Votes cast by proxy or in person at the Meeting will be tabulated by the Inspector of Election appointed for the Meeting. The Inspector of Election, who is an employee of the proxy solicitor engaged by the Fund’s investment adviser, Westchester, Capital Management, Inc. (the “Adviser”), will determine whether or not a quorum is present at the Meeting. The Inspector of Election will 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 on a particular matter) as present for purposes of determining a quorum.
If you hold your shares directly (not through a broker-dealer, bank or other financial institution or intermediary), and if you return a signed proxy card that does not specify how you wish to vote on a proposal, your shares will be voted “FOR” the nominees in Proposal 1, “FOR” Proposal 2 and “FOR” Proposal 3.1.
Broker-dealer firms holding shares of the 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 eachthe proposal before the Meeting. The New York Stock Exchange (the “NYSE”) may take the position that a broker-dealer that is a member of the NYSE and that has not received instructions from a customer or client prior to the date specified in the broker-dealer firm’sbroker-dealer’s request for voting instructions may not vote such customer’s or client’s shares with respect to Proposal 2 or Proposal 3.1. A signed proxy card or other authorization by a beneficial owner of Fund shares that does not specify how the beneficial owner’s shares should be voted on a proposal may be deemed an instruction to vote suchs uch shares in favor of the applicable proposal.
If you hold shares of the 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 Meeting, a service agent will vote shares for which it receives instructions from its customers in accordance with those instructions. A signed proxy card or other authorization by a shareholder that does not specify how the shareholder’s shares should be voted on a proposal may be deemed to authorize a service provider to vote such shares in favor of the applicable 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 notn ot 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.”
If you beneficially own shares that are held in “street name” through a broker-dealer or that are held of record by a service agent, and if you do not give specific voting instructions for your shares, they may not be voted at all or, as described above, they may be voted in a manner that you may not intend. Therefore, you are strongly encouraged to give your broker-dealer or service agent specific instructions as to how you want your shares to be voted.
Each nominee named in Proposal 1 must be elected by the shareholders owning of record a plurality of the total number of Fund shares voting at the Meeting.
Approval of Proposal 2 and Proposal 31 requires the affirmative vote of a majority of the outstanding shares of the Fund. The term “majority of the outstanding shares of the Fund” means the vote of (i) 67% or more of the Fund’s shares present at the Meeting if the holders of more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of the Fund’s outstanding shares, whichever is less (the “Required Vote”).less.
Approval of eachthe proposal will occur only if a sufficient number of votes at the Meeting are cast “FOR” that proposal. Abstentions and broker non-votes are not considered “votes cast” and, therefore, do not constitute a vote “FOR” proposals. Abstentions and broker non-votes effectively result in a vote “AGAINST” the proposals in Proposal 2 and “AGAINST” Proposal 3. Abstentions and broker non-votes will have no effect on the results of the voting on Proposal 1.
PROPOSAL 1: TO ELECT ONE NEW MEMBERCONSIDER AND RE-ELECT THREE CURRENT MEMBERS TO THE FUND’S BOARD OF TRUSTEES TO HOLD OFFICE UNTIL THEIR SUCCESSORS ARE DULY ELECTED AND QUALIFIED
APPROVE A PROPOSED INVESTMENT ADVISORY AGREEMENT WITH WCM
The purpose of this proposal is to elect one new memberconsider and re-elect three current members toapprove a proposed investment advisory agreement with WCM.
Under the Fund’s Board1940 Act, the Closing will result in the assignment and automatic termination of Trustees, to assume office upon their acceptance of their elections and commencement or continuation of servicethe Current Advisory Agreement. Therefore, as Trustees, and to hold office until their successors are duly elected and qualified. It is intended that the enclosed proxy card will be voted for all nominees (each a “Nominee” and, collectively, the “Nominees”) for the Board, unless a proxy contains specific instructions to the contrary. The Board is composed of a single class of Trustees. The Board has determined that the number of Trustees shall be fixed at four to correspond to the number of Trustees proposed to be elected in accordance with this Proxy Statement.
Shareholdersdescribed below, shareholders of the Fund are being asked to elect Messrs. Frederick W. Green, Michael J. Downey, James P. Logan, IIII and Barry Hamerling as Trustees. Messrs. Green, Downey and Logan currently serve as Trusteesapprove the Proposed Advisory Agreement.
THE CURRENT ADVISORY AGREEMENT
Pursuant to the Current Advisory Agreement, the Fund pays Westchester an advisory fee at the rate of 1.0% of the Fund. Ofvalue of the four nominees for election as Trustees, only Mr. Green is deemedFund’s average daily net assets.
Westchester has entered into a separate agreement with the Fund whereby Westchester has agreed to reduce its advisory fee rate so that the advisory fee rate will be: (i) 1.0% on an “interested person”annualized basis of the average daily net assets of the Fund (ason net assets below $1.5 billion; (ii) 0.9% on an annualized basis of the average daily net assets of the Fund on net assets between $1.5 billion and $2.0 billion; (iii) 0.8% on an annualized basis of the average daily net assets of the Fund on net assets between $2.0 billion and $5.0 billion; and (iv) 0.75% on an annualized basis of the average daily net assets of the Fund on net assets over $5.0 billion. This agreement is effective for the period from February 1, 2010 through January 31, 2011 and shall continue in effect from year to year thereafter only upon mutual agreement of the F und and Westchester. For the fiscal year ended September 30, 2010, the Fund paid advisory fees of $26,253,200 to Westchester.
The Current Advisory Agreement provides that the Fund pays all of the Fund’s expenses, including, without limitation, (i) the costs incurred in connection with registration and maintenance of its registration under the Securities Act of 1933, as amended, the 1940 Act and state securities laws and regulations, (ii) preparation, printing and mailing of reports, notices and prospectuses to current shareholders, (iii) transfer taxes on the sales of the Fund’s shares and on the sales of portfolio securities, (iv) brokerage commissions, (v) custodial and shareholder transfer charges, (vi) legal, auditing, administration and accounting expenses, (vii) expenses of servicing shareholder accounts, (viii) insurance expenses for fidelity and other coverage, (ix) fees and expenses of Trustees who are not “interested persons& #8221; within the meaning of the 1940 Act, (x) expenses of Trustee and shareholder meetings, and (xi) any expenses of distributing the Fund’s shares which may be payable pursuant to a Plan of Distribution adopted pursuant to Rule 12b-1 under the 1940 Act. The Fund is also liable for non-recurring expenses as may arise, including litigation to which the Fund may be a party. The Fund has an obligation to indemnify each of its officers and Trustees with respect to such litigation, but not against any liability to which any such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
The Current Advisory Agreement was last approved for continuance by the Board, including a majority of the Independent Trustees, on January 16, 2010. The date on which the Current Advisory Agreement was last submitted to a vote of shareholders for the purpose of approval was January 13, 1989.
