13 | ||||
10. |
ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY | 14 | ||||
11. |
[RESERVED] | 14 | ||||
12. |
RECORDS | 14 | ||||
13. |
FUNDS INDEPENDENT ACCOUNTANTS; REPORTS | 14 | ||||
14. |
CUSTODIANS STANDARD OF CARE; EXCULPATION | 14 | ||||
15. |
COMPENSATION AND INDEMNIFICATION OF CUSTODIAN; SECURITY INTEREST | 16 | ||||
16. |
EFFECTIVE PERIOD AND TERMINATION | 17 | ||||
17. |
SUCCESSOR CUSTODIAN | 18 | ||||
18. |
REMOTE ACCESS SERVICES ADDENDUM | 19 | ||||
19. |
LOAN SERVICES ADDENDUM | 19 | ||||
20. |
GENERAL | 19 |
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MASTER CUSTODIAN AGREEMENT
This Agreement is made as of December 31, 2018 (this Agreement), between each BlackRock entity identified on Appendix A and each BlackRock entity which becomes a party to this Agreement in accordance with the terms hereof (in each case, a Fund), including, if applicable, each series of the Fund identified on Appendix A and each series which becomes a party to this Agreement in accordance with the terms hereof, and State Street Bank and Trust Company, a Massachusetts trust company (the Custodian).
WITNESSETH:
WHEREAS, each Fund desires for the Custodian to provide certain custodial services relating to securities and other assets of the Fund; and
WHEREAS, the Custodian is willing to provide the services upon the terms contained in this Agreement;
SECTION 1. DEFINITIONS. In addition to terms defined in Section 4.1 (Rule 17f-5 and Rule 17f-7 related definitions) or elsewhere in this Agreement, (a) terms defined in the UCC have the same meanings herein as therein and (b) the following other terms have the following meanings for purposes of this Agreement:
1940 Act means the Investment Company Act of 1940, as amended from time to time.
Board means, in relation to a Fund, the board of directors, trustees or other governing body of the Fund.
Client Publications means the general client publications of State Street Bank and Trust Company available from time to time to clients and their investment advisers.
Deposit Account Agreement means the Deposit Account Agreement and Disclosure, as may be amended from time to time, issued by the Custodian and available on the Custodians internet customer portal, my.statestreet.com.
Domestic securities means securities held within the United States.
Foreign securities means securities primarily held outside of the United States.
Held outside of the United States means not held within the United States.
Held within the United States means (a) in relation to a security or other financial asset, the security or other financial asset (i) is a certificated security registered in the name of the Custodian or its sub-custodian, agent or nominee or is endorsed to the Custodian or its sub-custodian, agent or nominee or in blank and the security certificate is located within the United States, (ii) is an uncertificated security or other financial asset registered in the name of the Custodian or its sub-custodian, agent or nominee at an office located in the United States, or (iii) has given rise to a security entitlement of which the Custodian or its sub-custodian, agent or nominee is the entitlement holder against a U.S. Securities System or another securities intermediary for which the securities intermediarys jurisdiction is within the United States, and (b) in relation to cash, the cash is maintained in a deposit account denominated in U.S. dollars with the banking department of the Custodian or with another bank or trust companys office located in the United States.
Investment Advisor means, in relation to a Portfolio, the investment manager or investment advisor of the Portfolio.
On book currency means (a) U.S. dollars or (b) a foreign currency that, when credited to a deposit account of a customer maintained in the banking department of the Custodian or an Eligible Foreign Custodian, the Custodian maintains on its books as an amount owing as a liability by the Custodian to the customer.
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Portfolio means (a) in relation to a Fund that is a series organization, a series of the Fund and (b) in relation to a Fund that is not a series organization, the Fund itself.
Portfolio Interests means beneficial interests in a Portfolio.
Proper Instructions means instructions in accordance with Section 9 received by the Custodian from a Fund, the Funds Investment Advisor, or an individual or organization duly authorized by the Fund or the Investment Advisor. The term includes standing instructions.
SEC means the U.S. Securities and Exchange Commission.
Series organization means an organization that, pursuant to the statute under which the organization is organized, has the following characteristics: (a) the organic record of the organization provides for creation by the organization of one or more series (however denominated) with respect to specified property of the organization, and provides for records to be maintained for each series that identify the property of or associated with the series, (b) debt incurred or existing with respect to the activities of, or property of or associated with a particular series is enforceable against the property of or associated with the series only, and not against the property of or associated with the organization or of other series of the organization, and (c) debt incurred or existing with respect to the activities or property of the organization is enforceable against the property of the organization only, and not against the property of or associated with any series of the organization.
UCC means the Uniform Commercial Code of the State of New York as in effect from time to time.
Underlying Portfolios means a group of investment companies as defined in Section 12(d)(1)(G)(ii) of the 1940 Act.
Underlying Shares means shares or other securities, issued by a U.S. issuer, of Underlying Portfolios and other registered investment companies (as defined in Section 3(a)(1) of the 1940 Act), whether or not in the same group of investment companies (as defined in Section 12(d)(1)(G)(ii) of the 1940 Act).
Underlying Transfer Agent means State Street Bank and Trust Company or such other organization which may from time to time be appointed by the Fund to act as a transfer agent for the Underlying Portfolios and with respect to which the Custodian is provided with Proper Instructions.
U.S. Securities System means a securities depository or book-entry system authorized by the U.S. Department of the Treasury or a clearing corporation as defined in Section 8-102 of the UCC.
SECTION 2. EMPLOYMENT OF CUSTODIAN.
SECTION 2.1 GENERAL. Each Fund hereby employs the Custodian as a custodian of (a) securities and cash of each of the Portfolios and (b) other assets of each of the Portfolios that the Custodian agrees to treat as financial assets. Each Fund, on behalf of each of its Portfolios, agrees to deliver, or cause to be delivered, to the Custodian (i) all securities and cash of each Portfolio, (ii) all other assets of each Portfolio that the Fund desires the Custodian, and the Custodian is willing, to treat as a financial asset and (iii) all cash and other proceeds of the securities and financial assets held in custody under this Agreement. The holding of confirmation statements that identify Underlying Shares as being recorded in the Custodians name on behalf of the Portfolios will be custody for purposes of this Section 2.1. This Agreement does not require the Custodian to accept or treat any asset that is not a security or cash as a financial asset.
SECTION 2.2 SUB-CUSTODIANS. Upon receipt of Proper Instructions, the Custodian shall on behalf of a Fund appoint one or more banks, trust companies or other entities located in the United States and designated in the Proper Instructions to act as a sub-custodian for the purposes of effecting such transactions as may be designated by the Fund in the Proper Instructions. The Custodian may place and maintain each Funds foreign securities with foreign banking institution sub-custodians employed by the Custodian or foreign securities depositories, all in accordance with the applicable provisions of Sections 4 and 5. An entity acting in the capacity of Underlying Transfer Agent is not an agent or sub-custodian of the Custodian for purposes of this Agreement.
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SECTION 2.3 RELATIONSHIP. With respect to securities and other financial assets, the Custodian is a securities intermediary and the Portfolio is the entitlement holder. With respect to cash maintained in a deposit account and denominated in an on book currency, the Custodian is a bank and the Portfolio is the banks customer. If cash is maintained in a deposit account with a bank other than the Custodian and the cash is denominated in an on book currency, the Custodian is that banks customer. The Custodian agrees to treat the claim to the cash as a financial asset for the benefit of the Portfolio. The Custodian does not otherwise agree to treat cash as financial asset. The duties of the Custodian as securities intermediary and bank set forth in the UCC are varied by the terms of this Agreement to the extent that the duties may be varied by agreement under the UCC.
SECTION 3. ACTIVITIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY HELD IN THE UNITED STATES.
SECTION 3.1 HOLDING SECURITIES. The Custodian may deposit and maintain securities or other financial assets of a Portfolio in a U.S. Securities System in compliance with the conditions of Rule 17f-4 under the 1940 Act. Upon receipt of Proper Instructions on behalf of a Portfolio, the Custodian shall establish and maintain a segregated account or accounts for and on behalf of the Portfolio and into which account or accounts may be transferred cash or securities and other financial assets, including securities and financial assets maintained in a U.S. Securities System. The Custodian shall hold and physically segregate for the account of each Portfolio all securities and other financial assets held by the Custodian in the United States, including all domestic securities of the Portfolio, other than (a) securities or other financial assets maintained in a U.S. Securities System and (b) Underlying Shares maintained pursuant to Section 3.6 in an account of an Underlying Transfer Agent. The Custodian may at any time or times in its discretion appoint any other bank or trust company, qualified under the 1940 Act to act as a custodian in the United States, as the Custodians agent to carry out such of the provisions of this Section as the Custodian may from time to time direct. The appointment of any agent shall not relieve the Custodian of any of its duties hereunder and the Custodian shall be responsible for the acts and omissions of its agents hereunder as if performed by the Custodian hereunder. The Custodian may at any time or times in its discretion remove a bank or trust company as the Custodians agent.
SECTION 3.2 REGISTRATION OF SECURITIES. Domestic securities or other financial assets held by the Custodian and that are not bearer securities shall be registered in the name of the applicable Portfolio or in the name of any nominee of a Fund on behalf of the Portfolio or of any nominee of the Custodian, or in the name or nominee name of any agent or any sub-custodian permitted hereby. All securities accepted by the Custodian on behalf of the Portfolio under the terms of this Agreement shall be in street name or other good delivery form. However, if a Fund directs the Custodian to maintain securities or other financial assets in street name, the Custodian shall utilize reasonable efforts only to timely collect income due the Fund on the securities and other financial assets and to notify the Fund of relevant issuer actions including, without limitation, pendency of calls, maturities, tender or exchange offers.
SECTION 3.3 BANK ACCOUNTS. The Custodian shall open and maintain upon the terms of the Deposit Account Agreement a separate deposit account or accounts in the United States in the name of each Portfolio, subject only to draft or order by the Custodian acting pursuant to the terms of this Agreement. The Custodian shall credit to the deposit account or accounts, subject to the provisions hereof, all cash received by the Custodian from or for the account of the Portfolio, other than cash maintained by the Portfolio in a deposit account established and used in accordance with Rule 17f-3 under the 1940 Act. Funds held by the Custodian for a Portfolio may be deposited by the Custodian to its credit as Custodian in the banking department of the Custodian or in such other banks or trust companies as it may in its discretion deem necessary or desirable; provided, however, that every such bank or trust company shall be qualified to act as a custodian under the 1940 Act. The funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity.
SECTION 3.4 COLLECTION OF INCOME. Subject to the domestic securities or other financial assets held in the United States being registered as provided in Section 3.2, the Custodian shall collect on a timely basis all income and other payments with respect to the securities and other financial assets and to which a Portfolio shall be entitled either by law or pursuant to custom in the securities business. The Custodian shall collect on a timely basis all income and other payments with respect to bearer domestic securities if, on the date of payment by the issuer, the securities are held by the Custodian or its agent. The Custodian shall present for payment all income items requiring presentation as and when they become due and shall collect interest when due on securities and other financial assets held hereunder. The Custodian shall credit income to the Portfolio as such income is received or in accordance with the Custodians then current payable date income schedule. Any credit to the Portfolio in advance of receipt may be reversed when the Custodian determines that payment will not occur in due course, and the Portfolio may be charged at the Custodians applicable rate for time credited.
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SECTION 3.5 DELIVERY OUT. The Custodian shall release and deliver out domestic securities and other financial assets of a Portfolio held in a U.S. Securities System, or in an account at the Underlying Transfer Agent, only upon receipt of, and in accordance with, Proper Instructions on behalf of the applicable Portfolio, specifying the domestic securities or financial assets held in the United States to be delivered out and the person or persons to whom delivery is to be made. The Custodian shall pay out cash of a Portfolio upon receipt of, and in accordance with, Proper Instructions on behalf of the applicable Portfolio, specifying the amount of the payment and the person or persons to whom the payment is to be made.
SECTION 3.6 DEPOSIT OF FUND ASSETS WITH THE UNDERLYING TRANSFER AGENT. Underlying Shares of a Fund, on behalf of a Portfolio, shall be deposited and held in an account or accounts maintained with an Underlying Transfer Agent. The Custodians only responsibilities with respect to the Underlying Shares shall be limited to the following:
1) |
Upon receipt of a confirmation or statement from an Underlying Transfer Agent that the Underlying Transfer Agent is holding or maintaining Underlying Shares in the name of the Custodian (or a nominee of the Custodian) for the benefit of a Portfolio, the Custodian shall identify by book-entry that the Underlying Shares are being held by it as custodian for the benefit of the Portfolio. |
2) |
Upon receipt of Proper Instructions to purchase Underlying Shares for the account of a Portfolio, the Custodian shall pay out cash of the Portfolio as so directed to purchase the Underlying Shares and record the payment from the account of the Portfolio on the Custodians books and records. |
3) |
Upon receipt of Proper Instructions for the sale or redemption of Underlying Shares for the account of a Portfolio, the Custodian shall transfer the Underlying Shares as so directed to sell or redeem the Underlying Shares, record the transfer from the account of the Portfolio on the Custodians books and records and, upon the Custodians receipt of the proceeds of the sale or redemption, record the receipt of the proceeds for the account of such Portfolio on the Custodians books and records. |
SECTION 3.7 PROXIES. The Custodian shall cause to be promptly executed by the registered holder of domestic securities or other financial assets held in the United States of a Portfolio, if the securities or other financial assets are registered otherwise than in the name of the Portfolio or a nominee of the Portfolio, all proxies, without indication of the manner in which the proxies are to be voted, and shall promptly deliver to the Fund such proxies, all proxy soliciting materials and all notices relating to the securities or other financial assets.
SECTION 3.8 COMMUNICATIONS. Subject to the domestic securities or other financial assets held in the United States being registered as provided in Section 3.2, the Custodian shall transmit promptly to the applicable Fund for each Portfolio all written information received by the Custodian from issuers of the securities and other financial assets being held for the Portfolio. The Custodian shall transmit promptly to the applicable Fund all written information received by the Custodian from issuers of the securities and other financial assets whose tender or exchange is sought and from the party or its agent making the tender or exchange offer. The Custodian shall also transmit promptly to the applicable Fund for each Portfolio all written information received by the Custodian regarding any class action or other collective litigation relating to Portfolio securities or other financial assets issued in the United States and then held, or previously held, during the relevant class-action period during the term of this Agreement by the Custodian for the account of the Fund for the Portfolio, including, but not limited to, opt-out notices and proof-of-claim forms. The Custodian does not support class-action participation by a Fund beyond such forwarding of written information received by the Custodian, except as may otherwise be mutually agreed to in writing between the Custodian and a Fund.
SECTION 4. PROVISIONS RELATING TO RULES 17F-5 AND 17F-7.
SECTION 4.1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings:
Country Risk means all factors reasonably related to the systemic risk of holding Foreign Assets in a particular country. The factors include but are not limited to risks arising from the countrys political environment, economic
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and financial infrastructure (including any Eligible Securities Depository operating in the country); prevailing or developing custody, tax and settlement practices; nationalization, expropriation or other government actions; currency restrictions, devaluations or fluctuations; market conditions affecting the orderly execution of securities transactions or the value of assets; the regulation of the banking and securities industries, including changes in market rules; and laws and regulations applicable to the safekeeping and recovery of Foreign Assets held in custody in that country.
Covered Foreign Country means a country listed on Schedule A, which list of countries may be amended from time to time at the request of any Fund and with the agreement of the Foreign Custody Manager.
Eligible Foreign Custodian has the meaning set forth in Section (a)(1) of Rule 17f-5.
Eligible Securities Depository has the meaning set forth in section (b)(1) of Rule 17f-7.
Foreign Assets means, in relation to a Portfolio, any of the Portfolios securities or other investments (including foreign currencies) for which the primary market is outside the United States, and any cash and cash equivalents that are reasonably necessary to effect transactions of the Portfolio in those investments.
Foreign Custody Manager has the meaning set forth in section (a)(3) of Rule 17f-5.
Foreign Securities System means an Eligible Securities Depository listed on Schedule B.
Rule 17f-5 means Rule 17f-5 promulgated under the 1940 Act.
Rule 17f-7 means Rule 17f-7 promulgated under the 1940 Act.
SECTION 4.2. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
4.2.1 DELEGATION. Each Fund, by resolution adopted by its Board, has delegated to the Custodian, subject to Section (b) of Rule 17f-5, the responsibilities set forth in this Section 4.2 with respect to Foreign Assets of the Portfolios held outside the United States. The Custodian hereby accepts such delegation (the Custodian, in such delegated capacity, the Foreign Custody Manager). By giving at least 30 days prior written notice to the Fund, the Foreign Custody Manager may withdraw its acceptance of the delegated responsibilities generally or with respect to a Covered Foreign Country designated in the notice. Following the withdrawal, the Custodian shall have no further responsibility in its capacity as Foreign Custody Manager to the Fund generally or, as the case may be, with respect to the Covered Foreign Country so designated.
4.2.2 EXERCISE OF CARE AS FOREIGN CUSTODY MANAGER. The Foreign Custody Manager shall exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of the Foreign Assets would exercise in performing the delegated responsibilities.
4.2.3 FOREIGN CUSTODY ARRANGEMENTS. The Foreign Custody Manager shall be responsible for performing the delegated responsibilities only with respect to Covered Foreign Countries. The Foreign Custody Manager shall list on Schedule A for a Covered Foreign Country each Eligible Foreign Custodian selected by the Foreign Custody Manager to maintain the Foreign Assets of the Portfolios with respect to the Covered Foreign Country. The list of Eligible Foreign Custodians may be amended by the Foreign Custody Manager from time to time upon notice to the Funds in the sole discretion of the Foreign Custody Manager. This Agreement constitutes a Proper Instruction by a Fund, on behalf of each applicable Portfolio, to open an account, and to place and maintain Foreign Assets, for the Portfolio in each applicable Covered Foreign Country. The Fund, on behalf of the Portfolios, shall satisfy the account opening requirements for the Covered Foreign Country, and the delegation with respect to the Portfolio for the Covered Foreign Country will not be considered to have been accepted by the Custodian until that satisfaction. If the Foreign Custody Manager receives from the Fund Proper Instructions directing the Foreign Custody Manager to close the account, the delegation shall be considered withdrawn, and the Custodian shall immediately cease to be the Foreign Custody Manager with respect to the Portfolio for the Covered Foreign Country.
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4.2.4 SCOPE OF DELEGATED RESPONSIBILITIES: Subject to the provisions of this Section 4.2, the Foreign Custody Manager may place and maintain Foreign Assets in the care of an Eligible Foreign Custodian selected by the Foreign Custody Manager in each applicable Covered Foreign Country. The Foreign Custody Manager shall determine that (a) the Foreign Assets will be subject to reasonable care, based on the standards applicable to custodians in the country in which the Foreign Assets will be held by the Eligible Foreign Custodian, after considering all factors relevant to the safekeeping of such assets, including, without limitation the factors specified in Rule 17f-5(c)(1) and (b) the contract between the Foreign Custody Manager and the Eligible Foreign Custodian governing the foreign custody arrangements will satisfy the requirements of Rule 17f-5(c)(2). The Foreign Custody Manager shall establish a system to monitor (i) the appropriateness of maintaining the Foreign Assets with the Eligible Foreign Custodian and (ii) the performance of the contract governing the custody arrangements. The liability of the Foreign Custody Manager with respect to the acts or omissions of an Eligible Foreign Custodian is addressed in Section 14.4. If the Foreign Custody Manager determines that the custody arrangements with an Eligible Foreign Custodian are no longer appropriate, the Foreign Custody Manager shall so notify the Fund.
4.2.5 REPORTING REQUIREMENTS. The Foreign Custody Manager shall (a) report the withdrawal of Foreign Assets from an Eligible Foreign Custodian and the placement of Foreign Assets with another Eligible Foreign Custodian by making available to the Fund an amended Schedule A at the end of the calendar quarter in which the action has occurred, and (b) after the occurrence of any other material change in the foreign custody arrangements of the Portfolios described in this Section 4.2, make a written report to the Board containing a notification of the change.
4.2.6 REPRESENTATIONS. The Foreign Custody Manager represents to each Fund that it is a U.S. Bank as defined in Section (a)(7) of Rule 17f-5. Each Fund represents to the Custodian that its Board has (a) determined that it is reasonable for the Board to rely on the Custodian to perform the responsibilities delegated pursuant to this Agreement to the Custodian as the Foreign Custody Manager of the Portfolios and (b) considered and determined to accept such Country Risk as is incurred by placing and maintaining the Foreign Assets of each Portfolio in each Covered Foreign Country.
4.2.7 TERMINATION BY A PORTFOLIO OF THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. By giving at least 30 days prior written notice to the Custodian, a Fund, on behalf of a Portfolio, may terminate the delegation to the Custodian as the Foreign Custody Manager for the Portfolio. Following the termination, the Custodian shall have no further responsibility in its capacity as Foreign Custody Manager to the Portfolio.
SECTION 4.3 MONITORING OF ELIGIBLE SECURITIES DEPOSITORIES. The Custodian shall (a) provide the Fundor its Investment Advisor with an analysis of the custody risks associated with maintaining assets with the Eligible Securities Depositories set forth on Schedule B in accordance with Section (a)(1)(i)(A) of Rule 17f-7 and (b) monitor such risks on a continuing basis and promptly notify the Fund or its Investment Advisor of any material change in such risks, in accordance with Section (a)(1)(i)(B) of Rule 17f-7.
SECTION 5. ACTIVITIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY HELD OUTSIDE THE UNITED STATES.
SECTION 5.1. HOLDING SECURITIES. Foreign securities and other financial assets held outside of the United States shall be maintained in a Foreign Securities System in a Covered Foreign Country through arrangements implemented by the Custodian or an Eligible Foreign Custodian, as applicable, in the Covered Foreign Country. The Custodian shall identify on its books as belonging to the Portfolios the foreign securities and other financial assets held by each Eligible Foreign Custodian or Foreign Securities System, and shall provide or make available information to a Portfolio and such other persons as a Portfolio may designate with respect to the registration status of each Funds securities and a record of securities held by each Portfolio and such Portfolios respective interest therein. The Custodian may hold foreign securities and other financial assets for all of its customers, including the Portfolios, with any Eligible Foreign Custodian in an account that is identified as the Custodians account for the benefit of its customers; provided however, that (a) the records of the Custodian with respect to foreign securities or other financial assets of a Portfolio maintained in the account shall identify those securities and other financial assets as belonging to the Portfolio and (b) to the extent permitted and customary in the market in which the account is maintained, the Custodian shall require that securities and other financial assets so held by the Eligible Foreign Custodian be held separately from any assets of the Eligible Foreign Custodian or of other customers of the Eligible Foreign Custodian.
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SECTION 5.2. REGISTRATION OF FOREIGN SECURITIES. Foreign securities and other financial assets held outside of the United States maintained in the custody of an Eligible Foreign Custodian and that are not bearer securities shall be registered in the name of the applicable Portfolio or in the name of the Custodian or in the name of any Eligible Foreign Custodian or in the name of any nominee of any of the foregoing. Each Fund on behalf of a Portfolio agrees to hold any such nominee harmless from any liability as a holder of record of the foreign securities or other financial assets. The Custodian or an Eligible Foreign Custodian reserves the right not to accept securities or other financial assets on behalf of a Portfolio under the terms of this Agreement unless the form of the securities or other financial assets and the manner in which they are delivered are in accordance with local market practice.
SECTION 5.3. INDEMNIFICATION BY ELIGIBLE FOREIGN CUSTODIANS. Each contract pursuant to which the Custodian employs an Eligible Foreign Custodian shall, to the extent possible, require the Eligible Foreign Custodian to indemnify and hold harmless the Custodian from and against any loss, cost or expense arising out of or in connection with the Eligible Foreign Custodians performance of its obligations. At a Funds election, a Portfolio shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against an Eligible Foreign Custodian as a consequence of any such loss, cost or expense if and to the extent that the Portfolio has not been made whole for the loss, cost or expense. In no event shall the Custodian be obligated to bring suit in its own name or to allow suit to be brought in its name with respect to an Eligible Foreign Custodian.
SECTION 5.4 BANK ACCOUNTS.
5.4.1 GENERAL. The Custodian shall identify on its books as for the account of the applicable Portfolio the amount of cash (including cash denominated in foreign currencies) deposited with the Custodian. The Custodian shall maintain cash deposits in on book currencies on its balance sheet. The Custodian shall be liable for such balances. If the Custodian is unable to maintain, or market practice does not facilitate the maintenance for the Portfolio of a cash balance in a currency as an on book currency, a deposit account shall be opened and maintained by the Custodian outside the United States on behalf of the Portfolio with an Eligible Foreign Custodian. The Custodian shall not maintain such cash deposit on its balance sheet. The Eligible Foreign Custodian will be liable for such balance directly to the Portfolio. All deposit accounts referred to in this Section shall be subject only to draft or order by the Custodian or, if applicable, the Eligible Foreign Custodian acting pursuant to the terms of this Agreement. Cash maintained in a deposit account and denominated in an on book currency will be maintained under and subject to the laws of the State of New York. The Custodian will not have any deposit liability for deposits in any currency that is not an on book currency.
5.4.2 NON-U.S. BRANCH AND NON-U.S. DOLLAR DEPOSITS. In accordance with the laws of the Commonwealth of Massachusetts, the Custodian shall not be required to repay any deposit made at a non-U.S. branch of the Custodian or any deposit made with the Custodian and denominated in a non-U.S. dollar currency, if repayment of the deposit or the use of assets denominated in the non-U.S. dollar currency is prevented, prohibited or otherwise blocked due to (a) an act of war, insurrection or civil strife; (b) any action by a non-U.S. government or instrumentality or authority asserting governmental, military or police power of any kind, whether such authority be recognized as a de facto or a de jure government, or by any entity, political or revolutionary movement or otherwise that usurps, supervenes or otherwise materially impairs the normal operation of civil authority; or (c) the closure of a non-U.S. branch in order to prevent, in the reasonable judgment of the Custodian, harm to the employees or property of the Custodian.
SECTION 5.5. COLLECTION OF INCOME. The Custodian shall use reasonable commercial efforts to collect all income and other payments with respect to the Foreign Assets held hereunder to which a Portfolio shall be entitled. If extraordinary measures are required to collect the income or payment, the Fund and the Custodian shall consult as to such measures and as to the compensation and expenses of the Custodian relating to such measures. The Custodian shall credit income to the applicable Portfolio as such income is received or in accordance with the Custodians then current payable date income schedule. Any credit to the Portfolio in advance of receipt may be reversed when the Custodian determines that payment will not occur in due course, and the Portfolio may be charged at the Custodians applicable rate for time credited. Income on securities or other financial assets loaned other than from the Custodians securities lending program shall be credited as received.
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SECTION 5.6. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
5.6.1 DELIVERY OUT. The Custodian or an Eligible Foreign Custodian shall release and deliver foreign securities or other financial assets held outside of the United States owned by a Portfolio and held by the Custodian or such Eligible Foreign Custodian, or in a Foreign Securities System account, only upon receipt of, and in accordance with, Proper Instructions, specifying the foreign securities to be delivered and the person or persons to whom delivery is to be made. The Custodian shall pay out, or direct the respective Eligible Foreign Custodian or the respective Foreign Securities System to pay out, cash of a Portfolio only upon receipt of, and in accordance with, Proper Instructions specifying the amount of the payment and the person or persons to payment is to be made.
5.6.2 MARKET CONDITIONS. Notwithstanding any provision of this Agreement to the contrary, settlement and payment for Foreign Assets received for the account of the Portfolios and delivery of Foreign Assets maintained for the account of the Portfolios may be effected in accordance with the customary established securities trading or processing practices and procedures in the country or market in which the transaction occurs, including, without limitation, delivering Foreign Assets to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) with the expectation of receiving later payment for the Foreign Assets from such purchaser or dealer.
5.6.3 SETTLEMENT PRACTICES. The Custodian shall provide to the Fundor its Investment Advisor the information with respect to custody and settlement practices in countries in which the Custodian employs an Eligible Foreign Custodian described on Schedule C at the time or times set forth on the Schedule. The Custodian may revise Schedule C from time to time, but no revision shall result in a Board being provided with substantively less information than had been previously provided on Schedule C.
SECTION 5.7 SHAREHOLDER OR BONDHOLDER RIGHTS. The Custodian shall use reasonable commercial efforts to facilitate the exercise of voting and other shareholder and bondholder rights, including delivery to the Fund of any proxies, proxy soliciting materials and all applicable notices, with respect to foreign securities and other financial assets held outside the United States, subject always to the laws, regulations and practical constraints that may exist in the country where the securities or other financial assets are issued. The Custodian may utilize Broadridge Financial Solutions, Inc. or another proxy service firm of recognized standing as its delegate to provide proxy services for the exercise of shareholder and bondholder rights. Local conditions, including lack of regulation, onerous procedural obligations, lack of notice and other factors may have the effect of severely limiting the ability of a Fund to exercise shareholder and bondholder rights.
SECTION 5.8. COMMUNICATIONS. The Custodian shall transmit promptly to the applicable Fund written information with respect to materials received by the Custodian through Eligible Foreign Custodians from issuers of the foreign securities and other financial asset assets being held outside the United States for the account of a Portfolio. The Custodian shall transmit promptly to the applicable Fund written information with respect to materials so received by the Custodian from issuers of foreign securities whose tender or exchange is sought or from the party or its agent making the tender or exchange offer. The Custodian shall also transmit promptly to the Fund all written information received by the Custodian through Eligible Foreign Custodians from issuers of the foreign securities or other financial assets issued outside of the United States and being held for the account of the Portfolio regarding any class action or other collective litigation relating to the Portfolios foreign securities or other financial assets issued outside the United States and then held, or previously held, during the relevant class-action period during the term of this Agreement by the Custodian via an Eligible Foreign Custodian for the account of the Fund for the Portfolio, including, but not limited to, opt-out notices and proof-of-claim forms. The Custodian does not support class-action participation by a Fund beyond such forwarding of written information received by the Custodian, except as may otherwise be mutually agreed to in writing between the Custodian and a Fund.
SECTION 6. FOREIGN EXCHANGE.
SECTION 6.1. GENERALLY. Upon receipt of Proper Instructions, which for purposes of this section may also include security trade advices, the Custodian shall facilitate the processing and settlement of foreign exchange transactions. Such foreign exchange transactions do not constitute part of the services provided by the Custodian under this Agreement.
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SECTION 6.2. FUND ELECTIONS. Each Fund (or its Investment Advisor acting on its behalf) may elect to enter into and execute foreign exchange transactions with third parties that are not affiliated with the Custodian, with State Street Global Markets, which is the foreign exchange division of State Street Bank and Trust Company and its affiliated companies (SSGM), or with a sub-custodian. Where the Fund or its Investment Advisor gives Proper Instructions for the execution of a foreign exchange transaction using an indirect foreign exchange service described in the Client Publications, the Fund (or its Investment Advisor) instructs the Custodian, on behalf of the Fund, to direct the execution of such foreign exchange transaction to SSGM or, when the relevant currency is not traded by SSGM, to the applicable sub-custodian. The Custodian shall not have any agency (except as contemplated in preceding sentence), trust or fiduciary obligation to the Fund, its Investment Advisor or any other person in connection with the execution of any foreign exchange transaction. The Custodian shall have no responsibility under this Agreement for the selection of the counterparty to, or the method of execution of, any foreign exchange transaction entered into by the Fund (or its Investment Advisor acting on its behalf) or the reasonableness of the execution rate on any such transaction.
SECTION 6.3. FUND ACKNOWLEDGEMENT Each Fund acknowledges that in connection with all foreign exchange transactions entered into by the Fund (or its Investment Advisor acting on its behalf) with SSGM or any sub-custodian, SSGM and each such sub-custodian:
(i) |
shall be acting in a principal capacity and not as broker, agent or fiduciary to the Fund or its Investment Advisor; |
(ii) |
shall seek to profit from such foreign exchange transactions, and are entitled to retain and not disclose any such profit to the Fund or its Investment Advisor; and |
(iii) |
shall enter into such foreign exchange transactions pursuant to the terms and conditions, including pricing or pricing methodology, (a) agreed with the Fund or its Investment Advisor from time to time or (b) in the case of an indirect foreign exchange service, (i) as established by SSGM and set forth in the Client Publications with respect to the particular foreign exchange execution services selected by the Fund or the Investment Advisor or (ii) as established by the sub-custodian from time to time. |
SECTION 6.4. TRANSACTIONS BY STATE STREET. The Custodian or its affiliates, including SSGM, may trade based upon information that is not available to the Fund (or its Investment Advisor acting on its behalf), and may enter into transactions for its own account or the account of clients in the same or opposite direction to the transactions entered into with the Fund (or its Investment Advisor), and shall have no obligation, under this Agreement, to share such information with or consider the interests of their respective counterparties, including, where applicable, the Fund or the Investment Advisor.
