Putnam Fight Escalates

Shareholder takes it to court to stop planned fund liquidation.
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The fight over a Putnam closed-end municipal bond fund intensified as the Mildred B. Horejsi Trust last week sought an injunction to keep Putnam Investments from liquidating its

(PCA)

California Investment Grade Municipal Trust (PCA) fund.

Last week,

Putnam Investments

announced that it is liquidating the $67 million fund after it decided its

previous plan to merge the closed-end fund into an open-end fund was no longer feasible.

Putnam had announced in February that it was going to merge its Putnam California Investment Grade Municipal Trust into the $2.08 billion

(PCTEX) - Get Report

Putnam California Tax Exempt Income (PCTEX) fund, despite the objections of the Horejsi Trust, a major shareholder in the fund.

But the fund's board of trustees scrapped these plans after 20% of the outstanding shares had been acquired by the Horejsi Trust, which intended to vote against the merger.

"In light of the fact that the proposed merger would require the affirmative vote of a majority of the fund's outstanding common shares, the board believes that it is no longer practical to pursue the merger," the company said in a statement, adding that the immediate liquidation was "in the best interests of all shareholders."

But the Horejsi Trust disagrees.

In response to the plan, the trust filed an injunction in Massachusetts state court to stop the liquidation and the suspension of trading in the fund, which is scheduled for March 26.

The Horejsi Trust argues that the proposed liquidation violates the governing documents of the fund and that the only purpose of the move is to prevent it from closing its current tender offer of $15 per share.

Stewart Horejsi, spokesperson for the trust, says the fund's shareholders would be prevented from having the chance to sell their shares for more than the current market price and the fund's current net asset value.

"We believe

the fund's trustees have breached their fiduciary duties by forcing a liquidation plan on shareholders, on short notice and without a shareholder vote," he says.

"Putnam already got in trouble with various regulatory agencies before with their poor management and fiduciary oversight of shareholder assets; it appears that they are doing it again."

The proposed liquidation and termination plan includes the following steps:


  • March 26, 2007, will be the record date for determining the shareholders entitled to receive liquidating distributions. As of this date, trading of its shares will be suspended.

  • The fund will pay to preferred shareholders the amount of the liquidation preference on their shares, plus all accumulated dividends. The remaining assets will be distributed to the common shareholders pro rata according to the number of shares held as of the record date.

  • Costs associated with the liquidation will be paid by the fund.

Putnam also said that distributions to common shareholders will be paid in April, and that common shareholders will be allowed to invest their distributions in class A shares of other Putnam Funds at net asset value, without paying an initial sales load.

Michael Katz joined

TheStreet.com

in 2007. Michael has previously worked as a reporter at

Forbes

and an editor for two custom publishers, SmartMoney Custom Solutions and HNW Inc. He also worked in London as a freelance media reporter and foreign correspondent for

Broadcasting & Cable

magazine. Michael has a B.A. in English from the University of Virginia.