THE PROPOSED ADVISORY AGREEMENT
The Proposed Advisory Agreement will become effective as of the Closing. If the Closing does not take place, the Proposed Advisory Agreement will not become effective and the Current Advisory Agreement will continue in effect in accordance with its terms.
Under Section 15 of the 1940 Act, the Proposed Advisory Agreement requires the approval of (i) the Board, including a majority of the Independent Trustees, and (ii) the shareholders of the Fund.
Based on the considerations described below in “Board Considerations Regarding Approval of the Proposed Advisory Agreement,” the Board, including the Independent Trustees, unanimously approved the Proposed Advisory Agreement.
COMPARISON OF THE PROPOSED AND CURRENT ADVISORY AGREEMENTS
There are no material differences between the terms of the Proposed Advisory Agreement and the terms of the Current Advisory Agreement. A form of the Proposed Advisory Agreement is attached as Appendix A to this Proxy Statement.
WCM also has agreed to enter into a separate fee-waiver agreement that is the same in all material respects as the current fee-waiver agreement between the Fund and Westchester. Both agreements provide that the relevant adviser will reduce its advisory fee rate so that the advisory fee rate will be: (i) 1.0% on an annualized basis of the average daily net assets of the Fund on net assets below $1.5 billion; (ii) 0.9% on an annualized basis of the average daily net assets of the Fund on net assets between $1.5 billion and $2.0 billion; (iii) 0.8% on an annualized basis of the average daily net assets of the Fund on net assets between $2.0 billion and $5.0 billion; and (iv) 0.75% on an annualized basis of the average daily net assets of the Fund on net assets over $5.0 billion. This separate agreement, which is not subject to shareholder approval, will expire upon the initial term of the Proposed Advisory Agreement, and may continue in effect from year to year thereafter only upon mutual agreement of the Fund and WCM.
SECTION 15(f) OF THE 1940 ACT
As described above, the Closing will result in the assignment, and automatic termination, of the Current Advisory Agreement. Section 15(f) of the 1940 Act provides a safe harbor for the receipt by an investment adviser or any of its affiliated persons of any amount or benefit in connection with an assignment of an advisory contract as long as two conditions are satisfied.
The first condition requires that no “unfair burden” be imposed on the Fund as a result of the Transaction, or as the result of any express or implied terms, conditions or understandings applicable to the Transaction. The term “unfair burden,” as defined in the 1940 Act). Each Nominee has indicated an intentionAct, includes any arrangement during the two-year period after the assignment whereby the investment adviser (or predecessor or successor adviser), or any interested person of any such investment adviser, receives or is entitled to serve if elected and has consentedreceive any compensation, directly or indirectly, from the investment company or its security holders (other than fees for bona fide investment advisory or other services) or from any person in connection with the purchase or sale of securities or other property to, be named in this Proxy Statement.
The Nominating Committeefrom or on behalf of the Board, consistinginvestment comp any. The second condition specifies that, during the three-year period immediately following consummation of the Trustees who arechange of control transaction, at least 75% of the investment company’s board of directors or trustees must not be “interested persons” (as defined in the 1940 Act) of the Fund (the “Independent Trustees”)investment adviser or predecessor adviser. If either condition is not met, the safe harbor is not available.
Consistent with the first condition of Section 15(f), convenedWestchester and WCM have agreed to refrain from imposing or seeking to impose, for a meetingperiod of two years after the Closing of the Transaction, any “unfair burden” on January 16, 2007, at which the Nominating Committee recommended thatFund.
With respect to the second condition of Section 15(f), the Board of Trustees nominate Messrs. Green, Downey, Logan and Hamerlingcurrently satisfies such 75% requirement. The Board has appointed Mr. Behren to be submitted as nominees for electionfill the vacancy created by Mr. Green’s resignation, subject to the shareholdersClosing. Following the Closing, the Board will continue to satisfy such 75% requirement. WCM has agreed to use its reasonable best efforts to ensure continued satisfaction of the Fund. The75% requirement for the three-year period following the Closing.
BOARD CONSIDERATIONS REGARDING APPROVAL OF THE PROPOSED ADVISORY AGREEMENT
On September 25, 2010, at an in-person meeting called for the purpose of considering the Proposed Advisory Agreement, the full Board, including all of the Independent Trustees, unanimouslyapproved the Proposed Advisory Agreement. In so doing, the full Board, including the Independent Trustees, reviewed and evaluated materials and information about the Proposed Advisory Agreement, the Transaction and related matters provided by Westchester, WCM, counsel to the Independent Trustees and counsel to the Fund. The Independent Trustees conferred separately in executive session with counsel to the Independent Trustees about the Transaction.
At the meeting, the Board considered oral and written information provided by WCM regarding, among other things: WCM’s ownership structure; the portfolio managers’ experience, performance record, reputations, industry relationships and their ability to manage the Fund consistent with the Fund’s current investment objectives and policies; business and investment strategies; resources; and financial strength. Emphasis during the meeting focused on WCM’s business being the same in all material respects as Westchester’s business and WCM’s majority owners continuing to be the Fund’s portfolio managers. The Board discussed with Westchester and WCM the Transaction and its potential effect, if any, on the Fund and its shareholders.
The Board took into consideration that other than the change in ownership of Westchester’s business and assets, Mr. Green’s retirement and Mr. Green’s resignation from the Board, all other aspects of the operations of the Fund, including the Fund’s fundamental investment approach and risk profile, the advisory fee rate payable by the Fund and the persons principally responsible for the day-to-day investment management of the Fund, will not change. Messrs. Behren and Shannon assured the Board that there will be no reduction or other significant change in the nature, extent or quality of the investment advisory services to be provided to the Fund under the Proposed Advisory Agreement.