SECTION 6A. CONTRACTUAL SETTLEMENT SERVICES (PURCHASE/SALES).
SECTION 6A.1 GENERAL. The Custodian shall, in accordance with the terms set out in this Section 6A, debit or credit the appropriate deposit account of each Portfolio on a contractual settlement basis in connection with the purchase of securities or other financial assets for the Portfolio or the receipt of the proceeds of the sale or redemption of securities or other financial assets.
SECTION 6A.2 PROVISION OF SERVICES. The services described in Section 6A.1 (the Contractual Settlement Services) shall be provided for the securities and other financial assets and in such markets as the Custodian may advise from time to time. The Custodian may terminate or suspend any part of the provision of the Contractual Settlement Services at its sole discretion immediately upon notice to the applicable Fund on behalf of each Portfolio, including, without limitation, in the event of force majeure events affecting settlement, any disorder in markets, or other changed external business circumstances affecting the markets or the Fund.
SECTION 6A.3 PURCHASE CONSIDERATION. The consideration payable in connection with a purchase transaction shall be debited from the appropriate deposit account of the Portfolio as of the time and date that funds would ordinarily be required to settle the transaction in the applicable market in accordance with prevailing standards for transactions by institutions. The Custodian shall promptly recredit the amount at the time that the Portfolio or the Fund notifies the Custodian by Proper Instruction that the transaction has been canceled.
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SECTION 6A.4 SALES AND REDEMPTIONS. A provisional credit of an amount equal to the net sale price for a sale or redemption of securities or other financial assets shall be made to the account of the Portfolio as if the amount had been received as of the close of business on the date on which good funds would ordinarily be immediately available in the applicable market in accordance with prevailing standards for transactions by institutions. The provisional credit will be made conditional upon the Custodian having received Proper Instructions with respect to, or reasonable notice of, the transaction, as applicable; and the Custodian or its agent having possession of the securities of other financial assets (excluding financial assets subject to any third party lending arrangement entered into by a Portfolio) associated with the transaction in good deliverable form and not being aware of any facts which would lead the Custodian or its agent to believe that the transaction will not settle in the time period ordinarily applicable to such transactions in the applicable market.
SECTION 6A.5. REVERSALS OF PROVISIONAL CREDITS OR DEBITS. The Custodian shall have the right to reverse any provisional credit or debit given in connection with the Contractual Settlement Services at any time when the Custodian believes, in its reasonable judgment, that such transaction will not settle in accordance with its terms or amounts due pursuant thereto, will not be collectable or where the Custodian has not been provided Proper Instructions with respect thereto, as applicable. The Portfolio shall be responsible for any costs or liabilities resulting from such reversal. Upon such reversal, a sum equal to the credited or debited amount shall become immediately payable by the Portfolio to the Custodian and may be debited from any deposit or other account held for benefit of the Portfolio.
SECTION 7. TAX SERVICES.
SECTION 7.1 FUND INFORMATION. Each Fund will provide documentary evidence of its tax domicile, organizational specifics and other documentation and information as may be required by the Custodian from time to time for tax purposes, including, without limitation, information relating to any special ruling or treatment to which the Fund may be entitled that is not applicable to the general nationality and category of person to which the Fund belongs under general laws and treaty obligations and documentation and information required in relation to countries where the Fund engages or proposes to engage in investment activity or where Portfolio assets are or will be held. The provision of such documentation and information shall be deemed to be a Proper Instruction, upon which the Custodian shall be entitled to rely and act. In giving such documentation and information, the Fund represents and warrants that it is true and correct in all material respects and that it will promptly provide the Custodian with all necessary corrections or updates upon becoming aware of any changes or inaccuracies in the documentation or information supplied.
SECTION 7.2 TAX RESPONSIBILITY. The Fund shall be liable for all taxes (including Taxes, as defined below) relating to its investment activity, including with respect to any cash or securities held by the Custodian on behalf of the Fund or any transactions related thereto. Subject to compliance by the Fund with its obligations under Section 7.1, the Custodian shall withhold (or cause to be withheld) the amount of any Tax which is required to be withheld under applicable law in connection with the collection on behalf of the Fund pursuant to this Agreement of any dividend, interest income or other distribution with respect to any security and the proceeds or income from the sale or other transfer of any security held by the Custodian. If any Taxes become payable with respect to any prior payment made to the Fund by the Custodian or otherwise, the Custodian may apply any credit balance in the Funds deposit account to the extent necessary to satisfy such Tax obligation. The Fund shall remain liable for any tax deficiency. The Custodian is not liable for any tax obligations relating to the Portfolio or the Fund, other than those Tax services as set out specifically in this Section 7. The Fund agrees that the Custodian is not, and shall not be deemed to be, providing tax advice or tax counsel. The capitalized terms Tax or Taxes means any withholding or capital gains tax, stamp duty, levy, impost, charge, assessment, deduction or related liability, including any addition to tax, penalty or interest imposed on or in respect of (i) cash or securities, (ii) the transactions effected under this Agreement, or (iii) the Fund.
SECTION 7.3 TAX RELIEF. The Custodian will provide tax relief services in relation to designated markets as may be specified from time to time in the Client Publications. Subject to the preceding sentence and compliance by the Fund with its obligations under Section 7.1, the Custodian will apply for a reduction of withholding tax and refund of any tax paid or tax credits which apply in each applicable market in respect of income payments on securities for the benefit of the Fund. The Custodian shall provide information on reduction at source and tax reclaim processing in its Tax Entitlement Service Overview made available to the Fund on the Custodians customer portal,
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my.statestreet.com. The Custodian shall maintain tax entitlement accruals for possible tax benefits available in markets of investment and monitor tax entitlements and tax reclaim accruals based on existing situations in markets of investment with respect to the Funds entitlements. The Custodian shall facilitate communications to the Funds local tax consultants and Eligible Foreign Custodians with respect to reporting, payment and filing requirements regarding capital gains processing. Unless otherwise informed by the Fund, the Custodian shall be entitled to categorize a Fund in the relevant tax category according to its nationality, particulars of its organization and other relevant details supplied by the Fund.
SECTION 8. PAYMENTS FOR SALES OR REDEMPTIONS OF PORTFOLIO INTERESTS.
SECTION 8.1 PAYMENT FOR PORTFOLIO INTERESTS ISSUED. The Custodian shall receive from the distributor of Portfolio Interests of a Fund or from the Funds transfer agent (the Transfer Agent) and deposit into the account of the Portfolio such payments as are received for Portfolio Interests issued or sold from time to time by the Fund. The Custodian will provide timely notification to the Fund on behalf of the Portfolio and the Transfer Agent of any receipt of the payments by the Custodian.
SECTION 8.2 PAYMENT FOR PORTFOLIO INTERESTS REDEEMED. Upon receipt of instructions from the Transfer Agent, the Custodian shall set aside funds of a Portfolio to the extent available for payment to holders of Portfolio Interests who have delivered to the Transfer Agent a request for redemption of their Portfolio Interests. The Custodian is authorized upon receipt of instructions from the Transfer Agent to wire funds to or through a commercial bank designated by the redeeming interest holders. If the Custodian furnishes a check to a holder in payment for the redemption of the holders Portfolio Interests and the check is drawn on the Custodian, the Custodian shall honor the check so long as the check is presented to the Custodian in accordance with the Deposit Account Agreement and such procedures and controls as are mutually agreed upon from time to time between the Fund and the Custodian.
SECTION 9. PROPER INSTRUCTIONS.
SECTION 9. 1 FORM AND SECURITY PROCEDURES. Proper Instructions may be in writing signed by the authorized individual or individuals or may be in a tested communication or in a communication utilizing access codes effected between electro-mechanical or electronic devices or may be by such other means and utilizing such intermediary systems and utilities as may be agreed to from time to time by the Custodian and the individual or organization giving the instruction, provided that the Fund has followed any security procedures agreed to from time to time by the applicable Fund and the Custodian. The Custodian may agree to accept oral instructions, and in such case oral instructions will be considered Proper Instructions. The Fund shall cause all oral instructions to be confirmed in writing, but the Funds failure to do so shall not affect the Custodians authority to rely on the oral instructions.
Section 9.2 RELIANCE ON OFFICERS CERTIFICATE. Concurrently with the execution of this Agreement, and from time to time thereafter, as appropriate, each Fund shall deliver to the Custodian an officers certificate setting forth the names, titles, signatures and scope of authority of all individuals authorized to give Proper Instructions or any other notice, request, direction, instruction, certificate or instrument on behalf of the Fund. The certificate may be accepted and conclusively relied upon by the Custodian and shall be considered to be in full force and effect until receipt by the Custodian of a similar certificate to the contrary and the Custodian has had a reasonable time to act thereon.
Section 9.3 UNTIMELY PROPER INSTRUCTIONS. If the Custodian is not provided with reasonable time to execute a Proper Instruction (including any Proper Instruction not to execute, or any other modification to, a prior Proper Instruction), the Custodian will use good faith efforts to execute the Proper Instruction but will not be responsible or liable if the Custodians efforts are not successful (including any inability to change any actions that the Custodian had taken pursuant to the prior Proper Instruction). The inclusion of a statement of purpose or intent (or any similar notation) in a Proper Instruction shall not impose any additional obligations on the Custodian or condition or qualify its authority to effect the Proper Instruction. The Custodian will not assume a duty to ensure that the stated purpose or intent is fulfilled and will have no responsibility or liability when it follows the Proper Instruction without regard to such purpose or intent.
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SECTION 10. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY.
The Custodian may in its discretion, without express authority from the applicable Fund on behalf of each Portfolio:
1) |
Make payments to itself or others for normal and routine expenses to facilitate the settlement of securities transactions that are customary in the markets in which the Fund is trading and relating to the Custodians duties under this Agreement; provided that all such payments shall be accounted for to the Fund on behalf of the Portfolio; |
2) |
Surrender securities or other financial assets in temporary form for securities or other financial assets in definitive form; |
3) |
Endorse for collection, in the name of the Portfolio, checks, drafts and other negotiable instruments; and |
4) |
In general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and other financial assets of the Portfolio except as otherwise directed by the applicable Board. |
SECTION 11. RESERVED.
SECTION 12. RECORDS.
The Custodian shall with respect to each Portfolio create and maintain all records relating to its activities and obligations under this Agreement in such manner as will meet the obligations of each Fund under the 1940 Act, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Fund and employees and agents of the SEC. The Custodian shall, at the Funds request, supply the Fund with a tabulation of securities owned by each Portfolio and held by the Custodian and shall, when requested to do so by the Fund and for such compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations. In the event that the Custodian is requested or authorized by a Fund, or required by subpoena, administrative order, court order or other legal process, applicable law or regulation, or required in connection with any investigation, examination or inspection of the Fund by state or federal regulatory agencies, to produce the records of the Fund or the Custodians personnel as witnesses, the Fund agrees to pay the Custodian for the Custodians reasonable time and expenses, as well as the reasonable fees and expenses of the Custodians counsel, incurred in responding to such request, order or requirement. The Custodian shall, to the extent permitted by law, provide notice to the applicable Fund promptly after receipt of any request for records by an entity other than such Fund. Upon request, the Custodian shall provide the applicable Fund with an update on the fees and expenses incurred in responding to any such requests for records.
SECTION 13. FUNDS INDEPENDENT ACCOUNTANTS; REPORTS.
SECTION 13.1 OPINIONS. The Custodian shall take all reasonable action, as a Fund with respect to a Portfolio may from time to time request, to obtain from year to year favorable opinions from the Funds independent accountants with respect to its activities hereunder in connection with the preparation of the Funds Form N-1A or Form N-2, as applicable, and other annual reports to the SEC and with respect to any other requirements thereof.
SECTION 13.2 REPORTS. Upon reasonable request of a Fund, the Custodian shall provide the Fund with a copy of the Custodians Service Organizational Control (SOC) 1 reports prepared in accordance with the requirements of AT section 801, Reporting on Controls at a Service Organization (formerly Statement on Standards for Attestation Engagements (SSAE) No. 16). The Custodian shall use commercially reasonable efforts to provide the Fund with such reports as the Fund may reasonably request or otherwise reasonably require to fulfill its duties under Rule 38a-1 of the 1940 Act or similar legal and regulatory requirements.
SECTION 14. CUSTODIANS STANDARD OF CARE; EXCULPATION.
14.1 STANDARD OF CARE. In carrying out the provisions of this Agreement, the Custodian shall act (i) with reasonable care and diligence and in good faith, (ii) without negligence, fraud, willful misconduct, willful omission or bad faith, and at least at the same standard of care as the Custodian provides for itself and its affiliates (Affiliates) with respect to similar services, and (iii) with the level of skill and care which would be expected from
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a reasonably skilled and experienced professional provider of services similar to the services provided under this Agreement. Subject to the terms of the Agreement, including any exculpatory language, the Custodian shall have no liability for any error of judgment or mistake of law or for any loss or damage resulting from the performance or nonperformance of its duties hereunder unless and to the extent the Custodian fails to exercise such standard of care. Upon the occurrence of any event that causes or that the Custodian believes or a Portfolio reasonably believes will imminently cause any loss, damage or expense to any Portfolio, the Custodian (i) shall take and (ii) shall take all reasonable steps to cause any applicable sub-custodian to take all commercially reasonable steps (to the extent consistent with the Custodians obligations pursuant to Rules 17f-5 and 17f-7, as applicable) to mitigate the effects of such event and to avoid continuing harm to a Portfolio.
14.2 RELIANCE ON PROPER INSTRUCTIONS. The Custodian shall be entitled conclusively to rely and act upon Proper Instructions until the Custodian has received notice of any change from the Fund and has had a reasonable time to act thereon. The Custodian may act on a Proper Instruction if it reasonably believes that it contains sufficient information and may refrain from acting on any Proper Instructions until such time that it has determined, in its sole discretion, that is has received any required clarification or authentication of Proper Instructions. The Custodian may rely upon and shall be protected in acting upon any Proper Instruction or any other instruction, notice, request, consent, certificate or other instrument or paper reasonably believed by it in good faith to be genuine and to have been properly executed by or on behalf of the applicable Fund.
14.3 OTHER RELIANCE. The Custodian is authorized and instructed to rely upon the information that the Custodian receives from the Fund or any third party on behalf of the Fund. The Custodian shall have no responsibility to review, confirm or otherwise assume any duty with respect to the accuracy or completeness of any information supplied to it by or on behalf of any Fund. The Custodian shall have no liability in respect of any loss, cost or expense incurred or sustained by the Fund arising from the performance of the Custodians duties hereunder in reliance upon records that were maintained for the Fund by any individual or organization, other than the Custodian, prior to the Custodians appointment as custodian hereunder. The Custodian shall be entitled to rely on and may act upon reasonable advice of reputable counsel (who may be counsel for the Fund) on all matters and shall be without liability for any action reasonably taken or omitted in good faith pursuant to the advice; provided, however, that with respect to the reliance on such reasonable advice and the performance of any action or omission of any action upon such advice, the Custodian shall be required to conform to the standard of care set forth above. The Custodian and the applicable Funds shall mutually agree as to which entity will bear the cost of such advice of counsel.
14.4 LIABILITY FOR FOREIGN CUSTODIANS AND U.S. SUB-CUSTODIANS. The Custodian shall be liable for the acts or omissions of an Eligible Foreign Custodian and of any domestic sub-custodian selection by the Custodian to the same extent as if the action or omission were performed by the Custodian itself, taking into account the facts and circumstances and the established local market practices and laws prevailing in the particular jurisdiction in which the Fund elects to invest. If a Fund directs the Custodian to appoint a specific domestic sub-custodian, the Custodian shall, with respect to such domestic sub-custodian, be responsible only for losses arising from its own failure to meet the standard of care set forth in Section 14.1.
14.5 INSOLVENCY AND COUNTRY RISK. The Custodian shall in no event be liable for (a) the insolvency of any Eligible Foreign Custodian or U.S. sub-custodian, (b) the insolvency of any depositary bank maintaining in a deposit account cash denominated in any currency other than an on book currency, or (c) any loss, cost or expense incurred or sustained by a Fund or Portfolio resulting from or caused by Country Risk.
14.6 FORCE MAJEURE AND THIRD PARTY ACTIONS. The Custodian shall be without responsibility or liability to any Fund or Portfolio for: (a) events or circumstances beyond the reasonable control of the Custodian, including, without limitation, the interruption, suspension or restriction of trading on or the closure of any currency or securities market or system, power or other mechanical or technological failures or interruptions, computer viruses or communications disruptions, work stoppages, natural disasters, acts of war, revolution, riots or terrorism or other similar force majeure events or acts; (b) errors by any Fund, its Investment Advisor or any other duly authorized person in their instructions to the Custodian; (c) the insolvency of or acts or omissions by a U.S. Securities System, Foreign Securities System, Underlying Transfer Agent or a domestic sub-custodian designated by a Fund pursuant to Section 2.2; (d) the failure of any Fund, its Investment Advisor, Portfolio or any duly authorized individual or organization to adhere to the Custodians operational policies and procedures; (e) any delay or failure of any broker,
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agent, securities intermediary or other intermediary, central bank or other commercially prevalent payment or clearing system to deliver to the Custodians sub-custodian or agent securities or other financial assets purchased or in the remittance or payment made in connection with securities or other financial assets sold; (f) any delay or failure of any organization in charge of registering or transferring securities or other financial assets in the name of the Custodian, any Fund, any Portfolio, the Custodians sub-custodians, nominees or agents including non-receipt of bonus, dividends and rights and other accretions or benefits; (g) delays or inability to perform its duties due to any disorder in market infrastructure with respect to any particular security, other financial asset, U.S. Securities System or Foreign Securities System; and (h) the effect of any provision of any law or regulation or order of the United States of America, or any state thereof, or any other country, or political subdivision thereof or of any court of competent jurisdiction.
14.7 INDIRECT/SPECIAL/CONSEQUENTIAL DAMAGES. Notwithstanding any other provision set forth herein, in no event shall the Custodian be liable for any special, indirect, incidental, punitive or consequential damages of any kind whatsoever (including, without limitation, lost profits) with respect to the services provided pursuant to this Agreement, regardless of whether either party has been advised of the possibility of such damages.
14.8 DELIVERY OF PROPERTY. The Custodian shall not be responsible for any securities or other assets of a Portfolio which are not received by the Custodian or which are delivered out in accordance with Proper Instructions. The Custodian shall not be responsible for the title, validity or genuineness of any securities or other assets or evidence of title thereto received by it or delivered by it pursuant to this Agreement.
14.9 NO INVESTMENT ADVICE. The Custodian has no responsibility to monitor or oversee the investment activity undertaken by a Fund or its Investment Advisor or by a Portfolio. The Custodian has no duty to ensure or to inquire whether an Investment Advisor complies with any investment objectives or restrictions agreed upon between a Fund and the Investment Advisor or whether the Investment Advisor complies with its legal obligations under applicable securities laws or other laws, including laws intended to protect the interests of investors. The Custodian shall neither assess nor take any responsibility or liability for the suitability or appropriateness of the investments made by a Fund or a Portfolio or on its behalf.
14.10 COMMUNICATIONS. Subject to Section 14.1, the Custodian shall not be liable for any untimely exercise of any tender, exchange or other right or power in connection with securities or other financial assets of a Portfolio at any time held by the Custodian unless (a) the Custodian or the Eligible Foreign Custodian is in actual possession of such securities or other financial assets, (b) the Custodian receives Proper Instructions with regard to the exercise of the right or power, and (c) both of the conditions referred to in the foregoing clauses (a) and (b) have been satisfied at least three business days prior to the date on which the Custodian is to take action to exercise the right or power.
14.11 LOANED SECURITIES. Income due to each Portfolio on securities or other financial assets loaned shall be the responsibility of the applicable Fund. The Custodian will have no duty or responsibility in connection with loaned securities or other financial assets, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Portfolio is entitled, except as may otherwise be mutually agreed to in writing between the Custodian and a Fund.
14.12 TRADE COUNTERPARTIES. A Funds receipt of securities or other financial assets from a counterparty in connection with any of its purchase transactions and its receipt of cash from a counterparty in connection with any sale or redemption of securities or other financial assets will be at the Funds sole risk, and the Custodian shall not be obligated to make demands on the Funds behalf if the Funds counterparty defaults. If a Funds counterparty fails to deliver securities, other financial assets or cash, the Custodian will, as its sole responsibility, notify the Funds Investment Advisor of the failure within a reasonable time after the Custodian became aware of the failure.
SECTION 15. COMPENSATION AND INDEMNIFICATION OF CUSTODIAN; SECURITY INTEREST.
SECTION. 15.1 COMPENSATION. The Custodian shall be entitled to reasonable compensation for its services and expenses as agreed upon from time to time between each Fund on behalf of each applicable Portfolio and the Custodian.
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SECTION 15.2 INDEMNIFICATION. Each Portfolio severally and not jointly agrees to indemnify the Custodian and to hold the Custodian harmless from and against any loss, cost or expense sustained or incurred by the Custodian in acting or omitting to act under or in respect of this Agreement in a manner consistent with the standard of care set forth in Section 14.1, including, without limitation, (a) the Custodians compliance with Proper Instructions and (b) in connection with the provision of services to a Fund pursuant to Section 7, any obligations, including taxes, withholding and reporting requirements, claims for exemption and refund, additions for late payment, interest, penalties and other expenses, that may be assessed against the Fund, the Portfolio or the Custodian as custodian of the assets of the Fund or the Portfolio. If a Fund on behalf of a Portfolio instructs the Custodian to take any action with respect to securities or other financial assets, and the action involves the payment of money or may, in the opinion of the Custodian, result in the Custodian or its nominee assigned to the Fund or the Portfolio being liable therefor, the Fund on behalf of the Portfolio, as a prerequisite to the Custodian taking the action, shall provide to the Custodian at the Custodians request such further indemnification in an amount and form satisfactory to the Custodian.
SECTION 15.3 SECURITY INTEREST. Each Fund hereby grants to the Custodian, to secure the payment and performance of the Funds obligations under this Agreement, whether contingent or otherwise, a security interest in and right of recoupment and setoff against all cash and all securities and other financial assets at any time held for the account of a Portfolio by or through the Custodian. The obligations include, without limitation, the Funds obligations to reimburse the Custodian if the Custodian or any of its Affiliates, subsidiaries or agents advances cash or securities or other financial assets to the Fund for any purpose (including but not limited to settlements of securities or other financial assets, foreign exchange contracts and assumed settlement), or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Agreement, except such as may arise from its or its nominees own negligence, as well as the Funds obligation to compensate the Custodian pursuant to Section 15.1 or indemnify the Custodian pursuant to Section 15.2. Should the Fund fail to reimburse or otherwise pay the Custodian any obligation under this Agreement promptly, the Custodian shall have the rights and remedies of a secured party under this Agreement, the UCC and other applicable law, including the right to utilize available cash and to sell or otherwise dispose of the Portfolios assets to the extent necessary to obtain payment or reimbursement. The Custodian may at any time decline to follow Proper Instructions to deliver out cash, securities or other financial assets if the Custodian determines in its reasonable discretion that, after giving effect to the Proper Instructions, the cash, securities or other financial assets remaining will not have sufficient value fully to secure the Funds payment or reimbursement obligations, whether contingent or otherwise.
SECTION 16. EFFECTIVE PERIOD AND TERMINATION.
SECTION 16.1 TERM. This Agreement shall remain in full force and effect for an initial term of one (1) year from the effective date (the Initial Term). After the expiration of the Initial Term, this Agreement shall automatically renew for successive one (1) year terms. Following the Initial Term, this Agreement may be terminated by any Fund or Portfolio upon no less than ninety (90) days prior written notice to the Custodian, or by the Custodian upon no less than 180 days prior written notice to the applicable Fund or Portfolio.
SECTION 16.2 TERMINATION. Either party may terminate this Agreement as to a Fund or a Portfolio: (a) in the event of the other partys material breach of a material provision of this Agreement that the other party has either failed to cure, or failed to establish a remedial plan to cure that is reasonably acceptable to the non-breaching party, within 60 days written notice being given by the non-breaching party of the breach, or (b) in the event of the appointment of a conservator or receiver for the other party, the commencement by or against the other party of a bankruptcy or insolvency case or proceeding, or upon the happening of a like event to the other party at the direction of an appropriate agency or court of competent jurisdiction.
SECTION 16.3 PAYMENTS OWING TO THE CUSTODIAN. Upon termination of this Agreement pursuant to Section 16.1 or 16.2 with respect to any Fund or Portfolio, the applicable Fund shall pay to the Custodian any compensation then due and shall reimburse the Custodian for its other fees, expenses and charges. In the event of: (a) any Funds termination of this Agreement with respect to such Fund or a Portfolio of the Fund in any manner other than as set forth in Section 16.1 or 16.2 or (b) a transaction not in the ordinary course of business pursuant to which the Custodian is not retained to continue providing services hereunder to a Fund or Portfolio (or its respective successor), the applicable Fund shall pay to the Custodian any compensation due through the end of the then-current
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term (based upon the average monthly compensation previously earned by the Custodian with respect to the Fund or Portfolio) and shall reimburse the Custodian for its other fees, expenses and charges. Upon receipt of such payment and reimbursement, the Custodian will deliver the Funds or Portfolios cash and its securities and other financial assets as set forth in Section 17.
SECTION 16.4 EXCLUSIONS. No full term payment will be required pursuant to clause (b) of Section 16.3 in the event of any transaction consisting of (a) the liquidation or dissolution of a Fund or a Portfolio and distribution of the Funds or Portfolios assets as a result of the Boards determination in its reasonable business judgment that the Fund or Portfolio is no longer viable or that the liquidation is in the best interest of the Fund or such Portfolio, (b) a merger of a Fund or Portfolio into, or the consolidation of a Fund or Portfolio with, another organization or series, or (c) the sale by a Fund or Portfolio of all or substantially all of its assets to another organization or series and, in the case of a transaction referred to in the foregoing clause (b) or (c) the applicable Funds provide 90 days prior written notice in advance of the closing date of any such transactions.
SECTION 16.5 EFFECT OF TERMINATION. Termination of this Agreement with respect to any one particular Fund or Portfolio shall in no way affect the rights and duties under this Agreement with respect to any other Fund or Portfolio. Following termination with respect to a Fund or Portfolio, the Custodian shall have no further responsibility to forward information under Section 3.8 or 5.8. The provisions of Sections 7, 14, 15 and 17 of this Agreement shall survive termination of this Agreement.
SECTION 17. SUCCESSOR CUSTODIAN.
SECTION 17.1 SUCCESSOR APPOINTED. If a successor custodian shall be appointed for a Portfolio by its Board, the Custodian shall, upon termination of this Agreement and receipt of Proper Instructions, deliver to the successor custodian at the office of the Custodian, duly endorsed and in the form for transfer, all cash and all securities and other financial assets of the Portfolio then held by the Custodian hereunder and shall transfer to an account of the successor custodian all of the securities and other financial assets of the Portfolio held in a U.S. Securities System or Foreign Securities System or at the Underlying Transfer Agent.
SECTION 17.2 NO SUCCESSOR APPOINTED. If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of Proper Instructions, deliver at the office of the Custodian and transfer the cash and the securities and other financial assets of the Portfolio in accordance with the Proper Instructions.
SECTION 17.3 NO SUCCESSOR APPOINTED AND NO PROPER INSTRUCTIONS. If no successor custodian has been appointed and no Proper Instructions have been delivered to the Custodian on or before the termination of this Agreement, then the Custodian shall have the right to deliver to a bank or trust company, which is a bank as defined in the 1940 Act, doing business in Boston, Massachusetts, or New York, New York, of its own selection, all cash and all securities and other financial assets of the Portfolio then held by the Custodian hereunder, and to transfer to an account of the bank or trust company all of the securities and other financial assets of the Portfolio held in any U.S. Securities System or Foreign Securities System or at the Underlying Transfer Agent. The transfer will be on such terms as are contained in this Agreement or as the Custodian may otherwise reasonably negotiate with the bank or trust company. Any compensation payable to the bank or trust company, and any cost or expense incurred by the Custodian, in connection with the transfer shall be for the account of the Portfolio.
SECTION 17.4 REMAINING PROPERTY. If any cash or any securities or other financial assets of the Portfolio held by the Custodian hereunder remain held by the Custodian after the termination of this Agreement owing to the failure of the applicable Fund to provide Proper Instructions, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian holds the cash or the securities or other financial assets (the existing agreed-to compensation at the time of termination shall be one indicator of what is considered fair compensation). The provisions of this Agreement relating to the duties, exculpation and indemnification of the Custodian shall apply in favor of the Custodian during such period.
SECTION 17.5 RESERVES. Notwithstanding the foregoing provisions of this Section 17, the Custodian may retain cash or securities or other financial assets of the Fund or Portfolio as a reserve reasonably established by the Custodian to secure the payment or performance of any obligations of the Fund or Portfolio secured by a security interest or right of recoupment or setoff in favor of the Custodian.
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SECTION 18. REMOTE ACCESS SERVICES ADDENDUM. The Custodian and each Fund agree to be bound by the terms of the Remote Access Services Addendum hereto.
SECTION 19. LOAN SERVICES ADDENDUM. If a Fund directs the Custodian in writing to perform loan services, the Custodian and the Fund will be bound by the terms of the Loan Services Addendum attached hereto. The Fund shall reimburse Custodian for its fees and expenses related thereto as agreed upon from time to time in writing by the Fund and the Custodian.
SECTION 20. GENERAL.
SECTION 20.1 GOVERNING LAW. Any and all matters in dispute between the parties hereto, whether arising from or relating to this Agreement, shall be governed by and construed in accordance with laws of the State of New York, without giving effect to any conflict of laws rules.
SECTION 20.2 [RESERVED]
SECTION 20.3 PRIOR AGREEMENTS; AMENDMENTS. This Agreement supersedes all prior agreements between each Fund on behalf of each of the Funds Portfolios and the Custodian relating to the custody of the Funds assets. This Agreement may be amended at any time in writing by mutual agreement of the parties hereto.
SECTION 20.4 ASSIGNMENT; DELEGATION. This Agreement may not be assigned by (a) any Fund without the written consent of the Custodian or (b) the Custodian without the written consent of each applicable Fund. Notwithstanding the foregoing, the Custodian may assign this Agreement to a successor of all or a substantial portion of its business, or to an Affiliate of the Custodian upon ninety (90) days prior written notice to the Fund. The Custodian shall retain the right to employ its Affiliates to provide or assist it in the provision of any part of the services described herein or the discharge of any other obligations or duties under this Agreement without the consent or approval of any Fund. The Custodian may employ other agents, subcontractors, consultants and other third parties (each a Delegate) to provide the services stated herein to the Funds upon the prior written consent of the Funds. Except as otherwise provided below, the Custodian shall be responsible for the acts and omissions of any such Delegate or Affiliate so employed as if the Custodian had committed such acts and omissions itself. The Custodian shall be responsible for the compensation of its Delegates and Affiliates. Notwithstanding the foregoing, in no event shall the term Delegate include sub-custodians, Eligible Foreign Custodians, U.S. Securities Systems and Foreign Securities Systems, consultants, authorized data sources, suppliers of Custodians third party technology, providers of market infrastructure, and other non-affiliated entities that provide similar assistance to the Custodian in its performance of its duties under this Agreement, and the Custodian shall have no liability for their acts or omissions except as otherwise expressly provided elsewhere in this Agreement. The liability of the Custodian for the acts and omissions of sub-custodians, Eligible Foreign Custodians, U.S. Securities Systems and Foreign Securities Systems shall be as set forth in Section 14 above.
SECTION 20.5 INTERPRETIVE AND ADDITIONAL PROVISIONS. In connection with the operation of this Agreement, the Custodian and each Fund on behalf of each of the Portfolios, may from time to time agree on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. Any such interpretive or additional provisions shall be in a writing signed by all parties, provided that no such interpretive or additional provisions shall contravene any applicable laws or regulations or any provision of a Funds organic record and Prospectus. No interpretive or additional provisions made as provided in the preceding sentence shall be an amendment of this Agreement.
SECTION 20.6 ADDITIONAL FUNDS AND PORTFOLIOS.
20.6.1 ADDITIONAL FUNDS. If any management investment company in addition to those listed on Appendix A desires the Custodian to render services as custodian under the terms of this Agreement, the management investment company shall so notify the Custodian in writing. If the Custodian agrees in writing to provide the services, the management investment company shall become a Fund hereunder and be bound by all terms and conditions and provisions hereof including, without limitation, the representations and warranties set forth in Section 20.7 below.
