ThZeal - The Zeal

DEF 14A 1 tgscfproxy04f.txt TGSCF PROXY SPECIAL MEETING 3/19/04 SCHEDULE 14A (RULE 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Sec. 240.14a-12 TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. ---------------------------------------------------- (Name of Registrant as Specified in its Charter) -------------------------------------------------------------------- Name of Person(s) Filing Proxy Statement, other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11(s)(2). (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: [LOGO] FRANKLIN(R) TEMPLETON(R) INVESTMENTS TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. IMPORTANT SHAREHOLDER INFORMATION These materials are for a Special Meeting of Shareholders scheduled for March 19, 2004 at 2:00 p.m. Eastern time. The enclosed materials discuss four proposals (the "Proposals" or, each, a "Proposal") to be voted on at the meeting, and contain the Notice of Meeting, proxy statement and proxy card. A proxy card is, in essence, a ballot. When you vote your proxy by signing and returning your proxy card, it tells us how you wish to vote on important issues relating to Templeton Global Smaller Companies Fund, Inc. (the "Fund"). If you specify a vote for all Proposal(s), your proxy will be voted as you indicate. If you specify a vote for one or more Proposals, but not all, your proxy will be voted as specified on such Proposals and, on the Proposal(s) for which no vote is specified, your proxy will be voted FOR such Proposal(s). If you simply sign and date the proxy card, but do not specify a vote for any Proposal, your proxy will be voted FOR all Proposals. We urge you to spend a few minutes reviewing the Proposals in the proxy statement. Then, please fill out and sign the proxy card and return it to us so that we know how you would like to vote. When shareholders return their proxies promptly, the Fund may be able to save money by not having to conduct additional mailings. We welcome your comments. If you have any questions, call Fund Information at 1-800/DIAL BEN(R) (1-800-342-5236). ------------------------------------------------------------------------------- TELEPHONE AND INTERNET VOTING For your convenience, you may be able to vote by telephone or through the Internet, 24 hours a day. If your account is eligible, separate instructions are enclosed. ------------------------------------------------------------------------------- [LOGO] FRANKLIN(R) TEMPLETON(R) INVESTMENTS TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. NOTICE OF SPECIAL MEETING OF SHAREHOLDERS A Special Meeting of Shareholders (the "Meeting") of Templeton Global Smaller Companies Fund, Inc. (the "Fund"), will be held at the Fund's offices, 500 East Broward Boulevard, 12th Floor, Fort Lauderdale, Florida 33394-3091 on March 19, 2004 at 2:00 p.m. Eastern time. During the Meeting, shareholders of the Fund will vote on the following Proposals and Sub-Proposals: 1. To elect a Board of Directors of the Fund. 2. To approve an Agreement and Plan of Reorganization that provides for the reorganization of the Fund from a Maryland corporation to a Delaware statutory trust. 3. To approve amendments to certain of the Fund's fundamental investment restrictions (includes eight (8) Sub-Proposals): (a) To amend the Fund's fundamental investment restriction regarding diversification of investments; (b) To amend the Fund's fundamental investment restriction regarding investments in real estate; (c) To amend the Fund's fundamental investment restriction regarding investments in commodities; (d) To amend the Fund's fundamental investment restriction regarding underwriting; (e) To amend the Fund's fundamental investment restriction regarding issuing senior securities; (f) To amend the Fund's fundamental investment restriction regarding lending; (g) To amend the Fund's fundamental investment restriction regarding borrowing; and (h) To amend the Fund's fundamental investment restriction regarding industry concentration. 4. To approve the elimination of certain of the Fund's fundamental investment restrictions. By Order of the Board of Directors, Barbara J. Green Secretary January 27, 2004 PROXY STATEMENT TABLE OF CONTENTS

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. PROXY STATEMENT . INFORMATION ABOUT VOTING Who is asking for my vote? The Directors of Templeton Global Smaller Companies Fund, Inc. (the "Fund"), in connection with the Special Meeting of Shareholders of the Fund to be held on March 19, 2004 (the "Meeting"), have requested your vote on several matters. Who is eligible to vote? Shareholders of record at the close of business on January 20, 2004 are entitled to be present and to vote at the Meeting or any adjourned Meeting. Each share of record is entitled to one vote (and a proportionate fractional vote for each fractional share) on each matter presented at the Meeting. The Notice of Meeting, the proxy card, and proxy statement were first mailed to shareholders of record on or about January 27, 2004. On what issues am I being asked to vote? You are being asked to vote on four Proposals: 1. To elect a Board of Directors of the Fund; 2. To approve an Agreement and Plan of Reorganization that provides for the reorganization of the Fund from a Maryland corporation to a Delaware statutory trust; 3. To approve amendments to certain of the Fund's fundamental investment restrictions (includes eight (8) Sub-Proposals); and 4. To approve the elimination of certain of the Fund's fundamental investment restrictions. How do the Directors recommend that I vote? The Directors unanimously recommend that you vote: 1. FOR the election of all nominees as Directors of the Fund; 2. FOR the approval of an Agreement and Plan of Reorganization that provides for the reorganization of the Fund from a Maryland corporation to a Delaware statutory trust; 3. FOR the approval of each of the proposed amendments to certain of the Fund's fundamental investment restrictions; and 4. FOR the approval of the elimination of certain of the Fund's fundamental investment restrictions. How do I ensure that my vote is accurately recorded? You may attend the Meeting and vote in person or you may complete and return the enclosed proxy card. If you are eligible to vote by telephone or through the Internet, separate instructions are enclosed. Proxy cards that are properly signed, dated and received at or prior to the Meeting will be voted as specified. If you specify a vote on any of the Proposals 1 through 4, your proxy will be voted as you indicate, and any Proposal for which no vote is specified will be voted FOR that Proposal. If you simply sign, date and return the proxy card, but do not specify a vote on any of the Proposals 1 through 4, your shares will be voted FOR the election of all nominees as Directors (Proposal 1); FOR the approval of an Agreement and Plan of Reorganization that provides for the reorganization of the Fund from a Maryland corporation to a Delaware statutory trust (Proposal 2); FOR the approval of each of the proposed amendments to certain of the Fund's fundamental investment restrictions (Sub-Proposals 3a-3h); and FOR the approval of the elimination of certain of the Fund's fundamental investment restrictions (Proposal 4). May I revoke my proxy? You may revoke your proxy at any time before it is voted by forwarding a written revocation or a later-dated proxy to the Fund that is received by the Fund at or prior to the Meeting, or by attending the Meeting and voting in person. What if my shares are held in a brokerage account? If your shares are held by your broker, then in order to vote in person at the Meeting, you will need to obtain a "Legal Proxy" from your broker and present it to the Inspector of Election at the Meeting. 2 . THE PROPOSALS PROPOSAL 1: TO ELECT A BOARD OF DIRECTORS OF THE FUND How are nominees selected? The Board of Directors of the Fund (the "Board" or the "Directors") has a Nominating Committee (the "Committee") which, during 2003, consisted of Andrew H. Hines, Jr. (Chairman) and Gordon S. Macklin, neither of whom is an "interested person" of the Fund as defined by the Investment Company Act of 1940, as amended (the "1940 Act"). Directors who are not interested persons of the Fund are referred to as the "Independent Directors," and Directors who are interested persons of the Fund are referred to as the "Interested Directors." Mr. Hines retired from the Board and the Committee effective December 31, 2003. It is expected that the Board will appoint three new members to the Committee, each of whom will be an Independent Director, promptly after the Meeting. The Committee is responsible for selecting candidates to serve as Directors and recommending such candidates (a) for selection and nomination as Independent Directors by the incumbent Independent Directors and the full Board; and (b) for selection and nomination as Interested Directors by the full Board. In considering a candidate's qualifications, the Committee generally considers the potential candidate's educational background, business or professional experience, and reputation. In addition, the Committee has established as minimum qualifications for Board membership as an Independent Director: (1) that such candidate be independent from relationships with the Fund's investment manager and other principal service providers both within the terms and the spirit of the statutory independence requirements specified under the 1940 Act, (2) that such candidate demonstrate an ability and willingness to make the considerable time commitment, including personal attendance at Board meetings, believed necessary to his or her function as an effective Board member, and (3) that such candidate have no continuing relationship as a director, officer or board member of any mutual fund other than those within the Franklin Templeton Investments fund complex. When the Board has or expects to have a vacancy, the Committee receives and reviews information on individuals qualified to be recommended to the full Board as nominees for election as Directors, including any recommendations by shareholders. Such individuals are evaluated based upon the criteria described above. To date, the Committee has been able to identify, and expects to continue to be able to identify, from its own resources an ample number of qualified candidates. The Committee, however, will review shareholders' recommendations to fill vacancies on the Board if these recommendations are submitted in writing and addressed to the Committee at the Fund's offices. 3 The Board has adopted and approved a formal written charter for the Committee. A copy of the charter is attached as Exhibit A to this proxy statement. Who are the nominees? All of the nominees, except Frank J. Crothers, Edith E. Holiday, Frank A. Olson and Constantine D. Tseretopoulos, are currently members of the Board. An incumbent Independent Director recommended Messrs. Crothers, Olson and Tseretopoulos and Ms. Holiday for consideration by the Committee as nominees for Director. If elected, each nominee shall hold office until the next meeting of shareholders at which Directors are elected and until his or her successor shall be elected and shall qualify, or until his or her earlier death, resignation or removal. In addition, all of the current nominees are also directors or trustees of other Franklin(R) funds and/or Templeton(R) funds. Among these nominees, Nicholas F. Brady, Harmon E. Burns and Charles B. Johnson are deemed to be "interested persons" for purposes of the 1940 Act. Certain Directors of the Fund hold director and/or officer positions with Franklin Resources, Inc. ("Resources") and its affiliates. Resources is a publicly owned holding company, the principal shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who owned 18.25% and 15.26%, respectively, of its outstanding shares as of December 1, 2003. Resources, a global investment organization operating as Franklin Templeton Investments, is primarily engaged, through various subsidiaries, in providing investment management, share distribution, transfer agent and administrative services to a family of investment companies. Resources is a New York Stock Exchange, Inc. ("NYSE") listed holding company (NYSE: BEN). Charles B. Johnson, Chairman of the Board, Director and Vice President of the Fund, and Rupert H. Johnson, Jr., Vice President of the Fund, are brothers. There are no family relationships among any of the nominees for Director. Each nominee currently is available and has consented to serve if elected. If any of the nominees should become unavailable, the designated proxy holders will vote in their discretion for another person or persons who may be nominated as Directors. 4 Listed below, for each nominee, are their names, ages and addresses, as well as their positions and length of service with the Fund, principal occupations during the past five years, the number of portfolios in the Franklin Templeton Investments fund complex that they oversee, and any other directorships held by the nominee. Nominees for Independent Director:

8 * We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex that a nominee for election as director would oversee if elected. These portfolios have a common investment adviser or affiliated investment advisers, and also may share a common underwriter. ** Nicholas F. Brady, Harmon E. Burns and Charles B. Johnson are "interested persons" of the Fund as defined by the 1940 Act. The 1940 Act limits the percentage of interested persons that can comprise a fund's board of directors. Mr. Johnson is considered an interested person of the Fund due to his position as an officer and director and major shareholder of Resources, which is the parent company of the Fund's investment manager, and his position with the Fund. Mr. Burns is considered an interested person of the Fund under the federal securities laws due to his position as an officer and director of Resources and his position with the Fund. Mr. Brady's status as an interested person results from his business affiliations with Resources and Templeton Global Advisors Limited. On October 1, 2003, Resources acquired all of the shares of Darby Overseas Investments, Ltd. ("Darby Investments") and the remaining portion of the limited partner interests not currently owned by Resources of Darby Overseas Partners, L.P. ("Darby Partners"). Mr. Brady, formerly a shareholder of Darby Investments and a partner of Darby Partners, will continue as Chairman of Darby Investments, which is the corporate general partner of Darby Partners. In addition, Darby Partners and Templeton Global Advisors Limited are limited partners of Darby Emerging Markets Fund, L.P. ("DEMF"). Mr. Brady will also continue to serve as Chairman of the corporate general partner of DEMF, and Darby Partners and Darby Investments own 100% of the stock of the general partner of DEMF. Resources also is an investor in Darby Technology Ventures Group, LLC ("DTV") in which Darby Partners is a significant investor and for which Darby Partners has the right to appoint a majority of the directors. Templeton Global Advisors Limited also is a limited partner in Darby--BBVA Latin America Private Equity Fund, L.P. ("DBVA"), a private equity fund in which Darby Partners is a significant investor, and the general partner of which Darby Partners controls jointly with an unaffiliated third party. Mr. Brady is also a director of Templeton Capital Advisors Ltd. ("TCAL"), which serves as investment manager to certain unregistered funds. TCAL and Templeton Global Advisors Limited are both indirect subsidiaries of Resources. The remaining nominees are Independent Directors. 9 The tables below provide the dollar range of the equity securities of the Fund and of all funds overseen by the Directors in the Franklin Templeton Investments fund complex beneficially owned by the nominees as of December 31, 2003. Independent Nominees:

Interested Nominees:

How often do the Directors meet and what are they paid? The role of the Directors is to provide general oversight of the Fund's business and to ensure that the Fund is operated for the benefit of all shareholders. The Directors anticipate meeting at least five times during the current fiscal year to review the operations of the Fund and the Fund's investment performance. The Directors also oversee the services furnished to the Fund by Templeton Investment Counsel, LLC, the Fund's investment manager (the "Investment Manager"), Franklin Templeton Investments (Asia) Limited, the Fund's sub-advisor ("FTIA"), and various other service providers. The Fund currently pays the Independent Directors and Mr. Brady an annual retainer of $8,000 and a fee of $400 per Board meeting attended. Directors serving on the Audit Committee of the Fund and other investment companies in Franklin Templeton Investments receive a flat fee of $2,000 per Audit Committee meeting attended, a portion of which is allocated to the Fund. Members of a committee are not compensated for any committee meeting held on the day of a Board meeting. 10 During the fiscal year ended August 31, 2003, there were five meetings of the Board, three meetings of the Audit Committee, and five meetings of the Nominating Committee. Each Director then in office attended at least 75% of the aggregate of the total number of meetings of the Board and the total number of meetings held by all committees of the Board on which the Director served. Certain Directors and officers of the Fund are shareholders of Resources and may receive indirect remuneration due to their participation in management fees and other fees received by the Investment Manager and its affiliates from the investment companies in Franklin Templeton Investments. The Investment Manager or its affiliates pay the salaries and expenses of the officers. No pension or retirement benefits are accrued as part of Fund expenses.

-------- *Compensation received for the fiscal year ended August 31, 2003. **Compensation received for the calendar year ended December 31, 2003. ***We base the number of boards on the number of U.S. registered investment companies in the Franklin Templeton Investments fund complex. This number does not include the total number of series or funds within each investment company for which the Board members are responsible. Franklin Templeton Investments currently includes 51 registered investment companies, with approximately 154 U.S. based funds or series. ****Mr. Hines retired from the Board effective December 31, 2003. *****Ms. Krahmer is not seeking re-election on this Board. The table above indicates the total fees paid to Directors by the Fund individually and by all of the investment companies in Franklin Templeton Investments. These Directors also serve as directors or trustees of other investment companies in Franklin Templeton Investments, many of which hold meetings at different dates and times. The Directors and the Fund's management believe that having the same individuals serving on the boards of many of the investment 11 companies in Franklin Templeton Investments enhances the ability of each fund to obtain, at a relatively modest cost to each separate fund, the services of high caliber, experienced and knowledgeable Independent Directors who can more effectively oversee the management of the funds. Board members historically have followed a policy of having substantial investments in one or more of the investment companies in Franklin Templeton Investments, as is consistent with their individual financial goals. In February 1998, this policy was formalized through adoption of a requirement that each board member invest one-third of the fees received for serving as a director or trustee of a Templeton fund in shares of one or more Templeton funds and one-third of the fees received for serving as a director or trustee of a Franklin fund in shares of one or more Franklin funds until the value of such investments equals or exceeds five times the annual fees paid to such board member. Investments in the name of family members or entities controlled by a board member constitute fund holdings of such board member for purposes of this policy, and a three-year phase-in period applies to such investment requirements for newly elected board members. In implementing this policy, a board member's fund holdings existing on February 27, 1998 were valued as of such date, with subsequent investments valued at cost. Who are the Executive Officers of the Fund? Officers of the Fund are appointed by the Directors and serve at the pleasure of the Board. Listed below, for each Executive Officer, are their names, ages and addresses, as well as their positions and length of service with the Fund, and principal occupations during the past five years.

PROPOSAL 2: TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION THAT PROVIDES FOR THE REORGANIZATION OF THE FUND FROM A MARYLAND CORPORATION TO A DELAWARE STATUTORY TRUST The Directors unanimously recommend that you approve an Agreement and Plan of Reorganization (the "Plan"), substantially in the form attached to this proxy statement as Exhibit B, that would change the state of organization of the Fund. This proposed change calls for the reorganization of the Fund from a Maryland corporation to a newly formed Delaware statutory trust. This proposed reorganization will be referred to throughout this proxy statement as the "Reorganization." To implement the Reorganization, the Directors have approved the Plan, which contemplates the continuation of the current business of the Fund in the form of a new Delaware statutory trust, named "Templeton Global Smaller Companies Fund" (the "DE Fund"). What will the Reorganization mean for the Fund and its shareholders? If the Plan is approved by shareholders and the Reorganization is implemented, the DE Fund would have the same investment goal, policies and restrictions as the Fund (including, if approved by shareholders at the Meeting, the same fundamental investment restrictions amended or eliminated by Proposals 3 and 4 in this proxy statement). The Board, including any persons elected under Proposal 1, and officers of the DE Fund would be the same as those of the Fund, and would operate the DE Fund in essentially the same manner as they previously operated the Fund. Thus, on the effective date of the Reorganization, you would hold an interest in the DE Fund that is equivalent to your then interest in the Fund. For all practical purposes, a shareholder's investment in the Fund would not change. 16 Why are the Directors recommending approval of the Plan and the Reorganization? The Directors have determined that investment companies formed as Delaware statutory trusts have certain advantages over investment companies organized as Maryland corporations. Under Delaware law, investment companies are able to simplify their operations by reducing administrative burdens. For example, Delaware law allows greater flexibility in drafting and amending an investment company's governing documents, which can result in greater efficiencies of operation and savings for an investment company and its shareholders. Delaware law also provides favorable state tax treatment. Most significantly, an investment company formed as a Delaware statutory trust, unlike one formed as a Maryland corporation, need not pay an organization and capitalization tax on the aggregate par value of shares it issues to shareholders. Furthermore, as described below, in Delaware there is a well-established body of legal precedent in the area of corporate law that may be relevant in deciding issues pertaining to the DE Fund. This could benefit the DE Fund and its shareholders by, for example, making litigation involving the interpretation of provisions in the DE Fund's governing documents less likely or, if litigation should be initiated, less burdensome or expensive. Accordingly, the Directors believe that it is in the best interests of the shareholders to approve the Plan. How do the Maryland corporate law and the Fund's governing documents compare to the Delaware statutory trust law and the DE Fund's governing documents? The following summary compares certain rights and characteristics of the shares of the Fund to the shares of the DE Fund. The summary is qualified in its entirety by the more complete comparison of Maryland corporate law and Delaware statutory trust law, and a comparison of the relevant provisions of the governing documents of the Fund and the DE Fund, attached as Exhibit C to this proxy statement, which is entitled "A Comparison of Governing Documents and State Law." Reorganizing the Fund from a Maryland corporation to a Delaware statutory trust is expected to provide many benefits to the Fund and its shareholders. Funds formed as Delaware statutory trusts under the Delaware Statutory Trust Act (the "Delaware Act") are granted a significant amount of operational flexibility, resulting in efficiencies of operation that translate into savings for a fund, such as the DE Fund, and its shareholders. For example, the Delaware Act authorizes management to take various actions without requiring shareholder approval if permitted by the governing instrument. Additionally, unlike Maryland corporate 17 law, the Delaware Act permits any amendment to the statutory trust's governing instrument without the need for a state filing, which can reduce administrative burdens and costs. The operations of a Delaware statutory trust formed under the Delaware Act are governed by a declaration of trust and by-laws. The DE Fund's Agreement and Declaration of Trust ("Declaration of Trust") and By-Laws streamline many of the provisions in the Fund's Charter and By-Laws, and should thus lead to enhanced flexibility in management and administration as compared to its current operation as a Maryland corporation. As a Delaware statutory trust, the DE Fund should also be able to adapt more quickly and cost effectively to new developments in the mutual fund industry and the financial markets. Moreover, to the extent provisions in the DE Fund's Declaration of Trust and By-Laws are addressed by rules and principles established under Delaware corporate law and the laws governing other Delaware business entities (such as limited partnerships and limited liability companies), the Delaware courts may look to such other laws to help interpret provisions of the DE Fund's Declaration of Trust and By-Laws. Applying this body of law to the operation of the DE Fund should prove beneficial because these laws are extensively developed and business-oriented. In addition, Delaware's Chancery Court is dedicated to business law matters, which means that the judges tend to be more specialized and better versed in the nuances of the law that will be applied to the DE Fund. These legal advantages tend to make more certain the resolution of legal controversies and help to reduce legal costs resulting from uncertainty in the law. Shares of the DE Fund and the Fund each have one vote per full share and a proportionate fractional vote for each fractional share. Both the DE Fund and the Fund provide for noncumulative voting in the election of their Trustees/Directors. Like the Fund, the DE Fund is not required by its governing instrument to hold annual shareholder meetings. Shareholder meetings may be called at any time by the DE Fund Board, by the chairperson of the DE Fund Board or by the president of the DE Fund for the purpose of taking action upon any matter deemed by the DE Fund Board to be necessary or desirable. To the extent permitted by the 1940 Act, a meeting of the shareholders for the purpose of electing trustees may also be called by the chairperson of the DE Fund Board, or shall be called by the president or any vice-president of the DE Fund at the request of shareholders holding not less than 10% of the DE Fund's shares, provided that the shareholders requesting such meeting shall have paid the DE Fund the reasonably estimated cost of preparing and mailing the notice of the meeting. With respect to shareholder inspection rights of a fund's books and records, the Fund and the DE Fund each provide certain inspection rights to its shareholders at least to the extent required by applicable law. 18 While shareholders of the DE Fund will have similar distribution and voting rights as they currently have as shareholders of the Fund, there are certain differences. The organizational structures differ in record date parameters for determining shareholders entitled to notice, to vote and to a distribution, and differ in the proportion of shares required to vote on certain matters, such as mergers, dissolution and amendments to charter documents. Under Maryland