In their deliberations, the Trustees considered all materials that they believed reasonably necessary to evaluate in determining whether to approve the Proposed Advisory Agreement. In their deliberations, the Trustees did not identify any single piece of information that was all-important, controlling or determinative of their decision, and individual Trustees may have attributed different weights to the various factors. The material factors that formed the basis for the Trustees’ approval included the factors set forth below:
(i) | there is not expected to be any diminution in the nature, extent and quality of the services to be provided to the Fund following the Closing as a result of the Transaction; |
(ii) | the fundamental investment approach and risk profile of the Fund will not change after the Closing as a result of the Transaction; |
(iii) | the qualifications of WCM to provide advisory services to the Fund, including that two of Westchester’s portfolio managers will be the majority owners of WCM and will continue to be the Fund’s portfolio managers after the Closing; |
(iv) | the advisory fee rate paid by the Fund under the Current Advisory Agreement is the same rate proposed to be charged by WCM under the Proposed Advisory Agreement, WCM also has agreed to enter into a separate fee-waiver agreement that is the same in all material respects as the current fee-waiver agreement between the Fund and Westchester, and the Board plans to consider WCM’s willingness to continue this agreement when considering whether to renew the Proposed Advisory Agreement after its initial term; |
(v) | the transition from Westchester to WCM will not have any foreseeable short-term or long-term adverse impact on the Fund or its shareholders; |
(vi) | the compliance capabilities of WCM, including that WCM’s compliance program and the Fund’s Chief Compliance Officer, are not expected to change after the Closing as a result of the Transaction; |
(vii) | WCM assured the Board that it will retain all of Westchester’s employees, except Mr. Green and one other retiring employee; |
(viii) | the terms and conditions of the Proposed Advisory Agreement, including the differences between the Proposed Advisory Agreement and the Current Advisory Agreement, which are not material; |
(ix) | the financial strength and resources of WCM, including that WCM will have adequate cash, net worth and net working capital after the Closing to support its operations; |
(x) | the terms and conditions of other agreements and arrangements relating to the future operations of the Fund, including WCM’s services agreements with Messrs. Behren and Shannon; |
(xi) | Westchester, and not the Fund, will pay all of the costs of obtaining approval of the Proposed Advisory Agreement; |
(xii) | the members of the current Board will continue to oversee the Fund after the Closing, except that upon the Closing, Mr. Green will resign and the Board has appointed Mr. Behren to fill that vacancy; |
(xiii) | WCM has no affiliations that will adversely affect the Fund or its shareholders; |
(xiv) | shareholders of the Fund will face no adverse tax consequences as a result of the Transaction; and |
(xv) | WCM has agreed to exercise reasonable best efforts to assure that, for a period of two years after the Closing, there is not imposed on the Fund any “unfair burden” (within the meaning of Section 15(f) of 1940 Act). |
In connection with the Board’s consideration of the Proposed Advisory Agreement, the Board also considered the following factors:
Nature, Extent and Quality of Services to be Provided
The Trustees considered the expected nature, extent and quality of the services to be provided to the Fund by WCM and the resources to be dedicated to the Fund by WCM, including WCM’s portfolio-management services; the portfolio managers’ expertise, familiarity with the Fund, quality, competence and integrity; research capabilities; implementation and enforcement of compliance procedures and financial-reporting controls; adherence to the Fund’s investment objectives, policies and restrictions; and future plans for the Fund. The Trustees also reviewed WCM’s methodology, research and analysis that it will employ in selecting investments for the Fund. The Trustees considered the non-traditional nature of the Fund’s investment approach; the specialized expertise and experience of the Fun d’s portfolio managers, who will be the majority owners of WCM; and the difficulty, were it warranted, of selecting another adviser experienced in the Fund’s investment approach.
The Trustees additionally considered, among other things, the expected impact, if any, of the Transaction on the operations of the Fund; continuity in portfolio management, support and trading functions; the ability of WCM to attract, motivate and retain highly qualified advisory investment professionals; and the quality of WCM’s investment research capabilities and the other resources that it will devote to managing the Fund. As noted above, the Trustees also considered that Messrs. Behren and Shannon will continue to serve as the portfolio managers of the Fund following the Closing of the Transaction.
The Trustees noted the professional experience and qualifications of the portfolio managers of WCM. The Trustees also considered that the compliance program and resources proposed to be provided to the Fund by WCM will be the same in all material respects as the current compliance program and resources, including WCM’s representation that the current Chief Compliance Officer of the Fund and Westchester will serve as the Chief Compliance Officer of the Fund and WCM following the Closing.
After reviewing these and related factors, the Trustees determined, within the context of their overall conclusions, that the expected nature, extent and quality of the services to be provided by WCM to the Fund under the Proposed Advisory Agreement supported the approval of such agreement.
Investment Advisory Fee Rate
The Trustees considered the fact that the investment advisory fee rate payable by the Fund to WCM under the Proposed Advisory Agreement is the same as the investment advisory fee rate paid by the Fund to Westchester under the Current Advisory Agreement. The Trustees considered WCM’s willingness to enter into a separate fee-waiver agreement that is the same in all material respects as the current fee-waiver agreement between the Fund and Westchester. Both agreements provide that the relevant adviser will reduce its advisory fee rate so that the advisory fee rate will be: (i) 1.0% on an annualized basis of the average daily net assets of the Fund on net assets below $1.5 billion; (ii) 0.9% on an annualized basis of the average daily net assets of the Fund on net assets between $1.5 billion and $2.0 billion; ( iii) 0.8% on an annualized basis of the average daily net assets of the Fund on net assets between $2.0 billion and $5.0 billion; and (iv) 0.75% on an annualized basis of the average daily net assets of the Fund on net assets over $5.0 billion. The Trustees noted that this separate agreement, which is not subject to shareholder approval, will expire upon the initial term of the Proposed Advisory Agreement, and may continue in effect from year to year thereafter only upon mutual agreement of the Fund and WCM.
The Trustees received and considered information about the advisory fee rate that will be charged by WCM to its other clients, taking into account, among other things, differences in size and risk profile. In evaluating the Fund’s proposed advisory fee rate, the Trustees also took into account the demands, complexity and quality of the investment management of the Fund. The Board also reviewed comparisons of the rates of compensation paid to managers of funds in the Fund’s peer group, which includes alternative-investment mutual funds.
The Trustees also noted WCM’s covenants regarding compliance with Section 15(f) of the 1940 Act.
After reviewing these and related factors, the Trustees determined, within the context of their overall conclusions, that the proposed advisory fee rate supported the approval of the Proposed Advisory Agreement.
Investment Performance of the Fund and WCM
The Trustees also evaluated the investment performance of the Fund relative to the S&P 500 Index over the last year, three years, five years and 10 years, and relative to the performance of alternative-investment mutual funds, including those that engage in merger arbitrage. The Trustees noted that the Fund has had only two down years since inception in 1989. The Trustees also focused on the Fund’s performance since January 2007, when Messrs. Behren and Shannon started co-managing the Fund’s portfolio with Mr. Green.
The Trustees noted that although WCM was a newly formed entity, the Trustees were familiar with WCM’s portfolio managers’ investment performance as portfolio managers of the Fund and the other funds advised by Westchester since January 2007.
Costs of Services to be Provided and Estimated Profitability
Additionally, the Board reviewed information on the costs of the services to be provided and the profits to be realized by WCM from its relationship with the Fund, as evidenced by WCM’s projected profitability analysis. The profitability analysis consisted of projected income and expenses by category, less expenses allocated to other funds to be managed by an affiliate of WCM, adjusted total expenses, net income, pre-tax profit margin and pre-tax profit margin before payments to fund supermarkets. The Board also reviewed Lipper data relating to average expenses, advisory fee rates for comparable funds and the expected benefit to WCM of the Fund’s soft-dollar arrangements. The Trustees also considered information provided by WCM regarding its projected financial condition.
The Board considered the Fund’s total expense ratio, contractual investment advisory fee rate, 12b-1 distribution expense and service-provider fee ratio (in the aggregate and separately by fund administration, custodian, fund accounting and transfer agent fee ratios) compared to the industry average by quartile, within the appropriate Lipper benchmark category and Lipper category range.