20.6.2 ADDITIONAL PORTFOLIOS. If any Fund establishes a series in addition to the Portfolios set forth on Appendix A with respect to which the Fund desires the Custodian to render services as custodian under the terms of this Agreement, the Fund shall so notify the Custodian in writing. If the Custodian agrees in writing to provide the services, the series shall become a Portfolio hereunder.
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SECTION 20.7 THE PARTIES; REPRESENTATIONS AND WARRANTIES. All references in this Agreement to the Fund are to each of the management investment companies listed on Appendix A, and each management investment company made subject to this Agreement in accordance with Section 20.6 above, individually, as if this Agreement were between the individual Fund and the Custodian. In the case of a series organization, all references in this Agreement to the Portfolio are to the individual series of the series organization on behalf of the individual series. Any reference in this Agreement to the parties shall mean the Custodian and such other individual Fund as to which the matter pertains.
20.7.1 FUND REPRESENTATIONS AND WARRANTIES. Each Fund hereby represents and warrants that (a) it is duly organized and validly existing in good standing in its jurisdiction of organization; (b) it has the requisite power and authority under applicable law and its organic record to enter into and perform this Agreement; (c) all requisite proceedings have been taken to authorize it to enter into and perform this Agreement; (d) no legal or administrative proceedings have been instituted or threatened which would materially impair the Funds ability to perform its duties and obligations under this Agreement; and (e) its entering into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of the Fund or any law or regulation applicable to it.
20.7.2 CUSTODIAN REPRESENTATIONS AND WARRANTIES. The Custodian hereby represents and warrants that (a) it is a trust company, duly organized and validly existing under the laws of the Commonwealth of Massachusetts; (b) it has the requisite power and authority to carry on its business in the Commonwealth of Massachusetts; (c) all requisite proceedings have been taken to authorize it to enter into and perform this Agreement; (d) no legal or administrative proceedings have been instituted or threatened which would materially impair the Custodians ability to perform its duties and obligations under this Agreement; (e) its entering into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of the Custodian or any law or regulation applicable to it; and (f) it has and will maintain at least the minimum qualifications required by Section 17(f)(1) of the 1940 Act to act as custodian of the portfolio securities of each Portfolio.
SECTION 20.8 NOTICES. Any notice, instruction or other communication required to be given hereunder will, unless otherwise provided in this Agreement, be in writing and may be sent by hand, or by facsimile transmission, or overnight delivery by any recognized delivery service, to the parties at the following addresses or such other addresses as may be notified by any party from time to time.
To any Fund: | c/o BLACKROCK FINANCIAL MANAGEMENT, INC. | |
100 Bellevue Parkway | ||
Wilmington, DE 19809-3700 | ||
Attention: Neal Andrews | ||
Telephone: 302-797-6179 | ||
To the Custodian: | STATE STREET BANK AND TRUST COMPANY | |
100 Summer Street | ||
Boston, MA 02110 | ||
Attention: Anthony Ostler | ||
Telephone: 617-664-9797 | ||
with a copy to: |
||
STATE STREET BANK AND TRUST COMPANY | ||
Legal Division Global Services Americas | ||
One Lincoln Street | ||
Boston, MA 02110 | ||
Attention: Senior Vice President and Senior Managing Counsel |
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SECTION 20.9 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, and all such counterparts taken together shall constitute one and the same Agreement. Counterparts may be executed in either original or electronically transmitted form (e.g., faxes or emailed portable document format (PDF) form), and the parties hereby adopt as original any signatures received in electronically transmitted form.
SECTION 20.10 SEVERABILITY; NO WAIVER. If any provision of this Agreement shall be held to be invalid, unlawful or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired. The failure of a party hereto to insist upon strict adherence to any term of this Agreement on any occasion or the failure of a party hereto to exercise or any delay in exercising any right or remedy under this Agreement shall not constitute a waiver of any the term, right or remedy or a waiver of any other rights or remedies, and no single or partial exercise of any right or remedy under this Agreement shall prevent any further exercise of the right or remedy or the exercise of any other right or remedy.
SECTION 20.11 CONFIDENTIALITY. All information provided under this Agreement by a party (the Disclosing Party) to the other party (the Receiving Party) regarding the Disclosing Partys business and operations shall be treated as confidential. Subject to Section 20.12 below, all confidential information provided under this Agreement by Disclosing Party shall be used, including disclosure to third parties, by the Receiving Party, or its agents or service providers, solely for the purpose of performing or receiving the services and discharging the Receiving Partys other obligations under the Agreement or managing the business of the Receiving Party and its Affiliates, including financial and operational management and reporting, risk management, legal and regulatory compliance and client service management. The foregoing shall not be applicable to any information (a) that is publicly available when provided or thereafter becomes publicly available, other than through a breach of this Agreement, (b) that is independently derived by the Receiving Party without the use of any information provided by the Disclosing Party in connection with this Agreement, (c) that is disclosed to comply with any legal or regulatory proceeding, investigation, audit, examination, subpoena, civil investigative demand or other similar process, (d) that is disclosed as required by operation of law or regulation or as required to comply with the requirements of any market infrastructure that the Disclosing Party or its agents direct the Custodian or its Affiliates to employ (or which is required in connection with the holding or settlement of instruments included in the assets subject to this Agreement), or (e) where the party seeking to disclose has received the prior written consent of the party providing the information, which consent shall not be unreasonably withheld.
SECTION 20.12 USE OF DATA.
(a) In connection with the provision of the services and the discharge of its other obligations under this Agreement, the Custodian (which term for purposes of this Section 20.12 includes each of its Affiliates) may collect and store information regarding the Funds or Portfolios (Fund Information) and share such Fund Information with its Affiliates, agents, delegates and service providers in order and to the extent reasonably necessary (i) to carry out the provision of services contemplated under this Agreement and other agreements between a Fund and the Custodian or any of its Affiliates and (ii) to carry out the internal management of its businesses, including, but not limited to, financial and operational management and reporting, risk management, legal and regulatory compliance.
(b) Except as expressly contemplated by this Agreement, nothing in this Section 20.12 shall limit the confidentiality and data-protection obligations of the Custodian and its Affiliates under this Agreement and applicable law. The Custodian shall cause any Affiliate, agent or service provider to which it has disclosed Data pursuant to this Section 20.12 to comply at all times with confidentiality and data-protection obligations as if it were a party to this Agreement.
SECTION 20.13 DATA PRIVACY. The Custodian will implement and maintain a written information security program that contains appropriate security measures to safeguard the personal information of the Funds shareholders, employees, directors and officers that the Custodian receives, stores, maintains, processes or otherwise accesses in connection with the provision of services hereunder. The term, personal information, as used in this
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Section, means (a) an individuals name (first initial and last name or first name and last name), address or telephone number plus (i) Social Security number, (ii) drivers license number, (iii) state identification card number, (iv) debit or credit card number, (v) financial account number or (vi) personal identification number or password that would permit access to a persons account, or (b) any combination of any of the foregoing that would allow a person to log onto or access an individuals account. The term does not include information that is lawfully obtained from publicly available information, or from federal, state or local government records lawfully made available to the general public.
SECTION 20.14 LIMITATION ON LIABILITY OF TRUSTEES. Notice is hereby given that this Agreement is not executed on behalf of any directors or trustees of any Fund as individuals, and the obligations of this Agreement are not binding on any of the directors, trustees, officers, shareholders or partners of any Fund individually, but are binding only upon the property of each Fund or Portfolio. In relation to each Fund which is a business trust, this Agreement is executed and made by the Trustees of the Fund not individually, but as trustees under the Declarations of Trust of the Fund and the obligations of this Agreement are not binding upon any of such Trustees or upon any of the shareholders of the Fund individually, but bind only the trust estate of the Fund. The Custodian agrees that no shareholder, director, trustee, officer or partner of any Fund may be held personally liable or responsible for any obligations of any Fund arising out of this Agreement.
SECTION 20.15 REPRODUCTION OF DOCUMENTS. This Agreement and all schedules, addenda, exhibits, appendices, attachments and amendments hereto may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. Any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence.
SECTION 20.16 REGULATION GG. Each Fund represents and warrants that it does not engage in an Internet gambling business, as such term is defined in Section 233.2(r) of Federal Reserve Regulation GG (12 CFR 233) and covenants that it shall not engage in an Internet gambling business. In accordance with Regulation GG, each Fund is hereby notified that restricted transactions, as such term is defined in Section 233.2(y) of Regulation GG, are prohibited in any dealings with the Custodian pursuant to this Agreement or otherwise between or among any party hereto.
SECTION 20.17 SHAREHOLDER COMMUNICATIONS ELECTION. SEC Rule 14b-2 requires banks that hold securities, as that term is used in federal securities laws, for the account of customers to respond to requests by issuers of securities for the names, addresses and holdings of beneficial owners of securities of that issuer held by the bank unless the beneficial owner has expressly objected to disclosure of this information. In order to comply with the rule, as may be applicable, the Custodian needs each Fund to indicate whether it authorizes the Custodian to provide such Funds name, address, and share position to requesting companies whose securities the Fund owns. If a Fund tells the Custodian no, the Custodian will not provide this information to requesting companies. If a Fund tells the Custodian yes or does not check either yes or no below, the Custodian is required by the rule, as applicable, to treat the Fund as consenting to disclosure of this information for all securities owned by the Fund or any funds or accounts established by the Fund. For a Funds protection, the Rule, as applicable, prohibits the requesting company from using the Funds name and address for any purpose other than corporate communications. Please indicate below whether the Fund consents or objects by checking one of the alternatives below.
YES ☐ The Custodian is authorized to release the Funds name, address, and share positions.
NO ☒ The Custodian is not authorized to release the Funds name, address, and share positions.
[Remainder of the page intentionally left blank]
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SIGNATURE PAGE
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed in its name and behalf by its duly authorized representative under seal as of the date first above-written.
EACH OF ENTITIES
SET FORTH ON APPENDIX A HERETO
By: |
/s/ Neal J. Andrews |
|
Name: | Neal J. Andrews | |
Title: | Chief Financial Officer |
STATE STREET BANK AND TRUST COMPANY
By: |
/s/ Andrew Erickson |
|
Name: | Andrew Erickson | |
Title: | Executive Vice President |
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APPENDIX A
TO
MASTER CUSTODIAN AGREEMENT
- 24 -
October 30, 2020
BlackRock MuniHoldings Fund, Inc.
55 East 52nd Street
New York, New York 10055
Ladies and Gentlemen:
We have acted as special Maryland counsel to BlackRock MuniHoldings Fund, Inc., a Maryland corporation (the Company), in connection with the Registration Statement on Form N-14 (File No. 333-241481), together with all amendments through the date hereof, the Registration Statement), filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the Act), which relates to the registration of shares (the Shares) of the Companys common stock, par value $0.10 per share (the Common Stock), to be issued pursuant to (i) an Agreement and Plan of Reorganization between the Company and BlackRock Municipal Income Investment Quality Trust (the BAF Agreement), (ii) an Agreement and Plan of Reorganization between the Company and BlackRock Municipal Bond Trust (the BBK Agreement), (iii) an Agreement and Plan of Reorganization between the Company and BlackRock MuniHoldings Fund II, Inc. (the MUH Agreement), and (iv) an Agreement and Plan of Reorganization between the Company and BlackRock MuniHoldings Quality Fund, Inc. (together with the BAF Agreement, the BBK Agreement, and the MUH Agreement, and substantially in the form attached as an exhibit to the Registration Statement, the Agreements).
We have examined the Registration Statement (exclusive of the exhibits thereto other than the Agreements) and such corporate records, certificates and documents as we deemed necessary for the purpose of this opinion. We have relied as to certain factual matters on information obtained from public officials and officers of the Company. Based on that examination and assuming that upon any issuance of the Shares that the total number of shares of Common Stock issued and outstanding will not exceed the total number of shares of Common Stock that the Company is then authorized to issue under its charter, we advise you that in our opinion the Shares, when issued under the circumstances contemplated in the Registration Statement and the Agreements, will be legally issued, fully paid, and non-assessable.
In expressing the opinion set forth herein, we have assumed that (i) all documents submitted to us as originals are authentic, (ii) all documents submitted to us as copies conform with the originals of those documents, (iii) all signatures on all documents submitted to us for examination are genuine, (iv) each natural person executing any such document is legally competent to do so, and (v) all public records reviewed by us or on our behalf are accurate and complete. We express no opinion with respect to the laws of, or the effect or applicability of the laws of, any jurisdiction other than, and our opinion expressed herein is limited to, the laws of the State of Maryland. The opinion expressed herein is limited to the matters expressly set forth in this letter and no other opinion should be inferred beyond the matters expressly stated.
BlackRock MuniHoldings Fund, Inc.
October 30, 2020
Page 2
We hereby consent to the use of our name under the heading Legal Matters in the Joint Proxy Statement/Prospectus forming a part of the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. In giving our consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours, | ||
Miles & Stockbridge P.C. | ||
By: /s/ Emily Higgs | ||
Principal |
Exhibit (12)(a)
|
787 Seventh Avenue | |
New York, NY 10019-6099 |
||
Tel: 212 728 8000 |
||
Fax: 212 728 8111 |
[●], 2021
BlackRock Municipal Income Investment Quality Trust
BlackRock MuniHoldings Fund, Inc.
100 Bellevue Parkway
Wilmington, DE 19809
Ladies and Gentlemen:
BlackRock Municipal Income Investment Quality Trust, a Delaware statutory trust (BAF or the Target Fund), and BlackRock MuniHoldings Fund, Inc., a Maryland corporation (MHD or the Acquiring Fund), have requested our opinion as to certain federal income tax consequences of the Acquiring Funds proposed acquisition of the assets of the Target Fund pursuant to the Agreement and Plan of Reorganization dated as of [ ], 202[0/1] (the Plan). Pursuant to the Plan, (i) the Acquiring Fund will acquire substantially all of BAFs assets (the Assets) and assume substantially all of BAFs liabilities (the Assumed Liabilities) in exchange solely for newly issued common shares and Variable Rate Muni Term Preferred Shares (VMTP Shares and together with such common shares, the Acquiring Fund Shares) of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP holders, respectively, of BAF, and (ii) BAF will terminate its registration under the Investment Company Act of 1940, as amended, and liquidate, dissolve and terminate in accordance with its Agreement and Declaration of Trust and Delaware law (all the foregoing transactions being referred to herein collectively as the Reorganization). This opinion is being delivered pursuant to Sections 8(h) and 9(i) of the Plan.
We have reviewed such documents and materials as we have considered necessary for the purpose of rendering this opinion. In rendering this opinion, we have assumed that such documents as yet unexecuted will, when executed, conform in all material respects to the proposed forms of such documents that we have examined. In addition, we have assumed the genuineness of all signatures, the capacity of each party executing a document to so execute that document, the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as certified or photostatic copies.
We have made inquiry as to the underlying facts that we considered to be relevant to the conclusions set forth in this letter. The opinions expressed in this letter are based upon certain factual statements
NEW YORK WASHINGTON HOUSTON PALO ALTO SAN FRANCISCO CHICAGO PARIS LONDON FRANKFURT BRUSSELS MILAN ROME
BlackRock Municipal Income Investment Quality Trust
BlackRock MuniHoldings Fund, Inc.
[●], 2021
Page 2
relating to the Acquiring Fund and Target Fund set forth in the Joint Proxy Statement/ Prospectus filed as part of the Acquiring Funds registration statement on Form N-14 (the Registration Statement) and representations made in letters from the Target Fund and Acquiring Fund addressed to us for our use in rendering this opinion (the Tax Representation Letters). We have no reason to believe that these representations and facts are not valid, but we have not attempted to verify independently any of these representations and facts, and this opinion is based upon the assumption that each of them is accurate.
The conclusions expressed herein are based upon the Internal Revenue Code of 1986, as amended (the Code), Treasury Regulations issued thereunder, published rulings and procedures of the Internal Revenue Service and judicial decisions, all as in effect on the date of this letter.
Based upon the foregoing, we are of the opinion that for U.S. federal income tax purposes:
1. |
The Target Funds transfer to the Acquiring Fund of all the Assets solely in exchange for Acquiring Fund Shares and Acquiring Funds assumption of the Assumed Liabilities, followed by Target Funds distribution of such Acquiring Fund common shares and VMTP Shares to its common shareholders and VMTP holders, respectively, and the termination, dissolution and complete liquidation of the Target Fund, all pursuant to the Plan, will constitute a reorganization within the meaning of section 368(a) of the Code, and the Acquiring Fund and the Target Fund will each be a party to a reorganization within the meaning of section 368(b) of the Code. |
2. |
No gain or loss will be recognized by the Acquiring Fund upon the receipt of all of the Assets solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of the Assumed Liabilities. |
3. |
No gain or loss will be recognized by the Target Fund upon the transfer of the Assets to the Acquiring Fund solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of the Assumed Liabilities or upon the distribution of Acquiring Fund Shares to the Target Fund shareholders, the redemption of their Target Fund shares, or the complete liquidation of the Target Fund. |
4. |
No gain or loss will be recognized by the Target Fund shareholders upon their receipt of Acquiring Fund Shares or the redemption of their Target Fund shares in the Reorganization. |
5. |
The aggregate basis of Acquiring Fund Shares received by each Target Fund shareholder pursuant to the Reorganization will be the same as the aggregate basis of the Target Fund shares exchanged therefor by such a shareholder. |
6. |
The holding period of Acquiring Fund Shares to be received by each Target Fund shareholder pursuant to the Reorganization will include the holding period of the Target Fund shares |
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BlackRock Municipal Income Investment Quality Trust
BlackRock MuniHoldings Fund, Inc.
[●], 2021
Page 3
exchanged therefor, provided that such Target Fund shareholder held the Target Fund shares as capital assets at the time of the Reorganization. |
7. |
The basis of each Asset transferred to the Acquiring Fund in the Reorganization will be the same in the hands of the Acquiring Fund as the basis of such Asset in the hands of the Target Fund immediately prior to the transfer increased by the amount of gain or decreased by the amount of loss, if any, recognized by the Target Fund upon the transfer. |
8. |
The holding period of each of the Assets in the hands of the Acquiring Fund will include the holding period of each such Asset when held by the Target Fund (except to the extent that the investment activities of the Acquiring Fund reduce or eliminate such holding period). |
Notwithstanding the foregoing, this opinion does not address the tax consequences of the Reorganization to contracts or securities on which gain or loss is recognized (i) upon the close of the taxable year or (ii) upon the transfer of an asset regardless of whether such transfer would otherwise be a non-recognition transaction under the Code.
Our opinion is based upon the accuracy of the certifications, representations and warranties and satisfaction of the covenants and obligations contained in the Plan, the Tax Representation Letters and in the various other documents related thereto. Our opinion may not be relied upon if any of such certifications, representations or warranties are not accurate to any material extent or if any of such covenants or obligations are not satisfied in all material respects. We hereby consent to the filing of this opinion with the Registration Statement and to the reference to us in the Joint Proxy Statement/ Prospectus included as part of the Registration Statement.
Very truly yours,
- 3 -
Exhibit (12)(b)
|
787 Seventh Avenue | |
New York, NY 10019-6099 |
||
Tel: 212 728 8000 |
||
Fax: 212 728 8111 |
[●], 2021
BlackRock Municipal Bond Trust
BlackRock MuniHoldings Fund, Inc.
100 Bellevue Parkway
Wilmington, DE 19809
Ladies and Gentlemen:
BlackRock Municipal Bond Trust, a Delaware statutory trust (BBK or the Target Fund), and BlackRock MuniHoldings Fund, Inc., a Maryland corporation (MHD or the Acquiring Fund), have requested our opinion as to certain federal income tax consequences of the Acquiring Funds proposed acquisition of the assets of the Target Fund pursuant to the Agreement and Plan of Reorganization dated as of [ ], 202[0/1] (the Plan). Pursuant to the Plan, (i) the Acquiring Fund will acquire substantially all of BBKs assets (the Assets) and assume substantially all of BBKs liabilities (the Assumed Liabilities) in exchange solely for newly issued common shares and Variable Rate Muni Term Preferred Shares (VMTP Shares and together with such common shares, the Acquiring Fund Shares) of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP holders, respectively, of BBK, and (ii) BBK will terminate its registration under the Investment Company Act of 1940, as amended, and liquidate, dissolve and terminate in accordance with its Agreement and Declaration of Trust and Delaware law (all the foregoing transactions being referred to herein collectively as the Reorganization). This opinion is being delivered pursuant to Sections 8(h) and 9(i) of the Plan.
We have reviewed such documents and materials as we have considered necessary for the purpose of rendering this opinion. In rendering this opinion, we have assumed that such documents as yet unexecuted will, when executed, conform in all material respects to the proposed forms of such documents that we have examined. In addition, we have assumed the genuineness of all signatures, the capacity of each party executing a document to so execute that document, the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as certified or photostatic copies.
We have made inquiry as to the underlying facts that we considered to be relevant to the conclusions set forth in this letter. The opinions expressed in this letter are based upon certain factual statements relating to the Acquiring Fund and Target Fund set forth in the Joint Proxy Statement/ Prospectus filed
NEW YORK WASHINGTON HOUSTON PALO ALTO SAN FRANCISCO CHICAGO PARIS LONDON FRANKFURT BRUSSELS MILAN ROME
BlackRock Municipal Bond Trust
BlackRock MuniHoldings Fund, Inc.
[●], 2021
Page 2
as part of the Acquiring Funds registration statement on Form N-14 (the Registration Statement) and representations made in letters from the Target Fund and Acquiring Fund addressed to us for our use in rendering this opinion (the Tax Representation Letters). We have no reason to believe that these representations and facts are not valid, but we have not attempted to verify independently any of these representations and facts, and this opinion is based upon the assumption that each of them is accurate.
The conclusions expressed herein are based upon the Internal Revenue Code of 1986, as amended (the Code), Treasury Regulations issued thereunder, published rulings and procedures of the Internal Revenue Service and judicial decisions, all as in effect on the date of this letter.
Based upon the foregoing, we are of the opinion that for U.S. federal income tax purposes:
1. |
The Target Funds transfer to the Acquiring Fund of all the Assets solely in exchange for Acquiring Fund Shares and Acquiring Funds assumption of the Assumed Liabilities, followed by Target Funds distribution of such Acquiring Fund common shares and VMTP Shares to its common shareholders and VMTP holders, respectively, and the termination, dissolution and complete liquidation of the Target Fund, all pursuant to the Plan, will constitute a reorganization within the meaning of section 368(a) of the Code, and the Acquiring Fund and the Target Fund will each be a party to a reorganization within the meaning of section 368(b) of the Code. |
2. |
No gain or loss will be recognized by the Acquiring Fund upon the receipt of all of the Assets solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of the Assumed Liabilities. |
3. |
No gain or loss will be recognized by the Target Fund upon the transfer of the Assets to the Acquiring Fund solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of the Assumed Liabilities or upon the distribution of Acquiring Fund Shares to the Target Fund shareholders, the redemption of their Target Fund shares, or the complete liquidation of the Target Fund. |
4. |
No gain or loss will be recognized by the Target Fund shareholders upon their receipt of Acquiring Fund Shares or the redemption of their Target Fund shares in the Reorganization. |
5. |
The aggregate basis of Acquiring Fund Shares received by each Target Fund shareholder pursuant to the Reorganization will be the same as the aggregate basis of the Target Fund shares exchanged therefor by such a shareholder. |
6. |
The holding period of Acquiring Fund Shares to be received by each Target Fund shareholder pursuant to the Reorganization will include the holding period of the Target Fund shares exchanged therefor, provided that such Target Fund shareholder held the Target Fund shares as capital assets at the time of the Reorganization. |
- 2 -
BlackRock Municipal Bond Trust
BlackRock MuniHoldings Fund, Inc.
[●], 2021
Page 3
7. |
The basis of each Asset transferred to the Acquiring Fund in the Reorganization will be the same in the hands of the Acquiring Fund as the basis of such Asset in the hands of the Target Fund immediately prior to the transfer increased by the amount of gain or decreased by the amount of loss, if any, recognized by the Target Fund upon the transfer. |
8. |
The holding period of each of the Assets in the hands of the Acquiring Fund will include the holding period of each such Asset when held by the Target Fund (except to the extent that the investment activities of the Acquiring Fund reduce or eliminate such holding period). |
Notwithstanding the foregoing, this opinion does not address the tax consequences of the Reorganization to contracts or securities on which gain or loss is recognized (i) upon the close of the taxable year or (ii) upon the transfer of an asset regardless of whether such transfer would otherwise be a non-recognition transaction under the Code.
Our opinion is based upon the accuracy of the certifications, representations and warranties and satisfaction of the covenants and obligations contained in the Plan, the Tax Representation Letters and in the various other documents related thereto. Our opinion may not be relied upon if any of such certifications, representations or warranties are not accurate to any material extent or if any of such covenants or obligations are not satisfied in all material respects. We hereby consent to the filing of this opinion with the Registration Statement and to the reference to us in the Joint Proxy Statement/ Prospectus included as part of the Registration Statement.
Very truly yours,
- 3 -
Exhibit (12)(c)
|
787 Seventh Avenue New York, NY 10019-6099 Tel: 212 728 8000 Fax: 212 728 8111 |
[●], 2021
BlackRock MuniHoldings Fund II, Inc.
BlackRock MuniHoldings Fund, Inc.
100 Bellevue Parkway
Wilmington, DE 19809
Ladies and Gentlemen:
BlackRock MuniHoldings Fund II, Inc., a Maryland corporation (MUH or the Target Fund), and BlackRock MuniHoldings Fund, Inc., a Maryland corporation (MHD or the Acquiring Fund), have requested our opinion as to certain federal income tax consequences of the Acquiring Funds proposed acquisition of the assets of the Target Fund pursuant to the Agreement and Plan of Reorganization dated as of [ ], 202[0/1] (the Plan). Pursuant to the Plan, (i) the Acquiring Fund will acquire substantially all of MUHs assets (the Assets) and assume substantially all of MUHs liabilities (the Assumed Liabilities) in exchange solely for newly issued common shares and Variable Rate Muni Term Preferred Shares (VMTP Shares and together with such common shares, the Acquiring Fund Shares) of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP holders, respectively, of MUH, and (ii) MUH will terminate its registration under the Investment Company Act of 1940, as amended, and liquidate, dissolve and terminate in accordance with its charter and Maryland law (all the foregoing transactions being referred to herein collectively as the Reorganization). This opinion is being delivered pursuant to Sections 8(h) and 9(i) of the Plan.
We have reviewed such documents and materials as we have considered necessary for the purpose of rendering this opinion. In rendering this opinion, we have assumed that such documents as yet unexecuted will, when executed, conform in all material respects to the proposed forms of such documents that we have examined. In addition, we have assumed the genuineness of all signatures, the capacity of each party executing a document to so execute that document, the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as certified or photostatic copies.
We have made inquiry as to the underlying facts that we considered to be relevant to the conclusions set forth in this letter. The opinions expressed in this letter are based upon certain factual statements relating to the Acquiring Fund and Target Fund set forth in the Joint Proxy Statement/ Prospectus filed
NEW YORK WASHINGTON HOUSTON PALO ALTO SAN FRANCISCO CHICAGO PARIS LONDON FRANKFURT BRUSSELS MILAN ROME
BlackRock MuniHoldings Fund II, Inc.
BlackRock MuniHoldings Fund, Inc.
[●], 2021
Page 2
as part of the Acquiring Funds registration statement on Form N-14 (the Registration Statement) and representations made in letters from the Target Fund and Acquiring Fund addressed to us for our use in rendering this opinion (the Tax Representation Letters). We have no reason to believe that these representations and facts are not valid, but we have not attempted to verify independently any of these representations and facts, and this opinion is based upon the assumption that each of them is accurate.
The conclusions expressed herein are based upon the Internal Revenue Code of 1986, as amended (the Code), Treasury Regulations issued thereunder, published rulings and procedures of the Internal Revenue Service and judicial decisions, all as in effect on the date of this letter.
Based upon the foregoing, we are of the opinion that for U.S. federal income tax purposes:
1. |
The Target Funds transfer to the Acquiring Fund of all the Assets solely in exchange for Acquiring Fund Shares and Acquiring Funds assumption of the Assumed Liabilities, followed by Target Funds distribution of such Acquiring Fund common shares and VMTP Shares to its common shareholders and VMTP holders, respectively, and the termination, dissolution and complete liquidation of the Target Fund, all pursuant to the Plan, will constitute a reorganization within the meaning of section 368(a) of the Code, and the Acquiring Fund and the Target Fund will each be a party to a reorganization within the meaning of section 368(b) of the Code. |
2. |
No gain or loss will be recognized by the Acquiring Fund upon the receipt of all of the Assets solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of the Assumed Liabilities. |
3. |
No gain or loss will be recognized by the Target Fund upon the transfer of the Assets to the Acquiring Fund solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of the Assumed Liabilities or upon the distribution of Acquiring Fund Shares to the Target Fund shareholders, the redemption of their Target Fund shares, or the complete liquidation of the Target Fund. |
4. |
No gain or loss will be recognized by the Target Fund shareholders upon their receipt of Acquiring Fund Shares or the redemption of their Target Fund shares in the Reorganization. |
5. |
The aggregate basis of Acquiring Fund Shares received by each Target Fund shareholder pursuant to the Reorganization will be the same as the aggregate basis of the Target Fund shares exchanged therefor by such a shareholder. |
6. |
The holding period of Acquiring Fund Shares to be received by each Target Fund shareholder pursuant to the Reorganization will include the holding period of the Target Fund shares exchanged therefor, provided that such Target Fund shareholder held the Target Fund shares as capital assets at the time of the Reorganization. |
- 2 -
BlackRock MuniHoldings Fund II, Inc.
BlackRock MuniHoldings Fund, Inc.
[●], 2021
Page 3
7. |
The basis of each Asset transferred to the Acquiring Fund in the Reorganization will be the same in the hands of the Acquiring Fund as the basis of such Asset in the hands of the Target Fund immediately prior to the transfer increased by the amount of gain or decreased by the amount of loss, if any, recognized by the Target Fund upon the transfer. |
8. |
The holding period of each of the Assets in the hands of the Acquiring Fund will include the holding period of each such Asset when held by the Target Fund (except to the extent that the investment activities of the Acquiring Fund reduce or eliminate such holding period). |
Notwithstanding the foregoing, this opinion does not address the tax consequences of the Reorganization to contracts or securities on which gain or loss is recognized (i) upon the close of the taxable year or (ii) upon the transfer of an asset regardless of whether such transfer would otherwise be a non-recognition transaction under the Code.
Our opinion is based upon the accuracy of the certifications, representations and warranties and satisfaction of the covenants and obligations contained in the Plan, the Tax Representation Letters and in the various other documents related thereto. Our opinion may not be relied upon if any of such certifications, representations or warranties are not accurate to any material extent or if any of such covenants or obligations are not satisfied in all material respects. We hereby consent to the filing of this opinion with the Registration Statement and to the reference to us in the Joint Proxy Statement/ Prospectus included as part of the Registration Statement.
Very truly yours,
- 3 -
Exhibit (12)(d)
|
787 Seventh Avenue New York, NY 10019-6099 Tel: 212 728 8000 Fax: 212 728 8111 |
[●], 2021
BlackRock MuniHoldings Quality Fund, Inc.
BlackRock MuniHoldings Fund, Inc.
100 Bellevue Parkway
Wilmington, DE 19809
Ladies and Gentlemen:
BlackRock MuniHoldings Quality Fund, Inc., a Maryland corporation (MUS or the Target Fund), and BlackRock MuniHoldings Fund, Inc., a Maryland corporation (MHD or the Acquiring Fund), have requested our opinion as to certain federal income tax consequences of the Acquiring Funds proposed acquisition of the assets of the Target Fund pursuant to the Agreement and Plan of Reorganization dated as of [ ], 202[0/1] (the Plan). Pursuant to the Plan, (i) the Acquiring Fund will acquire substantially all of MUSs assets (the Assets) and assume substantially all of MUSs liabilities (the Assumed Liabilities) in exchange solely for newly issued common shares and Variable Rate Muni Term Preferred Shares (VMTP Shares and together with such common shares, the Acquiring Fund Shares) of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP holders, respectively, of MUS, and (ii) MUS will terminate its registration under the Investment Company Act of 1940, as amended, and liquidate, dissolve and terminate in accordance with its charter and Maryland law (all the foregoing transactions being referred to herein collectively as the Reorganization). This opinion is being delivered pursuant to Sections 8(h) and 9(i) of the Plan.
