77Q
Xxxxxxx Opportunity Fund
15(c)
Basis for Approval of the Fund's Management Agreement
At a meeting held in person on September 6, 2006 the Board,
including the Directors who are not "interested persons" of the
Fund or Xxxxxxx (the "Independent Directors"), approved a new
management agreement (the "New Management Agreement") between
the Fund and Xxxxxxx. The New Management Agreement replaced the
Fund's prior management agreement ClearBridge. The Board also
was provided with information about LMPFA and its fund
administration capabilities in advance of the September 6, 2006
Board meeting. In addition, the Independent Directors consulted
with their independent legal counsel, discussing, among other
things, the legal standards and certain other considerations
relevant to the Directors' deliberations.
At the September meeting and at two earlier meetings in May
and June of 2006, the Directors discussed with representatives
of Xxxxxxx and Xxxx Xxxxx the past performance of Xxxxxxx;
Xxxxxxx'x investment management experience, business
organization, personnel, operations, history and philosophy; and
the compatibility of Xxxxxxx?s investment management style with
the Fund's investment policies and objectives and past
investment management style. The Board considered whether the
terms of the New Management Agreement were in the best interests
of the Fund and its shareholders. Xxxx Xxxxx and Xxxxxxx
discussed the timing of the transition to Xxxxxxx and how the
transition could be accomplished with minimal disruption and
expense. The Independent Directors of the Board also conferred
separately and with their independent legal counsel about the
proposed replacement of the Fund's investment manager on a
number of occasions, including in connection with the May, June
and September Board meetings.
At the three meetings with the Board, representatives of
Xxxx Xxxxx and Xxxxxxx made presentations to, and responded to
questions from, the Board. After the presentations and after
reviewing the written materials provided, at the September 6
meeting, the Independent Directors met in executive session with
their independent legal counsel to consider the New Management
Agreement.
Among other things, the Directors considered:
(a) the reputation, financial strength and resources
of Xxxx Xxxxx and its investment advisory subsidiaries,
including Xxxxxxx and LMPFA;
(b) that Xxxxxxx is affiliated with a highly regarded
investment management organization and is an experienced
and respected asset management firm in its own right; that
the Board has been provided information that Xxxxxxx has
the resources and personnel necessary to provide the
investment advisory services to the Fund; and such other
matters as the Directors considered relevant in the
exercise of their reasonable judgment;
(c) that Xxxx Xxxxx has advised the Board that there
is not expected to be any diminution in the nature, quality
and extent of services provided to the Fund and its
shareholders by Xxxxxxx and LMPFA, including administrative
and compliance services;
(d) the terms and conditions of the New Management
Agreement, which contains no material differences from the
Fund's previous management agreement other than the
identity of Xxxxxxx and differences in dates of
effectiveness and termination;
(e) that the advisory fees paid by the Fund represent
reasonable compensation to Xxxxxxx in light of the services
expected to be provided and the fees paid by similar funds
and such other matters as the Directors considered relevant
in the exercise of their reasonable judgment;
(f) that Xxxx Xxxxx would bear a portion of the cost
of obtaining shareholder approval of the New Management
Agreement; and
(g) that the Fund would no longer be managed by
XxxxxXxxxxx, and therefore it would be necessary to provide
for continuation of investment advisory services to the
Fund.
Certain of these considerations are discussed in more
detail below.
The Directors did not identify any particular information
that was all-important or controlling, and each Director
attributed different weights to the various factors. The
Directors, including a majority of the Independent Directors,
concluded that the terms of the New Management Agreement are
fair and reasonable, that the fees stated therein are reasonable
in light of the services anticipated to be provided to the Fund,
and that the New Management Agreement should be approved and
recommended to Fund shareholders.
Nature, Quality and Extent of Services Provided
In evaluating the nature, quality and extent of the
services to be provided by Xxxxxxx under the New Management
Agreement, the Directors considered, among other things, the
expected impact, if any, of the appointment of Xxxxxxx on the
operations, facilities, organization and personnel to be made
available to the Fund, and the ability of Xxxxxxx to perform its
duties under the New Management Agreement, taking into account
the delegation of certain duties to LMPFA, as sub-administrator.
The Board reviewed and discussed information regarding Xxxxxxx'x
investment process and the performance of the registered
investment companies and other accounts advised and sub-advised
by Xxxxxxx. The Board noted favorable performance compared with
the applicable benchmark indices. The Board also noted that
Xxxxxxx'x investment process was based on fundamental analysis
and similar to the process employed by XxxxxXxxxxx. The
Directors recognized, however, that past performance is no
guarantee of future results.
Based on their review of the materials provided and the
assurances they had received from Xxxx Xxxxx and Xxxxxxx, the
Directors determined that the appointment of Xxxxxxx as the
Fund's investment manager would not, based upon the information
provided to the Board, adversely affect the nature and quality
of services provided to the Fund.
Cost of Services Provided
The Directors considered, among other things, that the
management fee rate would remain unchanged under the New
Management Agreement. The Directors noted that fees payable
under the sub-administration agreement with LMPFA would be paid
by Xxxxxxx and not by the Fund.
The Board received and considered pro forma information as
to the profitability to the Xxxx Xxxxx organization of its
relationship with the Fund. However, the Board recognized the
speculative nature of such information, which was based upon the
Fund's past relationship with Citigroup Asset Management and did
not give such information significant weight. The Directors
noted that they expect to receive cost, expense and
profitability information prior to the end of the initial term
of the New Management Agreement and, thus, be in a position to
evaluate at that time whether any adjustments in Fund fees would
be appropriate in connection with a renewal of the Agreement.
Fall-Out Benefits
In evaluating the fall-out benefits to be received by
Xxxxxxx under the New Management Agreement, the Directors
considered whether the replacement of ClearBridge by Xxxxxxx as
investment manager to the Fund would have an impact on the fall-
out benefits received by the Fund's investment manager. Based on
their review of the materials provided, and their discussions
with Xxxx Xxxxx, the Directors determined that those benefits
could include the use of portfolio brokerage transactions to pay
for research services generated by parties other than the
executing broker-dealer. The Directors noted that any such
benefits were difficult to quantify with certainty at this time,
and indicated that they would continue to evaluate them going
forward.
Fees and Economies of Scale
In considering the New Management Agreement, the Directors
considered, among other things, that the management fee rate
would remain unchanged. The Directors determined that the total
fees for management (including administrative) services for the
Fund were reasonable in light of the services provided. It was
noted that ClearBridge, at its expense, had provided the
Directors with, among other things, a report from Lipper
comparing the Fund's fees, expenses and performance with those
of a peer group for the Fund selected by Xxxxxx, and information
as to the fees charged by other registered investment company
clients for investment management services. The Directors
concluded that the Fund's proposed fees for management
(including administrative) services are reasonable in light of
the services expected to be provided and the fees paid by
similar funds.
Investment Performance
As noted above, the Board noted Xxxxxxx'x investment
management experience, past performance and capabilities, but
the Directors were unable to predict what effect, if any,
execution of the New Management Agreement would have on the
future performance of the Fund.
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082221-0009-10971-NY01.2643768.2 04/24/07 3:57 PM
082221-0009-10971-NY01.2643768.2 04/24/07 3:57 PM