The Board also considered the amount and nature of fees paid by the Fund. The Board considered the fact that WCM will agree to keep the current advisory fee rate with existing breakpoints so that the advisory fee rate will continue to be: (i) 1.0% on an annualized basis of the average daily net assets of the Fund on net assets below $1.5 billion; (ii) 0.9% on an annualized basis of the average daily net assets of the Fund on net assets between $1.5 billion and $2.0 billion; (iii) 0.8% on an annualized basis of the average daily net assets of the Fund on net assets between $2.0 billion and $5.0 billion; and (iv) 0.75% on an annualized basis of the average daily net assets of the Fund on net assets over $5.0 billion. The Board noted that this agreement will be effective for at least the initial term of the Proposed Advisory Agreement and will continue in effect from year to year thereafter only upon mutual agreement of the Fund and WCM.
WCM provided information on peer-group comparisons consisting of alternative-investment mutual funds, including those that engage in merger arbitrage. The materials compared each fund’s: investment strategies; management fee; expense ratio; total assets; whether a fund has a breakpoint, charges a sales load and is open to new investors; returns for the one year, three years, five years and 10 years ended December 31, 2009; and risk as measured by beta and standard deviation. It was noted that the Fund’s management fees and expense ratio were within the average range compared to its peer funds.
After reviewing these and related factors, the Trustees determined, within the context of their overall conclusions, that WCM’s expected expenses and profitability associated with its relationship with the Fund supported the approval of the Proposed Advisory Agreement.
Economies of Scale
The Board considered the extent to which economies of scale will be realized with respect to operational costs as the Fund grows in the number of shareholders and assets under management, the existence of previously established breakpoints agreed to be continued by WCM, and whether fee levels to be charged by WCM reflect these economies of scale for the benefit of Fund investors are fair under the circumstances, which the Board, including all of the NomineesIndependent Trustees, believed to be the case.
The Trustees considered the existence of any anticipated economies of scale in the provision by WCM of services to the Fund and to other funds managed by WCM, and whether those economies of scale were expected to be shared with the Fund. The Trustees considered the potential impact of the Transaction on the prospects for electiongrowth in the sale of shares of the Fund, and noted that breakpoints that reduce the fee rate on assets above specified threshold levels will not change. After reviewing these and related factors, the Trustees determined, within the context of their overall conclusions, that the extent to which economies of scale are expected to be shared with the Fund supported the approval of the Proposed Advisory Agreement.
Other Benefits to WCM
The Trustees received and considered information regarding any expected “fall-out” or ancillary benefits to be received by WCM as a result of its relationship with the Fund. The Trustees also considered the benefits of research expected to be made available to WCM by reason of brokerage commissions generated by the shareholders atFund’s securities transactions, and noted that WCM’s practices with respect to allocating portfolio brokerage for brokerage and research services will be the Meeting.same as Westchester’s practices. The Trustees considered the possible conflicts of interest associated with certain fall-out or other ancillary benefits and the reporting, disclosure and other processes that will be in place to disclose and to monitor such possible conflicts of interest. The Trust ees recognized that WCM’s profitability likely would be somewhat lower without these benefits.
If elected, each Nominee will serve for an indefinite term until a successor is duly electedConclusion
Based on its evaluation, in consultation with independent counsel, of all material aspects of the Proposed Advisory Agreement, including those factors described above, and qualified, or until such Trustee sooner dies, resigns or is removedother information believed to be reasonably necessary to evaluate the terms of the Proposed Advisory Agreement, the Board, including all of the Independent Trustees voting separately, unanimously determined that the terms of the Proposed Advisory Agreement were fair and reasonable, the compensation to be paid to WCM pursuant to the Fund’s AmendedProposed Advisory Agreement was reasonable, and Restated Declaration of Trust and By-Laws. Election of eachapproval of the NomineesProposed Advisory Agreement by the Board and the shareholders of the Fund would be in the best interests of the Fund and its shareholders.
REQUIRED VOTE AND RECOMMENDATION
Approval of the Proposed Advisory Agreement requires the affirmative vote of a plurality“majority of the votes cast in person or by proxy at the Meeting.
NOMINEES AND EXECUTIVE OFFICERS
The Nominees, their ages, their principal occupations during the past five years, the numberoutstanding voting securities” of portfolios in the Fund, Complex the Nominees currently oversee, and other board memberships they hold are set forth below. For purposes ofwhich for this Proxy Statement, “Fund Complex”purpose means the Fund and The Merger Fund VL, which is a registered open-end investment company whose shares are offered to certain insurance-company account holders.
Name, Address and Age
| Position(s)
Held with
the Fund
| Term of
Office and
Length of
Time Served
| Principal Occupation(s)
During the Past 5 Years
| Number of Portfolios
in Fund Complex
Overseen by
Trustee**
| Other
Directorships Held
by Trustee
|
Interested Nominee
| | | | | |
Frederick W. Green*
Westchester Capital
Management, Inc.
100 Summit Lake Drive
Valhalla, NY 10595
Age: 60
| President
and Trustee
| Indefinite;
since 1989
| President of
Westchester Capital
Management, Inc., the
Fund’s Adviser.
| 2 | None |
| | | | | |
Non-Interested
Nominees
| | | | | |
James P. Logan, III
Logan-Chace LLC
420 Lexington Avenue
New York, NY 10017
Age: 70
| Independent Trustee | Indefinite;
since 1989
| Chairman of Logan-
Chace LLC, an
executive search firm.
Chairman of J.P. Logan
& Company.
| 2 | None |
| | | | | |
Michael J. Downey
c/o Westchester Capital
Management, Inc.
100 Summit Lake Drive
Valhalla, NY 10595
Age: 63
| Independent Trustee | Indefinite;
since 1995
| Managing Partner of
Lexington Capital
Investments.
Consultant and
independent financial
adviser since July 1993.
| 2 | Chairman and
Director of The
Asia Pacific Fund,
Inc.; Director of AllianceBernstein
core mutual fund
group
|
| | | | | |
Barry Hamerling
c/o Westchester Capital
Management, Inc.
100 Summit Lake Drive
Valhalla, NY 10595
Age: 61
| Independent Trustee | Indefinite;
N/A
| Since 1999, Managing
Partner of Premium Ice
Cream of America;
since 2003, Managing
Partner of Premium
Salads of America.
| 2 | Trustee of AXA
Premier VIP Trust;
Trustee of Granum
Value Fund, a
series of Granum
Series Trust
|
| | | | | |
Officers
| | | | | |
Bonnie L. Smith
Westchester Capital
Management, Inc.
100 Summit Lake Drive
Valhalla, NY 10595
Age: 59
| Vice
President,
Secretary
and
Treasurer;
Anti-
Money
Laundering Compliance
Officer
| One-year
term; since
1989
| Vice President and
Treasurer of
Westchester Capital
Management, Inc., the
Fund’s Adviser. Chief
Operating Officer of
Westchester Capital
Management, Inc. since
January 2007.
| N/A | N/A |
| | | | | |
Roy Behren
Westchester Capital
Management, Inc.