We have reviewed such documents and materials as we have considered necessary for the purpose of rendering this opinion. In rendering this opinion, we have assumed that such documents as yet unexecuted will, when executed, conform in all material respects to the proposed forms of such documents that we have examined. In addition, we have assumed the genuineness of all signatures, the capacity of each party executing a document to so execute that document, the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as certified or photostatic copies.
We have made inquiry as to the underlying facts that we considered to be relevant to the conclusions set forth in this letter. The opinions expressed in this letter are based upon certain factual statements relating to the Acquiring Fund and Target Fund set forth in the Joint Proxy Statement/ Prospectus filed
NEW YORK WASHINGTON HOUSTON PALO ALTO SAN FRANCISCO CHICAGO PARIS LONDON FRANKFURT BRUSSELS MILAN ROME
BlackRock MuniHoldings Quality Fund, Inc.
BlackRock MuniHoldings Fund, Inc.
[●], 2021
Page 2
as part of the Acquiring Funds registration statement on Form N-14 (the Registration Statement) and representations made in letters from the Target Fund and Acquiring Fund addressed to us for our use in rendering this opinion (the Tax Representation Letters). We have no reason to believe that these representations and facts are not valid, but we have not attempted to verify independently any of these representations and facts, and this opinion is based upon the assumption that each of them is accurate.
The conclusions expressed herein are based upon the Internal Revenue Code of 1986, as amended (the Code), Treasury Regulations issued thereunder, published rulings and procedures of the Internal Revenue Service and judicial decisions, all as in effect on the date of this letter.
Based upon the foregoing, we are of the opinion that for U.S. federal income tax purposes:
1. |
The Target Funds transfer to the Acquiring Fund of all the Assets solely in exchange for Acquiring Fund Shares and Acquiring Funds assumption of the Assumed Liabilities, followed by Target Funds distribution of such Acquiring Fund common shares and VMTP Shares to its common shareholders and VMTP holders, respectively, and the termination, dissolution and complete liquidation of the Target Fund, all pursuant to the Plan, will constitute a reorganization within the meaning of section 368(a) of the Code, and the Acquiring Fund and the Target Fund will each be a party to a reorganization within the meaning of section 368(b) of the Code. |
2. |
No gain or loss will be recognized by the Acquiring Fund upon the receipt of all of the Assets solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of the Assumed Liabilities. |
3. |
No gain or loss will be recognized by the Target Fund upon the transfer of the Assets to the Acquiring Fund solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of the Assumed Liabilities or upon the distribution of Acquiring Fund Shares to the Target Fund shareholders, the redemption of their Target Fund shares, or the complete liquidation of the Target Fund. |
4. |
No gain or loss will be recognized by the Target Fund shareholders upon their receipt of Acquiring Fund Shares or the redemption of their Target Fund shares in the Reorganization. |
5. |
The aggregate basis of Acquiring Fund Shares received by each Target Fund shareholder pursuant to the Reorganization will be the same as the aggregate basis of the Target Fund shares exchanged therefor by such a shareholder. |
6. |
The holding period of Acquiring Fund Shares to be received by each Target Fund shareholder pursuant to the Reorganization will include the holding period of the Target Fund shares exchanged therefor, provided that such Target Fund shareholder held the Target Fund shares as capital assets at the time of the Reorganization. |
- 2 -
BlackRock MuniHoldings Quality Fund, Inc.
BlackRock MuniHoldings Fund, Inc.
[●], 2021
Page 3
7. |
The basis of each Asset transferred to the Acquiring Fund in the Reorganization will be the same in the hands of the Acquiring Fund as the basis of such Asset in the hands of the Target Fund immediately prior to the transfer increased by the amount of gain or decreased by the amount of loss, if any, recognized by the Target Fund upon the transfer. |
8. |
The holding period of each of the Assets in the hands of the Acquiring Fund will include the holding period of each such Asset when held by the Target Fund (except to the extent that the investment activities of the Acquiring Fund reduce or eliminate such holding period). |
Notwithstanding the foregoing, this opinion does not address the tax consequences of the Reorganization to contracts or securities on which gain or loss is recognized (i) upon the close of the taxable year or (ii) upon the transfer of an asset regardless of whether such transfer would otherwise be a non-recognition transaction under the Code.
Our opinion is based upon the accuracy of the certifications, representations and warranties and satisfaction of the covenants and obligations contained in the Plan, the Tax Representation Letters and in the various other documents related thereto. Our opinion may not be relied upon if any of such certifications, representations or warranties are not accurate to any material extent or if any of such covenants or obligations are not satisfied in all material respects. We hereby consent to the filing of this opinion with the Registration Statement and to the reference to us in the Joint Proxy Statement/ Prospectus included as part of the Registration Statement.
Very truly yours,
- 3 -
Exhibit (13)(a)
Amended and Restated Transfer Agency and Service Agreement
Among
Each of the BlackRock Closed-End Investment Companies
Listed Herein on Appendix A
and
Computershare Trust Company, N.A.
and
Computershare Inc.
Table of Contents
Section 1. |
Certain Definitions |
3 | ||||
Section 2. |
Appointment of Agent |
5 | ||||
Section 3. |
Standard Services |
6 | ||||
Section 4. |
Fees and Expenses |
7 | ||||
Section 5. |
Representations and Warranties of Transfer Agent |
8 | ||||
Section 6. |
Representations and Warranties of Customer |
8 | ||||
Section 7. |
Indemnification/Limitation of Liability |
9 | ||||
Section 8. |
Service Fee Credits; Service Levels |
11 | ||||
Section 9. |
Damages |
11 | ||||
Section 10. |
Responsibilities of the Transfer Agent |
11 | ||||
Section 11. |
Covenants of the Customer and Transfer Agent |
12 | ||||
Section 12. |
Addition of New Funds |
13 | ||||
Section 13. |
Audit and Site Visits |
13 | ||||
Section 14. |
Confidentiality |
14 | ||||
Section 15. |
Privacy |
16 | ||||
Section 16. |
Term and Termination |
16 | ||||
Section 17. |
Assignment |
18 | ||||
Section 18. |
Unaffiliated Third Parties |
19 | ||||
Section 19. |
Disaster Recovery |
19 | ||||
Section 20. |
Miscellaneous |
20 | ||||
Appendix A Fund List |
||||||
Appendix B Form of CFTC Compliance Letter |
||||||
Appendix C Form of New Fund Confirmation Letter |
- 2 -
AMENDED AND RESTATED TRANSFER AGENCY AGREEMENT
This Amended and Restated Transfer Agency Agreement (this Agreement) is made as of July 13, 2020, by and among each of the BlackRock closed-end investment companies listed on Appendix A, as amended from time to time, having a principal office and place of business at 100 Bellevue Parkway, Wilmington, Delaware 19809 (each a Customer or a Fund), Computershare Inc., a Delaware corporation, and its fully owned subsidiary Computershare Trust Company, N.A., a federally chartered trust company (Trust Company), both doing business at 150 Royall Street, Canton, Massachusetts 02021 (collectively the Transfer Agent or Computershare).
WHEREAS, Customer, Computershare, and Trust Company entered into that certain Transfer Agency and Service Agreement effective January 1, 2015 (Old Agreement);
WHEREAS, the Customer desires to confirm the appointment of Trust Company as its sole transfer agent, registrar and dividend disbursing agent for the Shares, and administrator of dividend reinvestment plans, and Computershare Inc. as processor of all payments received or made by Customer under this Agreement;
WHEREAS, Trust Company and Computershare Inc. will each continue to separately provide specified services covered by this Agreement and, in addition, Trust Company may continue to arrange for Computershare Inc. to act on behalf of Trust Company in providing certain of its services covered by this Agreement;
WHEREAS, Trust Company and Computershare Inc. desire to confirm their acceptance of such respective appointments and continue to perform the services related to such appointments; and
WHEREAS, Customer and Transfer Agent hereby agree to amend and restate the Old Agreement in its entirety as set forth herein; and
WHEREAS, the Board of Directors or Trustees, as applicable, of each Customer has approved the appointment of the Transfer Agent and the form of this Agreement.
NOW THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree to the statements made in the preceding paragraphs and as follows:
Section 1. Certain Definitions.
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Account or Accounts means the account of each Shareholder which account shall hold any full or fractional Shares held by such Shareholder, outstanding funds or reportable tax information.
- 3 -
Additional Services means any and all services which are not Services, but performed by Transfer Agent upon request of a Customer.
Agreement means this agreement and any and all appendices, exhibits or Schedules and any and all amendments or modifications, which may from time to time be executed.
Board of Directors means the Board of Directors or the Board of Trustees, as the case may be, of each Customer.
Dividend Reinvestment Plan means any dividend reinvestment plan, direct stock purchase plan, or other investment programs administered by the Trust Company for Customer, the services for which are as set forth in the Service Schedule.
Effective Date means the date first stated above.
Electronic Transmission means any form of communication, not directly involving the physical transmission of paper, which creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.
Fee Letter means the fee letter attached to the Side Agreement as Schedule 1, as may be amended from time to time.
Initial Term means the term commencing on the Effective Date and continuing for a period of one (1) year from such date.
KPI Document means the KPI document describing the agreed to service levels attached to the Side Agreement as Schedule 3, as may be amended from time to time.
Schedule or Schedules means each schedule attached hereto, separately or collectively as the context requires, as the same may be amended from time to time.
SEC means the U.S. Securities and Exchange Commission.
Securities Laws means the 1933 Act and the 1934 Act as applicable to the Transfer Agent.
Service Schedule means the service schedule attached to the Side Agreement as Schedule 2.
Services means any and all services as further described herein and in the Service Schedule or the Schedules.
Share means common units of beneficial interest or common stock, as the case may be, of each Customer authorized by the Customers respective Declaration of Trust or Articles of Incorporation, as the case may be.
- 4 -
Side Agreement means the Side Agreement for Transfer Agency Services between the Customer and Transfer Agent dated as of July 13, 2020.
Shareholder means the holder of record of one or more Shares.
U.S. means the states of the United States of America, the District of Columbia, Guam, Puerto Rico, U.S. Virgin Islands and any territory or commonwealth of the United States of America with a formal local government substantially equivalent to a state government. Each will be referred to as a State.
Section 2. Appointment of Agent.
2.1 |
Appointment. The Fund hereby appoints the Trust Company to serve as sole transfer agent and registrar for the Shares, Shareholder servicing agent to the Fund and administrator of the Dividend Reinvestment Plans in accordance with the terms and conditions thereof and appoints Computershare Inc. as the service provider to the Trust Company and as processor of all payments received or made by or on behalf of Customer under this Agreement, and the Trust Company and Computershare Inc. accept such respective appointments and agree in connection with such appointments to furnish the Services expressly set forth in this Agreement. Computershare represents that it is currently registered with the SEC as a transfer agent and will remain so registered during the effectiveness of this Agreement. |
2.2 |
Documents. In connection with the appointment of the Trust Company as the transfer agent and registrar for a Customer, the Customer will provide or has previously provided the following documents to the Transfer Agent: |
(a) |
Copies of Registration Statements and amendments thereto, filed with the Securities and Exchange Commission for initial public offerings; and |
(b) |
Specimens of the Signatures of the officers of the Customer authorized to sign written instructions and requests. |
2.3 |
Records. The books and records pertaining to the Customer required by Securities Laws and the 1940 Act which are in the possession or under the control of Computershare shall be the property of the Customer. Agent will prepare and maintain such books and records as required by Securities Laws, or as otherwise mutually agreed by the parties, subject to additional fees. Such books and records shall, to the extent practicable, be maintained separately for each Fund. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by Computershare to an Authorized Person, and may be subject to a reasonable fee to be agreed upon by the parties. Transfer Agent may adopt as part of its records all lists of Shareholders, records of the Customers Shares, books, documents and records which have been employed by any former agent of the Customer for the maintenance of the ledgers for the Customers Shares, provided such ledger is certified by an officer of Customer or the prior transfer agent to be true, authentic and complete. |
2.4 |
Shares. The Customer shall, if applicable, inform Transfer Agent as to (i) the existence or termination of any restrictions on the transfer of Shares and in the application to or removal from any book entry interest of stock of any legend restricting the transfer of such Shares or the substitution for such book entry interest of a book entry interest without such legend, (ii) any authorized but unissued Shares reserved for specific purposes, (iii) any outstanding shares which |
- 5 -
are exchangeable for Shares and the basis for exchange, (iv) reserved Shares subject to option and the details of such reservation and (v) special instructions regarding dividends and information of foreign holders. |
2.5 |
Customers Agent. Transfer Agent represents that it is engaged in an independent business and will perform its obligations under this Agreement as an agent of the Customer. |
2.6 |
Certificates. No physical certificates will be issued while this Agreement is in effect. All Shares issued while this Agreement is in effect shall be represented by book entry notations only. |
Section 3. Standard Services.
3.1 |
Services. Computershare shall perform the Services set forth in the Service Schedule. |
3.2 |
Information Security and Data Protection. Computershare shall comply with the provisions of Schedules 9 and 10 of the Side Agreement. |
3.3 |
Reports and Information. Computershare shall provide the Funds with the reports specified in Schedule 6 of the Side Agreement within the periods of time prescribed in Schedule 6 of the Side Agreement and at no additional cost to the Funds. |
3.4 |
Internet Services. Transfer Agent shall make available to Customer and Shareholders, through its web sites, including but not limited to www.computershare.com (collectively, Web Site), online access to certain Account and Shareholder information and certain transaction capabilities (Internet Services), subject to Transfer Agents security procedures and the terms and conditions set forth herein and on the Web Site. Transfer Agent provides Internet Services on an as available basis as set forth in Schedule 2 of the Side Agreement, and hereby specifically disclaims any and all representations or warranties, express or implied, regarding such Internet Services, including any implied warranty of merchantability or fitness for a particular purpose and implied warranties arising from course of dealing or course of performance. Notwithstanding the foregoing, Transfer Agent shall ensure that content as posted to Web Site by Transfer Agent is an accurate and complete reflection of information contained in Transfer Agents records database. |
3.5 |
Proprietary Information. Customer agrees that the databases, programs, screen and report formats, interactive design techniques, Internet Services, software (including methods or concepts used therein, source code, object code, or related technical information) and documentation manuals furnished to Customer by Transfer Agent as part of the Services are under the control and ownership of Transfer Agent or a third party (including its affiliates) and constitute copyrighted, trade secret, or other proprietary information (collectively, Proprietary Information). In no event shall Proprietary Information be deemed Shareholder data. Customer agrees that Proprietary Information is of substantial value to Transfer Agent or other third party and will treat all Proprietary Information as confidential in accordance with Section 14 of this Agreement. Customer shall take reasonable efforts to advise its relevant employees and agents of its obligations pursuant to this Section 3.5. Subject to this Section 3.5, Transfer Agent grants to Customer a nonexclusive, nontransferable, royalty free license to use any Proprietary Information solely for the internal business purposes of Customer. Any rights to the Proprietary Information not expressly licensed hereunder are reserved by Transfer Agent. |
3.6 |
Third Party Content. Transfer Agent may provide real-time or delayed quotations and other market information and messages (Market Data), which Market Data is provided to Transfer Agent by certain third parties who may assert a proprietary interest in Market Data disseminated by them but do not guarantee the timeliness, sequence, accuracy or completeness |
- 6 -
thereof. Customer agrees and acknowledges that Transfer Agent shall not be liable in any way for any loss or damage arising from or occasioned by any inaccuracy, error, delay in, omission of, or interruption in any Market Data or the transmission thereof. |
3.7 |
Compliance with Laws. The Customer agrees the Transfer Agent is obligated to and the Transfer Agent agrees to comply with all applicable U.S. federal, state and local laws and regulations, codes, order and government rules in the performance of its duties under this Agreement. |
Section 4. Fees and Expenses.
4.1 |
Fee Letters. As compensation for Services rendered by Computershare during the term of this Agreement, the Fund will pay to Computershare such fees and charges and reimburse Computershare for such expenses, as set forth in the Fee Letter or as may otherwise be agreed to from time to time in writing by the Fund and Computershare. |
4.2 |
Adjustments. Notwithstanding Section 4.1 above, fees may be changed from time to time as agreed upon in writing between the Transfer Agent and the Customer. |
4.3 |
Invoices. The Customer agrees to pay all fees and reimbursable expenses within forty-five (45) days of receipt of the respective billing notice, except for any fees or expenses that are subject to good faith dispute. In the event of such a dispute, the Customer may only withhold that portion of the fee or expense subject to the good faith dispute. The Customer shall notify the Transfer Agent within forty-five (45) days following the receipt of each billing notice if the Customer is disputing any amounts in good faith. If the Customer does not provide such notice of dispute within the required time, the billing notice will be deemed accepted by the Customer. The Customer shall settle such disputed amounts within a reasonable time following the day on which the parties agree on the amount to be paid by payment of the agreed amount. If no agreement is reached, then such disputed amounts shall be settled as may be required by law or legal process. |
4.4 |
Late Payments. |
(a) If any undisputed amount in an invoice of the Transfer Agent (for fees or reimbursable expenses) is not paid when due, the Customer shall pay the Transfer Agent interest thereon (from the due date to the date of payment) at a per annum rate equal to one percent (1.0%) plus the Prime Rate (that is, the base rate on corporate loans posted by large domestic Transfer Agents) published by The Wall Street Journal (or, in the event such rate is not so published, a reasonably equivalent published rate selected by Customer on the first day of publication during the month when such amount was due. Notwithstanding any other provision hereof, such interest rate shall be no greater than permitted under applicable provisions of Massachusetts law.
(b) The failure by Customer to pay an invoice within 45 days after written and telephonic notice to Customer that payment is overdue or the failure by the Customer to timely pay two consecutive invoices shall constitute a material breach pursuant to Section 16.3(a) below. Transfer Agent will provide notice by writing and telephone forty-five (45) days after payment is past due. The Transfer Agent may terminate this Agreement for such material breach immediately and shall not be obligated to provide the Customer with 30 days to cure such breach.
4.5 |
Taxes. Fund is responsible for all taxes, levies, duties, and assessments levied on Services purchased under this Agreement (collectively, Transaction Taxes). Computershare Inc. is responsible for collecting and remitting Transaction Taxes in all jurisdictions in which Computershare Inc. is registered to collect such Transaction Taxes. Computershare Inc. shall invoice Fund for such Transaction Taxes that Computershare Inc. is obligated to collect upon the |
- 7 -
furnishing of Services. Fund shall pay such Transaction Taxes according to the terms in Section 7.3. Computershare Inc. shall timely remit to the appropriate governmental authorities all such Transaction Taxes that Computershare Inc. collects from Customer. To the extent that Fund provides Computershare Inc. with valid exemption certificates, direct pay permits, or other documentation that exempts Computershare Inc. from collecting Transaction Taxes from Fund, invoices issued for Services provided after Computershare Inc.s receipt of such certificates, permits, or other documentation will not reflect exempted Transaction Taxes. Computershare Inc. is solely responsible for the payment of all personal property taxes, franchise taxes, corporate excise or privilege taxes, property or license taxes, taxes relating to Computershare Inc.s personnel, and taxes based on Computershare Inc.s net income or gross revenues relating to Services. |
Section 5. Representations and Warranties of Transfer Agent.
5.1 |
Governance. Computershare Trust Company, N.A. is a federally chartered limited purpose national bank duly organized under the laws of the U.S. and Computershare Inc. is a corporation validly existing and in good standing under the laws of the State of Delaware and they have full corporate power, authority and legal right to execute, deliver and perform this Agreement. The execution, delivery and performance of this Agreement by Computershare has been duly authorized by all necessary corporate action and constitutes the legal valid and binding obligation of Computershare enforceable against Computershare in accordance with its terms. |
5.2 |
Compliance. The execution, delivery and performance of the Agreement by Computershare will not violate, conflict with or result in the breach of any material term, condition or provision of, or require the consent of any other party to, (i) any existing law, ordinance, or governmental rule or regulation to which Computershare is subject, (ii) any judgment, order, writ, injunction, decree or award of any court, arbitrator or governmental or governmental or regulatory official, body or authority which is applicable to Computershare, (iii) the incorporation documents or by-laws of, or any material agreement to which Computershare is a party. |
5.3 |
Facilities. The Transfer Agent has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. |
5.4 |
Insurance. The Transfer Agent shall procure and maintain in effect all insurance coverages required by law, and further, shall procure and maintain the policies of insurance (regardless of whether such insurance is required by law) covering claims and liabilities arising from this Agreement as identified in Schedule 8 of the Side Agreement. |
Section 6. Representations and Warranties of Customer.
6.1 |
Each Customer severally and not jointly represents and warrants to the Transfer Agent that: |
(a) |
Organization. It is a corporation or Trust duly organized and existing and in good standing under the laws of the jurisdiction of its organization; |
(b) |
Governance. It is empowered under applicable laws and by its charter documents to enter into and perform this Agreement. All corporate proceedings required by said charter documents and applicable law have been taken to authorize it to enter into and perform this Agreement. The execution, delivery and performance of this Agreement by each Customer has been duly authorized by all necessary corporate or trust action and constitutes the legal valid and binding obligation of each Customer enforceable against each Customer in accordance with its terms; |
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(c) |
A registration statement under the 1933 Act has been filed and is currently effective, or will be effective prior to the sale of any Shares, and will remain so effective, and all appropriate state securities law filings have been made with respect to all the Shares of each Customer outstanding or being offered for sale except for any Shares which are offered in a transaction or series of transactions which are exempt from the registration requirements of the 1933 Act and state securities laws; information to the contrary will result in immediate notification to the Transfer Agent. |
Section 7. Indemnification/Limitation of Liability.
7.1 |
Standard of Care. The Transfer Agent shall at all times act in good faith and agrees to use its best efforts within reasonable time limits to insure the accuracy of all Services performed under this Agreement, but assumes no responsibility and shall not be liable for loss or damage unless said loss or damage is caused by its negligence, bad faith or willful misconduct or that of its employees as set forth or breach of any representation or warranty of the Transfer Agent hereunder and subject to the limitations set forth hereunder in Section 7.4 below. |
7.2 |
Customer Indemnity. The Transfer Agent shall not be responsible for, and the Customer shall indemnify and hold the Transfer Agent harmless from and against, any and all claims, losses, damages, costs, charges, payments, expenses, liability and, court costs, fees and expenses of attorneys, expert witnesses, and other professionals reasonably acceptable to Customer arising out of or attributable to: |
(a) |
All actions of the Transfer Agent or its agents or subcontractors required to be taken pursuant to this Agreement, provided such actions are taken in good faith and without negligence or willful misconduct; |
(b) |
The Customers bad faith, negligence or willful misconduct or the material breach of any representation or warranty of the Customer hereunder; |
(c) |
The reliance or use by the Transfer Agent or its agents or subcontractors of information, records and documents which (i) are received by the Transfer Agent or its agents or subcontractors and furnished to it by or on behalf of the Customer, and (ii) have been prepared and /or maintained by the Customer or any other person or firm on behalf of the Customer; |
(d) |
The reliance or use by the Transfer Agent or its agents or subcontractors of any paper or document reasonably believed to be genuine and to have been signed by the proper person or persons including Shareholders; |
(e) |
The reliance on, or the carrying out by the Transfer Agent or its agents or subcontractors of any instructions or requests of the Customers representatives, provided such actions are taken in good faith and without negligence or willful misconduct; and |
(f) |
The offer or sale of Shares in violation of any federal or state securities laws requiring that such shares be registered or in violation of any stop order or other determination or ruling by any federal or state agency with respect to the offer or sale of such Shares. |
7.3 |
Instructions. From time to time, the Customer may provide Transfer Agent with instructions concerning the Services. In addition, at any time the Transfer Agent may apply to any officer of the Customer for instruction, and may consult with legal counsel reasonably acceptable to Customer with respect to any matter arising in connection with the services to be performed by |
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the Transfer Agent under this Agreement, and Transfer Agent and its agents and subcontractors shall not be liable and shall be indemnified by the Customer for taking action or omitting to take action by it in reliance upon such instructions or upon the advice or opinion of such counsel provided that when the action is taken it is performed in good faith and without negligence or willful misconduct. The Transfer Agent, its agents and subcontractors shall be protected and indemnified in acting upon any paper or document reasonably believed to be genuine and to have been signed by the proper person or persons, or upon any instruction, information, data, records or documents provided the Transfer Agent or its agents or subcontractors by telephone, in person, machine readable input, telex, CRT data entry or similar means authorized by the Customer or the Fund, and shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Customer. The Transfer Agent, its agents and subcontractors shall also be protected and indemnified in recognizing stock certificates which are reasonably believed to bear the proper manual or facsimile signatures of officers of the Customer, and the proper countersignature of any former transfer agent or former registrar, or of a co-transfer agent or co-registrar. |
7.4 |
Transfer Agent Indemnification/Limitation of Liability. Transfer Agent shall be responsible for and shall indemnify and hold the Customer harmless from and against any and all claims, losses, damages, costs, charges, payments, expenses, liability, court costs, and reasonable fees and expenses of attorneys, expert witnesses, and other professionals, arising out of or attributable to Transfer Agents refusal or failure to comply with the terms of this Agreement, or which arise out of Transfer Agents bad faith, negligence or willful misconduct or which arise out of the breach of any representation or warranty of Transfer Agent hereunder, for which Transfer Agent is not entitled to indemnification under this Agreement. Any liability of the Transfer Agent shall be limited as set forth in Schedule 11 of the Side Agreement. |
7.5 |
Events Beyond Reasonable Control. Neither party nor its affiliates shall be liable for any loss (including loss caused by delays, failure, errors, interruption or loss of data) or breach hereunder occurring directly or indirectly by reason of any event or circumstance, whether foreseeable or unforeseeable, which despite the taking of commercially reasonable measures is beyond its reasonable control, including without limitation: natural disasters, such as floods, hurricanes, tornados, earthquakes and wildfires; epidemics; action or inaction of civil or military authority; war, terrorism, riots or insurrection; criminal acts; job action by organized labor; interruption, loss or malfunction of utilities, transportation, computer or communications capabilities; non-performance by third parties (other than subcontractors of Transfer Agent for duties or obligations described herein, except to the extent that such non-performance would be an Event Beyond Reasonable Control of Transfer Agent if Transfer Agent was itself the non-performing party and the event(s) referenced above had affected Transfer Agent); or functions or malfunctions of the internet, firewalls, encryption systems or security devices caused by any of the foregoing (all and any of the foregoing being an Event Beyond Reasonable Control). Upon the occurrence of an Event Beyond Reasonable Control, the affected party shall be excused from any non-performance caused by the Event Beyond Reasonable Control for so long such affected party continues to use commercially reasonable efforts to attempt to perform the obligation so impacted. |
7.6 |
Notice. In order that the indemnification provisions contained in this Section 7 shall apply, upon the assertion of a claim for which one party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The indemnifying |
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party shall have the option to participate with the indemnified party in the defense of such claim or to defend against said claim in its own name or the name of the indemnified party. The indemnified party shall in no case confess any claim or make any compromise in any case in which the indemnifying party may be required to indemnify it except with the indemnifying partys prior written consent. |
Section 8. Service Fee Credits; Service Levels.
8.1 |
The KPI Document sets forth provisions applicable to the determination and assessment of Service Fee Credits, as such term is defined in the KPI Document. Service Fee Credits shall not be an exclusive remedy for any loss incurred as a result of breach conduct (which may be claimable as damages pursuant to the terms of this Agreement), but are intended to be a form of recompense to the Fund for failure by the Transfer Agent to deliver the Services in a proper, timely and consistent manner, in view of the key significance that the service levels have to the Fund. The application of Service Fee Credits shall be without prejudice to any rights of the Fund under this Agreement including the right of the Fund to terminate this Agreement pursuant to the terms of the Agreement or to claim damages from Transfer Agent, pursuant to the terms of the Agreement, as a result of any matter constituting breach conduct that contributes to circumstances that cause Service Fee Credits that accrue to the Customer. |
8.2 |
The Services provided by Computershare to the Fund shall be provided in accordance with the terms of the KPI Document, as relevant. The KPI Document is subject to change, as agreed in writing between the parties. |
9.1 |
NOTWITHSTANDING ANY OTHER PROVISION OF THE AGREEMENT, IN NO EVENT SHALL ANY PARTY, ITS AFFILIATES OR ANY OF ITS OR THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE UNDER ANY THEORY OF TORT, CONTRACT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR LOST PROFITS, FOR EXEMPLARY, PUNITIVE, SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES, OR FOR ANY OTHER DAMAGES WHICH ARE NOT DIRECT DAMAGES REGARDLESS OF WHETHER SUCH DAMAGES WERE OR SHOULD HAVE BEEN FORESEEABLE AND REGARDLESS OF WHETHER ANY ENTITY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, ALL AND EACH OF WHICH DAMAGES IS HEREBY EXCLUDED BY AGREEMENT OF THE PARTIES. FOR PURPOSES OF CLARIFICATION: NO OTHER PROVISION OF THIS AGREEMENT SHALL BE INTERPRETED TO CONDITION, LIMIT, MODIFY, NULLIFY OR OTHERWISE PREVAIL IN WHOLE OR IN PART OVER THIS SECTION 9 |
Section 10. Responsibilities of the Transfer Agent.
10.1 |
The Transfer Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Customer, by its acceptance hereof, shall be bound: |
(a) |
Whenever in the performance of its duties hereunder the Transfer Agent shall deem it necessary or desirable that any fact or matter be proved or established prior to taking or suffering any action hereunder, such fact or matter may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, the President, |
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any Vice President, the Treasurer, any Assistant treasurer, the Secretary any Assistant Secretary or Chief Financial Officer of the Customer and delivered to the Transfer Agent. Such certificate shall be full authorization to the Transfer Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate provided the action taken is without negligence, bad faith or willful misconduct. |
(b) |
The Customer agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Transfer Agent for the carrying out, or performing by the Transfer Agent of the provisions of this Agreement. |
(c) |
Transfer Agent, any of its affiliates or subsidiaries, and any stockholder, director, officer or employee of the Transfer Agent may buy, sell or deal in the securities of the Customer or become pecuniary interested in any transaction in which the Customer may be interested, or contract with or lend money to the Customer or otherwise act as fully and freely as though it were not appointed as agent under this Agreement. Nothing herein shall preclude the Transfer Agent from acting in any other capacity for the Customer or for any other legal entity. |
(d) |
No provision of this Agreement shall require the Transfer Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if it shall believe in good faith that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. |
Section 11. Covenants of the Customer and Transfer Agent.
11.1 |
Customer Corporate Authority. The Customer has previously furnished or shall furnish to the Transfer Agent the following: |
(a) |
A copy of the Articles of incorporation and By-Laws of the Customer; |
(b) |
Copies of all material amendments to its Articles of Incorporation or By-Laws made after the date of this Agreement, promptly after such amendments are made; and |
(c) |
A certificate of the Customer as to the Shares authorized, issued and outstanding, as well as a description of all reserves of unissued shares relating to the exercise of options, warrants or a conversion of debentures or otherwise. |
11.2 |
Transfer Agent Facilities. The Transfer Agent hereby agrees to establish and maintain facilities and procedures consistent with industry standards for the safekeeping of check forms and facsimile signature imprinting devices, if any, and for the preparation, use, and recordkeeping of such forms and devices. |
11.3 |
Notification. Customer shall notify the Transfer Agent as soon as possible in advance of any stock split, stock dividend or any similar event which may affect the Shares and any bankruptcy, insolvency, moratorium or other proceeding regarding Customer affecting the enforcement of creditors rights. Notwithstanding any other provision of the Agreement to the contrary, the Transfer Agent will have no obligation to perform any Services under the Agreement subsequent to the commencement of any bankruptcy, insolvency, moratorium or other proceeding regarding Customer affecting the enforcement of creditors rights unless the Transfer Agent receives assurance satisfactory to it that it will receive full payment for such services. Further, Customer may not assume the Agreement after the filing of a bankruptcy petition without the Transfer Agents written consent. |
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11.4 |
Summary of Policies and Procedures. Transfer Agent shall upon request provide Customer with a summary of any of its policies and procedures relating to Services or this Agreement and provide prompt summary e-mail notification of material changes to such policies and procedures |
Section 12. Addition or Deletion of a Fund.