corporate law, the shareholders of the Fund are not subject to any personal liability for any claims against, or liabilities of, the Fund solely by reason of being or having been a shareholder of the Fund. Under the Delaware Act, shareholders of the DE Fund will be entitled to the same limitation of personal liability as is extended to shareholders of a private corporation organized for profit under the General Corporation Law of the State of Delaware. What are the procedures and consequences of the Reorganization? Upon completion of the Reorganization, the DE Fund will continue the business of the Fund and will have the same investment goal, policies and investment restrictions as those of the Fund existing on the date of the Reorganization, and will hold the same portfolio of securities then held by the Fund. The DE Fund will be operated under substantially identical overall management, investment management, distribution and administrative arrangements as those of the Fund. As the successor to the Fund's operations, the DE Fund will adopt the Fund's registration statement under the federal securities laws with amendments to show the new Delaware statutory trust structure. The DE Fund was created solely for the purpose of becoming the successor organization to, and carrying on the business of, the Fund. To accomplish the Reorganization, the Plan provides that the Fund will transfer all of its portfolio securities and any other assets, subject to its liabilities, to the DE Fund. In exchange for these assets and liabilities, the DE Fund will issue shares of the DE Fund to the Fund, which will then distribute those shares pro rata to you as a shareholder of the Fund. Through this procedure, you will receive exactly the same number and dollar amount of shares of the DE Fund as you held in the Fund immediately prior to the Reorganization. You will retain the right to any declared but undistributed dividends or other distributions payable on the shares of the Fund that you may have had as of the effective date of the Reorganization. As soon as practicable after the date of the Reorganization, the Fund will be dissolved and will cease its existence. The Directors may terminate the Plan and abandon the Reorganization at any time prior to the effective date of the Reorganization if they determine that 19 proceeding with the Reorganization is inadvisable. If the Reorganization is not approved by shareholders of the Fund, or if the Directors abandon the Reorganization, the Fund will continue to operate as a Maryland corporation. If the Reorganization is approved by shareholders, it is expected to be completed during 2004. What effect will the Reorganization have on the current investment management agreement? As a result of the Reorganization, the DE Fund will be subject to a new investment management agreement between the DE Fund and the Investment Manager and a new sub-advisory agreement between the Investment Manager and FTIA. The new investment management agreement and the new sub-advisory agreement will be substantially identical to the current investment management agreement between the Investment Manager and the Fund and the current sub-advisory agreement between the Investment Manager and FTIA, respectively. What effect will the Reorganization have on the current shareholder servicing agreements and distribution plans? The DE Fund will enter into an agreement with Franklin Templeton Investor Services, LLC for transfer agency, dividend disbursing and shareholder services that is substantially identical to the agreement currently in place for the Fund. Franklin Templeton Distributors, Inc. will serve as the distributor for the shares of the DE Fund under a separate distribution agreement that is substantially identical to the distribution agreement currently in effect for the Fund. As of the effective date of the Reorganization, the DE Fund will have distribution plans under Rule 12b-1 of the 1940 Act relating to the distribution of the classes of shares that are substantially identical to the distribution plans currently in place for the corresponding classes of shares of the Fund. It is anticipated that there will be no material change to the distribution plans as a result of the Reorganization. What is the effect of shareholder approval of the Plan? Under the 1940 Act, the shareholders of a mutual fund must elect trustees and approve the initial investment management agreement and any sub-advisory agreements for the fund. Theoretically, if the Plan is approved and the Fund is reorganized to a Delaware statutory trust, the shareholders would need to vote on these three items for the DE Fund. In fact, the DE Fund must obtain shareholder approval of these items or it will not comply with the 1940 Act. However, the 20 Directors have determined that it is in the best interests of the shareholders to avoid the considerable expense of another shareholder meeting to obtain these approvals after the Reorganization. Therefore, the Directors have determined that approval of the Plan also will constitute, for purposes of the 1940 Act, shareholder approval of (1) the election of the Directors of the Fund who are in office at the time of the Reorganization as Trustees of the DE Fund; (2) a new investment management agreement between the DE Fund and the Investment Manager, which is substantially identical to the investment management agreement currently in place for the Fund; and (3) a new sub-advisory agreement between the Investment Manager and FTIA, which is substantially identical to the sub-advisory agreement currently in place for the Fund. Prior to the Reorganization, if the Plan is approved by shareholders, the officers will cause the Fund, as the sole shareholder of the DE Fund, to vote its shares FOR the matters specified above. This action will enable the DE Fund to satisfy the requirements of the 1940 Act without involving the time and expense of another shareholder meeting. What is the capitalization and structure of the DE Fund? The DE Fund was formed as a Delaware statutory trust on December 2, 2003 pursuant to the Delaware Act. The DE Fund has an unlimited number of shares of beneficial interest without par value authorized. The shares of the DE Fund will be allocated into four classes to correspond to the current four classes of shares of the Fund. As of the effective date of the Reorganization, outstanding shares of the DE Fund will be fully paid, nonassessable, freely transferable, and will have no preemptive or subscription rights. The DE Fund also has the same fiscal year as the Fund. Who will bear the expenses of the Reorganization? The expenses incurred in the Reorganization, including the costs of soliciting proxies, will be paid by the Fund, whether or not the Reorganization is approved by shareholders. Are there any tax consequences for shareholders? The Reorganization is designed to be tax-free for federal income tax purposes so that you will not experience a taxable gain or loss when the Reorganization is completed. Generally, the basis and holding period of your shares in the DE Fund 21 will be the same as the basis and holding period of your shares in the Fund. Consummation of the Reorganization is subject to receipt of a legal opinion from the law firm of Stradley Ronon Stevens & Young, LLP, counsel to the DE Fund and the Fund, that, under the Internal Revenue Code of 1986, as amended, the Reorganization will not give rise to the recognition of income, gain or loss for federal income tax purposes to the Fund, the DE Fund or their shareholders. As a result of the Reorganization, there may be adverse tax consequences in a foreign jurisdiction, including possible taxes on capital gains and forfeiture of capital loss carry forwards. If a foreign jurisdiction treats the Reorganization as a "sale" and "purchase" of portfolio securities that are registered in that jurisdiction, the Fund may be required to pay taxes on any capital gains arising from the "sale" of those portfolio securities. Similarly, such treatment by a foreign jurisdiction may prevent the Fund from retaining the capital losses it previously incurred on securities registered in that jurisdiction to offset future capital gains, if any, incurred on securities registered in that jurisdiction. However, the Fund does not believe that it will experience a materially adverse impact as a result of a foreign jurisdiction's tax treatment of the Reorganization. What if I choose to sell my shares at any time? A request to sell Fund shares that is received and processed prior to the effective date of the Reorganization will be treated as a redemption of shares of the Fund. A request to sell shares that is received and processed after the effective date of the Reorganization will be treated as a request for the redemption of the same number of shares of the DE Fund. What is the effect of my voting "FOR" the Plan? By voting "FOR" the Plan, you will be agreeing to become a shareholder of a mutual fund organized as a Delaware statutory trust, with trustees, an investment management agreement, a sub-advisory agreement, distribution plans and other service arrangements that are substantially identical to those in place for the Fund. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL 2. 22 INTRODUCTION TO PROPOSALS 3 AND 4 The Fund is subject to a number of fundamental investment restrictions that (1) are more restrictive than those required under present law; (2) are no longer required; or (3) were adopted in response to regulatory, business or industry conditions that no longer exist. Under the 1940 Act, "fundamental" investment restrictions may be changed or eliminated only if shareholders approve such action. The Board is recommending that shareholders approve the amendment or elimination of certain of the Fund's fundamental investment restrictions principally to (1) update those current investment restrictions that are more restrictive than is required under the federal securities laws; and (2) conform the Fund's fundamental investment restrictions to those of the majority of the funds in Franklin Templeton Investments. In general, the proposed restrictions would (1) simplify, modernize and standardize the fundamental investment restrictions that are required to be stated by a fund under the 1940 Act; and (2) eliminate those fundamental investment restrictions that are no longer required by the federal securities laws, interpretations of the U.S. Securities and Exchange Commission ("SEC") or state securities law, as preempted by the National Securities Markets Improvement Act of 1996 ("NSMIA"). After the Fund was organized as a Maryland corporation in 1981, certain legal and regulatory requirements applicable to investment companies changed. For example, certain restrictions imposed by state securities laws and regulations were preempted by NSMIA and, therefore, are no longer applicable to investment companies. As a result, the Fund currently is subject to certain fundamental investment restrictions that are either more restrictive than is required under current law, or which are no longer required at all. The Board believes there are several distinct advantages to revising the Fund's fundamental investment restrictions at this time. First, by reducing the total number of investment restrictions that can be changed only by a shareholder vote, the Board and the Investment Manager believe that the Fund will be able to minimize the costs and delays associated with holding future shareholders' meetings to revise fundamental investment restrictions that have become outdated or inappropriate. Second, the Board and the Investment Manager also believe that the Investment Manager's ability to manage the Fund's assets in a changing investment environment will be enhanced because the Fund will have greater investment management flexibility to respond to market, industry, regulatory or technical changes by seeking Board approval only when necessary to revise certain investment restrictions. Finally, the standardized fundamental investment restrictions are expected to enable the Fund to more efficiently and more easily monitor portfolio compliance. 23 The proposed standardized fundamental investment restrictions cover those areas for which the 1940 Act requires the Fund to have fundamental restrictions and are substantially similar to the fundamental investment restrictions of other funds in Franklin Templeton Investments that have recently amended their investment restrictions. The proposed standardized restrictions will not affect the Fund's investment goal or its current principal investment strategies. Although the proposed amendments will give the Fund greater flexibility to respond to possible future investment opportunities, the Board does not anticipate that the changes, individually or in the aggregate, will result in a material change in the current level of investment risk associated with an investment in the Fund, nor does the Board anticipate that the proposed changes in fundamental investment restrictions will materially change the manner in which the Fund is currently managed and operated. However, the Board may change or modify the way the Fund is managed in the future, as contemplated by the proposed amendments to, or elimination of, the applicable investment restrictions. Should the Board in the future modify materially the way the Fund is managed to take advantage of such increased flexibility, the Fund will make the necessary disclosures to shareholders, including amending its prospectus and statement of additional information ("SAI"), as appropriate. PROPOSAL 3: TO APPROVE AMENDMENTS TO CERTAIN OF THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTIONS (this Proposal involves separate votes on Sub-Proposals 3a-3h) The Fund's existing fundamental investment restrictions, together with the recommended changes to the investment restrictions, are detailed in Exhibit D, which is entitled "Fundamental Investment Restrictions Proposed to be Amended or Eliminated." Shareholders are requested to vote separately on each Sub-Proposal in Proposal 3. Any Sub-Proposal that is approved by shareholders will be effective for the Fund as of the date of the supplement to the Fund's SAI reflecting such changes to certain of the Fund's fundamental investment restrictions, which is anticipated to be shortly after