327 F. Supp. 3d 690
D.N.J.2018Background
- Plaintiffs (shareholders of two BlackRock mutual funds: BlackRock Global Allocation Fund and BlackRock Equity Dividend Fund) allege BlackRock charged excessive advisory fees in violation of § 36(b) of the Investment Company Act. Plaintiffs rely chiefly on a "reverse manager-of-managers" theory: BRA (BlackRock Advisors, LLC) charged higher fees for advisory services than BRIM (BlackRock Investment Management, LLC) charged as a subadvisor to independent third‑party funds that used substantially the same portfolio managers and resources.
- BRA received advisory fees from the Funds calculated on a breakpoint schedule (.60–.75% ranges depending on AUM); during the relevant period (Feb 21, 2013–Nov 2015) Global Allocation paid >$1.2 billion and Equity Dividend >$450 million in advisory fees. BRIM received materially lower subadvisory fees from seven "Subadvised Funds."
- The Funds’ independent boards (supermajority independent trustees) reviewed and annually approved the IMAs and advisory fees; the Board received extensive materials (including Lipper and Morningstar comparisons, 15(c) profitability reports, PwC and E&Y analyses) and negotiated some fee concessions/breakpoints.
- Plaintiffs’ expert (Ian Ayres) opined that (1) economies of scale were realized and not fully shared with shareholders and (2) BRA’s profitability—measured against BRIM’s subadvisory fees and BRA’s own cost reports—shows excessive fees. Defendants dispute the comparability of services, the methodology, and say the Board’s review was robust.
- Procedurally: BlackRock moved for summary judgment seeking (a) a ruling that the Board’s approval is entitled to substantial deference and (b) dismissal of § 36(b) claims. The Court held the Board’s approval is entitled to substantial deference but denied summary judgment on dismissal because triable issues remain (comparative fees, economies of scale, profitability). Plaintiffs’ motion to preclude certain evidence was denied without prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Board approval is entitled to deference | Board was insufficiently informed; materials were misleading and omitted relevant comparators and cost detail | Board process was robust: independent trustees, extensive materials, follow‑up Q&A, negotiated concessions | Court: Board process was robust; substantial deference afforded to Board decision |
| Aptness of fee comparison (BRA advisory fee v. BRIM subadvisory fee) | Fees are comparable because portfolio management services (personnel, systems, strategies) are substantially the same; BRIM sometimes performed similar support services; cost analysis shows similar costs | Services differ in scope and risk; BRA provides broader "support services" and bears different liabilities; comparison therefore inapt | Court: Cannot resolve on summary judgment; factual dispute exists—comparison not inapt as a matter of law; issue for trial |
| Economies of scale: realized and shared | Dr. Ayres: AUM growth outpaced operating cost increases → economies of scale realized; BRA retained benefits (quantified additional profits) | Methodological flaws: Ayres relied on multi‑year data, didn't isolate per‑unit transaction cost, failed to allow for non‑scale cost changes; sharing occurred via breakpoints/waivers negotiated by Board | Court: Triable issues exist on both realization and adequate sharing; evidence survives summary judgment (trial required) |
| Profitability as indicia of excess | Comparative profitability shows BRA captured disproportionate profits versus BRIM; profit differentials support § 36(b) claim | Profitability alone (even high margins) is not dispositive; adviser entitled to profit; BRA’s margins fall within ranges courts have upheld | Court: Raised a genuine factual dispute on profitability; not resolved on summary judgment; issue goes to trial |
Key Cases Cited
- Jones v. Harris Associates L.P., 559 U.S. 335 (2010) (interprets §36(b), adopts Gartenberg factors, instructs courts to afford variable deference to informed board decisions)
- Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982) (sets multi‑factor test for §36(b) review: nature/quality, profitability, fall‑out benefits, economies of scale, comparative fees, board independence)
- Burks v. Lasker, 441 U.S. 471 (1979) (explains mutual fund/adviser relationship and Congress’s watchdog role for independent directors)
- Daily Income Fund, Inc. v. Fox, 464 U.S. 523 (1984) (discusses limits on arm’s‑length bargaining in mutual fund context and statutory protections)
- Krinsk v. Fund Asset Management, Inc., 875 F.2d 404 (2d Cir. 1989) (requires proof that per‑unit transaction costs decreased as fund size grew to demonstrate realized economies of scale)