12.1 |
The parties shall cooperate to update Appendix A (e.g., add or remove a Fund) within 30 days of the end of each calendar quarter to reflect the addition or deletion of any Fund receiving Services pursuant to this Agreement. |
12.2 |
The parties agree that Appendix A may be amended for purposes of Section 12.1 and otherwise without an executed written amendment if (a) any member of the BlackRock Relationship Team (as identified in Schedule 4 of the Side Agreement) delivers by email to the Transfer Agent Senior Customer Service Officer or a Transfer Agent Customer Service Officer (all as identified in Schedule 4 of the Side Agreement) (i) a copy of an amended and restated Appendix A, dated as of the date such amended and restated Appendix A is intended to be effective, and (ii) to the extent a Fund is being added, a letter substantially in the format stated in Appendix C signed by an authorized officer of such Fund confirming the addition of such Fund as a party to the Agreement, and (b) the Transfer Agent Senior Customer Service Officer or a Transfer Agent Customer Service Officer, as the case may be, receiving the email message and attachment(s) acknowledges in a responding email that the amended and restated Appendix A has been received. |
12.3 |
The parties agree that Funds listed on Appendix A, as it may be amended from time to time, automatically agree to be bound by the terms of the Side Agreement. |
12.4 |
Notwithstanding the foregoing, if Transfer Agent determines and advises the Customer that additions or revisions to the SCRIP System are necessary in order to accommodate any such new fund the Customer shall be deemed to have submitted a request for an amendment to the Agreement. |
Section 13. Audits and Site Visits.
13.1 |
Subject to the further provisions of this Section 13, a reasonable number of representatives of the Customer together, if applicable, with auditors associated with a firm of certified independent public accountants (Auditor Firms) may, during normal weekday business hours, upon giving the Transfer Agent at least twenty (20) days advance notice, no more frequently than once per year (unless required by Customers regulators or in response to a previously-identified deficiency, in which event the additional audit will only relate to such deficiency), except that, at mutually agreed dates, and subject to the Transfer Agents reasonable security, privacy and confidentiality policies and procedures inspect the Transfer Agent premises principally utilized to perform the Services and related operations, and (ii) examine on-site any books and records required to be maintained by the Transfer Agent in connection with the performance of the Services and the written procedures utilized by the Transfer Agent in performing the Services, solely to determine the Transfer Agents compliance with this Agreement. |
13.2 |
During the annual site visit by the BlackRock Relationship Team at mutually agreed dates, and subject to the Transfer Agents reasonable security, privacy and confidentiality policies and procedures the Customer may, subject to the further provisions of this Section 13, (i) inspect the Transfer Agent premises principally utilized to perform the Services and related operations, and |
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(ii) request the Transfer Agent provide system and transaction processing demonstrations, and (iii) make available employees with knowledge about the Services performed to conduct discussions with the Customer and answer reasonable questions of the Customer about such subjects. |
13.3 |
Subject to the further provisions of this Section 13, and Transfer Agents reasonable security, privacy and confidentiality policies and procedures. Transfer Agent will give regulatory authorities with jurisdiction over the Customer, upon reasonable advance written notice and during normal weekday business hours, the ability to (i) inspect the Transfer Agent premises principally utilized to perform the Services and related operations, and (ii) examine on-site any books and records required to be maintained by the Transfer Agent in connection with the performance of the Services. |
13.4 |
Transfer Agent shall not be required in connection with any site visits under this Section 13 to engage in any conduct that would significantly interfere with or disrupt the normal business operations of the Transfer Agent. The Transfer Agent may, in its sole discretion, prohibit the Customer, personnel of Auditor Firms, and regulators of the Customer from entering certain areas of its facilities for security reasons, in which case the Transfer Agent will provide the Customer with alternative access to the books and records, information or personnel in such restricted area, to the extent reasonably possible. Audits shall not include penetration testing. Any audit under this Section 13 includes the right to inspect the books and records of the Transfer Agent on-site at Transfer Agents office, but not the right to copy any records. The Customer will provide the Transfer Agent with a written scope of work including a mutually agreed level of detail, at least 10 business days in advance of commencement of any audit. Personnel of Auditor Firms or regulators of the Customer, who in the sole judgment of the Transfer Agent will have access to customer, confidential, proprietary or other privileged information of the Transfer Agent, must prior to the site visit if so requested by the Transfer Agent execute confidentiality agreements containing terms reasonably satisfactory to the Transfer Agent. The Transfer Agent shall not under any circumstances be obligated to divulge any information that is prohibited by law or by a confidentiality agreement with a third party. |
13.5 |
The Customer will compensate the Transfer Agent for all out of pocket expenses incurred in connection with any audit under this Section 13, and will also compensate the Transfer Agent, in accordance with the Transfer Agents fee schedule in effect at the time of such audit, for the time of each of the Transfer Agents employees required to assist with such audit; provided, however, that in no event shall the Customer be charged for the time incurred by the Transfer Agents Relationship Management employees required to assist with such audit. |
Section 14. Confidentiality.
14.1 |
Each party shall keep the Confidential Information (as defined in below) of the other party in confidence and will not use or disclose or allow access to or use of such Confidential Information except as set forth in Section 14.4 below. Each party acknowledges that the Confidential Information of the disclosing party will remain the sole property of such party. In complying with the first sentence of this Section 14.1, each party will use at least the same degree of care it uses to protect its own confidential information, but in no event less than a commercially reasonable degree of care. |
14.2 |
Subject to Sections 14.3 and 14.4 below, Confidential Information means (i) except to the extent disclosure may be required by the Securities Laws or the 1940 Act, the terms and |
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conditions (but not the existence of) this Agreement, all compensation agreements, arrangements and understandings (including waivers) respecting this Agreement, disputes pertaining to the Agreement, and information about a partys exercise of rights hereunder, performance of obligations hereunder or other conduct of a party in connection with the Agreement, in whatever form, and (ii) information and data of, owned by or about a disclosing party or its affiliates, customers, or subcontractors that may be provided to the other party or become known to the other party in the course of the relationship established by this Agreement, regardless of form or content, including but not limited to (A) competitively sensitive material, and not generally known to the public, including, but not limited to, studies, plans, reports, surveys, summaries, documentation and analyses, regardless of form, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of the Fund or Computershare, their respective subsidiaries and Affiliates and the customers, clients and suppliers of any of them; (B) scientific, technical or technological information, a design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords the Fund or Computershare a competitive advantage over its competitors; (C) a confidential or proprietary concept, Proprietary Information, documentation, report, data, specification, computer software, source code, object code, flow chart, database, invention, know how, trade secret, whether or not patentable or copyrightable; (D) information related to security, disaster recovery, business continuity and any other operational plans, procedures, practices and protocols, and (E) anything designated as confidential. |
14.3 |
Information or data that would otherwise constitute Confidential Information under Section 14.2 shall not constitute Confidential Information to the extent it: |
(a) |
is already known to the receiving party at the time it is obtained; |
(b) |
is or becomes publicly known or available through no wrongful act of the receiving party; |
(c) |
is rightfully received from a third party who, to the receiving partys knowledge, is not under a duty of confidentiality; |
(d) |
is released by the protected party to a third party without restriction; or |
(e) |
has been or is independently developed or obtained by the receiving party without reference to the Confidential Information provided by the protected party. |
14.4 |
Confidential Information of a disclosing party may be used or disclosed by the receiving party in the circumstances set forth below but except for such permitted use or disclosure shall remain Confidential Information subject to all applicable terms of this Agreement: |
(a) |
in connection with activities contemplated by this Agreement; |
(b) |
as required by law or regulation or pursuant to a court order, subpoena, order or request of a governmental or regulatory or self-regulatory authority or agency, or binding discovery request in pending litigation (provided that, other than for requests to the Transfer Agent for Shareholder records pursuant to standard subpoenas from state or federal government authorities (e.g., divorce and criminal actions) the receiving party will provide the other party written notice of such requirement or request, to the extent such notice is permitted, and subject to proper jurisdiction, if applicable); |
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(c) |
in connection with inquiries, examinations, audits or other reviews by a governmental, regulatory or self-regulatory authority or agency, audits by independent auditors or requests for advice or opinions from counsel; |
(d) |
the information or data is relevant and material to any claim or cause of action between the parties or the defense of any claim or cause of action asserted against the receiving party; or |
(e) |
as otherwise agreed in writing between the parties. |
14.5 |
Subject to the exceptions in Section 14.4, each party agrees not to publicly disseminate Confidential Information of the other party or mutual Confidential Information. |
14.6 |
Notwithstanding Section 20.8 (Survival) of this Agreement, the provisions of this Section 14 shall survive termination of this Agreement for a period of three (3) years after such termination. |
Section 15. Privacy.
15.1 |
Computershare agrees to implement and maintain appropriate security measures to protect personal information, as that term is defined in 201 CMR 17.00: Standards For The Protection Of Personal Information Of Residents Of The Commonwealth (Massachusetts Privacy Regulation), consistent with the Massachusetts Privacy Regulation and any applicable federal regulations. Computershare shall treat non-public personal information of Shareholders as confidential, and shall not disclose such information except in connection with carrying out the Services set forth in this Agreement, as required by law or regulation, or as allowed in this Agreement. |
Section 16. Term and Termination.
16.1 |
Term. This Agreement shall be effective from the Effective Date and shall remain in full force and effect and continue through to the end of the Initial Term and shall, upon the expiration thereof, be automatically renewed thereafter for successive one (1) year terms, unless terminated pursuant to Section 16. |
16.2 |
Termination for Convenience. Either party may terminate this Agreement by providing a written notice of termination to the other party, specifying the date this Agreement will terminate as follows: (a) if terminated by Customer, at least 90 days and not more than 365 days in advance of the termination date so specified in the notice, or (b) if terminated by Computershare, at least 180 days and not more than 365 days in advance of the termination date so specified in the notice. |
16.3 |
Termination for Cause. Without prejudice to its other rights under this Agreement, a party (the Terminating Party) shall be entitled to terminate this Agreement if: |
(a) |
the other party commits a material breach of the Agreement which is capable of being remedied but, following receipt of written notice of such material breach from the Terminating Party, the breaching party does not remedy the material breach within 90 days of receiving such notice (or within such other period as the Customer and the Transfer Agent may agree upon following receipt of such notice). In such case, the Terminating Party may terminate this Agreement by providing a written notice of termination to the breaching party, specifying the date as of which this Agreement will terminate, which may be any date, including the date such written notice is provided, however, the failure by the Customer to pay an invoiced Fee which is subject to a good faith dispute shall not constitute a material breach of the Agreement; |
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(b) |
a party commits a material breach of the Agreement which is not capable of being remedied. In such case, the Terminating Party may terminate this Agreement by providing a written notice of termination to the breaching party, specifying the date as of which this Agreement will terminate, which may be any date 90 days from the date such written notice is provided; |
(c) |
In the case of Transfer Agent assigning this Agreement pursuant to Section 17.1, Customer may terminate this Agreement. Customer must exercise its right to terminate pursuant to this Section 16.3(c) within 60 days from the date Customer receives notice of such assignment and must provide the Transfer Agent with not less than ninety (90) days prior written notice of termination. |
(d) |
a party ceases to maintain a regulatory license, registration, permission or authorization that, in the case of the Transfer Agent materially impairs its ability to provide the Services or any material portion thereof or in the case of the Customer, materially alters its ability to perform its obligations under this Agreement; or |
(e) |
the other party becomes the subject of a significant action (such as an enforcement action or investigation) by a regulatory authority with jurisdiction over that party that materially impacts, in the case of the Transfer Agent, its ability to provide Services and, in the case of the Customer, its ability to perform its obligations under this Agreement. |
16.4 |
Regulatory Necessity. In the event the Customer, is required by the written directive an applicable provincial or federal regulatory or self-regulatory organization with jurisdiction over the Customer (the Issuing Regulator) to terminate this Agreement or to cease to receive or procure one or more Services from the Transfer Agent or to cease to carry on the business for the purpose of which it requires the Services due to any circumstance relating specifically to the Transfer Agent (a Termination Directive), the Customer shall provide the Transfer Agent with a copy of the Termination Directive as promptly as permitted by such Termination Directive, if permitted, and thereafter be entitled to terminate the Agreement or impacted Services in accordance with the requirements of the Termination Directive. |
16.5 |
Termination by the Customer. The Customer may terminate this Agreement by providing a written notice of termination to the Transfer Agent, specifying the date as of which this Agreement will terminate, which may be any date, including the date such written notice is provided, provided the circumstances described below giving rise to the termination right are continuing at the time of the Transfer Agents receipt of such written notice, if as a result of an Event Beyond Reasonable Control: |
(a) |
The Transfer Agent is prevented from performing the whole or substantially the whole of the Services, or of any key elements of the Services, for a continuous period in excess of 60 days; or |
(b) |
The Transfer Agent is prevented from performing the whole or substantially the whole of the Services, or of any key elements of the Services for a continuous period in excess of 14 days and during that period it has not used all commercially reasonable efforts to: find a solution by which its obligations under this Agreement may be performed despite the continuance of the Event Beyond Reasonable Control; or attempt to perform the impacted obligations, including by implementing its business continuity and disaster recovery plan. |
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16.6 |
Insolvency. |
(a) |
Notwithstanding any other provision of this Agreement, the Customer or the Transfer Agent may in their or its sole discretion terminate this Agreement immediately by sending notice thereof to the other party upon the happening of any of the following to such other party: |
(i) |
such party commences as debtor any case or proceeding under any bankruptcy, insolvency or similar law, or there is commenced against such party any such case or proceeding; |
(ii) |
such party commences as debtor any case or proceeding seeking the appointment of a receiver, conservator, trustee, custodian or similar official for such party or any substantial part of its property or there is commenced against such party any such case or proceeding; |
(iii) |
such party makes a general assignment for the benefit of creditors; or |
(iv) |
such party states in any medium, written, electronic or otherwise, any public communication or in any other public manner its inability to pay debts as they come due. |
(b) |
Each of the Customer, and the Transfer Agent may exercise its termination right under Section 16 at any time after the occurrence of any of the foregoing events notwithstanding that such event may cease to be continuing prior to such exercise, and any delay in exercising this right shall not be construed as a waiver or other extinguishment of that right. Any exercise by the Customer or the Transfer Agent of its termination right under Section 16 shall be without any prejudice to any other remedies or rights available to such party and shall not be subject to any fee or penalty, whether monetary or equitable. Notwithstanding anything to the contrary in this Agreement, notice of termination under this Section 16 shall be considered given and effective when given, not when received. |
16.7 |
Each party will notify the other party promptly of any occurrence of the circumstances specified in Sections 16.2, 16.3, 16.4, 16.5, and 16.6. No failure or delay by a party to give any such notice will prejudice or limit the rights of the other party to terminate this Agreement (whether arising out of, in connection with or relating to this Agreement or otherwise). |
16.8 |
Records. Upon receipt of written notice of termination, the parties will use commercially practicable efforts to effect an orderly termination of this Agreement. Subject to the provisions in Schedule 7 of the Side Agreement, the Transfer Agent will deliver promptly to the Customer electronically or in other media, in Computershares industry standard format, all stockholder and other records, files and data supplied to or compiled by the Transfer Agent on behalf of the Customer, subject to applicable law and Transfer Agents records management policy. |
Section 17. Assignment.
17.1 |
Affiliates. Upon thirty (30) days prior written notice to Customer, the Transfer Agent may, without further consent of the Customer assign its right and obligations hereunto to any affiliated and registered transfer agent under Rule 17Ac2-1 promulgated under the 1934 Act. The Transfer Agent will not assign its rights and obligations to any other person without the Customers prior written consent. |
17.2 |
Sub-contractors. The Transfer Agent may, without further consent of the Customer, subcontract with (a) any affiliates, or (b) unaffiliated subcontractors such services as may be required from |
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time to time (e.g., lost shareholder searches, escheatment, telephone and mailing services); provided, however, that the Transfer Agent shall be as fully responsible to the Customer for the acts and omissions of any subcontractor as it is for its own acts and omissions. |
Section 18. Unaffiliated Third Parties.
18.1 |
Nothing herein shall impose any duty upon the Transfer Agent in connection with or make the Transfer Agent liable for the actions or omissions to act of unaffiliated third parties such as, by way of example and not limitation, airborne services, the U.S. mails and telecommunication companies, provided, if the Transfer Agent selected such company, the Transfer Agent shall have exercised due care in selecting the same. |
Section 19. Disaster Recovery.
19.1 |
Computershare shall maintain or arrange with third parties for back-up facilities (Back-Up Facilities) to the primary operations and data centers used by Computershare to provide the Services (Primary Facilities). The Back-Up Facilities will be capable of providing the Services in the event an incident to the Primary Facilities significantly interrupts the delivery of a significant Service. In the event of equipment failures, Computershare shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions, including using the Back-Up Facilities where appropriate. |
19.2 |
Computershare shall develop and maintain a business continuity plan containing disaster recovery procedures for its data centers and operations facilities (Business Continuity Plan). Computershare will provide business continuity and disaster recovery services in accordance with its Business Continuity Plan. Computershares Business Continuity Plan will at a minimum contain: |
(a) |
Crisis management procedures for command and control during a disaster; |
(b) |
Emergency notification process; |
(c) |
Activation procedures including assignment of the authority to activate; |
(d) |
Recovery process; |
(e) |
Procedures and accommodations for the recovery of systems, applications and networks; and |
(f) |
Identification of external service providers required for recovery, including but not limited to, disaster recovery service providers, equipment maintenance, transportation, salvage and building maintenance. |
19.3 |
Annually, or upon the Funds reasonable request, Computershare will certify that its Business Continuity Plan complies with the provisions of this Section 19 and Schedule 5 of the Side Agreement. |
19.4 |
Attached to the Side Agreement as Schedule 5 is an executive summary of the Business Continuity Plan as the Business Continuity Plan was constituted on the Effective Date which sets forth in reasonable detail the characteristics of the Business Continuity Plan. Computershare shall annually provide the Fund with an executive summary in written form of the Business Continuity Plan, updated as necessary to incorporate into the executive summary, as of the date provided, summaries of any changes to the Business Continuity Plan since the Effective Date, or the date of the last executive summary of the Business Continuity Plan provided to the Fund, as the case may be. |
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Section 20. Miscellaneous.
20.1 Notices.
All notices or other communications required to be given pursuant to this Agreement shall be in writing, including by Electronic Transmission, and shall be deemed given when (i) delivered in person, by overnight delivery through a commercial courier service, or by registered or certified mail or (ii) delivered by electronic mail directed to the electronic mail address set out in this Section 20. Notices shall be addressed to each party at its address set forth below, or such other address as the recipient may have specified by earlier notice to the sender.
If to the Customer:
c/o BlackRock Advisors, LLC
100 Bellevue Parkway
Wilmington, Delaware 19809
Attn: TA Oversight
E-mail: Matthew.luongo@blackrock.com
If to the Transfer Agent:
Computershare Trust Company, N.A.
150 Royall Street
Canton, MA 02021
Attn: Client Services
Email:Jennifer.bridges@computershare.com;
Jeffrey.Almeida@computershare.com; Angela.Dray@computershare.com
The Transfer Agent and the Customer may, by notice to the other, designate additional or different addresses for subsequent notices or communications.
20.2 Successors.
All the covenants and provisions of this Agreement by or for the benefit of the Customer or the Transfer Agent shall bind and inure to the benefit of their respective successors and assigns hereunder.
20.3 Amendments.
This Agreement may be amended or modified by a written amendment executed by both parties hereto and, to the extent required by Customer, authorized or approved by a resolution of the Board of Directors of the Customer, subject to the provisions of Section 12.
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20.4 Severability.
If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provision, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
20.5 Governing Law.
This Agreement shall be governed by the laws of The Commonwealth of Massachusetts.
20.6 Descriptive Headings.
Descriptive headings of the several sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.
20.7 Third Party Beneficiaries.
The provisions of this Agreement are intended to benefit only the Transfer Agent, the Customer and their respective permitted successors and assigns. No rights shall be granted to any other person by virtue of this Agreement, and there are no third party beneficiaries hereof.
20.8 Survival.
All provisions regarding indemnification, warranty, liability and limits thereon, and confidentiality and protection of proprietary rights and trade secrets shall survive the termination of this Agreement.
20.9 Merger of Agreement.
This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject matter hereof, whether oral or written.
20.10 Priorities.
In the event of any conflict, discrepancy, or ambiguity between the terms and conditions contained in this Agreement and any schedules or attachments hereto, the terms and conditions contained in this Agreement shall take precedence.
20.11 Counterparts.
This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. A signature to this Agreement transmitted electronically shall have the same authority, effect, and enforceability as an original signature.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by one of its officers thereunto duly authorized, all as of the date first written above.
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Exhibit (13)(b)
ADMINISTRATION AND FUND ACCOUNTING SERVICES AGREEMENT
Between
Each BlackRock Management Investment Company Listed in Schedule A
And
State Street Bank and Trust Company
Dated as of December 31, 2018
TABLE OF CONTENTS
Page | ||||||
1. |
APPOINTMENT OF ADMINISTRATOR |
4 | ||||
2. |
DELIVERY OF DOCUMENTS |
4 | ||||
3. |
REPRESENTATIONS AND WARRANTIES OF THE ADMINISTRATOR |
5 | ||||
4. |
REPRESENTATIONS AND WARRANTIES OF THE FUNDS |
5 | ||||
5. |
ADMINISTRATION SERVICES |
6 | ||||
6. |
COMPENSATION OF ADMINISTRATOR; EXPENSE REIMBURSEMENT; FUND EXPENSES |
6 | ||||
7. |
INSTRUCTIONS AND ADVICE |
6 | ||||
8. |
STANDARD OF CARE; LIMITATION OF LIABILITY AND INDEMNIFICATION |
7 | ||||
9. |
CONFIDENTIALITY |
8 | ||||
10. |
USE OF DATA |
8 | ||||
11. |
COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS; RECORDS |
9 | ||||
12. |
SERVICES NOT EXCLUSIVE |
9 | ||||
13. |
EFFECTIVE PERIOD AND TERMINATION |
9 | ||||
14. |
DELEGATION |
10 | ||||
15. |
INTERPRETIVE AND ADDITIONAL PROVISIONS |
10 | ||||
16. |
NOTICES |
11 | ||||
17. |
AMENDMENT |
11 | ||||
18. |
ASSIGNMENT |
11 | ||||
19. |
SUCCESSORS |
11 | ||||
20. |
DATA PROTECTION |
11 | ||||
21. |
ENTIRE AGREEMENT |
12 | ||||
22. |
WAIVER |
12 | ||||
23. |
SEVERABILITY |
12 | ||||
24. |
GOVERNING LAW |
12 | ||||
25. |
REPRODUCTION OF DOCUMENTS |
12 | ||||
26. |
LIMITATION OF LIABILITY OF TRUSTEES |
12 | ||||
27. |
COUNTERPARTS |
12 |
- 2 -
TABLE OF CONTENTS
(continued)
SCHEDULE A |
LISTING OF FUNDS AND PORTFOLIOS |
|
SCHEDULE B |
LIST OF SERVICES |
|
SCHEDULE B1 |
FUND ADMINISTRATION TREASURY SERVICES |
|
SCHEDULE B2 |
FUND ADMINISTRATION TAX SERVICES |
|
SCHEDULE B5 |
FUND ADMINISTRATION MONEY MARKET FUND SERVICES |
|
SCHEDULE B6 |
FUND ADMINISTRATION FORM N-PORT AND FORM N-CEN SUPPORT SERVICES |
|
SCHEDULE B7 |
FUND ACCOUNTING SERVICES |
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ADMINISTRATION AND FUND ACCOUNTING SERVICES AGREEMENT
This Administration and Fund Accounting Services Agreement (Agreement) dated and effective as of December 31, 2018, is by and between State Street Bank and Trust Company, a Massachusetts trust company (the Administrator), and each management investment company identified on Schedule A hereto, together with each management investment company which becomes a party to this Agreement in accordance with the terms hereof (each a Fund and collectively, the Funds).
WHEREAS, each Fund is, unless otherwise noted, an open-end or closed-end, management investment company, and may be currently comprised of different series (each, a Portfolio and collectively, the Portfolios), and is registered with the U.S. Securities and Exchange Commission (SEC) by means of a registration statement (Registration Statement) under the Investment Company Act of 1940, as amended (the 1940 Act), and in most instances, the Securities Act of 1933, as amended (1933 Act); and
WHEREAS, each Fund desires to retain the Administrator to furnish certain administrative services to the Funds, and the Administrator is willing to furnish such services, on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto agree as follows:
1. |
APPOINTMENT OF ADMINISTRATOR |
Each Fund hereby appoints the Administrator to act as administrator to such Fund for purposes of providing certain administrative services for the period and on the terms set forth in this Agreement. The Administrator accepts such appointment and agrees to render the services stated herein.
Certain Funds currently consist of the Portfolios as listed in Schedule A to this Agreement. In the event that a Fund establishes one or more additional Portfolio(s) with respect to which it wishes to retain the Administrator to act as administrator hereunder, the Fund shall notify the Administrator in writing. Upon written acceptance by the Administrator, such Portfolio(s) shall become subject to the provisions of this Agreement to the same extent as the existing Portfolios, except to the extent that such provisions (including those relating to compensation and expenses payable) may be modified with respect to such Portfolio in writing by the Fund and the Administrator at the time of the addition of such Portfolio.
2. |
DELIVERY OF DOCUMENTS |
Each Fund has or will promptly deliver, or make available electronically, to the Administrator copies of each of the following documents and all future amendments and supplements, if any:
a. |
The Funds Charter Documents (Governing Documents); |
b. |
The Funds currently effective Registration Statement under the 1933 Act (if applicable) and the 1940 Act and each Prospectus and Statement of Additional Information (SAI) relating to the Portfolio(s) and all amendments and supplements thereto as in effect from time to time; |
c. |
Copies of the resolutions of the Board of Directors/Trustees of each Fund (the Board) certified by such Funds Secretary authorizing (1) the Fund to enter into this Agreement and (2) certain individuals on behalf of the Fund to (a) give instructions to the Administrator pursuant to this Agreement and (b) sign checks and pay expenses; |
d. |
A copy of the investment advisory agreement between each Fund, on behalf of itself or each Portfolio, and its investment adviser; and |
e. |
Such other certificates, documents or opinions which the Administrator may, in its reasonable discretion, deem necessary or appropriate in the proper performance of its duties. |
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3. |
REPRESENTATIONS AND WARRANTIES OF THE ADMINISTRATOR |
The Administrator represents and warrants to the Funds that:
a. |
It is a Massachusetts trust company, duly organized and existing under the laws of The Commonwealth of Massachusetts; |
b. |
It has the requisite power and authority to carry on its business in The Commonwealth of Massachusetts; |
c. |
All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement; |
d. |
No legal or administrative proceedings have been instituted or threatened which would have a material effect on the Administrators ability to perform its duties and obligations under this Agreement; and |
e. |
Its entrance into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of the Administrator or any law or regulation applicable to it. |
4. |
REPRESENTATIONS AND WARRANTIES OF THE FUNDS |
Each Fund represents and warrants to the Administrator that:
a. |
It is a corporation, business trust or statutory trust, as the case may be, duly organized, existing and in good standing under the laws of its state of formation; |
b. |
It has the requisite power and authority under applicable laws and by its Governing Documents to enter into and perform this Agreement; |
c. |
All requisite proceedings have been taken to authorize it to enter into and perform this Agreement; |
d. |
A Registration Statement has been filed and, with respect to Funds that are open-end management investment companies, will be effective and remain effective during the term of this Agreement. Each Fund also warrants to the Administrator that as of the effective date of this Agreement, all necessary filings under the securities laws of the states in which the Fund offers or sells its shares have been made; |
e. |
No legal or administrative proceedings have been instituted or threatened which would have a material effect on a Funds ability to perform its duties and obligations under this Agreement; |
f. |
Its entrance into this Agreement will not cause a material breach or be in material conflict with any other agreement or obligation of the Funds or any law or regulation applicable to it; and |
g. |
Where information provided by the Funds or the Funds shareholders includes information about an identifiable individual (Personal Information), each Fund represents and warrants that it has obtained all consents and approvals, as required by all applicable laws, regulations, by-laws and ordinances that regulate the collection, processing, use or disclosure of Personal Information, necessary to disclose such Personal Information to the Administrator, and as required for the Administrator to use and disclose such Personal Information in connection with the performance of the services hereunder. Each Fund acknowledges that the Administrator may perform any of the services, and may use and disclose Personal Information outside of the jurisdiction in which it was initially collected by the Funds, including the United States, solely in connection with the performance of the services set out in this Agreement and that information relating to the Funds, including Personal Information may be accessed by national security authorities, law enforcement and courts. The Administrator shall be kept indemnified by and be without liability to the Funds for any action taken or omitted by it in reliance upon this representation and warranty, including without limitation, any liability or costs in connection with claims or complaints for failure to comply with any applicable law that regulates the collection, processing, use or disclosure of Personal Information. |
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5. |
ADMINISTRATION SERVICES |
The Administrator shall provide the services as listed on Schedule B, subject to the authorization and direction of the Funds and, in each case where appropriate, the review and comment by the Funds independent accountants and legal counsel and in accordance with procedures which may be established from time to time between the Funds and the Administrator.
The Administrator shall perform such other services for the Funds that are mutually agreed to in writing by the parties from time to time, for which the Funds will pay such fees as may be mutually agreed upon in writing, including the Administrators reasonable out-of-pocket expenses. The provision of such services shall be subject to the terms and conditions of this Agreement, unless otherwise modified in writing.
The Administrator shall provide the office facilities and the personnel determined by it to perform the services contemplated herein.
6. |
COMPENSATION OF ADMINISTRATOR; EXPENSE REIMBURSEMENT; FUND EXPENSES |
The Administrator shall be entitled to reasonable compensation for its services and expenses, as agreed upon from time to time in writing between the Funds on behalf of each applicable Portfolio and the Administrator.
The Funds agree to promptly reimburse, or cause to be reimbursed, the Administrator for any equipment and supplies specially ordered by or for the Funds through the Administrator and for any other reasonable expenses not contemplated by this Agreement that the Administrator may incur on the Funds behalf at the Funds request or with the Funds consent.
Each Fund will bear all expenses that are incurred in its operation and not specifically assumed by the Administrator. For the avoidance of doubt, Fund expenses not assumed by the Administrator include, but are not limited to: organizational expenses; cost of services of independent accountants and outside legal and tax counsel (including such counsels review of the Registration Statement, Form N-CSR, Form N-Q or Form N-PORT (as applicable), Form N-PX, Form N-MFP, Form N-SAR or Form N-CEN (as applicable), proxy materials, federal and state tax qualification as a regulated investment company and other notices, registrations, reports, filings and materials prepared by the Administrator under this Agreement, as applicable); cost of any services contracted for by the Funds directly from parties other than the Administrator; cost of trading operations and brokerage fees, commissions and transfer taxes in connection with the purchase and sale of securities for the Funds; investment advisory fees; taxes, insurance premiums and other fees and expenses applicable to its operation; costs incidental to any meetings of shareholders including, but not limited to, legal and accounting fees, proxy filing fees and the costs of preparation (e.g., typesetting, XBRL-tagging, page changes and all other print vendor and EDGAR charges, collectively referred to herein as Preparation), printing, distribution and mailing of any proxy materials; costs incidental to Board meetings, including fees and expenses of Board members; the salary and expenses of any officer, director/trustee or employee of the Funds; costs of Preparation, printing, distribution and mailing, as applicable, of the Funds Registration Statements and any amendments and supplements thereto; printing, distribution and mailing of shareholder reports; cost of Preparation and filing of the Funds tax returns, Form N-1A, Form N-2, Form N-CSR, Form N-Q or Form N-PORT (as applicable), Form N-PX, Form N-MFP and Form N-SAR or Form N-CEN (as applicable), and all notices, registrations and amendments associated with applicable federal and state tax and securities laws; all applicable registration fees and filing fees required under federal and state securities laws; the cost of fidelity bond and D&O/E&O liability insurance; and the cost of independent pricing services used in computing the Portfolio(s) net asset value.
7. |
INSTRUCTIONS AND ADVICE |
At any time, the Administrator may apply to any officer of the Funds or his or her designee for instructions or the independent accountants for the Funds, with respect to any matter arising in connection with the services to be performed by the Administrator under this Agreement. The Administrator shall be entitled to rely on and may act upon reasonable advice of reputable counsel (who may be counsel for the Funds) on all matters, and shall be without liability for any action reasonably taken or omitted in good faith pursuant to such advice; provided, however, that with respect to the reliance of such reasonable advice and performance of any action or omission of any action upon such advice, the Administrator shall be required to conform to the standard of care set forth in Section 8. The Administrator and the applicable Funds shall mutually agree as to which entity will bear the cost of such advice of counsel.
- 6 -
Subject to the standard of care set forth in Section 8, the Administrator shall not be liable, and shall be indemnified by the Funds, for any action taken or omitted by it in good faith in reliance upon any such instructions or advice or upon any paper or document reasonably believed by it to be genuine and to have been signed by the proper person or persons. The Administrator shall not be held to have notice of any change of authority of any person until receipt of written notice thereof from the Fund(s). The Administrator shall provide written confirmation of receipt of such notice promptly after receipt.
