BofA v. Steel Partners


06/19/09 – 06/19/09


Plaintiffs were investors in the Steel Partners 2 family of funds, which included both domestic and off-shore entities, operating as part of a master feeder investment fund structure. The economic disruption of 2008 resulted in an unprecedented number of withdrawal requests. By November 30, 2008, withdrawal requests equaled 38% of invested funds.

On December 9, 2008, redemptions were temporarily suspended. On December 31, 2008, investors were presented with a plan that would transfer the interests and assets in the fund to a publicly traded limited partnership, and investors would receive interests in the new entity in exchange for their interests in the Steel Partners 2 funds.

Investors resisted the plan because they would not be entitled to redeem their interests in the new entity. A revised plan offered investors a cash distribution, and have a choice between (1) receiving units in accordance with the original plan (Option A), or (2) receiving a pro rata distribution of securities held by the funds in full satisfaction of their investments (Option B-1). A third option (B-2) was later added, which would have allowed investors to place their share of equities in a liquidating trust. The investors were told they could accept A or B.

Plaintiffs were not satisfied with this plan and asked the Court for a preliminary injunction. Plaintiffs asserted that the general partner lacked authority to implement the revised plan. Second, the plaintiffs asserted that the Steel Partners funds should be wound up through an orderly liquidation, either because the plaintiffs were entitled to a judicial liquidation or because the general partner was already dissolving the funds. Third, plaintiffs asserted that the general partner corrupted the process by which investors would choose A or B.

The plaintiff claimed that unless enjoined Steel Partners' Warren Lichtenstein (managing agent for the general partner) would break up Steel Partners, five days before the trial, and distribute much of its portfolio to investors without making any serious attempt to liquidate its provisions. According to the plaintiff, this "restructuring" was in reality an expulsion of every partner with an option either to accept an illiquid asset or convert to shares in a new Lichtenstein-controlled special purpose vehicle (SPV).

The plaintiff characterized the shareholders as being offered "Let's Make a Deal with Monty Hall" only "door 1 is a pig" and "what's behind the curtain there's a goat. We don't want the pig, and we don't want the goat -- we want a redemption." Instead, the transaction allegedly should have been submitted for shareholder approval prior to completion.

The plaintiff also asserted that Steel Partners was in fact in dissolution, which required a liquidation, and that the proposed move would in fact destroy the value of the investors' assets and make a subsequent liquidation impossible. Steel Partners allegedly held $200M in cash.

According to the defendant, the fund was entitled to effect an exchange plan without investor approval, and in any case a redemption would be allowed effective July 15, 2009, based on valuation on July 15, 2009. The defendant asserted that the plaintiffs were unlikely to succeed on the merits, would not be irreparably harmed, and did not show that the balance of hardships favored an injunction.

The defendant claimed that this was merely a contact case, and that the plaintiff's arguments amounted to "sound and fury, signifying nothing." Even if the plaintiffs wanted a liquidation, the general partner was entitled to decide.

The Court denied the injunction motion on the ground that the plaintiffs had failed to establish immediate and irreparable harm if the injunction were not issued. It was not clear that the plaintiffs would do better under a liquidation, and, more important, the plaintiffs had failed to show that they were entitled to require a liquidation. Alternately, the Court did not find a likelihood of success on the merits that the revised plan was not authorized or that the plaintiffs were entitled to a liquidation.


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