100 Summit Lake Drive
Valhalla, NY 10595
Age: 46
| Chief
Compliance
Officer
| One-year
term; since
2004
| Analyst and Trader for
Westchester Capital
Management, Inc., the
Fund’s Adviser.
| N/A | N/A |
* Denotes a trustee who is an "interested person" (as that term is defined in Section 2(a)(19)affirmative vote of the 1940 Act)lesser of (i) more than 50% of the outstanding voting securities of the Fund, or (ii) 67% or more of the Fund’s investment adviser. Mr. Green is deemed to be an interested person because of his affiliation with the Fund’s investment adviser, Westchester Capital Management, Inc. and because he is an officer of the Fund.
** The fund complex consistsoutstanding voting securities of the Fund and The Merger Fund VL. Messrs. Green, Logan and Downey are presently memberspresent at the Meeting if more than 50% of the Board of Trustees of The Merger Fund VL, which is another registered investment company advised by the Adviser. Mr. Hamerling will be elected to serve on the Board of Trustees of The Merger Fund VL.
COMPENSATION
No director, officer or employee of the Adviser or its affiliates receives any compensation from the Fund for serving as an officeroutstanding voting securities of the Fund other thanare present at the Fund’s Chief Compliance Officer. The fees of the non-interested Trustees ($16,000 per year and $2,000 per meeting attended effective January 1, 2006),Meeting in addition to their out-of-pocket expenses in connection with attendance at Trustees meetings, are paidperson or represented by the Fund. The Fund did not offer its Trustees any pension or retirement benefits during or prior to the fiscal year ended September 30, 2006. For the fiscal year ended September 30, 2006, the Fund paid the following in Trustees’ fees:
COMPENSATION TABLE (for the fiscal year ended September 30, 2006) |
|
Name of Trustee | Aggregate Compensation from Fund | Pension or Retirement Benefits Accrued as Part of Fund Expenses | Estimated Annual Benefits upon Retirement | Total Compensation from Fund and Fund Complex Paid to Trustees* |
| | | | |
Frederick W. Green | 0 | 0 | 0 | 0 |
Michael J. Downey | $22,500 | 0 | 0 | $30,500 |
James P. Logan, III | $22,500 | 0 | 0 | $30,500 |
Barry Hamerling | N/A | N/A | N/A | N/A |
* The fund complex consistsproxy. All shares of the Fund and The Merger Fund VL.
EQUITY SECURITIES OWNED BY THE NOMINEES
The following table sets forth the amount of equity securities owned by each Nominee in the Fund, and in the portfolios in the Fund Complex (in the aggregate), overseen by that Trustee, as of the Record Date. As of December 31, 2006, the Trustees and officers of the Fund and the Adviser’s retirement funds,vote together as a group, owned less than 1% of the Fund's outstanding shares.
Trustee Equity Ownership as of December 31, 2006 |
|
single class on Proposal 1. Name of Trustee
| Dollar Range of Equity Securities
in the Fund
| Aggregate Dollar Range of Equity Securities in
All Registered Investment Companies Overseen
by Trustee in Family of Investment Companies
|
| | |
Frederick W. Green | over $100,000 | over $100,000 |
Michael J. Downey | 10,001-$50,000 | 10,001-$50,000 |
James P. Logan, III(1)
| $1-$10,000 | $1-$10,000 |
Barry Hamerling | over $100,000 | over $100,000 |
(1)Mr. Logan disclaims beneficial ownership of his wife's shares.
ATTENDANCE OF TRUSTEES AT ANNUAL MEETING; BOARD MEETINGS
The Fund’s Declaration of Trust does not require the Fund to hold annual meetings of shareholders. However, the Fund will hold special meetings when required by federal or state securities laws. The holders of at least 10% of the Fund's outstanding shares have the right to call a meeting of shareholders for the purpose of voting upon the removal of one or more Trustees, and in connection with any such meeting, the Fund will comply with the provisions of Section 16(c) of the 1940 Act relating to shareholder communications.
During the fiscal year ended September 30, 2006, the Board met five times. Each Nominee who currently serves as a Trustee attended all meetings of the Board and of each committee of the Board on which the Nominee served.
STANDING COMMITTEES OF THE BOARD
AUDIT COMMITTEE. The Board has a standing Audit Committee comprised of Messrs. Downey and Logan, each of whom is an Independent Trustee. If Mr. Hamerling is elected by the shareholders as a Trustee, he will be appointed by the Board of Trustees as a member of the Audit Committee. The purpose of the Audit Committee is to advise the full Board with respect to accounting, auditing and financial matters affecting the Fund. During the Fund’s fiscal year ended September 30, 2006, the Audit Committee met twice.
NOMINATING COMMITTEE. The Fund has a Nominating Committee consisting of Messrs. Downey and Logan, which did not meet during the fiscal year. If Mr. Hamerling is elected by the shareholders as a Trustee, he will be appointed by the Board of Trustees as a member of the Nominating Committee. The Nominating Committee will consider, among other sources, nominees recommended by shareholders. Shareholders may submit recommendations by mailing the candidate’s name and qualifications to the attention of the President. The Nominating Committee does not have a charter. The Nominating Committee convened a meeting on January 16, 2007, at which the Nominating Committee recommended that the Board of Trustees nominate Mr. Hamerling to be submitted as a nominee for election by the shareholders of the Fund.
The Nominating Committee is responsible for assisting the Board in its selection and evaluation of members to oversee the Fund so that the interests of the shareholders are well-served. The Nominating Committee’s responsibilities include the nomination of new Trustees and the evaluation of the Board and its committee structure. The Nominating Committee may consider candidates submitted by shareholders, or from other sources it deems appropriate. Shareholders who wish to recommend a nominee should send recommendations to the Fund’s Secretary that include all information relating to such person that is required to be disclosed in solicitations of proxies for the election of Trustees. A recommendation must be accompanied by such individual’s written consent to being named in the proxy statement as a nominee and to serving as a Trustee (if elected).
In nominating candidates, the Nominating Committee will search for those qualified candidates who can bring to the Board the skills, experience and judgment necessary to address the issues trustees of investment companies confront in their duties to shareholders. The Nominating Committee shall review and make recommendations with regard to the tenure of Trustees, including any term limits, limits on the number of boards on which a Trustee may sit and normal retirement age. The Nominating Committee may, in its discretion, establish specific, minimum qualifications (including skills) that must be met by Committee-nominated or shareholder-nominated candidates.
The Board does not have a compensation committee.
SHAREHOLDER APPROVAL
The election of the Nominees, whose term of office will commence or continue upon their acceptance of their elections and commencement or continuation of service as Trustees, must be approved by a plurality of the votes cast in person or by proxy at the Meeting at which a quorum exists.
THE BOARD OF TRUSTEES, INCLUDING THE INDEPENDENT TRUSTEES, UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF EACH OF THE NOMINEES.FOR THIS PROPOSAL.