Pursuant to other agreements (the Other State Street Agreements) now or at any time in effect between a Fund (or its investment manager or investment advisor, on its behalf) and the Administrator or its affiliates (Affiliates) in any capacity other than as the Administrator hereunder (in such other capacities, the Bank), the Bank may be in possession of certain information and data relating to a Fund and/or a Portfolio that is necessary to provide the Services, including the Services described in Schedule B6. The Funds hereby acknowledge and agree that this Section 7 of the Agreement serves as its consent and instruction for itself and on behalf of each Fund/Portfolio under and pursuant to such Other State Street Agreements for the Bank to provide or otherwise make available (including via platforms such as my.statestreet.com) to the Administrator, Funds and Portfolios information such as net asset values and information relating to the net assets of the Funds/Portfolios, holdings and liquidity reports, market value and other information and data related to the Funds/Portfolios that is necessary to provide the Services and subject to Section 9 hereof.
8. |
STANDARD OF CARE; LIMITATION OF LIABILITY AND INDEMNIFICATION |
In carrying out the provisions of this Agreement, the Administrator shall act (i) with reasonable care and diligence and in good faith, (ii) without negligence, fraud, willful misconduct, willful omission or bad faith, and at least at the same standard of care as the Administrator provides for itself and its Affiliates with respect to similar services, and (iii) with the level of skill and care which would be expected from a reasonably skilled and experienced professional provider of services similar to the services provided under this Agreement. The Administrator shall have no liability for any error of judgment or mistake of law or for any loss or damage resulting from the performance or nonperformance of its duties hereunder unless and to the extent that the Administrator fails to exercise such standard of care. The Administrator shall be responsible for the performance only of such duties as are set forth in this Agreement and, except as otherwise provided under Section 14, shall have no responsibility for the actions or activities of any other party, including other service providers. The Administrator shall have no liability in respect of any loss, damage or expense suffered by the Funds insofar as such loss, damage or expense arises from the performance of the Administrators duties hereunder in reliance upon records that were maintained for the Funds by entities other than the Administrator prior to the Administrators appointment as administrator for the Funds. The Administrator shall not be liable for any special, indirect, incidental, punitive or consequential damages, including lost profits, of any kind whatsoever (including, without limitation, attorneys fees) under any provision of this Agreement or for any such damages arising out of any act or failure to act hereunder, each of which is hereby excluded by agreement of the parties regardless of whether such damages were foreseeable or whether either party or any entity had been advised of the possibility of such damages. Except as may otherwise be agreed to by the parties, the Administrators cumulative liability for each calendar year (a Liability Period) with respect to the Funds under this Agreement regardless of the form of action or legal theory shall be limited to its total annual compensation earned and fees payable hereunder during the preceding Compensation Period, as defined herein, for any liability or loss suffered by the Funds including, but not limited to, any liability relating to qualification of the Funds as a regulated investment company or any liability relating to the Funds compliance with any federal or state tax or securities statute, regulation or ruling during such Liability Period. Compensation Period shall mean the calendar year ending immediately prior to each Liability Period in which the event(s) giving rise to the Administrators liability for that period have occurred.
Neither party shall be responsible or liable for any failure or delay in performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its control, including without limitation, work stoppage, power or other mechanical failure, computer virus, natural disaster, governmental action or communication disruption.
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Each Fund severally and not jointly shall indemnify and hold the Administrator and its directors, officers, employees and agents harmless from all loss, cost, damage and expense, including reasonable fees and expenses for counsel, incurred by the Administrator resulting from any claim, demand, action or suit in connection with the Administrators acceptance of this Agreement, any action or omission by it in the performance of its duties hereunder, or as a result of acting upon any instructions reasonably believed by it to have been duly authorized by the Funds or upon reasonable reliance on information or records given or made by the Funds or its investment adviser, provided that this indemnification shall not apply to actions or omissions of the Administrator, its agents, delegates, officers or employees in cases of its or their own negligence, fraud, willful misconduct, willful omission or bad faith.
The limitation of liability and indemnification contained herein shall survive the termination of this Agreement.
9. |
CONFIDENTIALITY |
All information provided under this Agreement by a party (the Disclosing Party) to the other party (the Receiving Party) regarding the Disclosing Partys business and operations shall be treated as confidential. Subject to Section 10 below, all confidential information provided under this Agreement by Disclosing Party shall be used, including disclosure to third parties, by the Receiving Party, or its agents, delegates or service providers, solely for the purpose of performing or receiving the services and discharging the Receiving Partys other obligations under the Agreement or managing the business of the Receiving Party and its affiliates, including financial and operational management and reporting, risk management, legal and regulatory compliance and client service management. The foregoing shall not be applicable to any information (a) that is publicly available when provided or thereafter becomes publicly available, other than through a breach of this Agreement, (b) that is independently derived by the Receiving Party without the use of any information provided by the Disclosing Party in connection with this Agreement, or (c) where the party seeking to disclose has received the prior written consent of the party providing the information. Notwithstanding the foregoing, the Receiving Party shall be permitted to disclose any confidential information provided under this Agreement by the Disclosing Party (i) to comply with any legal or regulatory proceeding, investigation, audit, examination, subpoena, civil investigative demand or other similar process or (ii) as required by operation of law or regulation or as required to comply with the requirements of any market infrastructure that the Disclosing Party or its agents direct the Administrator or its Affiliates to employ (or which is required in connection with the holding or settlement of instruments included in the assets subject to this Agreement), provided that the Receiving Party take reasonable steps to otherwise maintain the confidential nature of such information.
10. |
USE OF DATA |
(a) In connection with the provision of the services and the discharge of its other obligations under this Agreement, the Administrator (which term for purposes of this Section 10 includes each of its Affiliates) may collect and store information regarding the Funds or Portfolios (Fund Information) and share such Fund Information with its Affiliates, agents, delegates and service providers in order and to the extent reasonably necessary (i) to carry out the provision of services contemplated under this Agreement and other agreements between the Funds and the Administrator or any of its Affiliates and (ii) to carry out the internal management of its businesses, including, but not limited to, financial and operational management and reporting, risk management, legal and regulatory compliance.
(b) Except as expressly contemplated by this Agreement, nothing in this Section 10 shall limit the confidentiality and data-protection obligations of the Administrator and its Affiliates under this Agreement and applicable law. The Administrator shall cause any Affiliate, agent, delegate or service provider to which it has disclosed Data pursuant to this Section 10 to comply at all times with confidentiality and data-protection obligations as if it were a party to this Agreement.
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11. |
COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS; RECORDS |
Each Fund assumes full responsibility for complying with all securities, tax, commodities and other laws, rules and regulations applicable to it.
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Administrator agrees that all records which it maintains for the Funds shall at all times remain the property of the Funds, shall be readily accessible during normal business hours, and shall be promptly surrendered upon the termination of the Agreement or otherwise on written request except as otherwise provided in Section 13. The Administrator further agrees that all records that it maintains for the Funds pursuant to Rule 31a-1 under the 1940 Act will be preserved for the periods prescribed by Rule 31a-2 under the 1940 Act unless any such records are earlier surrendered as provided above. Records may be surrendered in either written or machine-readable form, at the option of the Administrator. In the event that the Administrator is requested or authorized by the Funds, or required by subpoena, administrative order, court order or other legal process, applicable law or regulation, or required in connection with any investigation, examination or inspection of the Funds by state or federal regulatory agencies, to produce the records of the Funds or the Administrators personnel as witnesses or deponents, the Funds agrees to pay the Administrator for the Administrators reasonable time and expenses, as well as the reasonable fees and expenses of the Administrators counsel incurred in such production. The Administrator shall, to the extent permitted by law, provide notice to the applicable Fund promptly after receipt of any request for records by an entity other than such Fund. Upon request, the Administrator shall provide the applicable Fund with an update on the fees and expenses incurred in responding to any such requests for records.
12. |
SERVICES NOT EXCLUSIVE |
The services of the Administrator are not to be deemed exclusive, and the Administrator shall be free to render similar services to others. The Administrator shall be deemed to be an independent contractor and shall, unless otherwise expressly provided herein or authorized by the Funds from time to time, have no authority to act or represent the Funds in any way or otherwise be deemed an agent of the Funds.
13. |
EFFECTIVE PERIOD AND TERMINATION |
(a) |
Term. This Agreement shall remain in full force and effect for an initial term ending one (1) year from the effective date (the Initial Term). After the expiration of the Initial Term, this Agreement shall automatically renew for successive one (1) year terms. Following the Initial Term, this Agreement may be terminated by any Fund or Portfolio upon no less than ninety (90) days prior written notice to the Administrator, or by the Administrator upon no less than 180 days prior written notice to the applicable Fund or Portfolio. |
(b) |
Termination. During the Initial Term and thereafter, either party may terminate this Agreement: (i) in the event of the other partys material breach of a material provision of this Agreement that the other party has either failed to cure or failed to establish a remedial plan to cure that is reasonably acceptable, in each case within 60 days written notice of such breach, or (ii) in the event of the appointment of a conservator or receiver for the other party or upon the happening of a like event to the other party at the direction of an appropriate agency or court of competent jurisdiction. |
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(c) |
Payments Owing to the Administrator. Upon termination of this Agreement pursuant to Section 13(a) or 13(b) with respect to the Funds or any Portfolio, the Funds or applicable Portfolio shall pay Administrator its compensation due as of the date of such termination and shall reimburse Administrator for its costs, expenses and disbursements. In the event of: (i) the Funds termination of this Agreement with respect to the Funds or their Portfolio(s) in any manner other than as set forth in Section 13(a) and 13(b) or (ii) a transaction not in the ordinary course of business pursuant to which the Administrator is not retained to continue providing services hereunder to the Funds or a Portfolio (or its respective successor), the Fund or applicable Portfolio shall pay the Administrator any compensation due through the end of the then-current term (based upon the average monthly compensation previously earned by the Administrator with respect to the Fund or Portfolio) and shall reimburse the Administrator for its costs, expenses and disbursements. Upon receipt of such payment and reimbursement, the Administrator will deliver the Funds or such Portfolios records as set forth herein. |
(d) |
Exclusions. For the avoidance of doubt, no full term payment will be required pursuant to clause (ii) of Section 13(c) in the event of any transaction such as (i) the liquidation or dissolution of the Funds or a Portfolio and distribution of the Funds or such Portfolios assets as a result of the Boards determination in its reasonable business judgment that the Funds or such Portfolio is no longer viable or that the liquidation is in the best interest of the Funds or such Portfolio, (ii) a merger of the Funds or a Portfolio into, or the consolidation of the Funds or a Portfolio with, another entity, or (iii) the sale by the Funds or a Portfolio of all, or substantially all, of the Funds or Portfolios assets to another entity, in each of (ii) and (iii) where the applicable Funds provide ninety (90) days prior written notice in advance of the closing date of any such transactions. |
(e) |
Effect of Termination. Termination of this Agreement with respect to any one particular Portfolio shall in no way affect the rights and duties under this Agreement with respect to the Funds or any other Portfolio. |
14. |
DELEGATION |
The Administrator shall retain the right to employ its Affiliates to provide or assist it in the provision of any part of the services stated herein or the discharge of any other obligations or duties under this Agreement without the consent or approval of any Fund. The Administrator may employ other agents, subcontractors, consultants and other third parties (each a Delegate) to provide the services stated herein to the Funds upon the prior written consent of the Funds. The Administrator shall be responsible for the acts and omissions of any such Delegate or Affiliate so employed as if the Administrator had committed such acts and omissions itself. The Administrator shall be responsible for the compensation of its Delegates and Affiliates. Notwithstanding the foregoing, in no event shall the term Delegate include consultants, authorized data sources, suppliers of Administrators third party technology, providers of market infrastructure, and other non-affiliated entities that provide similar assistance to the Administrator in the performance of its duties under this Agreement, and the Administrator shall have no liability for their acts or omissions except as otherwise expressly provided elsewhere in this Agreement.
15. |
INTERPRETIVE AND ADDITIONAL PROVISIONS |
In connection with the operation of this Agreement, the Administrator and the Funds on behalf of each of the Portfolios, may from time to time agree on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. Any such interpretive or additional provisions shall be in a writing signed by all parties, provided that no such interpretive or additional provisions shall contravene any applicable laws or regulations or any provision of the Funds Governing Documents. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of the Agreement.
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16. |
NOTICES |
Any notice, instruction or other instrument required to be given hereunder will be in writing and may be sent by hand, or by facsimile transmission, or overnight delivery by any recognized delivery service, to the parties at the following address or such other address as may be notified by any party from time to time:
If to the Funds:
C/O BLACKROCK ADVISORS, LLC
100 Bellevue Parkway
Wilmington, DE 19809-3700
Attention: Neal Andrews
Telephone: 302-797-6179
If to the Administrator:
100 Summer Street
Boston, MA 02110
Attention: Anthony Ostler
Telephone: 617-664-9797
with a copy to:
STATE STREET BANK AND TRUST COMPANY
Legal Division Global Services Americas
One Lincoln Street
Boston, MA 02111
Attention: Senior Vice President and Senior Managing Counsel
17. |
AMENDMENT |
This Agreement may be amended at any time in writing by mutual agreement of the parties hereto.
18. |
ASSIGNMENT |
This Agreement may not be assigned by (a) the Funds without the written consent of the Administrator or (b) the Administrator without the written consent of the Funds. Notwithstanding the foregoing, the Administrator may assign this Agreement to a successor of all or a substantial portion of its business or to an Affiliate of the Administrator upon ninety (90) days written notice to the Fund.
19. |
SUCCESSORS |
This Agreement shall be binding on and shall inure to the benefit of the Funds and the Administrator and their respective successors and permitted assigns.
20. |
DATA PROTECTION |
The Administrator shall implement and maintain a comprehensive written information security program that contains appropriate security measures to safeguard the personal information of each Funds shareholders, employees, directors and/or officers that the Administrator receives, stores, maintains, processes or otherwise accesses in connection with the provision of services hereunder. For these purposes, personal information shall mean (i) an individuals name (first initial and last name or first name and last name), address or telephone number plus (a) social security number, (b) drivers license number, (c) state identification card number, (d) debit or credit card number, (e) financial account number or (f) personal identification number or password that would permit access to a persons account or (ii) any combination of the foregoing that would allow a person to log onto or access an individuals account. Notwithstanding the foregoing personal information shall not include information that is lawfully obtained from publicly available information, or from federal, state or local government records lawfully made available to the general public.
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21. |
ENTIRE AGREEMENT |
This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes all previous representations, warranties or commitments regarding the services to be performed hereunder whether oral or in writing.
22. |
WAIVER |
The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver nor shall it deprive such party of the right thereafter to insist upon strict adherence to that term or any term of this Agreement or the failure of a party hereto to exercise or any delay in exercising any right or remedy under this Agreement shall not constitute a waiver of any such term, right or remedy or a waiver of any other rights or remedies, and no single or partial exercise of any right or remedy under this Agreement shall prevent any further exercise of the right or remedy or the exercise or any other right or remedy. Any waiver must be in writing signed by the waiving party.
23. |
SEVERABILITY |
If any provision or provisions of this Agreement shall be held to be invalid, unlawful or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired.
24. |
GOVERNING LAW |
This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of the State of New York, without regard to its conflicts of laws rules.
25. |
REPRODUCTION OF DOCUMENTS |
This Agreement and all schedules, exhibits, attachments and amendments hereto may be reproduced by any photographic, xerographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties hereto all/each agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence.
26. |
LIMITATION ON LIABILITY OF TRUSTEES |
In relation to each Fund which is a business trust, this Agreement is executed and made by the Trustees of the Fund not individually, but as trustees under the Declarations of Trust of the Fund and the obligations of this Agreement are not binding upon any of such Trustees or upon any of the shareholders of the Fund individually, but bind only the trust estate of the Fund.
27. |
COUNTERPARTS |
This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, and all such counterparts taken together shall constitute one and the same Agreement. Counterparts may be executed in either original or electronically transmitted form (e.g., faxes or emailed portable document format (PDF) form), and the parties hereby adopt as original any signatures received via electronically transmitted form.
[Remainder of page intentionally left blank.]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below as of the date first written above.
EACH MANAGEMENT INVESTMENT COMPANY IDENTIFIED ON SCHEDULE A HERETO |
||
By: |
/s/ Neal J. Andrews |
|
Name: | Neal J. Andrews | |
Title: | Chief Financial Officer | |
STATE STREET BANK AND TRUST COMPANY | ||
By: |
/s/ Andrew Erickson |
|
Name: | Andrew Erickson | |
Title: | Executive Vice President |
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Exhibit (13)(c)
SIXTH AMENDED AND RESTATED
SECURITIES LENDING AGENCY AGREEMENT
This Sixth Amended and Restated Agreement, dated as of January 1, 2020, between each investment company, severally and not jointly, identified on Schedule A, as such schedule may be amended from time to time (each a Client), acting on behalf of itself or the funds listed on Schedule A hereto and any future series of a Client (each, a Fund), by and through BlackRock Advisors, LLC (BlackRock), not in its individual capacity but as agent and investment advisor, and BlackRock Investment Management, LLC (the Lending Agent), a Delaware limited liability company.
WHEREAS, each Client is registered as an open-end management investment company or closed end management investment company under the Investment Company Act of 1940, as amended (the 1940 Act);
WHEREAS, the Lending Agent acts as the agent for each Client and its corresponding Funds, as applicable, for the purpose of lending securities pursuant to a Fifth Amended and Restated Securities Lending Agency Agreement dated January 1, 2019;
WHEREAS, the parties to this Agreement desire to amend and restate such agreement on the terms set forth herein; and
WHEREAS, the Directors or Trustees, as the case may be, of each Client have authorized each Client and its corresponding Funds, as applicable, to lend securities to Approved Borrowers (as defined below); and
WHEREAS, the Directors or Trustees, as the case may be, of each Client have approved the appointment of the Lending Agent as each Clients securities lending agent and coordinator of each Clients securities lending program, subject to the terms and conditions set forth herein.
NOW, THEREFORE, for and in consideration of the mutual promises contained herein, the parties hereto agree as follows:
1. Appointment. The Client, on behalf of its Funds, as applicable, appoints BlackRock Investment Management, LLC as its lending agent to perform the duties and responsibilities set forth in this Agreement in its capacity as Lending Agent, and BlackRock Investment Management, LLC accepts such appointment. The Lending Agent will act solely as a directed agent of the Client hereunder, and the Lending Agent shall have no duties or responsibilities in respect of securities lending transactions except those expressly set forth in this Agreement.
2. Authorizations. The Client authorizes the Lending Agent to act as agent as set forth in this Section.
2.1 |
Lending of Available Securities. The Client authorizes the Lending Agent to lend, on the Clients behalf, those securities (Available Securities) which are held in accounts maintained under the supervision of the Clients custodian (the Custodian) or any sub-custodian (each a Custody Account), other than |
1
securities which the Clients investment advisor (the Advisor), on behalf of the Client, specifically notifies the Lending Agent are not available for lending. With respect to the Clients identified on Schedule A as Closed-End Funds, except as otherwise agreed by the Client and the Advisor, the Lending Agent shall lend Available Securities only when the lending spread with respect to such Available Securities is equal to or greater than 300 basis points, determined at the time such loan is entered into (Threshold Lending Securities). For purposes of this Agreement, lending spread shall mean the difference between the rebate rate (interest rate) owed to the Approved Borrower and the risk free rate (typically Fed Funds Target). The Client warrants to the Lending Agent that it will give appropriate instructions to the Advisor and the Custodian sufficient to permit the Lending Agent to arrange and settle loan transactions on the Clients behalf as contemplated by this Agreement. |
2.2 |
Lending to Approved Borrowers. The Client authorizes the lending of Available Securities to any one or more of the institutions approved by the Client, the Clients Board of Directors/Trustees and/or the Clients Advisor, in accordance with the Funds Guidelines and Procedures for Lending of Securities (Securities Lending Guidelines) (each, an Approved Borrower). The Clients Advisor, on behalf of the Client, may request that the Lending Agent change the Approved Borrowers by delivering an updated list to the Lending Agent, provided that the Advisor shall report to the Board of Directors/Trustees at its next quarterly meeting any addition or removal of an Approved Borrower to or from the approved list made by the Advisor since the Board of Directors/Trustees prior quarterly meeting. |
2.3 |
Securities Loan Agreement. The Lending Agent is authorized to execute securities loan agreements (each an SLA) as the Clients agent on a disclosed basis with Approved Borrowers. The SLA will be in substantially a form or forms set forth in Schedule B hereto, as such form or forms may be materially amended from time to time with prior written approval of the Client. The Client specifically approves such form of agreement and agrees, upon request of the Lending Agent, to cause the Advisor to promptly furnish to the Lending Agent the Clients financial statements or other documents or information reasonably requested by the Lending Agent in order to enable the Lending Agent to satisfy reasonable credit and legal requests by Approved Borrowers in connection with any SLA or loan transaction. |
2.4 |
Lending under Approved Terms. All loans arranged by the Lending Agent on behalf of a Client shall comply with applicable Securities and Exchange Commission (SEC) guidelines for securities lending, any applicable SEC exemptive orders, no-action positions taken by the staff of the SEC with respect to securities lending transactions, and the investment restrictions and/or guidelines for the Client, all of which shall be provided to the Lending Agent by the Client or the Advisor, and shall be subject to the terms of an SLA substantially similar to Schedule B. The Client may, at the request of the Lending Agent, approve changes to the approved terms by delivering an amended Schedule B to the Lending Agent. The Lending Agent shall negotiate on behalf of the Client with each Approved Borrower all terms of a securities loan, including the amounts or fees to be received |
2
or paid pursuant to the applicable SLA. The Lending Agent may prepare a transactional confirmation in respect of each loan effected pursuant to an SLA, setting forth the securities borrowed and the material terms of the loan, and may transmit such confirmation to the Approved Borrower in accordance with such SLA. The Client understands and agrees that the identity of the Client will be disclosed by the Lending Agent to the Approved Borrower in accordance with the SLA. |
2.5 |
Authorizations by Client. The Client authorizes and empowers the Lending Agent to execute in the Clients name all agreements and documents as may be necessary or appropriate in the Lending Agents judgment to carry out the purposes of this Agreement. It is understood and agreed that the Lending Agent is authorized to supply any information regarding the Client that is required by an SLA or under applicable law, subject to Section 10.1 hereof. |
3. Loan of Securities. During the term of any securities loan, the Client shall permit the loaned securities to be transferred, pursuant to an SLA, into the name of an Approved Borrower.
3.1 |
Limits on Return of Loaned Securities. The Client acknowledges that, under the applicable SLA, Approved Borrowers will not be required to return loaned securities immediately upon receipt of notice from the Lending Agent terminating the applicable loan, but instead will be required to return such loaned securities within the earlier of (i) such period of time following such notice which is the standard settlement period for trades of the loaned securities entered into on the date of such notice in the principal market therefor, or from the giving of such notice or (ii) the third business day following such notice. |
3.2 |
Recall of Loaned Securities. Upon receiving a notice from the Advisor that Available Securities which have been lent to an Approved Borrower should no longer be considered Available Securities (whether because of the sale of such securities or otherwise), the Lending Agent shall notify promptly thereafter the Approved Borrower which has borrowed such securities that the loan of such securities is terminated and that such securities are to be returned within the time specified by the applicable SLA, provided that the Lending Agent may alternatively determine that it is in the best interests of another lending client of the Lending Agent to renew and restate such loan transaction on behalf, and in the name, of such other lending client and cause to be delivered to the Client an equivalent amount of such security from the assets of such other lending client (in which event such renewal and restatement of the loan shall constitute separate transactions between each lending client of the Lending Agent and the borrower and shall not be construed as a transaction between such lending clients). |
3.3 |
Notification of Sales of Loaned Securities. The Client acknowledges its obligation to the Lending Agent, as applicable, to cause and require the Advisor to provide notification of any sale of securities which are out on loan by the close of business, in the principal market therefor, on trade date of such sale. |
3
3.4 |
Termination. The Lending Agent is authorized in its discretion to terminate any securities loan entered into with an Approved Borrower without prior notice to the Client, subject to the conditions of the relevant SLA. The Advisor, on behalf of a Client, may instruct the Lending Agent to terminate any loan on any date, subject to the conditions of the relevant SLA. The Lending Agent agrees to comply with any such instruction. |
3.5 |
Lending Agent Subject to Supervision of Advisor. The Lending Agent shall at all times be subject to the supervision of the Advisor. |
3.6 |
Compliance with Securities Lending Guidelines. The Lending Agent hereby acknowledges receipt of the current Securities Lending Guidelines. The Client shall promptly notify the Lending Agent of any changes to the Securities Lending Guidelines. The Lending Agent acknowledges and agrees that it shall only lend Securities on behalf of the Client and its Funds in accordance with the conditions of the Securities Lending Guidelines applicable to the Lending Agent. |
4. Loan Collateral. For each loan of securities, the Approved Borrower shall pledge at all times during the term of the loan collateral in the form of one or more of the following items: (a) cash in U.S. dollars or foreign currency (Cash Collateral), or (b) securities issued or fully guaranteed by the United States government or any agencies or instrumentalities thereof or such other collateral as may be then permitted by applicable law, regulation and/or interpretation, and the Securities Lending Guidelines (Non-Cash Collateral and, collectively with Cash Collateral, Collateral) in the aggregate having a market value (as determined by the Lending Agent pursuant to the applicable SLA) at least equal to the market value of the loaned securities (as determined by the Lending Agent pursuant to the applicable SLA).
4.1 |
Receipt of Collateral. At the commencement of any loan, the Lending Agent shall instruct the Approved Borrower to transfer to the Lending Agent the required Collateral. Collateral will be received from an Approved Borrower prior to or simultaneous with delivery of the securities loaned. If the Approved Borrower does not provide Collateral to the Lending Agent, as previously agreed, then the Lending Agent will cancel the corresponding loan instruction prior to delivery. |
4.2 |
Holding and Administration of Collateral. |
(a) |
Cash Collateral. All Cash Collateral shall be received, held and administered by the Lending Agent for the benefit of the Client in the applicable account maintained for the Lending Agent. The Lending Agent is hereby authorized and directed, without obtaining any further approval from the Client or the Advisor, to invest and reinvest all Cash Collateral in accordance with the Securities Lending Guidelines (Permitted Investments). |
(b) |
Non-Cash Collateral. All Non-Cash Collateral shall be received, held and administered by the Lending Agent for the benefit of the Client in the applicable account established for the purpose of holding Non-Cash Collateral. |
4
4.3 |
Maintenance of Collateral Margin. In respect of loans of securities entered into on behalf of the Client, the Lending Agent will value on a daily basis under policies consistent with the valuation policies of the Client, in accordance with the applicable SLA, the loaned securities and all Collateral and, where applicable, the Lending Agent shall, in accordance with the provisions of the applicable SLA, request the Approved Borrower to deliver sufficient additional Collateral to the Client by 12:00 noon on the next business day to satisfy the applicable margin requirement. If, as a result of marking-to-market, Collateral is required to be returned to the Approved Borrower under the SLA, the Lending Agent will return such Collateral to the Approved Borrower. |
4.4 |
Substitution of Collateral. To the extent the Clients Board of Directors/Trustees permits the use of Non-Cash Collateral, the Client acknowledges and agrees that, pursuant to any SLA, the Lending Agent may permit an Approved Borrower to substitute Collateral of any type specified in Section 4 hereof during the term of any loan so long as the required margin in respect of such loan continues to be satisfied at the time of such substitution. |
4.5 |
Return of Collateral. Upon termination of the loan, the Lending Agent shall instruct the Approved Borrower to return the loaned securities to the applicable Custody Account. The Lending Agent will instruct any custodian or sub-custodian of the Client to accept such return delivery of loaned securities. The Lending Agent shall monitor the return of loaned securities. Once the Lending Agent has confirmed settlement of the return of the loaned securities, the Lending Agent shall effect, on behalf of the Client, the redemption of any Permitted Investment, if applicable, and effect the return of Collateral due the Approved Borrower in accordance with the Approved Borrowers transfer instructions with respect thereto, without obtaining any further approval from the Client. |
5. Investment of Cash Collateral. Pursuant to the SLA, the Client shall have the right to invest Cash Collateral received in respect of any loan, subject to an obligation, upon the termination of the loan, to return to the Approved Borrower the amount of cash initially pledged (as adjusted for any interim marks-to-market).
5.1 |
Cash Collateral Investment Direction. The Client authorizes and directs the Lending Agent, subject to oversight by the Advisor, to cause to be invested, on the Clients behalf and at the Clients sole risk, all Cash Collateral by effecting purchases and sales and/or subscriptions and redemptions of such Collateral in accordance with the Securities Lending Guidelines. The Lending Agent shall, where applicable, send timely instructions to the transfer agent of the Permitted Investment with respect to any cash transfers required to be completed in conjunction with any subscription or redemption in a Permitted Investment, and cause the Advisor and the Custodian to be notified of such investment. To facilitate the Lending Agents ability to effect investments of Cash Collateral authorized by |
5
this Agreement, the Client appoints the Lending Agent as its true and lawful attorney-in-fact, with full power of substitution and revocation, in its name, place and stead to take action in the Clients name to the extent necessary or desirable to fulfill the purposes of this Agreement, including, without limitation, (i) to establish trading accounts in a Clients name, (ii) to execute and deliver such contracts and other documents on a Clients behalf as the Lending Agent, in its discretion, deems necessary or desirable to establish such trading accounts or otherwise to effect investments on the Clients behalf that are authorized by this Agreement, and (iii) to act, in the Lending Agents discretion, in the Clients name to enforce the Clients rights and remedies under such contracts or documents. |
5.2 |
Cash Collateral Investment Risk. Any investment of Cash Collateral shall be at the sole risk of the Client. Any income or gains and losses from investing and reinvesting any Cash Collateral delivered by an Approved Borrower pursuant to an SLA shall be at the Clients risk, and the Client agrees that to the extent any such losses reduce the amount of cash below the amount required to be returned to the Approved Borrower upon the termination of any loan (including any Cash Collateral Fee as defined in the SLA), the Client will, on demand of the Lending Agent, immediately pay or cause to be paid to such Approved Borrower an equivalent amount in cash. |
6. Borrower Default. In the event of default by a Borrower with respect to any loan entered into pursuant to an SLA, the Lending Agent will take such actions as agent for the Client as are set forth in the applicable SLA. In addition, the following provisions shall apply.
6.1 |
Replacement of Loaned Securities. If the Lending Agent declares an event of default pursuant to the SLA with a Borrower (a Default Event), then the Lending Agent shall use the Collateral or the proceeds of the liquidation of Collateral to purchase for the affected Clients account, for settlement in the normal course, replacement securities of the same issue, type, class and series as that of the loaned securities (Buy-In). The Lending Agent shall purchase an amount of replacement securities having a value equal to the value of the securities on loan for which a Default Event has been declared. If the cost of fully replacing the loaned securities is greater than the value of the Collateral (or liquidated damages calculated under Section 6.2), the Lending Agent shall be responsible for using its funds, at its expense, to satisfy the shortfall, but only to the extent that such shortfall is not due to any diminution in the value of the Collateral due to reinvestment risk that is borne by the Client pursuant to Section 5 of this Agreement. For purposes of this Section, value of the Collateral shall be calculated as follows: |
6.1.1 |
Value of Cash Collateral. In the case of loans collateralized solely by Cash Collateral, the value of the Collateral shall be the market value of such Cash Collateral. |
6.1.2 |
Value of Securities Collateral. In the case of loans collateralized solely by securities Collateral, the value of the Collateral shall be the market value of such Collateral. |
6
6.1.3 |
Valuation Date. The value of the Collateral shall be determined on the date of the Buy-In (or the payment made pursuant to Section 6.2 below). |
6.1.4 |
Market Value. Market value shall be determined by the Lending Agent, where applicable, based upon the valuation policies adopted by the Clients Board of Directors/Trustees. |
6.1.5 |
Multiple Forms of Collateral. Where a loan is collateralized by more than one type of Collateral, the aggregate market value of Collateral securing such loan (for the purpose of computing the indemnity) shall be the sum of the market values for each relevant type of Collateral. |
6.2 |
Impossibility of Replacement/Liquidated Damages. If the Lending Agent determines that a Buy-In is commercially impracticable (for any reason other than price), the Lending Agent shall, in lieu of effecting a Buy-In, pay to the affected Client an amount equal to the market value of the loaned securities determined at the close of business on the date of the Default Event to be reduced by any shortfall diminution in the value of the Collateral due to reinvestment risk that is borne by the Client pursuant to Section 5. |
6.3 |
Replacement of Distributions. In addition to making the purchases or payments required above, the Lending Agent shall pay from the proceeds of Collateral to the Client the value of all distributions on the Loaned Securities, the record dates for which occur before the date that the Lending Agent executes a Buy-In or makes the payments to the Client required pursuant to Section 6.2 and that have not otherwise been credited to the Clients applicable account. For purposes of this Section, the value of such distributions shall be calculated net of taxes, expenses or other deductions that would normally accrue to such distributions. The Lending Agent shall use Collateral or the proceeds of such Collateral to the extent available to make such payments of distributions. |
6.4 |
Collateral not in Possession or Control of the Lending Agent. If, on the date of the Default Event, by reason of the Clients request or actions, the Lending Agent is not in possession or control of the Collateral allocated to the defaulted Loan, the Client shall promptly cause such Collateral to be transferred to the Lending Agent for application against the cost of any Buy-In. In such event, the replacement provisions of this Section 6 shall not apply, and the compensation of the Client shall be limited to the value of the Collateral on the date that Buy-In or replacement payment may be affected. |
6.5 |
Subrogation and Assignment of Rights in Collateral. In the event that the Lending Agent is required to perform or make any payment under this Section, the Client agrees that, to the extent of such performance or payment, the Lending Agent shall be subrogated to the Client, and the Client shall assign, and be deemed to have assigned, to the Lending Agent all of such Clients rights in, to and against the Borrower in respect of the related loan, any Collateral pledged by such Borrower in respect of such loan and all proceeds of such Collateral to the extent permitted |
7
by applicable law. In the event that the Client receives or is credited with any payment, benefit or value from or on behalf of the Borrower in respect of rights to which the Lending Agent is subrogated as provided herein, the Client shall promptly remit or pay to the Lending Agent the same (or, where applicable, its United States dollar equivalent). |
7. Income, Corporate Actions and Substitute Payments. Income, corporate actions and Substitute Payments (as defined in Sections 7.1 and 7.2) shall be dealt with as provided in this Section 7.
