Closed-End Fund Foxby Settles Lawsuit, But Remains Undesirable (CEF: FXX)

Foxby Corp announced that they have settled their pending litigation with Richard Shaker. The litigation stems from the 2004 annual meeting where Shaker’s nominees for the Board won a majority of the votes cast, but were rejected by the fund’s president. If elected, the new directors probably would have merged Foxby into an open-end fund.

As part of the deal, the management fee paid to the fund's advisor will be lowered, and Richard Shaker agreed not to try to gain control of the fund in the future. I'm a bit puzzled why a lowered management fee was part of the settlement, because Shaker is no longer a shareholder in the fund. Since he sold his entire stake to an affiliate of the fund's advisor, he shouldn't care too much what the new management fee is.

Overall, it doesn’t appear that Shaker made money on his Foxby investment, but in the private transaction that took place on 12/29/2005, he was able to sell his shares for $2.25, which is substantially higher than the closing market price of $2.05 on that date.

For the rest of the fund’s shareholders, this settlement is not the optimal result. Even with the management fee being lowered from 1.00% to 0.50%, since the fund’s asset base is so small, its expense ratio is still likely to be in the 3% - 4% range. This, coupled with its history of poor returns, makes Foxby one of the worst closed-end funds in existence today, and completely deserving of its wide discount to NAV. The best outcome would have been for Foxby to liquidate or merge into another fund.