ADDITIONAL INFORMATION ABOUT THE ADVISER
Westchester Capital Management, Inc., a New York corporation, is a registered investment adviser with its principal offices located at 100 Summit Lake Drive, Valhalla, New York 10595. Mr. Frederick W. Green has served as President of the Adviser since 1980 and also serves as the President and a Trustee of the Fund. Mr. Green and Bonnie L. Smith were primarily responsible for the day-to-day management of the Fund’s portfolio from January 1989 until January 2007. Effective as of January 2007, Mr. Green, Mr. Michael Shannon and Mr. Roy D. Behren are primarily responsible for the day-to-day management of the Fund’s portfolio. Mr. Shannon served as the Adviser’s Director of Research from May 1996 until April 2005, and has served as a research analyst and portfolio strategist for the Adviser since May 2006. From April 2005 to April 2006, Mr. Shannon was Senior Vice President in charge of the Special Situations and Mergers Group of D.E. Shaw & Co. Mr. Shannon has served as a portfolio manager for the Fund since January 2007. Mr. Behren has served as a research analyst for the Adviser since 1994 and as the Adviser’s Chief Compliance Officer since 2004, and has served as a portfolio manager for the Fund since January 2007. Mr. Behren also serves as Chief Compliance Officer of the Fund. For a list of officers of the Fund who also serve as officers of the Adviser, please refer to Proposal 1 above.
ADMINISTRATOR
U.S. Bancorp Fund Services, LLC, P.O. Box 701, Milwaukee, Wisconsin 53201-0701 is the Fund's administrator.
OVERVIEW OF PROPOSALS TO REVISE CERTAIN FUNDAMENTAL INVESTMENT POLICIES AND TO ELIMINATE CERTAIN FUNDAMENTAL INVESTMENT POLICIES
The 1940 Act requires a registered investment company, including the Fund, to have certain specific investment policies that can be changed only with shareholder approval. These policies are referred to as “fundamental.” In this proxy statement, the word “restriction”’ or “limitation” is sometimes used to describe a policy. While the number of investment practices that must be governed by fundamental policies currently is small, this has not always been the case. As a result, the Fund has certain fundamental policies that are no longer required by law. In addition, certain of the Fund’s policies that continue to be required by law, as currently adopted by the Fund, are more restrictive than required by law. Accordingly, the Adviser recently conducted a thorough review of all of the Fund’s policies, with the following goals: (i) to simplify and modernize the Fund’s policies that are required to be fundamental under the 1940 Act and (ii) to eliminate any policies previously required under state securities laws that are not required to be fundamental under the 1940 Act.
Although Proposal 2 and Proposal 3 give the Fund greater flexibility to respond to future investment opportunities, the Adviser does not anticipate that the changes, individually or in the aggregate, will result in a material change in the level of investment risk associated with an investment in the Fund, nor does the Adviser anticipate that the proposed changes in the Fund’s fundamental investment policies will, individually or in the aggregate, change materially the manner in which the Fund is managed and operated. Before a material change is made in the Fund’s investment practices in response to the revised policies, shareholders will be notified in advance of the change, the Board will be asked to approve such change and the Fund’s prospectus and/or statement of additional information will be revised to disclose the change and, as applicable, any additional risks.
The Fund’s Board recommends that shareholders of the Fund vote to revise or eliminate the Fund’s fundamental policies as discussed below. Proposal 2 seeks to revise certain of the Fund's fundamental investment policies. Each sub-section of Proposal 2 sets out the fundamental policy that will apply to the Fund if shareholders of the Fund approve the policy in that sub-section. Proposal 3 seeks to eliminate certain of the Fund’s fundamental investment policies.
The revised and eliminated policies that are approved will take effect April 17, 2007.
To be approved, each proposal must receive the Required Vote of the outstanding voting securities of the Fund, as such term is defined above in “Vote Required and Manner of Voting Proxies.”
PROPOSAL 2: TO REVISE CERTAIN FUNDAMENTAL INVESTMENT POLICIES
The revised fundamental policies are expected to provide the Adviser with greater flexibility in managing the Fund’s assets and to simplify the process of monitoring compliance with the Fund’s fundamental investment policies.
In addition, the revised fundamental policies are intended to provide the Fund with flexibility to respond to changing markets, new investment opportunities and future changes in applicable law. Accordingly, the policies are written, and should be interpreted, broadly. The revised policies generally allow the investment practice in question to be conducted to the extent permitted by the 1940 Act. It is possible that as the financial markets continue to evolve over time, the 1940 Act and the related rules may be further amended to address changed circumstances and new investment opportunities. It is also possible that the 1940 Act and the related rules could change for other reasons. For flexibility, the revised policies should be interpreted to refer to the 1940 Act and the related rules as they are in effect from time to time. This should allow the Fund to take advantage of future changes in applicable law without seeking additional costly and time-consuming shareholder approvals.
Approval of the revised fundamental policies does not necessarily mean that the Fund will broaden its investment practices to the extent permitted under the policies. To the extent the Fund engages in new investment practices, there could be a material increase in the level of investment risk associated with an investment in the Fund. Before a material change is made in the Fund’s investment practices in response to the revised policies, shareholders will be notified in advance of the change, the Board will be asked to approve such change and the Fund’s prospectus and/or statement of additional information will be revised to disclose the change and, as applicable, any additional risks. The actual investment practices of the Fund currently are not expected to change as a result of the revised policies. However, these practices could change in the future, and for various reasons.
From time to time the Securities and Exchange Commission (the “SEC”) or members of its staff, and other authorities having jurisdiction over the Fund, issue formal or informal views on various provisions of the 1940 Act and the related rules, including through no-action letters and exemptive orders. The revised policies should be interpreted to refer to these interpretations or modifications as they are given from time to time. Again, this should allow the Fund the flexibility to take advantage of future changes in the interpretations of regulators and others without the expense and delay of seeking further shareholder approvals.
PROPOSAL 2-A: TO REVISE THE FUNDAMENTAL INVESTMENT POLICY RELATING TO ISSUING SENIOR SECURITIES
If shareholders of the Fund approve this proposal, the Fund’s current fundamental investment policy which states “The Fund may not issue senior securities other than to evidence borrowings as permitted in paragraph (5) below” will be revised to read as follows:
The Fund may not issue senior securities, except that this restriction shall not be deemed to prohibit the Fund from (a) making any permitted borrowings, loans, mortgages, or pledges, (b) entering into options, futures contracts, forward contracts, repurchase transactions or reverse repurchase transactions, or (c) making short sales of securities, in each case to the extent permitted by the 1940 Act, and any rule or order thereunder, or Securities and Exchange Commission staff interpretation thereof.
The Adviser has advised the Board that the proposed revisions to the fundamental policy on issuing senior securities are not expected to materially affect the manner in which the Fund’s investment program is being conducted at this time, as reflected in the Fund’s current prospectus and/or statement of additional information. Before a material change is made in the Fund’s investment practices in response to this revised policy, shareholders will be notified in advance of the change, and the Fund’s prospectus and/or statement of additional information will be revised to disclose the change, the purpose of the changed practice and, as applicable, any additional risks.