7.1 |
Income and Related Payments to Borrower. Payments to an Approved Borrower shall be made in accordance with the terms of the applicable SLA. |
7.2 |
Income and Related Payments to Client. The Lending Agent shall instruct each Approved Borrower which is a party to an SLA to remit any payment in-lieu-of the interest or other distribution on loaned securities (Loan Substitute Payment) for the account of the Client. The Lending Agent shall also instruct each Approved Borrower which is a party to an SLA to remit any other fees payable on loaned securities to the Lending Agent for the account of the Client, and the Lending Agent shall receive, hold and administer the same for the account of the Client. |
7.3 |
Corporate Actions and Proxy Rights. The Client acknowledges that, with respect to securities which are out on loan over the applicable record date for such action, unless otherwise agreed hereto, it will not be entitled to participate in any dividend reinvestment program or vote any proxies; provided, however, that the Client may recall such securities upon sufficient notice to exercise proxy rights. Corporate actions will otherwise be processed in accordance with the SLA. |
8. Reports and Statements. The Lending Agent shall furnish the Client with the reports and statements set forth in the Securities Lending Guidelines or as otherwise agreed from time to time.
9. SIPC Coverage. THE PARTIES ACKNOWLEDGE THAT THE PROVISIONS OF THE SECURITIES INVESTOR PROTECTION ACT OF 1970 (SIPA) OR THE DODD-FRANK ACT OF 2010 (DFA) MAY NOT PROTECT THE FUND WITH RESPECT TO THE SECURITIES LOAN TRANSACTION AND THAT, THEREFORE, THE COLLATERAL DELIVERED BY AN APPROVED BORROWER TO THE FUND MAY CONSTITUTE THE ONLY SOURCE OF SATISFACTION OF THE OBLIGATION OF THE APPROVED BORROWER IN THE EVENT THE APPROVED BORROWER (OR ITS AGENT) FAILS TO RETURN THE SECURITIES. THE LENDING AGENT SHALL NOT BE RESPONSIBLE FOR ANY LOSSES INCURRED OR LIABILITIES WHICH ARISE SOLELY DUE TO THE APPLICATION OF SIPA OR DFA TO THE SECURITIES LENDING TRANSACTIONS DESCRIBED HEREIN.
10. Client Information. The Client covenants and agrees to promptly furnish to the Lending Agent any information regarding the Client which is necessary to effect transactions on behalf of the Client, including, but not limited to, any limitations imposed pursuant to any applicable law, regulation, authority, charter, by-law, statute or other instrument. The Lending Agent agrees to comply with such restrictions and limitations.
8
10.1 |
The Lending Agent may not disclose or supply any information regarding the Client or Fund unless required by any law or governmental regulation now or hereafter in effect or requested to do so by the Client; provided that the Lending Agent may disclose or supply information regarding the Client and/or Fund and any transactions authorized by this Agreement as necessary in the sole discretion of the Lending Agent in order to facilitate, effect or continue any securities loans hereunder or to assist in the analysis of the performance of the securities lending program. |
11. Tax Treatment. The Client acknowledges that the tax treatment of Substitute Payments may differ from the tax treatment of the interest or dividend to which such payment relates and that the Client has made its own determination as to the tax treatment of any securities loan transactions undertaken pursuant to this Agreement and of any dividends, distributions, remuneration or other funds received hereunder. The Client also acknowledges that, to the extent that either the Client or the Approved Borrower is a non-U.S. resident, the Lending Agent may be required to withhold tax on amounts payable to or by the Client pursuant to a securities loan and may at any time claim from the Client any shortfall in the amount so withheld.
12. Responsibility of the Lending Agent. Except as otherwise set forth herein, and subject to the requirements of applicable law, the Lending Agent shall not be liable with respect to any losses incurred by the Client in connection with this securities lending program or under any provision hereof, except to the extent that such losses result from the Lending Agents willful misfeasance, bad faith, negligence or reckless disregard in the performance of its duties under this Agreement. The Lending Agent shall not be liable for losses, costs, expenses or liabilities caused by or resulting from the acts or omissions of the Client or of any agent or third party custodian of the Client. The Lending Agent shall not be responsible for any special, punitive, indirect or consequential damages, whether or not the Lending Agent has been apprised of the likelihood of such damages.
13. Standard of Care: Indemnification.
13.1 |
Subject to Section 6, the Client shall indemnify and hold harmless the Lending Agent (which, for purposes of this paragraph shall include its respective officers, directors, partners, managers, employees and agents) from and against any and all claims, damages, liabilities, losses, costs or expenses, including the reasonable fees and expenses of counsel (each, a Loss) incurred, suffered or sustained by the Lending Agent, which arise from the Lending Agents actions or failure to act, in either case taken in good faith in performance of this Agreement, except to the extent that such claims, damages, liabilities, losses, costs or expenses were caused by the willful misfeasance, bad faith, negligence or reckless disregard of the Lending Agent, provided that the Clients indemnification obligation with respect to the acts or omissions of the Advisor shall not exceed the indemnification provided by such Advisor to the Client. This indemnity shall survive the termination of this Agreement and the resignation or removal of the Lending Agent as agent. |
9
13.2 |
The Lending Agent shall indemnify and hold harmless the Client and each Fund, its Board of Directors/Trustees and the Advisor (which for purposes of this paragraph shall include its officers, directors, partners, managers, employees and agents) and any other investment advisor for the Clients and Funds from any and all Losses to the extent that any such Loss arises out of the material breach of this Agreement by or the willful misfeasance, bad faith, negligence or reckless disregard of the Lending Agent, its officers, directors or employees in connection with the securities lending activities undertaken pursuant to this Agreement, provided that the Lending Agents indemnification obligation with respect to the acts or omissions of its subcustodians shall not exceed the indemnification provided by the applicable subcustodian to the Lending Agent. This indemnity shall survive the termination of this Agreement and the resignation or removal of the Lending Agent. |
14. Representations and Warranties. Each party represents and warrants to the other that (i) it has due authority to enter into and perform this Agreement and any transactions contemplated thereby; (ii) the execution and performance of this Agreement and any transaction contemplated thereby has been duly authorized by all necessary action, corporate or otherwise, and does not violate any law, regulation, charter, by-law or other instrument, restriction or provision applicable to it; and (iii) this Agreement constitutes such partys legal, valid and binding obligation enforceable in accordance with its terms. In addition, the Client represents that: (a) any loan authorized hereunder and the performance of this Agreement in respect of such loan is authorized by the prospectus and other constitutive documents of the Client (including any limits as to the aggregate amount of authorized lending under such documents); and (b) as to any securities lent at any time and from time to time on behalf of the Client, the Client shall be the owner thereof with clear title thereto and no lien, charge or encumbrance upon such securities shall exist.
15. Non-Exclusivity of Agency Service and Similar Matters. The Client acknowledges that the Lending Agent, acting on behalf of other lending clients, may effect transactions with or for the same Approved Borrowers to which loans of securities may be made hereunder, which transactions may give rise to potential conflict of interest situations. Lending opportunities among Approved Borrowers shall be allocated at the discretion of the Lending Agent in an equitable manner.
16. Force Majeure. The Lending Agent shall not be responsible or liable for any failure or delay in the performance of its obligations under this Agreement arising out of, or caused directly or indirectly by, circumstances beyond its control, including without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; sabotage; epidemics; riots; interruptions, loss or malfunctions of utilities, transportation, computer (hardware or software) or communications service; accidents; labor disputes; acts of civil or military authority; governmental actions; or inability to obtain labor, material, equipment or transportation. Without limiting the foregoing, but subject to Section 6, the Lending Agent shall not be responsible for economic, political or investment risks incurred through the Clients participation in this securities lending program.
10
17. Reliance on Client Communications. The Lending Agent shall be entitled to conclusively rely upon any certification, notice or other communication (including by facsimile or email) reasonably believed by it to be genuine and correct and to have been signed or sent by or on behalf of an approved person of the party sending such certification, notice or other communication. The Lending Agent reserves the right to notify the Client of any restrictions (self-imposed or otherwise) concerning its activities worldwide. The Lending Agent and the Client shall each have the right to consult with counsel with respect to their respective rights and duties hereunder and shall not be liable for actions taken or not taken in reliance on such advice.
18. Compensation. In connection with the lending of Available Securities, a Fund shall pay to the Lending Agent a percentage (the Lending Agent Fee Percentage) of the net amount earned from securities lending activities, consisting of income earned on the investment and reinvestment of Cash Collateral plus any Securities Loan Fees otherwise paid by the Authorized Borrowers. For purposes of this Agreement, Securities Loan Fees shall mean the amount payable by an Authorized Borrower to the Lending Agent, as agent to the Fund, pursuant to the applicable SLA in connection with the loan of Available Securities, if any, collateralized by collateral other than Cash Collateral. The net amount to be paid to the Lending Agent shall be computed after deducting (a) any applicable rebate due to the Authorized Borrowers under the applicable SLA and (b) Cash Management Costs. Cash Management Costs shall mean the expenses incurred in connection with the management and investment of a Funds Cash Collateral in accordance with Section 5 of this Agreement, including any fees payable to the Lending Agent, the Advisor or any other affiliate of the Lending Agent as a result of the investment of Cash Collateral in any joint account, fund or similar vehicle. The Lending Agent, upon mutual agreement with the Client, may determine to cap the Cash Management Costs. Any such cap on the Cash Management Costs shall be set forth in Appendix A, Appendix B or Appendix C hereto, as applicable, as each such Appendix may be amended from time to time. The Lending Agent Fee Percentage shall be such percentage as may from time to time be agreed upon by the Board of Directors/Trustees of the Client and the Lending Agent and shall be set forth in writing. The Lending Agent Fee Percentage for each Fund is set forth in Appendix A, Appendix B or Appendix C hereto, as applicable, as each such Appendix may be amended from time to time. The Client authorizes and directs the Lending Agent to deduct amounts equal to such compensation from the Custody Account and to retain such amounts as compensation. The Lending Agent shall notify the Client, on or about the 10th (tenth) day of each month, of the amount of fees due the Lending Agent hereunder and, promptly upon receipt of such notice, the Client shall effect the requisite payment to the Lending Agent in immediately available funds of U.S. dollars. The Lending Agent shall be responsible for all transaction fees and all other operational costs relating to securities lending activities, other than Cash Management Costs as described above and extraordinary expenses (e.g., litigation and indemnification expenses), each to be borne by the respective Fund.
19. Termination. This Agreement may be terminated at any time upon mutual written agreement of the Lending Agent and the Client or upon sixty (60) days prior written notice to the other party; provided that the indemnification obligations in Section 13 shall survive any such termination.
20. Action on Termination. It is agreed that (a) upon receipt of notice of termination, no further loans shall be made hereunder by the Lending Agent and (b) the Lending Agent shall, as promptly as possible after termination of this Agreement, terminate any and all outstanding
11
loans but continue to administer to any outstanding loans as necessary to effect their termination and remit and deliver to the Custody Account all securities, earnings and other items due to the Client. The provisions hereof shall continue in full force and effect in all other respects until all loans have been terminated and all obligations satisfied as herein provided. Both parties shall take all commercially reasonable steps to cooperate to provide a smooth transition in the event of a termination.
21. Notices. All notices, demands and other communications hereunder shall be in writing and delivered or transmitted (as the case may be) by registered mail, facsimile, email, courier, or be effected by telephone promptly confirmed in writing and delivered or transmitted as aforesaid, to the intended recipient as provided below. Notices shall be effective upon receipt.
21.1 |
Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Lending Agent, shall be sufficiently given if addressed to BlackRock Investment Management, LLC and received by it at its offices at 1 University Square Drive, Princeton, NJ 08540, Attention: Securities Lending Department, with a copy to BlackRock Investment Management, LLC, 400 Howard Street, San Francisco, CA 94105, Attention: Securities Lending Department, or at such other place as the Lending Agent may from time to time designate in writing. |
21.2 |
Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Client shall be sufficiently given if addressed to the Client and received by it at: Mutual Fund Administration, c/o BlackRock Advisors, LLC, 100 Bellevue Parkway, Wilmington, Delaware 19809, with a copy to: Legal Department, or at such other place as the Client may from time to time designate in writing. |
22. Governing Law and Jurisdiction. This agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to conflict of law provisions thereof. The parties hereto hereby irrevocably consent to the exclusive jurisdiction of (and waive dispute of venue in) the courts of the State of New York and the federal courts located in New York City in the Borough of Manhattan.
23. Entire Agreement. This Agreement supersedes any other agreement between the parties hereto concerning loans of securities owned by the Client. This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof. This Agreement together with any other written agreements between the parties entered into in connection with this Agreement contain the entire agreement between the parties with respect to the transactions contemplated hereby and supersede all previous oral or written negotiations, commitments and understandings related thereto.
24. Assignment. This Agreement shall not be assigned by any party without the prior written consent of the other party.
25. Capitalized Terms. Capitalized terms not otherwise defined herein shall have the meanings provided in the SLA.
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26. Amendment. This Agreement may not be amended or modified in any respect, without the written agreement of both parties.
27. Waiver. No provision of this Agreement may be waived, without the written agreement of both parties. No waiver by one party of any obligation of the other hereunder shall be considered a waiver of any other obligation of such party. The failure of a party to this Agreement to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement.
28. Remedies. All remedies hereunder shall survive the termination of this Agreement.
29. Severability. In the event any provision of this Agreement is adjudicated to be void, illegal, invalid, or unenforceable, the remaining terms and provisions of this Agreement shall not be affected thereby, and each of such remaining terms and provisions shall be valid and enforceable to the fullest extent permitted by law, unless a party demonstrates by a preponderance of the evidence that the invalidated provision was an essential economic term of the Agreement.
30. Further Assurances. Each party hereto shall execute and deliver such other documents or agreements as may be necessary or desirable for the implementation of this Agreement and the consummation of the transactions contemplated hereby.
31. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which taken together shall be deemed one and the same instrument.
32. Headings. The headings of sections herein are included solely for convenience and shall have no effect on the meaning of this Agreement.
33. Separate Agreement. Execution of this Agreement by more than one Client or on behalf of itself and more than one Fund shall not create any contractual or other obligation between or among such Clients or Funds, and this Agreement shall constitute a separate agreement between the Lending Agent and each Client on behalf of itself and each respective Fund. Every reference to Client or Fund shall be construed to be a reference solely to the particular Client or Fund that is a party to the relevant transaction. Each of the parties agrees that under no circumstances shall any rights, obligations, remedies or liabilities of a particular Client or Fund, or with respect to transactions to which a particular Client or Fund is a party, be deemed to constitute rights, obligations, remedies or liabilities applicable to any other Client or Fund or to transactions to which other Clients or Funds are parties, and the Lending Agent shall have no right to set off claims of any Client or Fund against property or liabilities of any other Client or Fund. All transactions are entered into in reliance on the fact that this Agreement constitutes a separate agreement between the Lending Agent and the Client or Fund.
34. Additional Parties. The Lending Agent agrees that additional Clients may be added as parties to this Agreement from time to time upon written notice to the Lending Agent and upon written consent of the Lending Agent to the addition of any such additional Client.
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35. Business Trust. With respect to a Client which is a business trust, the Lending Agent acknowledges and agrees that this Agreement is executed by such Client on behalf of the trustees of such Client as trustees and not individually; and no trustee, shareholder, officer, employee or agent of such business trust shall be held to any personal liability, nor shall resort be had to their property (other than the applicable trust property) for the satisfaction of the Clients obligations under this Agreement, and such obligations are binding only upon the applicable trust property held by such trustee.
36. Series Trusts. The parties acknowledge that the Client is an investment company, whose assets may be allocated to two or more series. In such case, the Lending Agent agrees to seek satisfaction of all obligations of such Client hereunder solely out of the assets of the series on whose behalf the Transaction(s) giving to the obligations was entered into. If the Client establishes two or more series, the Client shall so indicate on Schedule A or otherwise give notice thereof and identify such series, and from such time the liability of such series shall be limited as set forth above, as though and to the same extent as if such series was a separate and distinct Client hereunder.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed in its name and behalf as of the day and year first set forth above.
BLACKROCK ADVISORS, LLC, | ||
on behalf of each investment company indicated on Schedule A |
||
By: |
|
|
Name: | ||
Title: | ||
BLACKROCK INVESTMENT MANAGEMENT, LLC, | ||
as Lending Agent | ||
By: |
|
|
Name: | ||
Title: |
15
Schedule A: Clients and Funds
Fixed-Income Complex Closed-End Funds
BlackRock 2022 Global Income Opportunity Trust
BlackRock California Municipal Income Trust
BlackRock Core Bond Trust
BlackRock Corporate High Yield Fund, Inc.
BlackRock Credit Allocation Income Trust
BlackRock Credit Strategies Fund
BlackRock Debt Strategies Fund, Inc.
BlackRock Energy and Resources Trust
BlackRock Enhanced Capital and Income Fund, Inc.
BlackRock Enhanced Equity Dividend Trust
BlackRock Enhanced Global Dividend Trust
BlackRock Enhanced Government Fund, Inc.
BlackRock Enhanced International Dividend Trust
BlackRock Floating Rate Income Strategies Fund, Inc.
BlackRock Floating Rate Income Trust
BlackRock Florida Municipal 2020 Term Trust
BlackRock Health Sciences Trust
BlackRock Income Trust, Inc.
BlackRock Investment Quality Municipal Trust, Inc.
BlackRock Limited Duration Income Trust
BlackRock Long-Term Municipal Advantage Trust
BlackRock Maryland Municipal Bond Trust
BlackRock Massachusetts Tax-Exempt Trust
BlackRock Multi-Sector Income Trust
BlackRock Multi-Sector Opportunities Trust
BlackRock Multi-Sector Opportunities Trust II
BlackRock Muni Intermediate Duration Fund, Inc.
BlackRock Muni New York Intermediate Duration Fund, Inc.
BlackRock MuniAssets Fund, Inc.
BlackRock Municipal 2020 Term Trust
BlackRock Municipal 2030 Target Term Trust
BlackRock Municipal Bond Trust
BlackRock Municipal Income Investment Quality Trust
BlackRock Municipal Income Investment Trust
BlackRock Municipal Income Quality Trust
BlackRock Municipal Income Trust
BlackRock Municipal Income Trust II
BlackRock MuniEnhanced Fund, Inc.
BlackRock MuniHoldings California Quality Fund, Inc.
BlackRock MuniHoldings Fund II, Inc.
BlackRock MuniHoldings Fund, Inc.
BlackRock MuniHoldings Investment Quality Fund
BlackRock MuniHoldings New Jersey Quality Fund, Inc.
Schedule A-1
BlackRock MuniHoldings New York Quality Fund, Inc.
BlackRock MuniHoldings Quality Fund II, Inc.
BlackRock MuniHoldings Quality Fund, Inc.
BlackRock MuniVest Fund II, Inc.
BlackRock MuniVest Fund, Inc.
BlackRock MuniYield Arizona Fund, Inc.
BlackRock MuniYield California Fund, Inc.
BlackRock MuniYield California Quality Fund, Inc.
BlackRock MuniYield Fund, Inc.
BlackRock MuniYield Investment Fund
BlackRock MuniYield Investment Quality Fund
BlackRock MuniYield Michigan Quality Fund, Inc.
BlackRock MuniYield New Jersey Fund, Inc.
BlackRock MuniYield New York Quality Fund, Inc.
BlackRock MuniYield Pennsylvania Quality Fund
BlackRock MuniYield Quality Fund II, Inc.
BlackRock MuniYield Quality Fund III, Inc.
BlackRock MuniYield Quality Fund, Inc.
BlackRock New York Municipal Bond Trust
BlackRock New York Municipal Income Quality Trust
BlackRock New York Municipal Income Trust
BlackRock New York Municipal Income Trust II
BlackRock Resources & Commodities Strategy Trust
BlackRock Science and Technology Trust
BlackRock Science and Technology Trust II
BlackRock Taxable Municipal Bond Trust
BlackRock Utilities, Infrastructure & Power Opportunities Trust
BlackRock Virginia Municipal Bond Trust
The BlackRock Strategic Municipal Trust
Multi-Asset Complex Open-End Funds Group A
BlackRock Advantage U.S. Total Market Fund, Inc.
BlackRock Advantage Global Fund, Inc.
BlackRock Asian Dragon Fund, Inc.
BlackRock Balanced Capital Fund, Inc.
BlackRock Basic Value Fund, Inc.
BlackRock Capital Appreciation Fund, Inc.
BlackRock Emerging Markets Fund, Inc.
BlackRock Equity Dividend Fund
BlackRock EuroFund
BlackRock Financial Institutions Series Trust
BlackRock Summit Cash Reserves Fund
Schedule A-2
BlackRock FundsSM
BlackRock Advantage ESG U.S. Equity Fund
BlackRock Advantage Emerging Markets Fund
BlackRock Advantage International Fund
BlackRock Advantage Large Cap Growth Fund
BlackRock Advantage Small Cap Core Fund
BlackRock Advantage Small Cap Growth Fund
BlackRock All-Cap Energy & Resources Portfolio
BlackRock China A Opportunities Fund
BlackRock Commodity Strategies Fund
BlackRock Emerging Markets Equity Strategies Fund
BlackRock Energy & Resources Portfolio
BlackRock Exchange Portfolio
BlackRock Global Long/Short Equity Fund
BlackRock Health Sciences Opportunities Portfolio
BlackRock High Equity Income Fund
BlackRock International Dividend Fund
BlackRock Liquid Environmentally Aware Fund
BlackRock Mid-Cap Growth Equity Portfolio
BlackRock Money Market Portfolio
BlackRock Real Estate Securities Fund
BlackRock Short Obligations Fund
BlackRock Tactical Opportunities Fund
BlackRock Technology Opportunities Fund
BlackRock Total Emerging Markets Fund
BlackRock Total Factor Fund
BlackRock Funds II
BlackRock 20/80 Target Allocation Fund
BlackRock 40/60 Target Allocation Fund
BlackRock 60/40 Target Allocation Fund
BlackRock 80/20 Target Allocation Fund
BlackRock Dynamic High Income Portfolio
BlackRock Global Dividend Portfolio
BlackRock LifePath® Smart Beta 2025 Fund
BlackRock LifePath® Smart Beta 2030 Fund
BlackRock LifePath® Smart Beta 2035 Fund
BlackRock LifePath® Smart Beta 2040 Fund
BlackRock LifePath® Smart Beta 2045 Fund
BlackRock LifePath® Smart Beta 2050 Fund
BlackRock LifePath® Smart Beta 2055 Fund
BlackRock LifePath® Smart Beta 2060 Fund
BlackRock LifePath® Smart Beta 2065 Fund
BlackRock LifePath® Smart Beta Retirement Fund
BlackRock Managed Income Fund
BlackRock Multi-Asset Income Portfolio
BlackRock Global Allocation Fund, Inc.
BlackRock Large Cap Focus Growth Fund, Inc.
Schedule A-3
BlackRock Large Cap Series Funds, Inc.
BlackRock Advantage Large Cap Core Fund
BlackRock Advantage Large Cap Value Fund
BlackRock Event Driven Equity Fund
BlackRock Latin America Fund, Inc.
BlackRock Liquidity Funds
California Money Fund
Federal Trust Fund
FedFund
MuniCash
MuniFund
New York Money Fund
TempCash
TempFund
T-Fund
Treasury Trust Fund
BlackRock Long-Horizon Equity Fund
BlackRock Mid Cap Dividend Series, Inc.
BlackRock Mid Cap Dividend Fund
BlackRock Natural Resources Trust
BlackRock Series, Inc.
BlackRock International Fund
BlackRock Series Fund, Inc.
BlackRock Advantage Large Cap Core Portfolio
BlackRock Balanced Capital Portfolio
BlackRock Capital Appreciation Portfolio
BlackRock Global Allocation Portfolio
BlackRock Government Money Market Portfolio
BlackRock Variable Series Funds, Inc.
BlackRock 60/40 Target Allocation ETF V.I. Fund
BlackRock Advantage Large Cap Core V.I. Fund
BlackRock Advantage Large Cap Value V.I. Fund
BlackRock Advantage U.S. Total Market V.I. Fund
BlackRock Basic Value V.I. Fund
BlackRock Capital Appreciation V.I. Fund
BlackRock Equity Dividend V.I. Fund
BlackRock Global Allocation V.I. Fund
BlackRock Government Money Market V.I. Fund
BlackRock International V.I. Fund
BlackRock International Index V.I. Fund
BlackRock Large Cap Focus Growth V.I. Fund
BlackRock Managed Volatility V.I. Fund
BlackRock S&P 500 Index V.I. Fund
BlackRock Small Cap Index V.I.
Schedule A-4
Funds For Institutions Series
BlackRock Premier Government Institutional Fund
BlackRock Select Treasury Strategies Institutional Fund
BlackRock Treasury Strategies Institutional Fund
FFI Government Fund
FFI Treasury Fund
Managed Account Series
BlackRock GA Disciplined Volatility Equity Fund
BlackRock GA Dynamic Equity Fund
Master Advantage U.S. Total Market LLC
Master Focus Growth LLC
Master Institutional Money Market LLC
Master Premier Government Institutional Portfolio
Master Treasury Strategies Institutional Portfolio
Master Large Cap Series LLC
Master Advantage Large Cap Core Portfolio
Master Advantage Large Cap Value Portfolio
Ready Assets Government Liquidity Fund
Ready Assets U.S. Treasury Money Fund
Retirement Series Trust
Retirement Reserves Money Fund
Fixed-Income Complex Open-End Funds Group B
BlackRock Allocation Target Shares
BATS: Series A Portfolio
BATS: Series C Portfolio
BATS: Series E Portfolio
BATS: Series M Portfolio
BATS: Series P Portfolio
BATS: Series S Portfolio
BlackRock Bond Fund, Inc.
BlackRock Total Return Fund
BlackRock California Municipal Series Trust
BlackRock California Municipal Opportunities Fund
BlackRock Funds IV
BlackRock Global Long/Short Credit Fund
BlackRock Impact Bond Fund
BlackRock Systematic Multi-Strategy Fund
BlackRock Funds V
BlackRock Core Bond Portfolio
BlackRock Credit Strategies Income Fund
BlackRock Emerging Markets Bond Fund
BlackRock Emerging Markets Flexible Dynamic Bond Portfolio
BlackRock Floating Rate Income Portfolio
BlackRock GNMA Portfolio
Schedule A-5
BlackRock High Yield Bond Portfolio
BlackRock Inflation Protected Bond Portfolio
BlackRock Low Duration Bond Portfolio
BlackRock Strategic Income Opportunities Portfolio
BlackRock U.S. Government Bond Portfolio
BlackRock Multi-State Municipal Series Trust
BlackRock New Jersey Municipal Bond Fund
BlackRock New York Municipal Opportunities Fund
BlackRock Pennsylvania Municipal Bond Fund
BlackRock Municipal Bond Fund, Inc.
BlackRock High Yield Municipal Fund
BlackRock National Municipal Fund
BlackRock Short-Term Municipal Fund
BlackRock Municipal Series Trust
BlackRock Strategic Municipal Opportunities Fund
BlackRock Series Fund II, Inc.
BlackRock High Yield Portfolio
BlackRock U.S. Government Bond Portfolio
BlackRock Strategic Global Bond Fund, Inc.
BlackRock Variable Series Funds II, Inc.
BlackRock High Yield V.I. Fund
BlackRock Total Return V.I. Fund
BlackRock U.S. Government Bond V.I. Fund
Managed Account Series II
BlackRock U.S. Mortgage Portfolio
Master Bond LLC
Master Total Return Portfolio
Schedule A-6
Schedule B: Forms of Securities Loan Agreement
Schedule B-1
Appendix A
Closed-End Funds: Threshold Lending Program
1. |
For the Funds in the Fixed-Income Complex identified on Schedule A as Fixed-Income Complex Closed-End Funds (collectively, the Closed-End Funds), the Lending Agent Fee Percentage is eighteen percent (18%). The Fixed-Income Complex refers to all of the Funds currently or in the future overseen by a board of directors/trustees consisting of the same individuals who comprise the members of the boards of directors/trustees of the Closed-End Funds, the Fixed-Income Complex Open-End Funds Group B (the Group B Funds) listed on Schedule A and the funds listed on Appendix D hereto. |
2. |
Notwithstanding paragraph 1 above, if at any point during a calendar year, the aggregate gross revenues earned by the funds in the Fixed-Income Complex prior to payment of compensation to the applicable lending agent exceed $3,150,000 (the Fixed-Income Complex Breakpoint), the Lending Agent Fee Percentage shall be reduced to fifteen percent (15%) in allocating net income after the gross revenues for the calendar year equal the Fixed-Income Complex Breakpoint. The adjusted allocation shall become effective on incremental gross income starting on the next business day after the Fixed-Income Complex Breakpoint is reached. |
3. |
The Client and the Lending Agent agree and acknowledge that no advisory fee is payable with respect to management and investment of a Funds Cash Collateral in any joint account, fund or similar vehicle. The Lending Agent has agreed to cap the Cash Management Costs in respect of the investment of Cash Collateral in Money Market Series on an annualized basis at 0.04% of the daily net asset value of Money Market Series. The cap on the Cash Management Costs may be raised or reduced upon mutual agreement between the Lending Agent and the Client. In the event that a Fund directly or indirectly bears any Cash Management Costs, as computed at least monthly by the Lending Agent or its designee, in excess of such cap, then such excess shall, without limitation, be deemed a transaction fee or other operational cost for which the Lending Agent shall be responsible. |
App. A-1
Appendix B
Group A Funds: Full Program
1. |
For the Funds in the Multi-Asset Complex identified on Schedule A as Multi-Asset Complex Open-End Funds Group A (the Group A Funds), the Lending Agent Fee Percentage shall be as set forth below: |
a. |
With respect to a Group A Fund that is identified as a U.S. Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is twenty-five percent (25%). |
b. |
With respect to a Group A Fund that is identified as an International Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is eighteen percent (18%). |
c. |
With respect to a Group A Fund that is identified as a Fund of Funds in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is eighteen percent (18%). |
d. |
With respect to a Group A Fund that is identified as a Fixed Income Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is eighteen percent (18%). |
The Multi-Asset Complex refers to all of the Funds currently or in the future overseen by a board of directors/trustees consisting of the same individuals who comprise the members of the boards of directors/trustees of the Group A Funds listed on Schedule A and the funds listed on Appendix E hereto.