the date of shareholder approval. The Board of Directors recommends unanimously a vote "FOR" each Sub-Proposal. Sub-Proposal 3a: To amend the Fund's fundamental investment restriction regarding diversification of investments. The 1940 Act prohibits "diversified" investment companies, like the Fund, from purchasing securities of any one issuer if, at the time of purchase, with respect to 75% of a fund's total assets, more than 5% of total assets would be invested in the securities of that issuer, or the fund would own or hold more than 10% of the 24 outstanding voting securities of that issuer. Up to 25% of a fund's total assets may be invested without regard to these limitations. Under the 1940 Act, these limitations do not apply to securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, or to the securities of other investment companies. What effect will amending the current diversification restriction have on the Fund? The Fund has a fundamental investment restriction prohibiting investments of more than 5% of the Fund's total assets in securities of any one issuer (other than U.S. government securities) (the "5% limitation"). The Fund's current fundamental investment restriction regarding diversification of investments is more restrictive in several respects than the requirements of the 1940 Act. First, the Fund's current diversification restriction applies the 5% limitation to 100% of the Fund's total assets, rather than to 75% of total assets as permitted by the 1940 Act. Second, the Fund's current 5% limitation does not exclude securities of other investment companies, as permitted by the 1940 Act. The proposed fundamental investment restriction regarding diversification follows the 5% and 10% limitations set forth in the 1940 Act. In addition, the proposed fundamental investment restriction would exclude from such 5% and 10% limitations securities issued by other investment companies (whether registered or unregistered pursuant to certain SEC rules or orders). Under the amended investment restriction, the Fund would be able to invest cash held at the end of the day in money market funds or other short-term investments (such as unregistered money market funds) without regard to the 5% and 10% limitations. The Fund, together with the other investment companies in Franklin Templeton Investments, obtained an exemptive order from the SEC (the "Cash Sweep Order") that permits the investment companies in Franklin Templeton Investments to invest their uninvested cash in one or more registered Franklin Templeton money market funds and in unregistered money market funds sponsored by Franklin Templeton Investments. Amending the Fund's current investment restriction regarding diversification would enable the Fund to take advantage of the investment opportunities presented by the Cash Sweep Order. The proposed fundamental investment restriction regarding diversification of investments is consistent with the definition of a diversified investment company under the 1940 Act and the Cash Sweep Order issued by the SEC. In addition, the proposed investment restriction would provide the Fund with greater investment flexibility consistent with the provisions of the 1940 Act and future rules or SEC interpretations. However, it is not currently anticipated that the adoption of the proposed restriction would materially change the way the Fund is managed. 25 Sub-Proposal 3b: To amend the Fund's fundamental investment restriction regarding investments in real estate. Under the 1940 Act, a fund's restriction regarding investments in real estate must be fundamental. The 1940 Act does not prohibit an investment company from investing in real estate, either directly or indirectly. The Fund's current fundamental investment restriction relating to real estate prohibits the Fund from investing in real estate or mortgages on real estate, although the Fund may invest in marketable securities secured by real estate or interests therein. What effect will amending the current real estate restriction have on the Fund? The proposed restriction would permit the Fund to continue to invest in marketable securities secured by real estate or interests therein, and would also permit the Fund to invest in such securities that are not "marketable." In addition, under the proposed restriction, the Fund would be permitted to invest in securities of issuers that invest, deal or otherwise engage in transactions in real estate or interests therein, including real estate limited partnership interests. The proposed restriction would also permit the Fund to hold and sell real estate acquired by the Fund as a result of owning a security or other instrument. Modifying the Fund's real estate restriction may increase the Fund's exposure to certain risks inherent to investments in real estate, such as relative illiquidity, difficulties in valuation, and greater price volatility. In addition, to the extent the Fund invests in developing or emerging market countries, these investments are subject to risk of forfeiture due to governmental action. Under the proposed real estate restriction, the Fund will not be limited to investments in "marketable" securities secured by real estate or interests therein, which would increase the Fund's ability to invest in illiquid securities. However, the Board has adopted a non-fundamental investment restriction, consistent with the SEC Staff's current position on illiquid securities, which prohibits the Fund from investing more than 15% of its net assets in illiquid securities (the "Illiquid Securities Restriction"). As a result, it is not currently intended that the Fund would materially change its investment strategies as they relate to real estate or interests therein. Thus, it is not currently anticipated that the proposed amendments to the investment restriction relating to real estate would involve additional material risk at this time. The Fund's current fundamental investment restriction relating to real estate is combined with fundamental investment restrictions relating to investments in commodities, investments in other investment companies, and investments in oil, gas, and other mineral development programs. The adoption of this Sub-Proposal would result in separating the Fund's restriction regarding investments in real 26 estate from these other fundamental investment restrictions, including the Fund's fundamental investment restriction on investments in commodities. (See Sub-Proposal 3c below.) The Fund is proposing to eliminate the restrictions on investing in other investment companies and on investing in oil, gas, and mineral development programs. (See Proposal 4 below.) Sub-Proposal 3c: To amend the Fund's fundamental investment restriction regarding investments in commodities. Under the 1940 Act, a fund's investment policy relating to the purchase and sale of commodities must be fundamental. The most common types of commodities are physical commodities such as wheat, cotton, rice and corn. Under the federal securities and commodities laws, certain financial instruments such as futures contracts and options thereon, including currency futures, stock index futures or interest rate futures, may, under limited circumstances, also be considered to be commodities. Funds typically invest in futures contracts and related options on these and other types of commodity contracts for hedging purposes, to implement a tax or cash management strategy, or to enhance returns. What effect will amending the current commodities restriction have on the Fund? The current fundamental investment restriction on commodities states that the Fund may not purchase or sell commodity contracts. The proposed investment restriction relating to commodities clarifies the ability of the Fund to engage in currency and financial futures contracts and related options and to invest in securities or other instruments that are secured by physical commodities but not to invest directly in physical commodities. Notwithstanding the flexibility provided by the proposed fundamental investment restriction, the Fund is subject to guidelines established by the Board regarding the use of derivatives. Under these guidelines, currently no more than 5% of the Fund's assets may be invested in, or exposed to, options and swap agreements (as measured at the time of investment). The use of futures contracts can involve substantial risks and, therefore, the Fund would only invest in such futures contracts where the Investment Manager believes such investments are advisable and then only to the extent permitted by the guidelines established by the Board. It is not currently intended that the Fund would materially change these guidelines or its use of futures contracts, forward currency contracts and related options. Thus, it is not currently anticipated that the proposed amendments to the investment restriction relating to commodities would involve additional material risk at this time. The Fund's current fundamental investment restriction relating to commodities is combined with fundamental investment restrictions relating to 27 investments in real estate, investments in other investment companies, and investments in oil, gas, and other mineral development programs. The adoption of this Sub-Proposal would result in separating the Fund's restriction regarding commodity contracts from these other fundamental investment restrictions, including the Fund's fundamental investment restriction relating to real estate. (See Sub-Proposal 3b above.) The Fund is proposing to eliminate the restrictions on investing in other investment companies and on investing in oil, gas, and mineral development programs. (See Proposal 4 below.) Sub-Proposal 3d: To amend the Fund's fundamental investment restriction regarding underwriting. Under the 1940 Act, the Fund's policy concerning underwriting is required to be fundamental. Under the federal securities laws, a person or company generally is considered to be an underwriter if the person or company participates in the public distribution of securities of other issuers, which involves purchasing the securities from another issuer with the intention of re-selling the securities to the public. From time to time, a mutual fund may purchase securities in a private transaction for investment purposes and later sell or redistribute the securities to institutional investors. Under these or other circumstances, the Fund could possibly be considered to be within the technical definition of an underwriter under the federal securities laws. SEC Staff interpretations have clarified, however, that re-sales of privately placed securities by institutional investors, such as the Fund, do not make the institutional investor an underwriter in these circumstances. In addition, under certain circumstances, the Fund may be deemed to be an underwriter of its own securities. The proposed restriction incorporates these SEC interpretations and would make clear that the Fund has the ability to sell its own shares. What effect will amending the current underwriting restriction have on the Fund? The Fund's current fundamental investment restriction relating to underwriting prohibits the Fund from acting as an underwriter. The current investment restriction does not provide any clarification regarding whether the Fund may sell securities that the Fund owns or whether the Fund may sell its own shares in those limited circumstances where the Fund might be deemed to be an underwriter. The proposed restriction relating to underwriting is substantially similar to the Fund's current investment restriction by prohibiting the Fund from engaging in underwriting. The proposed investment restriction, however, clarifies that the Fund may re-sell securities that the Fund owns and that it may also sell its own shares. It is not anticipated that the adoption of the proposed restriction would involve 28 additional material risk to the Fund or affect the way the Fund is currently managed or operated. The Fund's current fundamental investment restriction relating to underwriting is combined with restrictions relating to issuing senior securities, purchasing securities on margin, engaging in short sales and writing, purchasing or selling options. The adoption of this Sub-Proposal would result in the separation of the Fund's underwriting restriction from these other fundamental investment restrictions, including the Fund's investment restriction relating to issuing senior securities. (See Sub-Proposal 3e below.) The Fund is proposing to eliminate the restrictions on purchasing securities on margin, engaging in short sales and writing, purchasing or selling options. (See Proposal 4 below.) Sub-Proposal 3e: To amend the Fund's fundamental investment restriction regarding issuing senior securities. The 1940 Act requires the Fund to have an investment policy describing its ability to issue senior securities. A "senior security" is an obligation of a fund, with respect to its earnings or assets, that takes precedence over the claims of the fund's shareholders with respect to the same earnings or assets. The 1940 Act generally prohibits an open-end fund from issuing senior securities in order to limit the fund's ability to use leverage. In general, leverage occurs when a fund borrows money to enter into securities transactions or acquires an asset without being required to make payment until a later time. SEC Staff interpretations allow an open-end fund under certain conditions to engage in a number of types of transactions that might otherwise be considered to create "senior securities," for example, short sales, certain options and futures transactions, reverse repurchase agreements and securities transactions that obligate the fund to pay money at a future date (such as when-issued, forward commitment or delayed delivery transactions). According to SEC Staff interpretations, when engaging in these types of transactions, an open-end fund must mark on its books, or segregate with its custodian bank, cash or other liquid securities to cover its future obligations, in order to avoid the creation of a senior security. This procedure limits the amount of a fund's assets that may be invested in these types of transactions and the fund's exposure to the risks associated with senior securities. What effect will amending the current senior securities restriction have on the Fund? The current fundamental investment restriction relating to issuing senior securities prohibits the Fund from issuing senior securities. 