THE BOARD OF TRUSTEES, INCLUDING THE INDEPENDENT TRUSTEES, UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THIS PROPOSAL.
PROPOSAL 2-B: TO REVISE THE FUNDAMENTAL INVESTMENT POLICY RELATING TO BORROWING MONEY
If shareholders of the Fund approve this proposal, the Fund’s current fundamental investment policy which states “The Fund may not borrow money except that it may borrow (i) from banks to purchase or carry securities or other investments, (ii) from banks for temporary or emergency purposes, or (iii) by entering into reverse repurchase agreements, if, immediately after any such borrowing, the value of the Fund's assets, including all borrowings then outstanding less its liabilities, is equal to at least 300% of the aggregate amount of borrowings then outstanding (for the purpose of determining the 300% asset coverage, the Fund’s liabilities will not include amounts borrowed). Any such borrowings may be secured or unsecured. The Fund may issue securities (including senior securities) appropriate to evidence the indebtedness, including reverse repurchase agreements, which the Fund is permitted to incur” will be revised to read as follows:
The Fund may not borrow money except that it may borrow: (a) from banks to purchase or carry securities or other investments, (b) from banks for temporary or emergency purposes, (c) by entering into reverse repurchase agreements, or (d) by entering into equity swap contracts if, immediately after any such borrowing, the value of the Fund’s assets, including all borrowings then outstanding less its liabilities, is equal to at least 300% of the aggregate amount of borrowings then outstanding (for the purpose of determining the 300% asset coverage, the Fund’s liabilities will not include amounts borrowed). Any such borrowings may be secured or unsecured.
The Adviser has advised the Board that the proposed revisions to the fundamental policy on borrowing money are not expected to materially affect the manner in which the Fund’s investment program is being conducted at this time, as reflected in the Fund’s current prospectus and/or statement of additional information. Before a material change is made in the Fund’s investment practices in response to this revised policy, shareholders will be notified in advance of the change, and the Fund’s prospectus and/or statement of additional information will be revised to disclose the change, the purpose of the changed practice and, as applicable, any additional risks.
THE BOARD OF TRUSTEES, INCLUDING THE INDEPENDENT TRUSTEES, UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THIS PROPOSAL.
PROPOSAL 2-C: TO REVISE THE FUNDAMENTAL INVESTMENT POLICY RELATING TO CONCENTRATION OF INVESTMENTS
If shareholders of the Fund approve this proposal, the Fund’s current fundamental investment policy which states “The Fund may not concentrate its investments in any industry. No more than 25% of the value of the total assets of the Fund may be invested in the securities of issuers having their principal business activities in the same industry” will be revised to read as follows:
The Fund may not purchase any securities that would cause more than 25% of the total assets of the Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to the securities of other investment companies, investments in obligations issued or guaranteed by the United States Government, its agencies or instrumentalities or tax-exempt municipal securities.
The Adviser has advised the Board that the proposed revisions to the fundamental policy on concentration of investments are not expected to materially affect the manner in which the Fund’s investment program is being conducted at this time, as reflected in the Fund’s current prospectus and/or statement of additional information. Before a material change is made in the Fund’s investment practices in response to this revised policy, shareholders will be notified in advance of the change, and the Fund’s prospectus and/or statement of additional information will be revised to disclose the change, the purpose of the changed practice and, as applicable, any additional risks.
THE BOARD OF TRUSTEES, INCLUDING THE INDEPENDENT TRUSTEES, UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THIS PROPOSAL.
PROPOSAL 2-D: TO REVISE THE FUNDAMENTAL INVESTMENT POLICY RELATING TO PURCHASING OR SELLING REAL ESTATE
If shareholders of the Fund approve this proposal, the Fund’s current fundamental investment policy which states “The Fund may not purchase or sell real estate or real estate mortgage loans as such, but this restriction shall not prevent the Fund from investing in readily marketable interests in real estate investment trusts, readily marketable securities of companies which invest in real estate, or obligations secured by real estate or interests therein” will be revised to read as follows:
The Fund may not purchase or sell real estate or real estate mortgage loans as such, except that the Fund may purchase securities issued by issuers, including real estate investment trusts, which invest in real estate or interests therein.
The Adviser has advised the Board that the proposed revisions to the fundamental policy on purchasing and selling real estate are not expected to materially affect the manner in which the Fund’s investment program is being conducted at this time, as reflected in the Fund’s current prospectus and/or statement of additional information. Before a material change is made in the Fund’s investment practices in response to this revised policy, shareholders will be notified in advance of the change, and the Fund’s prospectus and/or statement of additional information will be revised to disclose the change, the purpose of the changed practice and, as applicable, any additional risks.
THE BOARD OF TRUSTEES, INCLUDING THE INDEPENDENT TRUSTEES, UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THIS PROPOSAL.
PROPOSAL 2-E: TO REVISE THE FUNDAMENTAL INVESTMENT POLICY RELATING TO MAKING LOANS
If shareholders of the Fund approve this proposal, the Fund’s current fundamental investment policy which states “The Fund may not make loans, except that subject to paragraph (8), the Fund may enter into repurchase agreements maturing in seven days or less” will be revised to read as follows:
The Fund will not make loans if, as a result, more than 33 1/3% of the Fund’s total assets would be loaned to other parties, except that the Fund may (a) purchase or hold debt instruments in accordance with its investment objective and policies, (b) enter into repurchase agreements, and (c) lend its securities.
The Adviser has advised the Board that the proposed revisions to the fundamental policy on making loans are not expected to materially affect the manner in which the Fund’s investment program is being conducted at this time, as reflected in the Fund’s current prospectus and/or statement of additional information. Before a material change is made in the Fund’s investment practices in response to this revised policy, shareholders will be notified in advance of the change, and the Fund’s prospectus and/or statement of additional information will be revised to disclose the change, the purpose of the changed practice and, as applicable, any additional risks.
THE BOARD OF TRUSTEES, INCLUDING THE INDEPENDENT TRUSTEES, UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THIS PROPOSAL.
PROPOSAL 3: TO ELIMINATE CERTAIN FUNDAMENTAL INVESTMENT POLICIES
Certain of the Fund’s fundamental policies were adopted to reflect certain regulatory, business or industry conditions that are no longer in effect. For example, the National Securities Markets Improvement Act of 1996 (“NSMIA”) preempted many investment restrictions formerly imposed by state securities laws and regulations (these state laws and regulations are often referred to as “blue sky” laws and regulations), so that those state requirements no longer apply. As a result, many of the current restrictions unnecessarily limit the investment strategies available to the Adviser in managing the Fund’s assets. In addition, the unnecessarily large number of restrictions increases the costs of compliance monitoring.