2. |
Notwithstanding the foregoing, if at any point during a calendar year, the aggregate gross revenues earned by the funds in the Multi-Asset Complex prior to payment of compensation to the applicable lending agent exceed $29,780,000 (the Multi-Asset Complex Breakpoint), the Lending Agent Fee Percentage shall be reduced as follows in allocating net income after the gross revenues for the calendar year equal the Multi-Asset Complex Breakpoint: |
a. |
With respect to a Group A Fund that is identified as a U.S. Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be twenty percent (20%). |
b. |
With respect to a Group A Fund that is identified as an International Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be fifteen percent (15%). |
App. B-1
c. |
With respect to a Group A Fund that is identified as a Fund of Funds in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be fifteen percent (15%). |
d. |
With respect to a Group A Fund that is identified as a Fixed Income Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be fifteen percent (15%). |
The adjusted allocation shall become effective on incremental gross income starting on the next business day after the Multi-Asset Complex Breakpoint is reached.
3. |
The Client and the Lending Agent agree and acknowledge that no advisory fee is payable with respect to management and investment of a Group A Funds Cash Collateral in any joint account, fund or similar vehicle. The Lending Agent has agreed to cap the Cash Management Costs in respect of the investment of Cash Collateral in Money Market Series on an annualized basis at 0.04% of the daily net asset value of Money Market Series. The cap on the Cash Management Costs may be raised or reduced upon mutual agreement between the Lending Agent and the Client. In the event that a Group A Fund directly or indirectly bears any Cash Management Costs, as computed at least monthly by the Lending Agent or its designee, in excess of such cap, then such excess shall, without limitation, be deemed a transaction fee or other operational cost for which the Lending Agent shall be responsible. |
4. |
Notwithstanding any of the foregoing, if the fee calculated pursuant to paragraphs 1, 2 and 3 of this Appendix B would result in an effective fee split for a Group A Fund of less than seventy percent (70%) of the sum of such Group A Funds securities lending income (after deducting the rebate to the Approved Borrowers) and Cash Management Costs for any day (the Group A Funds Effective Fee Split Floor), then the Lending Agents fees for such day shall be reduced to the extent necessary to provide such Group A Fund with the Group A Funds Effective Fee Split Floor. |
App. B-2
Appendix C
Group B Funds: Full Program
1. |
For the Funds in the Fixed-Income Complex identified on Schedule A as Fixed-Income Complex Open-End Funds Group B (the Group B Funds), the Lending Agent Fee Percentage shall be as set forth below: |
a. |
With respect to a Group B Fund that is identified as a U.S. Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is twenty-five percent (25%). |
b. |
With respect to a Group B Fund that is identified as an International Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is eighteen percent (18%). |
c. |
With respect to a Group B Fund that is identified as a Fund of Funds in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is eighteen percent (18%). |
d. |
With respect to a Group B Fund that is identified as a Fixed Income Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is eighteen percent (18%). |
The Fixed-Income Complex refers to all of the Funds currently or in the future overseen by a board of directors/trustees consisting of the same individuals who comprise the members of the boards of directors/trustees of the Closed-End Funds, the Group B Funds listed on Schedule A, and the funds listed on Appendix D hereto.
2. |
Notwithstanding the foregoing, if at any point during a calendar year, the aggregate gross revenues earned by the funds in the Fixed-Income Complex prior to payment of compensation to the applicable lending agent exceed $3,150,000 (the Fixed-Income Complex Breakpoint), the Lending Agent Fee Percentage shall be reduced as follows in allocating net income after the gross revenues for the calendar year equal the Fixed-Income Complex Breakpoint: |
a. |
With respect to a Group B Fund that is identified as a U.S. Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be twenty percent (20%). |
b. |
With respect to a Group B Fund that is identified as an International Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be fifteen percent (15%). |
App. C-1
c. |
With respect to a Group B Fund that is identified as a Fund of Funds in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be fifteen percent (15%). |
d. |
With respect to a Group B Fund that is identified as a Fixed Income Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be fifteen percent (15%). |
The adjusted allocation shall become effective on incremental gross income starting on the next business day after the Fixed-Income Complex Breakpoint is reached.
3. |
The Client and the Lending Agent agree and acknowledge that no advisory fee is payable with respect to management and investment of a Group B Funds Cash Collateral in any joint account, fund or similar vehicle. The Lending Agent has agreed to cap the Cash Management Costs in respect of the investment of Cash Collateral in Money Market Series on an annualized basis at 0.04% of the daily net asset value of Money Market Series. The cap on the Cash Management Costs may be raised or reduced upon mutual agreement between the Lending Agent and the Client. In the event that a Group B Fund directly or indirectly bears any Cash Management Costs, as computed at least monthly by the Lending Agent or its designee, in excess of such cap, then such excess shall, without limitation, be deemed a transaction fee or other operational cost for which the Lending Agent shall be responsible. |
4. |
Notwithstanding any of the foregoing, if the fee calculated pursuant to paragraphs 1, 2 and 3 of this Appendix C would result in an effective fee split for a Group B Fund of less than seventy percent (70%) of the sum of such Group B Funds securities lending income (after deducting the rebate to the Approved Borrowers) and Cash Management Costs for any day (the Group B Funds Effective Fee Split Floor), then the Lending Agents fees for such day shall be reduced to the extent necessary to provide such Group B Fund with the Group B Funds Effective Fee Split Floor. |
App. C-2
Appendix D
Fixed-Income Complex Open-End Funds*
BlackRock Funds VI
BlackRock CoreAlpha Bond Fund
Master Investment Portfolio II
CoreAlpha Bond Master Portfolio
* |
Funds have alternative securities lending agency arrangement. |
App. D-1
Appendix E
Multi-Asset Complex Open-End Funds*
BlackRock ETF Trust**
BlackRock U.S. Equity Factor Rotation ETF
BlackRock FundsSM
iShares Developed Real Estate Index Fund
iShares Edge MSCI Min Vol EAFE Index Fund
iShares Edge MSCI Min Vol USA Index Fund
iShares Edge MSCI Multifactor Intl Index Fund
iShares Edge MSCI Multifactor USA Index Fund
iShares Municipal Bond Index Fund
iShares Russell Mid-Cap Index Fund
iShares Russell Small/Mid-Cap Index Fund
iShares Short-Term TIPS Bond Index Fund
iShares Total U.S. Stock Market Index Fund
BlackRock Funds III
BlackRock Cash Funds: Institutional
BlackRock Cash Funds: Treasury
BlackRock LifePath® Dynamic Retirement Fund
BlackRock LifePath® Dynamic 2025 Fund
BlackRock LifePath® Dynamic 2030 Fund
BlackRock LifePath® Dynamic 2035 Fund
BlackRock LifePath® Dynamic 2040 Fund
BlackRock LifePath® Dynamic 2045 Fund
BlackRock LifePath® Dynamic 2050 Fund
BlackRock LifePath® Dynamic 2055 Fund
BlackRock LifePath® Dynamic 2060 Fund
BlackRock LifePath® Dynamic 2065 Fund
BlackRock LifePath® Index Retirement Fund
BlackRock LifePath® Index 2025 Fund
BlackRock LifePath® Index 2030 Fund
BlackRock LifePath® Index 2035 Fund
BlackRock LifePath® Index 2040 Fund
BlackRock LifePath® Index 2045 Fund
BlackRock LifePath® Index 2050 Fund
BlackRock LifePath® Index 2055 Fund
BlackRock LifePath® Index 2060 Fund
BlackRock LifePath® Index 2065 Fund
iShares MSCI Total International Index Fund
iShares Russell 1000 Large-Cap Index Fund
iShares S&P 500 Index Fund
iShares U.S. Aggregate Bond Index Fund
App. E-1
BlackRock Index Funds, Inc.
iShares MSCI EAFE International Index Fund
iShares Russell 2000 Small-Cap Index Fund
Master Investment Portfolio
Active Stock Master Portfolio
International Tilts Master Portfolio
Large Cap Index Master Portfolio
LifePath® Dynamic Retirement Master Portfolio
LifePath® Dynamic 2025 Master Portfolio
LifePath® Dynamic 2030 Master Portfolio
LifePath® Dynamic 2035 Master Portfolio
LifePath® Dynamic 2040 Master Portfolio
LifePath® Dynamic 2045 Master Portfolio
LifePath® Dynamic 2050 Master Portfolio
LifePath® Dynamic 2055 Master Portfolio
LifePath® Dynamic 2060 Master Portfolio
LifePath® Dynamic 2065 Master Portfolio
LifePath® Index Retirement Master Portfolio
LifePath® Index 2025 Master Portfolio
LifePath® Index 2030 Master Portfolio
LifePath® Index 2035 Master Portfolio
LifePath® Index 2040 Master Portfolio
LifePath® Index 2045 Master Portfolio
LifePath® Index 2050 Master Portfolio
LifePath® Index 2055 Master Portfolio
LifePath® Index 2060 Master Portfolio
LifePath® Index 2065 Master Portfolio
Money Market Master Portfolio
S&P 500 Index Master Portfolio
Total International ex U.S. Index Master Portfolio
Treasury Money Market Master Portfolio
U.S. Total Bond Index Master Portfolio
Quantitative Master Series LLC
Master Small Cap Index Series
* |
Funds have alternative securities lending agency arrangement. |
** |
Fund is an exchange-traded fund |
App. E-2
Exhibit (14)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Registration Statement No. 333-241481 on Form N-14 of our reports dated as indicated in the table below, relating to the financial statements and financial highlights of the funds indicated in the table below (the Funds), appearing in the Annual Reports on Form N-CSR of the Funds for the years ended indicated in the table below.
Funds | Year Ended | Report Date | ||
BlackRock Municipal Income Investment Quality Trust | August 31, 2020 | October 21, 2020 | ||
BlackRock Municipal Bond Trust | August 31, 2020 | October 21, 2020 | ||
BlackRock MuniHoldings Fund II, Inc. | April 30, 2020 | June 22, 2020 | ||
BlackRock MuniHoldings Quality Fund, Inc. | April 30, 2020 | June 22, 2020 | ||
BlackRock MuniHoldings Fund, Inc. | April 30, 2020 | June 22, 2020 |
We also consent to the references to us under the headings Other Service Providers, Financial Highlights and Independent Registered Public Accounting Firm in the Joint Proxy Statement/Prospectus, which is a part of such Registration Statement.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
October 30, 2020
EVERY SHAREHOLDERS VOTE IS IMPORTANT!
EASY VOTING OPTIONS:
|
VOTE ON THE INTERNET Log on to: www.proxy-direct.com or scan the QR code Follow the on-screen instructions available 24 hours |
|||
|
VOTE BY TELEPHONE Call 1-800-337-3503 Follow the recorded instructions available 24 hours |
|||
|
VOTE BY MAIL Vote, sign and date your Proxy Card and return it in the postage-paid envelope |
|||
|
VIRTUAL MEETING at the following Website: www.meetingcenter.io/295614271, on December 15 at 11:00 a.m. Eastern Time To participate in the Virtual Meeting, enter the 14-digit control number from the shaded box on this card. The Password for this meeting is BLK2020 |
Please detach at perforation before mailing.
PROXY BLACKROCK MUNICIPAL INCOME INVESTMENT QUALITY TRUST
JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 15, 2020
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
COMMON SHARES
The undersigned hereby appoints Jay M. Fife and Paul Mickle, and each of them, as proxies, each with the power to appoint his or her substitute, and hereby authorizes them to represent and to vote, as designated on the reverse side hereof, all of the common shares of BlackRock Municipal Income Investment Quality Trust (BAF) that the undersigned is entitled to vote at the Joint Special Meeting of Shareholders of BAF to be held on Tuesday, December 15, 2020 at 11:00 a.m. (Eastern time) (the Fund Joint Special Meeting), and any adjournment(s) or postponement(s) thereof, to cast on behalf of the undersigned all votes that the undersigned is entitled to cast at the Fund Joint Special Meeting and otherwise to represent the undersigned at the Fund Joint Special Meeting with all powers possessed by the undersigned if personally present at the Fund Joint Special Meeting. Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Fund Joint Special Meeting will be held in a virtual meeting format only, at the following Website: www.meetingcenter.io/295614271. To attend and participate in the virtual Fund Joint Special Meeting enter the 14-digit control number from the shaded box on this card. The Password for this meeting is BLK2020. The validity of this proxy is governed by Delaware law. This proxy does not revoke any prior powers of attorney except for prior proxies given in connection with the Fund Joint Special Meeting. The undersigned hereby acknowledges receipt of the Joint Proxy Statement/Prospectus, the terms of which are incorporated herein by reference, and revokes any proxy heretofore given with respect to the Fund Joint Special Meeting.
THIS PROXY, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSAL.
VOTE VIA THE INTERNET: www.proxy-direct.com | ||||
VOTE VIA THE TELEPHONE: 1-800-337-3503
|
||||
BAF_31540_102020
xxxxxxxxxxxxxx | code |
EVERY SHAREHOLDERS VOTE IS IMPORTANT!
Important Notice Regarding the Availability of Proxy Materials for the
Joint Special Meeting of Shareholders on December 15, 2020.
The Joint Proxy Statement/Prospectus and Proxy card for this meeting are available at:
https://www.proxy-direct.com/blk-31540
Please detach at perforation before mailing.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD. THE BOARD RECOMMENDS VOTING FOR THE PROPOSAL.
TO VOTE MARK BLOCKS BELOW IN BLUE OR BLACK INK AS SHOWN IN THIS EXAMPLE: ☒
A | Proposal | |||||||||
FOR | AGAINST | ABSTAIN | ||||||||
1A. |
The common shareholders and holders of Variable Rate Muni Term Preferred Shares (VMTP Shares and the holders thereof, VMTP Holders) of BlackRock Municipal Income Investment Quality Trust (BAF) are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between BAF and BlackRock MuniHoldings Fund, Inc. (the Acquiring Fund and such Agreement and Plan of Reorganization, the BAF Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of BAFs assets and the assumption by the Acquiring Fund of substantially all of BAFs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of BAF, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by BAF of its registration under the Investment Company Act of 1940, as amended, and the liquidation, dissolution and termination of BAF in accordance with its Agreement and Declaration of Trust and Delaware law (the BAF Reorganization).
|
☐ | ☐ | ☐ | ||||||
B | Authorized Signatures This section must be completed for your vote to be counted. Sign and Date Below | |||||||||
Note: Please sign exactly as your name(s) appear(s) on this Proxy Card, and date it. When shares are held jointly, each holder should sign. When signing as attorney, executor, guardian, administrator, trustee, officer of corporation or other entity or in another representative capacity, please give the full title under the signature. |
Date (mm/dd/yyyy) Please print date below | Signature 1 Please keep signature within the box | Signature 2 Please keep signature within the box | ||||||
/ / |
Scanner bar code
|
||||
xxxxxxxxxxxxxx | BAF 31540 | M xxxxxxxx |
EVERY SHAREHOLDERS VOTE IS IMPORTANT!
EASY VOTING OPTIONS:
|
VOTE ON THE INTERNET Log on to: www.proxy-direct.com or scan the QR code Follow the on-screen instructions available 24 hours |
|||
|
VOTE BY TELEPHONE Call 1-800-337-3503 Follow the recorded instructions available 24 hours |
|||
|
VOTE BY MAIL Vote, sign and date your Proxy Card and return it in the postage-paid envelope |
|||
|
VIRTUAL MEETING at the following Website: www.meetingcenter.io/295614271, on December 15 at 11:00 a.m. Eastern Time To participate in the Virtual Meeting, enter the 14-digit control number from the shaded box on this card. The Password for this meeting is BLK2020 |
Please detach at perforation before mailing.
PROXY BLACKROCK MUNICIPAL BOND TRUST
JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 15, 2020
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
COMMON SHARES
The undersigned hereby appoints Jay M. Fife and Paul Mickle, and each of them, as proxies, each with the power to appoint his or her substitute, and hereby authorizes them to represent and to vote, as designated on the reverse side hereof, all of the common shares of BlackRock Municipal Bond Trust (BBK) that the undersigned is entitled to vote at the Joint Special Meeting of Shareholders of BBK to be held on Tuesday, December 15, 2020 at 11:00 a.m. (Eastern time) (the Fund Joint Special Meeting), and any adjournment(s) or postponement(s) thereof, to cast on behalf of the undersigned all votes that the undersigned is entitled to cast at the Fund Joint Special Meeting and otherwise to represent the undersigned at the Fund Joint Special Meeting with all powers possessed by the undersigned if personally present at the Fund Joint Special Meeting. Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Fund Joint Special Meeting will be held in a virtual meeting format only, at the following Website: www.meetingcenter.io/295614271. To attend and participate in the virtual Fund Joint Special Meeting enter the 14-digit control number from the shaded box on this card. The Password for this meeting is BLK2020. The validity of this proxy is governed by Delaware law. This proxy does not revoke any prior powers of attorney except for prior proxies given in connection with the Fund Joint Special Meeting. The undersigned hereby acknowledges receipt of the Joint Proxy Statement/Prospectus, the terms of which are incorporated herein by reference, and revokes any proxy heretofore given with respect to the Fund Joint Special Meeting.
THIS PROXY, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSAL.
VOTE VIA THE INTERNET: www.proxy-direct.com | ||||
VOTE VIA THE TELEPHONE: 1-800-337-3503
|
||||
BBK_31540_102020
xxxxxxxxxxxxxx | code |
EVERY SHAREHOLDERS VOTE IS IMPORTANT!
Important Notice Regarding the Availability of Proxy Materials for the
Joint Special Meeting of Shareholders on December 15, 2020.
The Joint Proxy Statement/Prospectus and Proxy card for this meeting are available at:
https://www.proxy-direct.com/blk-31540
Please detach at perforation before mailing.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD. THE BOARD RECOMMENDS VOTING FOR THE PROPOSAL.
TO VOTE MARK BLOCKS BELOW IN BLUE OR BLACK INK AS SHOWN IN THIS EXAMPLE: ☒
A | Proposal | |||||||||
FOR | AGAINST | ABSTAIN | ||||||||
1C. |
The common shareholders and holders of Variable Rate Muni Term Preferred Shares (VMTP Shares and the holders thereof, VMTP Holders) of BlackRock Municipal Bond Trust (BBK) are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between BBK and BlackRock MuniHoldings Fund, Inc. (the Acquiring Fund and such Agreement and Plan of Reorganization, the BBK Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of BBKs assets and the assumption by the Acquiring Fund of substantially all of BBKs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of BBK, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by BBK of its registration under the Investment Company Act of 1940, as amended, and the liquidation, dissolution and termination of BBK in accordance with its Agreement and Declaration of Trust and Delaware law (the BBK Reorganization).
|
☐ | ☐ | ☐ | ||||||
B | Authorized Signatures This section must be completed for your vote to be counted. Sign and Date Below | |||||||||
Note: Please sign exactly as your name(s) appear(s) on this Proxy Card, and date it. When shares are held jointly, each holder should sign. When signing as attorney, executor, guardian, administrator, trustee, officer of corporation or other entity or in another representative capacity, please give the full title under the signature. |
Date (mm/dd/yyyy) Please print date below | Signature 1 Please keep signature within the box | Signature 2 Please keep signature within the box | ||||||
/ / |
Scanner bar code
|
||||
xxxxxxxxxxxxxx | BBK 31540 | M xxxxxxxx |
EVERY SHAREHOLDERS VOTE IS IMPORTANT!
EASY VOTING OPTIONS:
|
VOTE ON THE INTERNET Log on to: www.proxy-direct.com or scan the QR code Follow the on-screen instructions available 24 hours |
|||
|
VOTE BY TELEPHONE Call 1-800-337-3503 Follow the recorded instructions available 24 hours |
|||
|
VOTE BY MAIL Vote, sign and date your Proxy Card and return it in the postage-paid envelope |
|||
|
VIRTUAL MEETING at the following Website: www.meetingcenter.io/295614271, on December 15 at 11:00 a.m. Eastern Time To participate in the Virtual Meeting, enter the 14-digit control number from the shaded box on this card. The Password for this meeting is BLK2020 |
Please detach at perforation before mailing.
PROXY BLACKROCK MUNIHOLDINGS FUND II, INC.
JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 15, 2020
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
COMMON SHARES
The undersigned hereby appoints Jay M. Fife and Paul Mickle, and each of them, as proxies, each with the power to appoint his or her substitute, and hereby authorizes them to represent and to vote, as designated on the reverse side hereof, all of the common shares of BlackRock MuniHoldings Fund II, Inc. (MUH) that the undersigned is entitled to vote at the Joint Special Meeting of Shareholders of MUH to be held on Tuesday, December 15, 2020 at 11:00 a.m. (Eastern time) (the Fund Joint Special Meeting), and any adjournment(s) or postponement(s) thereof, to cast on behalf of the undersigned all votes that the undersigned is entitled to cast at the Fund Joint Special Meeting and otherwise to represent the undersigned at the Fund Joint Special Meeting with all powers possessed by the undersigned if personally present at the Fund Joint Special Meeting. Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Fund Joint Special Meeting will be held in a virtual meeting format only, at the following Website: www.meetingcenter.io/295614271. To attend and participate in the virtual Fund Joint Special Meeting enter the 14-digit control number from the shaded box on this card. The Password for this meeting is BLK2020. The validity of this proxy is governed by Maryland law. This proxy does not revoke any prior powers of attorney except for prior proxies given in connection with the Fund Joint Special Meeting. The undersigned hereby acknowledges receipt of the Joint Proxy Statement/Prospectus, the terms of which are incorporated herein by reference, and revokes any proxy heretofore given with respect to the Fund Joint Special Meeting.
THIS PROXY, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSAL.
VOTE VIA THE INTERNET: www.proxy-direct.com | ||||
VOTE VIA THE TELEPHONE: 1-800-337-3503
|
||||
MUH_31540_102020
xxxxxxxxxxxxxx | code |
EVERY SHAREHOLDERS VOTE IS IMPORTANT!
Important Notice Regarding the Availability of Proxy Materials for the
Joint Special Meeting of Shareholders on December 15, 2020.
The Joint Proxy Statement/Prospectus and Proxy card for this meeting are available at:
https://www.proxy-direct.com/blk-31540
Please detach at perforation before mailing.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD. THE BOARD RECOMMENDS VOTING FOR THE PROPOSAL.
TO VOTE MARK BLOCKS BELOW IN BLUE OR BLACK INK AS SHOWN IN THIS EXAMPLE: ☒
A | Proposal | |||||||||
FOR | AGAINST | ABSTAIN | ||||||||
1E. |
The common shareholders and holders of Variable Rate Muni Term Preferred Shares (VMTP Shares and the holders thereof, VMTP Holders) of BlackRock MuniHoldings Fund II, Inc. (MUH) are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between MUH and BlackRock MuniHoldings Fund, Inc. (the Acquiring Fund and such Agreement and Plan of Reorganization, the MUH Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of MUHs assets and the assumption by the Acquiring Fund of substantially all of MUHs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of MUH, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by MUH of its registration under the Investment Company Act of 1940, as amended, and the liquidation, dissolution and termination of MUH in accordance with its charter and Maryland law (the MUH Reorganization).
|
☐ | ☐ | ☐ | ||||||
B | Authorized Signatures This section must be completed for your vote to be counted. Sign and Date Below | |||||||||
Note: Please sign exactly as your name(s) appear(s) on this Proxy Card, and date it. When shares are held jointly, each holder should sign. When signing as attorney, executor, guardian, administrator, trustee, officer of corporation or other entity or in another representative capacity, please give the full title under the signature. |
Date (mm/dd/yyyy) Please print date below | Signature 1 Please keep signature within the box | Signature 2 Please keep signature within the box | ||||||
/ / |
Scanner bar code
|
||||
xxxxxxxxxxxxxx | MUH 31540 | M xxxxxxxx |
EVERY SHAREHOLDERS VOTE IS IMPORTANT!
EASY VOTING OPTIONS:
|
VOTE ON THE INTERNET Log on to: www.proxy-direct.com or scan the QR code Follow the on-screen instructions available 24 hours |
|||
|
VOTE BY TELEPHONE Call 1-800-337-3503 Follow the recorded instructions available 24 hours |
|||
|
VOTE BY MAIL Vote, sign and date your Proxy Card and return it in the postage-paid envelope |
|||
|
VIRTUAL MEETING at the following Website: www.meetingcenter.io/295614271, on December 15 at 11:00 a.m. Eastern Time To participate in the Virtual Meeting, enter the 14-digit control number from the shaded box on this card. The Password for this meeting is BLK2020 |
Please detach at perforation before mailing.
PROXY BLACKROCK MUNIHOLDINGS QUALITY FUND, INC.
JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 15, 2020
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
COMMON SHARES
The undersigned hereby appoints Jay M. Fife and Paul Mickle, and each of them, as proxies, each with the power to appoint his or her substitute, and hereby authorizes them to represent and to vote, as designated on the reverse side hereof, all of the common shares of BlackRock MuniHoldings Quality Fund, Inc. (MUS) that the undersigned is entitled to vote at the Joint Special Meeting of Shareholders of MUS to be held on Tuesday, December 15, 2020 at 11:00 a.m. (Eastern time) (the Fund Joint Special Meeting), and any adjournment(s) or postponement(s) thereof, to cast on behalf of the undersigned all votes that the undersigned is entitled to cast at the Fund Joint Special Meeting and otherwise to represent the undersigned at the Fund Joint Special Meeting with all powers possessed by the undersigned if personally present at the Fund Joint Special Meeting. Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Fund Joint Special Meeting will be held in a virtual meeting format only, at the following Website: www.meetingcenter.io/295614271. To attend and participate in the virtual Fund Joint Special Meeting enter the 14-digit control number from the shaded box on this card. The Password for this meeting is BLK2020. The validity of this proxy is governed by Maryland law. This proxy does not revoke any prior powers of attorney except for prior proxies given in connection with the Fund Joint Special Meeting. The undersigned hereby acknowledges receipt of the Joint Proxy Statement/Prospectus, the terms of which are incorporated herein by reference, and revokes any proxy heretofore given with respect to the Fund Joint Special Meeting.
THIS PROXY, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSAL.
VOTE VIA THE INTERNET: www.proxy-direct.com | ||||
VOTE VIA THE TELEPHONE: 1-800-337-3503
|
||||
MUS_31540_102020
xxxxxxxxxxxxxx | code |
EVERY SHAREHOLDERS VOTE IS IMPORTANT!
Important Notice Regarding the Availability of Proxy Materials for the
Joint Special Meeting of Shareholders on December 15, 2020.
The Joint Proxy Statement/Prospectus and Proxy card for this meeting are available at:
https://www.proxy-direct.com/blk-31540
Please detach at perforation before mailing.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD. THE BOARD RECOMMENDS VOTING FOR THE PROPOSAL.
TO VOTE MARK BLOCKS BELOW IN BLUE OR BLACK INK AS SHOWN IN THIS EXAMPLE: ☒
A | Proposal | |||||||||
FOR | AGAINST | ABSTAIN | ||||||||
1G. |
The common shareholders and holders of Variable Rate Muni Term Preferred Shares (VMTP Shares and the holders thereof, VMTP Holders) of BlackRock MuniHoldings Quality Fund, Inc. (MUS) are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between MUS and BlackRock MuniHoldings Fund, Inc. (the Acquiring Fund and such Agreement and Plan of Reorganization, the MUS Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of MUSs assets and the assumption by the Acquiring Fund of substantially all of MUSs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of MUS, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by MUS of its registration under the Investment Company Act of 1940, as amended, and the liquidation, dissolution and termination of MUS in accordance with its charter and Maryland law (the MUS Reorganization).
|
☐ | ☐ | ☐ | ||||||
B | Authorized Signatures This section must be completed for your vote to be counted. Sign and Date Below | |||||||||
Note: Please sign exactly as your name(s) appear(s) on this Proxy Card, and date it. When shares are held jointly, each holder should sign. When signing as attorney, executor, guardian, administrator, trustee, officer of corporation or other entity or in another representative capacity, please give the full title under the signature. |
Date (mm/dd/yyyy) Please print date below | Signature 1 Please keep signature within the box | Signature 2 Please keep signature within the box | ||||||
/ / |
Scanner bar code
|
||||
xxxxxxxxxxxxxx | MUS 31540 | M xxxxxxxx |
EVERY SHAREHOLDERS VOTE IS IMPORTANT!
EASY VOTING OPTIONS:
|
VOTE ON THE INTERNET Log on to: www.proxy-direct.com or scan the QR code Follow the on-screen instructions available 24 hours |
|||
|
VOTE BY TELEPHONE Call 1-800-337-3503 Follow the recorded instructions available 24 hours |
|||
|
VOTE BY MAIL Vote, sign and date your Proxy Card and return it in the postage-paid envelope |
|||
|
VIRTUAL MEETING at the following Website: www.meetingcenter.io/295614271, on December 15 at 10:00 a.m. Eastern Time To participate in the Virtual Meeting, enter the 14-digit control number from the shaded box on this card. The Password for this meeting is BLK2020 |
Please detach at perforation before mailing.
PROXY BLACKROCK MUNIHOLDINGS FUND, INC.
JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 15, 2020
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
COMMON SHARES
The undersigned hereby appoints Jay M. Fife and Paul Mickle, and each of them, as proxies, each with the power to appoint his or her substitute, and hereby authorizes them to represent and to vote, as designated on the reverse side hereof, all of the common shares of BlackRock MuniHoldings Fund, Inc (MHD) that the undersigned is entitled to vote at the Joint Special Meeting of Shareholders of MHD to be held on Tuesday, December 15, 2020 at 11:00 a.m. (Eastern time) (the Fund Joint Special Meeting), and any adjournment(s) or postponement(s) thereof, to cast on behalf of the undersigned all votes that the undersigned is entitled to cast at the Fund Joint Special Meeting and otherwise to represent the undersigned at the Fund Joint Special Meeting with all powers possessed by the undersigned if personally present at the Fund Joint Special Meeting. Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Fund Joint Special Meeting will be held in a virtual meeting format only, at the following Website: www.meetingcenter.io/295614271. To attend and participate in the virtual Fund Joint Special Meeting enter the 14-digit control number from the shaded box on this card. The Password for this meeting is BLK2020. The validity of this proxy is governed by Maryland law. This proxy does not revoke any prior powers of attorney except for prior proxies given in connection with the Fund Joint Special Meeting. The undersigned hereby acknowledges receipt of the Joint Proxy Statement/Prospectus, the terms of which are incorporated herein by reference, and revokes any proxy heretofore given with respect to the Fund Joint Special Meeting.
THIS PROXY, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSALS.
VOTE VIA THE INTERNET: www.proxy-direct.com | ||||
VOTE VIA THE TELEPHONE: 1-800-337-3503
|
||||
MHD_31540_102020
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EVERY SHAREHOLDERS VOTE IS IMPORTANT!
Important Notice Regarding the Availability of Proxy Materials for the
Joint Special Meeting of Shareholders on December 15, 2020.
The Joint Proxy Statement/Prospectus and Proxy card for this meeting are available at:
https://www.proxy-direct.com/blk-31540
Please detach at perforation before mailing.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD. THE BOARD RECOMMENDS VOTING FOR THE PROPOSALS.
TO VOTE MARK BLOCKS BELOW IN BLUE OR BLACK INK AS SHOWN IN THIS EXAMPLE: ☒
A | Proposals | |||||||||
FOR | AGAINST | ABSTAIN | ||||||||
2A. |
The common shareholders and holders of Variable Rate Muni Term Preferred Shares (VMTP Shares and the holders thereof, VMTP Holders) of BlackRock MuniHoldings Fund, Inc. (the Acquiring Fund) are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with an Agreement and Plan of Reorganization between BlackRock Municipal Income Investment Quality Trust and the Acquiring Fund.
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☐ | ☐ | ☐ | ||||||
FOR | AGAINST | ABSTAIN | ||||||||
2B. |
The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with an Agreement and Plan of Reorganization between BlackRock Municipal Bond Trust and the Acquiring Fund.
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☐ | ☐ | ☐ | ||||||
FOR | AGAINST | ABSTAIN | ||||||||
2C. |
The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with an Agreement and Plan of Reorganization between BlackRock MuniHoldings Fund II, Inc. and the Acquiring Fund.
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☐ | ☐ | ☐ | ||||||
FOR | AGAINST | ABSTAIN | ||||||||
2D. |
The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with an Agreement and Plan of Reorganization between BlackRock MuniHoldings Quality Fund, Inc. and the Acquiring Fund.
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☐ | ☐ | ☐ | ||||||
B | Authorized Signatures This section must be completed for your vote to be counted. Sign and Date Below | |||||||||
Note: Please sign exactly as your name(s) appear(s) on this Proxy Card, and date it. When shares are held jointly, each holder should sign. When signing as attorney, executor, guardian, administrator, trustee, officer of corporation or other entity or in another representative capacity, please give the full title under the signature. |
Date (mm/dd/yyyy) Please print date below | Signature 1 Please keep signature within the box | Signature 2 Please keep signature within the box | ||||||
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