29 The proposed restriction would permit the Fund to issue senior securities as permitted under the 1940 Act or any relevant rule, exemption, or interpretation issued by the SEC. The proposed restriction also would clarify that the Fund may, provided that certain conditions are met, engage in those types of transactions that have been interpreted by the SEC Staff as not constituting senior securities, such as covered reverse repurchase transactions. The Fund has no present intention of changing its current investment strategies regarding transactions that may be interpreted as resulting in the issuance of senior securities. Therefore, the Board does not anticipate that amending the current restriction will result in additional material risk to the Fund. However, the Fund may initiate the use of these strategies in the future to the extent described in the proposed new restriction. To the extent the Fund does engage in such strategies in the future, it would be subject to the risks associated with leveraging, including reduced total returns and increased volatility. The additional risks to which the Fund may be exposed are limited, however, by the limitations on issuing senior securities imposed by the 1940 Act and any rule, exemption or interpretation thereof that may be applicable. The Fund's current fundamental investment restriction relating to issuing senior securities is combined with restrictions relating to underwriting, purchasing securities on margin, engaging in short sales, and writing, purchasing and selling options. The adoption of this Sub-Proposal would result in the separation of the Fund's senior securities restriction from these other fundamental investment restrictions, including the Fund's investment restriction relating to underwriting. (See Sub-Proposal 3d above.) The Fund is proposing to eliminate the restrictions on purchasing securities on margin, engaging in short sales, and writing, purchasing and selling options. (See Proposal 4 below.) Sub-Proposal 3f: To amend the Fund's fundamental investment restriction regarding lending. Under the 1940 Act, a fund must describe, and designate as fundamental, its policy with respect to making loans. In addition to a loan of cash, the term "loans" may, under certain circumstances, be deemed to include certain transactions and investment-related practices. Among those transactions and practices are lending of portfolio securities, entering into repurchase agreements and the purchase of certain debt instruments. If a fund adopts a fundamental policy that prohibits lending, the fund may still invest in debt securities, enter into securities lending transactions, and enter into repurchase agreements if it provides an exception from the general prohibition. 30 Under SEC Staff interpretations, lending by an investment company, under certain circumstances, may also give rise to issues relating to the issuance of senior securities. To the extent that the Fund enters into lending transactions under these limited circumstances, the Fund will continue to be subject to the limitations imposed under the 1940 Act regarding the issuance of senior securities. (See Sub-Proposal 3e above.) What effect will amending the current lending restriction have on the Fund? The Fund's current investment restriction regarding lending prohibits the Fund from loaning money, except that the Fund may purchase a portion of an issue of publicly distributed bonds, debentures, notes and other evidences of indebtedness. In addition, the Fund may buy U.S. government obligations with a simultaneous agreement by the seller to repurchase them within no more than seven days at the original purchase price plus accrued interest (such transactions are commonly known as "repurchase agreements"). Although the Fund's current investment restriction permits the purchase of certain debt securities, the Fund is only permitted to purchase publicly distributed debt securities and may not invest in certain types of private placement debt securities or engage in direct corporate loans, even if such investments would otherwise be consistent with the Fund's investment goal and policies. The proposed fundamental investment restriction provides that the Fund may not make loans to other persons except (1) through the lending of its portfolio securities; (2) through the purchase of debt securities, loan participations and/or engaging in direct corporate loans in accordance with its investment goals and policies; and (3) to the extent the entry into a repurchase agreement is deemed to be a loan. The proposed investment restriction provides the Fund with greater lending flexibility by permitting the Fund to invest in non-publicly distributed debt securities, loan participations, and direct corporate loans. To the extent that these instruments are illiquid, they will be subject to the Illiquid Securities Restriction. The proposed investment restriction also provides the Fund with greater flexibility by permitting the Fund to enter into repurchase agreements with terms of more than seven days. To the extent that repurchase agreements with terms of more than seven days are illiquid, they will be subject to the Illiquid Securities Restriction. In addition, the proposed investment restriction will not limit the Fund to only collateralizing repurchase agreements with U.S. government obligations. To the extent the Fund uses other forms of collateral for its repurchase agreements, however, it will still generally be subject to regulations under the 1940 Act regarding eligible collateral. 31 The proposed fundamental investment restriction also provides the Fund with additional flexibility to make loans to affiliated investment companies or other affiliated entities. In September 1999, the SEC granted an exemptive order to the Fund, together with other funds in Franklin Templeton Investments, permitting the Fund to loan money to other funds in Franklin Templeton Investments (the "Inter-Fund Lending and Borrowing Order"). These lending transactions may include terms that are more favorable than those which would otherwise be available from lending institutions. The proposed investment restriction would permit the Fund, under certain conditions, to lend cash to other funds in Franklin Templeton Investments at rates higher than those that the Fund would receive if the Fund loaned cash to banks through short-term lending transactions, such as repurchase agreements. Management anticipates that this additional flexibility to lend cash to affiliated investment companies would allow additional investment opportunities, and could enhance the Fund's ability to respond to changes in market, industry or regulatory conditions. Because the proposed lending restriction would provide the Fund with greater flexibility to invest in non-publicly distributed debt securities, loan participations, and other direct corporate loans, the Fund may be exposed to additional risks associated with such securities, including general illiquidity, greater price volatility and the possible lack of publicly available information about issuers of privately placed debt obligations and loan counterparties. However, these risks will be somewhat offset by the Fund's adoption of the non-fundamental Illiquid Securities Restriction. Thus, the Investment Manager believes that the risks posed by these investments should be relatively modest. Sub-Proposal 3g: To amend the Fund's fundamental investment restriction regarding borrowing. The 1940 Act requires investment companies to impose certain limitations on borrowing activities, and a fund's borrowing limitations must be fundamental. The 1940 Act limitations on borrowing are generally designed to protect shareholders and their investment by restricting a fund's ability to subject its assets to the claims of creditors who, under certain circumstances, might have a claim to the fund's assets that would take precedence over the claims of shareholders. Under the 1940 Act, an open-end fund may borrow up to 33 1/3% of its total assets (including the amount borrowed) from banks and may borrow up to 5% of its total assets for temporary purposes from any other person. Generally, a loan is considered temporary if it is repaid within sixty days. Funds typically borrow money to meet redemptions or for other short-term cash needs in order to avoid forced, unplanned sales of portfolio securities. This technique allows a fund greater 32 flexibility by allowing its manager to buy and sell portfolio securities primarily for investment or tax considerations, rather than for cash flow considerations. What effect will amending the current borrowing restriction have on the Fund? The Fund's current investment restriction relating to borrowing prohibits the Fund from borrowing money for any purpose other than redeeming its shares for cancellation, and then only as a temporary measure up to an amount not exceeding 5% of the value of its total assets. The Fund's current fundamental investment restriction further prohibits the Fund from pledging, mortgaging or hypothecating its assets for any purpose other than to secure such borrowings, and only in amounts not exceeding 10% of the value of the Fund's total assets as the Board may approve. In addition, the Fund will not pledge, mortgage or hypothecate its assets if the percentage of pledged assets plus the sales commission will exceed 10% of the offering price of the shares of the Fund. The proposed investment restriction would prohibit borrowing money, except to the extent permitted by the 1940 Act or any rule, exemption or interpretation thereunder issued by the SEC. Unlike the current fundamental investment restriction on borrowing, the proposed restriction does not limit the purposes for which the Fund can borrow. In addition, the Fund's investment restriction on pledging, mortgaging or hypothecating its assets would be eliminated because the 1940 Act does not require this type of fundamental investment restriction. By so amending the investment restriction, the Fund would not unnecessarily limit the Investment Manager if the Investment Manager determines that borrowing is in the best interests of that Fund and its shareholders. As a general matter, however, Section 18 of the 1940 Act limits a fund's borrowings to not more than 33 1/3% of the fund's total assets (including the amount borrowed), which is greater than the Fund's current investment restriction of up to 5% of the value of the Fund's total assets. The proposed restriction would also permit the Fund to borrow money from affiliated investment companies or other affiliated entities. In September 1999, the SEC granted the Inter-Fund Lending and Borrowing Order, permitting the Fund to borrow money from other funds in Franklin Templeton Investments. The proposed borrowing restriction would permit the Fund, under certain circumstances and in accordance with the Inter-Fund Lending and Borrowing Order, to borrow money from other funds in Franklin Templeton Investments at rates that are more favorable than the rates that the Fund would receive if it borrowed from banks or other lenders. The proposed borrowing restriction would also permit the Fund to borrow from other affiliated entities, such as the Investment Manager, under emergency market conditions should the SEC permit investment companies to engage in such borrowing in the future, such as it did in response to the emergency market conditions that existed immediately after the events of September 11, 2001. 33 Because the proposed borrowing restriction would provide the Fund with additional borrowing flexibility, to the extent that the Fund uses such flexibility, the Fund may be subject to additional costs and risks inherent to borrowing, such as reduced total return and increased volatility. The additional costs and risks to which the Fund may be exposed are limited, however, by the borrowing limitations imposed by the 1940 Act and any rule, exemption or interpretation thereof that may be applicable. Sub-Proposal 3h: To amend the Fund's fundamental investment restriction regarding industry concentration. Under the 1940 Act, a fund's policy regarding concentration of investments in the securities of companies in any particular industry must be fundamental. The SEC Staff takes the position that a fund "concentrates" its investments if it invests more than 25% of its "net" assets (exclusive of certain items such as cash, U.S. government securities, securities of other investment companies, and certain tax-exempt securities) in any particular industry or group of industries. An investment company is not permitted to concentrate its investments in any particular industry or group of industries unless it discloses its intention to do so. What effect will amending the current industry concentration restriction have on the Fund? The proposed concentration restriction is substantially the same as the Fund's current restriction, except that (1) it modifies the Fund's asset measure (from "total assets" to "net assets") by which concentration is assessed; and (2) it expressly references, in a manner consistent with current SEC Staff policy, the categories of investments that are excepted from coverage of the restriction. The proposed restriction reflects a more modernized approach to industry concentration, and provides the Fund with investment flexibility that ultimately is expected to help the Fund respond to future legal, regulatory, market or technical changes. In addition, the Board may from time to time establish guidelines regarding industry classifications. The proposed restriction would expressly exempt from the 25% limitation those securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities, and the securities of other investment companies, consistent with SEC Staff policy. The proposed restriction thus clarifies the types of U.S. government securities in which the Fund may invest. In addition, if Proposal 4 is approved, then the Fund's current fundamental investment restriction against investments in other investment companies will be eliminated. The proposed restriction on industry concentration will make explicit that such investments in 34 other investment companies are exempt from the Fund's concentration restriction. Even with this modified restriction, however, the Fund would continue to remain subject to the limitations on a fund's investments in other investment companies as set forth in the 1940 Act, its Prospectus and any exemptive orders issued by the SEC. In general, absent such rules or orders from the SEC, the 1940 Act would prohibit the Fund from investing more than 5% of its total assets in any one investment company and investing more than 10% of its total assets in other investment companies overall. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" SUB-PROPOSALS 3a-3h. PROPOSAL 4: TO APPROVE THE ELIMINATION OF CERTAIN OF THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTIONS. The Fund's current fundamental investment restrictions, together with those recommended to be eliminated, are detailed in Exhibit D, which is entitled "Fundamental Investment Restrictions Proposed to be Amended or Eliminated." If the Fund's shareholders approve Proposal 4, the elimination of such investment restrictions of the Fund will be effective as of the date of the supplement to the Fund's SAI reflecting elimination of such fundamental investment restrictions, which is anticipated to be shortly after the date of shareholder approval. Why is the Board recommending that certain fundamental investment restrictions be eliminated, and what effect will their elimination have on the Fund? Certain of the Fund's fundamental investment restrictions are either restatements of restrictions that are already included within the 1940 Act or are more restrictive than current SEC Staff interpretations. These restrictions include those relating to (1) investments in other investment companies; (2) purchasing securities on margin, engaging in short sales and purchasing and writing options; and (3) participation in joint trading accounts. The Fund's fundamental investment restrictions relating to illiquid and restricted securities and "letter" stocks do not represent current SEC Staff positions and are effectively limited by the Fund's non-fundamental Illiquid Securities Restriction. The other fundamental investment restrictions of the Fund were originally adopted to comply with state securities laws and regulations. Due to the passage of NSMIA, these fundamental restrictions are no longer required by law. As a result, the Fund is no longer legally required to adopt or maintain investment restrictions 35 relating to (1) investments in oil and gas programs; (2) management ownership of portfolio securities; (3) investing for purposes of exercising control; (4) investments in companies with less than three years of continuous operation; and (5) warrants. Accordingly, the Investment Manager has recommended, and the Board has determined, that these ten restrictions (referred to in this Proposal 4 as the "Restrictions") be eliminated and that their elimination is consistent with the federal securities laws. By reducing the total number of investment restrictions that can be changed only by a shareholder vote, the Board believes that the Fund will be able to reduce the costs and delays associated with holding future shareholder meetings for the purpose of revising fundamental investment restrictions that become outdated or inappropriate. Elimination of the Restrictions would also enable the Fund to be managed in accordance with the current requirements of the 1940 Act, without being constrained by additional and unnecessary limitations. The Board believes that the elimination of the Restrictions is in the best interest of the Fund's shareholders as it will provide the Fund with increased flexibility to pursue its investment goal and will enhance the Investment Manager's ability to manage the Fund's assets in a changing investment environment. Which ten (10) Restrictions is the Board recommending that the Fund eliminate? The Fund currently is subject to ten Restrictions that are no longer required by law and were adopted primarily in response to regulatory, business or industry conditions that no longer exist. The exact language of the Restrictions has been included in Exhibit D, which is entitled "Fundamental Investment Restrictions Proposed to be Amended or Eliminated." Investment in Other Investment Companies The Fund's current fundamental investment restriction prohibits the Fund from investing in other open-end investment companies (except in connection with a merger, consolidation, acquisition or reorganization) and closed-end investment companies. This fundamental investment restriction is more restrictive than the 1940 Act and current SEC Staff interpretations, which do not require a fund to adopt such a provision as a fundamental investment restriction. Upon elimination of this restriction, the Fund would remain subject to the restrictions under Section 12(d) of the 1940 Act relating to the Fund's ability to invest in other investment companies, including open-end and closed-end investment companies, except where the Fund has received an exemption from such restrictions. The 1940 Act restrictions generally specify that the Fund may not purchase more than 3% of another fund's total outstanding voting stock, invest 36 more than 5% of its total assets in another fund's securities, or have more than 10% of its total assets invested in securities of all other funds. In addition, eliminating the Fund's current restriction on investments in other investment companies would enable the Fund to take advantage of the investment opportunities presented by the Cash Sweep Order (discussed in Sub-Proposal 3a above), since it contemplates relief from the 1940 Act restrictions relating to investments in other registered and unregistered investment companies in certain limited circumstances. Therefore, the Board is recommending that the restriction be eliminated. Oil and Gas Programs The Fund has a fundamental investment restriction that prohibits the Fund from investing in interests (other than publicly issued debentures or equity stock interests) in oil, gas or other mineral exploration or development programs. The Fund's fundamental investment restriction regarding oil and gas programs was based on state securities laws that had been adopted by a few jurisdictions, but have since been pre-empted by NSMIA. Accordingly, the Board proposes that the restriction be eliminated. Management Ownership of Securities The Fund's current fundamental investment restriction prohibits the Fund from investing in companies in which certain affiliated persons of the Fund have an ownership interest. This restriction was based on state law provisions that have been pre-empted by NSMIA. In addition, the 1940 Act provisions addressing conflicts of interest would continue to apply to the Fund. Therefore, the Board is recommending that the restriction be eliminated. Investing for Purposes of Exercising Control The 1940 Act does not require, and applicable state law no longer requires, that the Fund adopt a fundamental investment restriction prohibiting it from investing in any company for the purpose of exercising control or management. Because the Fund, as a diversified investment company, is already subject to certain limitations with respect to how much of a single issuer's voting securities it may acquire (and, if approved by shareholders, would be subject to the amended fundamental investment restriction regarding diversification of investments described in Sub-Proposal 3a above), the Board is recommending that this restriction be eliminated. 37 Purchasing Securities on Margin, Engaging in Short Sales and Writing, Buying or Selling Options The 1940 Act does not require the Fund to adopt a fundamental investment restriction regarding purchasing securities on margin, engaging in short sales, or writing, buying or selling options, except to the extent that these transactions may result in the creation of senior securities (as described more fully in Sub-Proposal 3e above). The Fund's current fundamental investment restrictions prohibits the Fund from (1) purchasing securities on margin; (2) engaging in short sales of securities; and (3) writing, buying or selling puts, calls, straddles or spreads. Current 1940 Act provisions on issuing senior securities, engaging in short sales and purchasing on margin, together with the proposed fundamental investment restriction on senior securities, will limit the ability of the Fund to purchase securities on margin, engage in short sales and write, buy or sell puts, calls, straddles or spreads. Therefore, the Investment Manager does not anticipate that deleting the current restrictions will result in additional material risk to the Fund at this time. Three Years of Continuous Operation The Fund's current fundamental investment restriction relating to investments in newer companies limits the Fund's ability to invest more than 5% of the value of its total assets in securities of issuers which have been in continuous operation less than three years. This restriction was based upon state securities laws, which have been pre-empted by NSMIA. Therefore, the Board proposes that the restriction be eliminated. Warrants The Fund's fundamental investment restriction relating to warrants limits the Fund's investments in warrants to 5% of its total assets whether or not the warrant is listed on the New York Stock Exchange or the American Stock Exchange, including no more than 2% of the Fund's total assets, which may be invested in warrants that are not listed on those exchanges. A warrant entitles an investor to purchase a specified amount of stock at a specified price and is effective for a period of time normally ranging from a number of years to perpetuity. The Fund's fundamental investment restriction on warrants was based on state securities laws that have since been pre-empted by NSMIA. Accordingly, the Board proposes that the restriction be eliminated. 38 Illiquid and Restricted Securities The fundamental investment restriction on illiquid and restricted securities limits the Fund from investing more than 10% of its total assets in restricted securities, securities with a limited trading market (which the Fund may not be able to dispose of at the current market price) or those which are not otherwise readily marketable with readily available current market quotations. With some exceptions, such securities generally include securities that have not been registered under the Securities Act of 1933, as amended, and therefore may only be resold to certain institutional investors under certain circumstances, and securities that are subject to other contractual restrictions on resale (often referred to as "restricted securities"). To the extent that a restricted security is not readily marketable at a price that is approximately equal to the value placed on such assets by the Fund, these types of securities may be considered illiquid. The Fund's current fundamental investment restriction on investments in securities with a limited trading market was based upon state law restrictions on the purchase of unregistered securities, as well as an SEC Staff position relating to illiquid securities. The state law provision has been pre-empted by NSMIA and the SEC Staff, which does not require investment companies to adopt the position as a fundamental restriction, has subsequently amended its position to permit investment companies to invest up to 15% of their net assets in illiquid securities. The Fund remains subject to the limitations imposed by the SEC Staff on an open-end fund's ability to invest in illiquid securities. As a result of the proposed elimination of the Fund's current investment restrictions that relate to illiquid and restricted securities (including "letter" stocks described below), the Board has adopted the non-fundamental Illiquid Securities Restriction. Thus, the Fund is already prohibited from investing more than 15% of its net assets in illiquid securities, including securities that are not readily marketable. The Board is therefore recommending that the current fundamental investment restrictions on illiquid and restricted securities be eliminated. However, because the Illiquid Securities Restriction increases slightly, from 10% to 15%, the amount of the Fund's assets that may be invested in illiquid securities, to the extent the Fund were to take advantage of such increase, the Fund would be subject to a greater degree to the risks associated with illiquid securities. Such risks include limited ability to sell such securities and to sell at a price acceptable to the Fund, and difficulty in valuation. "Letter" Stocks The Fund's fundamental investment restriction relating to "letter" stocks prohibits the Fund from investing in "letter" stocks or securities on which there are 39 any sales restrictions under a purchase agreement. As with other illiquid and restricted securities, discussed above, these types of securities may be illiquid to the extent that they are not readily marketable. This fundamental investment restriction is not required by the 1940 Act. Moreover, as described above, the Board has adopted the non-fundamental Illiquid Securities Restriction in recognition of the SEC Staff position on illiquid securities. Accordingly, the Board is recommending that the current fundamental investment restriction on "letter" stocks be eliminated. However, to the extent the Fund does invest in "letter" stocks as permitted by the Illiquid Securities Restriction, the Fund will be subject to the risks described above under "Illiquid and Restricted Securities." Joint Trading Accounts The Fund's fundamental investment restriction relating to joint trading accounts prohibits the Fund's participation on a joint or a joint and several basis in such an account. Because Section 12(a)(2) of the 1940 Act prohibits a mutual fund from participating in a joint trading account unless allowed by rule or exemptive order, the current fundamental restriction is unnecessary. Therefore, the Board is recommending that the restriction be eliminated. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL 4. . ADDITIONAL INFORMATION ABOUT THE FUND The Investment Manager. The Investment Manager of the Fund is Templeton Investment Counsel, LLC, 500 East Broward Boulevard, Suite 2100, Fort Lauderdale, Florida 33394-3091. Pursuant to an investment management agreement, the Investment Manager manages the investment and reinvestment of Fund assets. The Investment Manager is an indirect, wholly owned subsidiary of Resources. Under an agreement with the Investment Manager, FTIA, 2701 Shui On Centre, 6-8 Harbour Road, Wanchai, Hong Kong, is the Fund's sub-advisor. FTIA provides the Investment Manager with investment management advice and assistance. The Administrator. The administrator of the Fund is Franklin Templeton Services, LLC ("FT Services"), with offices at 500 East Broward Boulevard, Suite 2100, Fort Lauderdale, Florida 33394-3091. FT Services is an indirect, 40 wholly owned subsidiary of Resources and an affiliate of the Investment Manager, sub-advisor, and principal underwriter. Pursuant to an administration agreement, FT Services provides certain administrative functions for the Fund. The Underwriter. The underwriter for the Fund is Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906. The Transfer Agent. The transfer agent and dividend-paying agent for the Fund is Franklin Templeton Investor Services, LLC, 100 Fountain Parkway, St. Petersburg, Florida 33716-1205. The Custodian. The custodian for the Fund is JPMorgan Chase Bank, MetroTech Center, Brooklyn, New York 11245. Pending Litigation. Woodbury v. Templeton Global Smaller Companies Fund, Inc. and Templeton Investment Counsel, LLC, Case 2003 L 001362, was filed on October 3, 2003 in the Circuit Court of the Third Judicial Circuit, Madison County, Illinois. The lawsuit alleges various breaches of duty with respect to the valuation of the Fund's portfolio securities. On November 14, 2003, the case was removed to the United States District Court for the Southern District of Illinois. Management strongly believes that the claims made in this action are without merit and intends vigorously to defend against this action. Other Matters. The Fund's last audited financial statements and annual report for the fiscal year ended August 31, 2003 are available free of charge. To obtain a copy of this report, please call 1-800/DIAL BEN(R) (1-800-342-5236) or forward a written request to Franklin Templeton Investor Services, LLC, P.O. Box 33030, St. Petersburg, Florida 33733-8030. Shareholders Sharing the Same Address. If two or more shareholders share the same address, only one copy of this proxy statement is being delivered to that address, unless the Fund has received contrary instructions from one or more of the shareholders at that shared address. Upon written or oral request, the Fund will deliver promptly a separate copy of this proxy statement to a shareholder at a shared address. Please call 1-800/DIAL BEN(R) (1-800-342-5236) or forward a written request to Franklin Templeton Investor Services, LLC, P.O. Box 33030, St. Petersburg, Florida 33733-8030 if you would like to (1) receive a separate copy of this proxy statement; (2) receive your annual reports or proxy statements separately in the future; or (3) request delivery of a single copy of annual reports or proxy statements if you are currently receiving multiple copies at a shared address. 41 Principal Shareholders. As of January 20, 2004, the Fund had total net assets of $870,939,494.19 and a total of 100,454,059.715 shares of common stock, $1.00 par value ("shares"), outstanding divided among four separate classes of shares as follows: 95,722,730.266 Class A shares, 708,832.346 Class B shares, 3,093,808.312 Class C shares and 928,688.791 Advisor Class shares. From time to time, the number of shares held in "street name" accounts of various securities dealers for the benefit of their clients may exceed 5% of the total shares outstanding. To the knowledge of the Fund's management, as of January 20, 2004, the only other entities owning beneficially more than 5% of the outstanding shares of any class of the Fund were:

42 Note: Charles B. Johnson and Rupert H. Johnson, Jr., who are officers and/or directors of the Fund, serve on the administrative committee of the Franklin Templeton Profit Sharing 401(k) Plan, which owns shares of the Fund. In that capacity, they participate in the voting of such shares. Charles B. Johnson and Rupert H. Johnson, Jr. disclaim beneficial ownership of any shares of the Fund owned by the Franklin Templeton Profit Sharing 401(k) Plan. In addition, to the knowledge of the Fund management, as of January 20, 2004, the Directors and officers of the Fund, as a group, owned of record and beneficially less than 1% of the outstanding shares of the Fund in the aggregate and of each class of the Fund. Contacting the Board of Directors. If a shareholder wishes to send a communication to the Board of Directors, such correspondence should be in writing and addressed to the Board of Directors at the Fund's offices, 500 East Broward Boulevard, Suite 2100, Fort Lauderdale, Florida 33394-3091, Attention: Secretary. The correspondence will then be given to the Board for their review and consideration. . AUDIT COMMITTEE Audit Committee and Independent Auditors. The Fund's Audit Committee is responsible for the selection of the Fund's independent auditors, including evaluating their independence, and meeting with such auditors to consider and review matters relating to the Fund's financial reports and internal accounting. The Audit Committee also reviews the maintenance of the Fund's records and the safekeeping arrangements of the Fund's custodian. The Audit Committee consists of Independent Directors, and, during 2003, Andrew H. Hines, Jr. and Fred R. Millsaps (Chairman) were the members of the Audit Committee. Mr. Hines retired from the Board and the Audit Committee effective December 31, 2003. It is expected that the Board will appoint three new members to the Audit Committee, each of whom will be an Independent Director, promptly after the Meeting. Selection of Independent Auditors. The Audit Committee and the Board selected the firm of PricewaterhouseCoopers LLP ("PwC") as independent auditors of the Fund for the current fiscal year. Representatives of PwC are not expected to be present at the Meeting, but will have the opportunity to make a statement if they wish, and will be available should any matter arise requiring their presence. Audit Fees. The aggregate fees paid to PwC for professional services rendered by PwC for the audit of the Fund's annual financial statements or for services that are normally provided by PwC in connection with statutory and 43 regulatory filings or engagements were $27,934 for the fiscal year ended August 31, 2003 and $28,909 for the fiscal year ended August 31, 2002. Audit-Related Fees. The aggregate fees paid to PwC for assurance and related services by PwC that are reasonably related to the performance of the audit or review of the Fund's financial statements and are not reported under "Audit Fees" above were $4,840 for the fiscal year ended August 31, 2003 and $3,981 for the fiscal year ended August 31, 2002. The services for which these fees were paid included the review of semi-annual reports to shareholders, internal control testing and evaluation and services in connection with the Fund's contract renewal. In addition, the Audit Committee pre-approves PwC's engagement for audit-related services with the Investment Manager and certain entities controlling, controlled by, or under common control with the Investment Manager that provide ongoing services to the Fund, which engagements relate directly to the operations and financial reporting of the Fund. The fees for these services were $426,460 for the fiscal year ended August 31, 2003 and $284,400 for the fiscal year ended August 31, 2002. Tax Fees. PwC did not render any tax compliance, tax advice or tax planning services to the Fund for the fiscal year ended August 31, 2003 or for the fiscal year ended August 31, 2002. PwC did not render any such tax services to the Investment Manager or certain entities controlling, controlled by, or under common control with the Investment Manager that provide ongoing services to the Fund, which engagements relate directly to the operations and financial reporting of the Fund for the fiscal year ended August 31, 2003 or for the fiscal year ended August 31, 2002. All Other Fees. PwC did not bill for other products and services, other than the services reported above, for the fiscal year ended August 31, 2003 or for the fiscal year ended August 31, 2002. PwC did not render other services to the Investment Manager or entities controlling, controlled by, or under common control with the Investment Manager that provide ongoing services to the Fund, which engagements relate directly to the operations and financial reporting of the Fund for the fiscal year ended August 31, 2003 or for the fiscal year ended August 31, 2002. Audit Committee Pre-Approval Policies and Procedures. As of the date of this proxy statement, the Audit Committee has not adopted pre-approval policies and procedures. As a result, all services provided by PwC must be directly pre-approved by the Audit Committee. 44 Aggregate Non-Audit Fees. PwC did not render any non-audit services to the Fund, to the Investment Manager or to any entity controlling, controlled by, or under common control with the Investment Manager that provides ongoing services to the Fund for the fiscal year ended August 31, 2003 or for the fiscal year ended August 31, 2002. . FURTHER INFORMATION ABOUT VOTING AND THE MEETING Solicitation of Proxies. Your vote is being solicited by the Board of Directors of the Fund. The cost of soliciting proxies, including the fees of a proxy soliciting agent, is borne by the Fund. The Fund reimburses brokerage firms and others for their expenses in forwarding proxy material to the beneficial owners and soliciting them to execute proxies. The Fund has engaged D.F. King & Co., Inc. ("D.F. King"), a professional proxy solicitation firm, to solicit proxies from brokers, banks, other institutional holders and individual shareholders at an estimated cost of approximately $60,000, including out-of-pocket expenses. The Fund expects that the solicitation will be primarily by mail, but also may include telephone, facsimile, electronic or other means of communications. If the Fund does not receive your proxy by a certain time, you may receive a telephone call from D.F. King asking you to vote. The Fund does not reimburse Directors and officers of the Fund or regular employees and agents of the Investment Manager involved in the solicitation of proxies. Voting by Broker Dealers. The Fund expects that, before the Meeting, broker-dealer firms holding shares of the Fund in "street name" for their customers and beneficial owners will request voting instructions from their customers and beneficial owners. If these instructions are not received by the date specified in the broker-dealer firms' or such depositories' proxy solicitation materials, the Fund understands that the broker-dealers may vote on Proposal 1 on behalf of their customers and beneficial owners. Certain broker-dealers may exercise discretion over shares held in their name for which no instructions are received by voting these shares in the same proportion as they vote shares for which they received instructions. Quorum. A majority of the shares entitled to vote - present in person or represented by proxy - constitutes a quorum at the Meeting. The shares over which broker-dealers have discretionary voting power, the shares that represent "broker non-votes" (i.e., shares held by brokers or nominees as to which (i) instructions have not been received from the beneficial owners or persons entitled to vote and (ii) the broker or nominee does not have discretionary voting power on a particular matter), and the shares whose proxies reflect an abstention on any item will all be counted as shares present and entitled to vote for purposes of determining whether the required quorum of shares exists. 45 Methods of Tabulation. Proposal 1, the election of Directors, requires the affirmative vote of the majority of the votes cast at the Meeting. Proposal 2, to approve an Agreement and Plan of Reorganization that provides for the reorganization of the Fund from a Maryland corporation to a Delaware statutory trust, requires the affirmative vote of a majority of the Fund's outstanding shares. Proposal 3, to approve amendments to certain of the Fund's fundamental investment restrictions (including eight (8) Sub-Proposals), and Proposal 4, to approve the elimination of certain of the Fund's fundamental investment restrictions, each require the affirmative vote of the lesser of (i) more than 50% of the outstanding shares of the Fund; or (ii) 67% or more of the outstanding shares of the Fund present at the Meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy. Abstentions and broker non-votes will be treated as votes present at the Meeting but will not be treated as votes cast. Abstentions and broker non-votes, therefore, will have no effect on Proposal 1, which requires a majority of the Fund's shares present and voting, but will have the same effect as a vote "against" Proposal 2, Sub-Proposals 3a-3h, and Proposal 4. Adjournment. In the event that a quorum is not present at the Meeting or, in the event that a quorum is present but sufficient votes have not been received to approve a Proposal or Sub-Proposal, the Meeting may be adjourned to permit further solicitation of proxies. The holders of a majority of shares entitled to vote at the Meeting and present in person or by proxy, whether or not sufficient to constitute a quorum, or any officer present entitled to preside or act as Secretary of the Meeting, may adjourn the Meeting without determining the date of the new Meeting or from time to time, without further notice, to a date not more than 120 days after the original record date to permit further solicitation of proxies or for other reasons consistent with Maryland law and the Fund's Articles of Incorporation, as amended, and By-Laws, as amended and restated. Any business that might have been transacted at the Meeting originally called may be transacted at such adjourned Meeting at which a quorum is present. Unless otherwise instructed by a shareholder granting a proxy, the persons designated as proxies may use their discretionary authority to vote on questions of adjournment. Shareholder Proposals. Neither the Fund nor the DE Fund is required, and they do not intend, to hold regular annual shareholders' meetings. A shareholder wishing to submit a proposal for consideration for inclusion in a proxy statement for the next shareholders' meeting should send his or her written proposal to the offices of the Fund or the DE Fund, as applicable, 500 East Broward Boulevard, Suite 2100, Fort Lauderdale, Florida 33394-3091, Attention: Secretary, so that it is received within a reasonable time before any such meeting. A shareholder proposal 46 may be presented at a meeting of shareholders only if such proposal concerns a matter that may be properly brought before the meeting under applicable federal proxy rules, state law, and other governing instruments. Submission of a proposal by a shareholder does not guarantee that the proposal will be included in the Fund's or the DE Fund's, as applicable, proxy statement or presented at the meeting. No business other than the matters described above is expected to come before the Meeting, but should any other matter requiring a vote of shareholders arise, including any question as to an adjournment or postponement of the Meeting, the persons designated as proxies named on the enclosed proxy card will vote on such matters in accordance with the views of management. By Order of the Board of Directors, Barbara J. Green Secretary January 27, 2004 47 EXHIBIT A NOMINATING COMMITTEE CHARTER I. The Committee. The Nominating Committee (the "Committee") is a committee of, and established by, the Board of Directors/Trustees of the Fund (the "Board"). The Committee consists of such number of members as set by the Board from time to time and its members shall be selected by the Board. The Committee shall be comprised entirely of "independent members." For purposes of this Charter, independent members shall mean members who are not interested persons of the Fund ("Disinterested Board members") as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended (the "1940 Act"). II. Board Nominations and Functions. 