Certain policies were originally required by state “blue sky” regulations which are no longer applicable, and are not required under the 1940 Act. The Fund’s policies with respect to certain practices are already disclosed in the Fund’s prospectus/or statement of additional information. Elimination of these restrictions would avoid including a list of specific restrictions, which list could quickly become outdated. The goal is to prevent technical concerns from limiting the Fund’s investment opportunities. Eliminating these investment restrictions would not affect the Fund’s investment strategy.
Certain of these fundamental policies are unnecessary and may be unduly restrictive given current SEC staff positions. If an SEC staff position or other interpretations about these practices were to change, the Fund might not be able to take advantage of that change without seeking shareholder approval. If these fundamental policies are eliminated, the Fund will still be subject to the position of the SEC’s staff with respect to these practices as that position may change from time to time. There may be circumstances in which the Adviser believes that a certain practice is in the best interests of shareholders. The Fund will be subject to any limitations on these practices imposed by the 1940 Act and related interpretations, by the Board from time to time, as well as the Fund’s other investment policies.
The Board, in its sole discretion, may subsequently adopt as non-fundamental one or more investment policies that are eliminated.
If shareholders of the Fund approve this proposal, the following current fundamental investment policies of the Fund will be eliminated (the numbers below correspond to the list of fundamental investment policies contained in the Fund’s current statement of additional information).
(2)The Fund may not make short sales of securities (unless by virtue of its ownership of other securities at the time of such sale, it owns or has a prospective right to receive, without the payment of additional compensation, securities equivalent in kind and amount to the securities sold). The total market value of all securities sold short may not exceed 50% of the value of the net assets of the Fund, and the value of securities of any one issuer in which the Fund is short may not exceed the lesser of 10% of the value of the Fund's net assets or 10% of the securities of any class of any issuer.
(3)The Fund may not purchase securities on margin, except that the Fund may obtain such short-term credits as may be necessary for the clearance of purchases and sales of securities.
(4)The Fund may not (a) purchase call options except to terminate, through a closing purchase transaction, its obligation with respect to a previously written covered call option; (b) sell uncovered (naked) call options; (c) sell covered call options the underlying securities of which have an aggregate value (determined as of the date the calls are sold) exceeding 50% of the value of the net assets of the Fund; or (d) invest in put options to the extent that the premiums on protective put options exceed 25% of the value of its net assets; provided that the provisions of this paragraph (4) shall not prevent the purchase, ownership, holding or sale of forward contracts with respect to foreign securities or currencies.
(6)The Fund may not pledge, mortgage or hypothecate its assets, except that to secure borrowings as permitted in paragraph (5) above, the Fund may pledge securities having a market value at the time of pledge not exceeding 33% of the value of its total assets. The Fund may, in addition, pledge securities having a market value at the time of pledge not exceeding 50% of the value of its net assets to secure short sales as permitted in paragraph (2) above or covered option writing as permitted in paragraph (4) above.
(8)The Fund may not invest more than 10% of its total assets in securities which are subject to legal or contractual restrictions on resale or in securities without readily available market quotations, including repurchase agreements having a maturity of more than seven days.
(13)The Fund may not purchase warrants, valued at the lower of cost or market, in excess of 5% of the net assets of the Fund (taken at current value); provided that this shall not prevent the purchase, ownership, holding or sale of warrants of which the grantor is the issuer of the underlying securities. Included within that amount, but not to exceed 2% of the value of the Fund's net assets, may be warrants which are not listed on the New York or American Stock Exchange. Warrants acquired by the Fund at any time in units or attached to securities are not subject to this restriction.
(14)The Fund may not invest in interests (other than equity stock interests or debentures) in oil, gas or other mineral exploration or development programs.
(15)The Fund may not invest in companies for the purpose of exercising control or management.
(16)The Fund may not purchase or retain the securities of any issuer, other than its own securities, if, to the knowledge of the Fund's management, the Trustees and officers, or the directors and employees of the Fund's investment adviser, who individually own beneficially more than 1/2% of the outstanding securities of such issuer, together own beneficially more than 5% of such outstanding securities.
(17)The Fund may not invest more than 5% of the value of its total assets in the securities of issuers which, together with any predecessors, have been in continuous operation for less than three years.
(18)The Fund may not participate on a joint or a joint and several basis in any trading account in securities.
(19)The Fund may not purchase securities of other investment companies, except by purchases in the open market where no underwriter or broker-dealer's commission or profit is involved, other than customary broker-dealers' commissions, and except as they may be acquired as part of a merger, consolidation or acquisition of assets.
(20)The Fund may not invest more than 10% of its total assets (taken at market value) in the securities of any one issuer, except those issued or guaranteed by the United States Government, its agencies or instrumentalities.
(21)The Fund may not purchase securities of any one issuer if as a result more than 10% of the voting securities of such issuer would be held by the Fund.
THE BOARD OF TRUSTEES, INCLUDING THE INDEPENDENT TRUSTEES, UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THIS PROPOSAL.
ADDITIONAL INFORMATION
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of the Record Date, the following persons owned of record the amounts indicated of the shares of the Fund.
NAME AND ADDRESS | PERCENT HELD |
| |
National Financial Services Corp. Church200 Liberty Street, Station
P.O. Box 39085th Floor
New York, NY 10008-390810281-5598 | [_____]% |
| 44.98% |
Charles Schwab & Co. Inc. 101 Montgomery Street San Francisco, CA 94104-412294104-4151 | [_____]% |
| |
National Investor Services Corp.19.74%
55 Water Street, 32nd Floor
New York, NY 10041-0028
| [_____]% |
| |
SUBMISSION OF SHAREHOLDER PROPOSALS
The Fund does not hold annual meetings of shareholders. A shareholder proposal intended to be presented at a future special meeting of shareholders of the Fund must be received at the offices of the Fund, 100 Summit Lake Drive, Valhalla, New York 10595, at a reasonable time before the Fund begins to print and mail its proxy materials. Timely submission of a proposal does not guarantee that such proposal will be included in a proxy statement.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE MEETING TO BE HELD ON NOVEMBER 24, 2010
This Proxy Statement is available on the Internet at: https://www.mergerfund.com.
ANNUAL REPORTS
A COPY OF THE FUND’S MOST RECENT SEMI-ANNUAL AND ANNUAL REPORTS WILL BE SENT TO YOU WITHOUT CHARGE UPON WRITTEN REQUEST BY WRITING TO THE MERGER FUND C/O U.S. BANCORP FUND SERVICES, LLC, P.O. BOX 701, MILWAUKEE, WISCONSIN 53201-0701, BY CALLING 1-800-343-8959 OR CALLING 1-800-343-8959.BY VISITING THE FUND’S WEBSITE AT WWW.MERGERFUND.COM. COPIES OF THE FUND’S SHAREHOLDER REPORTS ALSO ARE AVAILABLE ON THE EDGAR DATABASE ON THE SEC’S INTERNET SITE AT WWW.SEC.GOV.
Frederick W. Green