## Facts

- Louis G. Navellier organized the Navellier Series Fund as a Delaware business trust operating as a mutual fund with both interested and independent trustees.
- Navellier Management, Inc. (NMI) served as the Fund’s original investment adviser under an advisory contract subject to periodic renewal under the Investment Company Act of 1940 (ICA).
- During the renewal process, the independent trustees, advised by counsel, requested detailed information from NMI to evaluate the advisory fee and contract terms; NMI declined to provide the information in the requested form and scope.
- The independent trustees did not renew NMI’s advisory contract, appointed Massachusetts Financial Services (MFS) as interim adviser, and removed Navellier and another NMI employee from the board as interested trustees.
- The trustees submitted continuation of MFS as adviser to a shareholder vote; the vote did not reach the required supermajority, so the trustees reinstated NMI and then resigned.
- Navellier, NMI, and Fund shareholders sued the independent trustees, MFS, a trustee associated with MFS, and trustees’ counsel, alleging breach of fiduciary duty, corporate waste, negligence, and related theories.
- The district court dismissed claims against MFS, the MFS-affiliated trustee, and counsel; the remaining fiduciary duty and waste claims against the independent trustees were tried to a jury, which found for the trustees.
- The district court dismissed a trustee’s breach-of-contract counterclaim and imposed discovery-related sanctions on that trustee and his counsel.

## Issues

1. Whether the jury instructions and interpretation of ICA § 15(c) wrongly limited trustees’ authority to replace an investment adviser absent prior shareholder approval.
2. Whether the evidence and trial rulings supported the jury’s verdict that the independent trustees did not breach fiduciary duties or commit corporate waste when they sought information, declined to renew NMI, and appointed an interim adviser.
3. Whether dismissal of claims against the replacement adviser, the MFS-affiliated trustee, and trustees’ counsel was legally proper.
4. Whether the district court abused its discretion by imposing sanctions and whether dismissal of the breach-of-contract counterclaim was proper.

## Decision

- Affirmed the judgment for the independent trustees and upheld the jury’s verdict finding their conduct protected by the business judgment rule.
- Held the ICA § 15(c) jury instructions adequately reflected the statute’s requirements and did not impose an extra-statutory shareholder-approval prerequisite for replacing an adviser.
- Affirmed dismissal of claims against MFS, the MFS-affiliated trustee, and trustees’ counsel.
- Affirmed dismissal of the trustee’s breach-of-contract counterclaim.
- Reversed in part by vacating the sanctions order, concluding the district court abused its discretion in sustaining sanctions on the trustee and his counsel.

## Legal Principles

- ICA § 15(c) requires independent fund trustees to request and evaluate information reasonably necessary to assess an advisory contract; an adviser’s refusal to provide sufficient information may support nonrenewal.
- Under Delaware business trust principles, the business judgment rule protects trustees who act in good faith, on an informed basis, and with an honest belief that their decisions serve the fund’s best interests.
- Courts generally defer to independent trustees’ informed decisions regarding advisory contracts absent proof of bad faith, disloyalty, or uninformed decision-making.
- Replacement advisers and counsel to trustees are not treated as fiduciaries to shareholders based solely on their professional or contractual roles; claims require a sufficient legal basis showing an assumed fiduciary duty and actionable breach.
- Sanctions must rest on valid legal authority and an adequately supported record; appellate courts will vacate sanctions imposed without sufficient basis or appropriate procedural grounding.

## Conclusion

The Ninth Circuit upheld a defense verdict for independent mutual-fund trustees, ruling that ICA § 15(c) and state-law business judgment principles supported deference to their informed, good-faith decisions regarding advisory contracts, while providing limited relief by vacating an improperly sustained sanctions order.


Navellier v. Sletten, 262 F.3d 923 (9th Cir. 2001)