1. The Committee shall make recommendations for nominations for Disinterested Board members on the Board to the incumbent Disinterested Board members and to the full Board. The Committee shall evaluate candidates' qualifications for Board membership and the independence of such candidates from the Fund's investment manager and other principal service providers. Persons selected must be independent in terms of both the letter and the spirit of the 1940 Act. The Committee shall also consider the effect of any relationships beyond those delineated in the 1940 Act that might impair independence, e.g., business, financial or family relationships with investment managers or service providers. 2. The Committee also shall evaluate candidates' qualifications and make recommendations for "interested" members on the Board to the full Board. 3. The Committee may adopt from time to time specific, minimum qualifications that the Committee believes a candidate must meet before being considered as a candidate for Board membership and shall comply with any rules adopted from time to time by the U.S. Securities and Exchange Commission regarding investment company nominating committees and the nomination of persons to be considered as candidates for Board membership. 4. The Committee shall review shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Fund's offices. The Committee shall adopt, by resolution, a policy regarding its procedures for considering candidates for the Board, including any recommended by shareholders. A-1 III. Committee Nominations and Functions. 1. The Committee shall make recommendations to the full Board for nomination for membership on all committees of the Board. 2. The Committee shall review as necessary the responsibilities of any committees of the Board, whether there is a continuing need for each committee, whether there is a need for additional committees of the Board, and whether committees should be combined or reorganized. The Committee shall make recommendations for any such action to the full Board. 3. The Committee shall, on an annual basis, review the performance of the Disinterested Board members. IV. Other Powers and Responsibilities. 1. The Committee shall meet at least twice each year or more frequently in open or executive sessions. The Committee may invite members of management, counsel, advisers and others to attend its meetings as it deems appropriate. The Committee shall have separate sessions with management and others, as and when it deems appropriate. 2. The Committee shall have the resources and authority appropriate to discharge its responsibilities, including authority to retain special counsel and other experts or consultants at the expense of the Fund. 3. The Committee shall report its activities to the Board and make such recommendations as the Committee may deem necessary or appropriate. 4. A majority of the members of the Committee shall constitute a quorum for the transaction of business at any meeting of the Committee. The action of a majority of the members of the Committee present at a meeting at which a quorum is present shall be the action of the Committee. The Committee may meet in person or by telephone, and the Committee may act by written consent, to the extent permitted by law and by the Fund's by-laws. In the event of any inconsistency between this Charter and the Fund's organizational documents, the provisions of the Fund's organizational documents shall be given precedence. 5. The Committee shall review this Charter at least annually and recommend any changes to the full Board. A-2 EXHIBIT B FORM OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. AND TEMPLETON GLOBAL SMALLER COMPANIES FUND This Agreement and Plan of Reorganization ("Agreement") is made as of this day of , 2004 by and between Templeton Global Smaller Companies Fund, Inc., a Maryland corporation (the "Fund"), and Templeton Global Smaller Companies Fund, a Delaware statutory trust (the "Trust") (the Fund and the Trust are hereinafter collectively referred to as the "parties"). In consideration of the mutual promises contained herein, and intending to be legally bound, the parties hereto agree as follows: 1. Plan of Reorganization. (a) Upon satisfaction of the conditions precedent described in Section 3 hereof, the Fund will convey, transfer and deliver to the Trust at the closing provided for in Section 2 (hereinafter referred to as the "Closing") all of the Fund's then-existing assets (the "Assets"). In consideration thereof, the Trust agrees at the Closing (i) to assume and pay when due all obligations and liabilities of the Fund, existing on or after the Effective Date of the Reorganization (as defined in Section 2 hereof), whether absolute, accrued, contingent or otherwise, including all fees and expenses in connection with this Agreement, which fees and expenses shall, in turn, include, without limitation, costs of legal advice, accounting, printing, mailing, proxy solicitation and transfer taxes, if any (collectively, the "Liabilities"), such Liabilities to become the obligations and liabilities of the Trust; and (ii) to deliver to the Fund in accordance with paragraph (b) of this Section 1, full and fractional shares of each class of shares of beneficial interest, without par value, of the Trust, equal in number to the number of full and fractional shares of the corresponding class of shares of common stock, $0.20 par value per share, of the Fund outstanding at the close of regular trading on the New York Stock Exchange, Inc. ("NYSE") on the business day immediately preceding the Effective Date of the Reorganization. The reorganization contemplated hereby is intended to qualify as a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund shall distribute to the Fund's shareholders the shares of the Trust in accordance with this Agreement and the resolutions of the Board of Directors of the Fund (the "Board of Directors") authorizing the transactions contemplated by this Agreement. B-1 (b) In order to effect the delivery of shares described in Section 1(a)(ii) hereof, the Trust will establish an open account for each shareholder of the Fund and, on the Effective Date of the Reorganization, will credit to such account full and fractional shares of beneficial interest, without par value, of the appropriate class of the Trust equal to the number of full and fractional shares of common stock such shareholder holds in the corresponding class of the Fund at the close of regular trading on the NYSE on the business day immediately preceding the Effective Date of the Reorganization. Fractional shares of the Trust will be carried to the third decimal place. At the close of regular trading on the NYSE on the business day immediately preceding the Effective Date of the Reorganization, the net asset value per share of each class of shares of the Trust shall be deemed to be the same as the net asset value per share of each corresponding class of shares of the Fund. On the Effective Date of the Reorganization, each certificate representing shares of a class of the Fund will be deemed to represent the same number of shares of the corresponding class of the Trust. Simultaneously with the crediting of the shares of the Trust to the shareholders of record of the Fund, the shares of the Fund held by such shareholders shall be cancelled. Shareholders of the Fund will have the right to deliver their share certificates of the Fund to the Trust in exchange for share certificates of the Trust. However, a shareholder need not deliver such certificates to the Trust unless the shareholder so desires. (c) As soon as practicable after the Effective Date of the Reorganization, the Fund shall take all necessary steps under Maryland law to effect a complete dissolution of the Fund. (d) The expenses of entering into and carrying out this Agreement will be borne by the Fund to the extent not paid by its investment manager. 2. Closing and Effective Date of the Reorganization. The Closing shall consist of (i) the conveyance, transfer and delivery of the Assets to the Trust in exchange for the assumption and payment, when due, by the Trust, of the Liabilities of the Fund; and (ii) the issuance and delivery of the Trust's shares in accordance with Section 1(b), together with related acts necessary to consummate such transactions. The Closing shall occur either on (a) the business day immediately following the later of the receipt of all necessary regulatory approvals and the final adjournment of the meeting of shareholders of the Fund at which this Agreement is considered and approved, or (b) such later date as the parties may mutually agree ("Effective Date of the Reorganization"). Solely for purposes of subsection (a) above, the effectiveness of one or more post-effective amendments to the Fund's Registration Statement as described below in Section 3(b)(i) shall not be deemed to be a necessary regulatory approval. B-2 3. Conditions Precedent. The obligations of the Fund and the Trust to effectuate the transactions hereunder shall be subject to the satisfaction of each of the following conditions: (a) Such authority and orders from the U.S. Securities and Exchange Commission (the "Commission") and state securities commissions as may be necessary to permit the parties to carry out the transactions contemplated by this Agreement shall have been received; (b) (i) One or more post-effective amendments to the Fund's Registration Statement on Form N-1A ("Registration Statement") under the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended ("1940 Act"), containing such amendments to such Registration Statement as are determined under the supervision of the Board of Directors to be necessary and appropriate as a result of this Agreement, shall have been filed with the Commission; (ii) the Trust shall have adopted as its own such Registration Statement, as so amended; (iii) the most recent post-effective amendment or amendments to the Fund's Registration Statement shall have become effective, and no stop order suspending the effectiveness of the Registration Statement shall have been issued, and no proceeding for that purpose shall have been initiated or threatened by the Commission (other than any such stop order, proceeding or threatened proceeding which shall have been withdrawn or terminated); and (iv) an amendment of the Form N-8A Notification of Registration filed pursuant to Section 8(a) of the 1940 Act ("Form N-8A") reflecting the change in legal form of the Fund to a Delaware statutory trust shall have been filed with the Commission and the Trust shall have expressly adopted such amended Form N-8A as its own for purposes of the 1940 Act; (c) Each party shall have received an opinion of Stradley, Ronon, Stevens & Young, LLP, Philadelphia, Pennsylvania, to the effect that, assuming the reorganization contemplated hereby is carried out in accordance with this Agreement, the laws of the State of Maryland and the State of Delaware, and in accordance with customary representations provided by the parties in a certificate(s) delivered to Stradley, Ronon, Stevens & Young, LLP, the reorganization contemplated by this Agreement qualifies as a "reorganization" under Section 368 of the Code, and thus will not give rise to the recognition of income, gain or loss for federal income tax purposes to the Fund, the Trust or the shareholders of the Fund or the Trust; (d) The Fund shall have received an opinion of Stradley, Ronon, Stevens & Young, LLP, dated the Effective Date of the Reorganization, addressed to and in form and substance reasonably satisfactory to the Fund, to the effect that (i) the Trust is a statutory trust duly formed, validly existing, B-3 and in good standing under the laws of the State of Delaware; (ii) this Agreement and the transactions contemplated thereby and the execution and delivery of this Agreement have been duly authorized and approved by all requisite statutory trust action of the Trust and this Agreement has been duly executed and delivered by the Trust and is a legal, valid and binding agreement of the Trust in accordance with its terms; and (iii) the shares of the Trust to be issued in the reorganization have been duly authorized and, upon issuance thereof in accordance with this Agreement, will have been validly issued and fully paid and will be nonassessable by the Trust; (e) The Trust shall have received the opinion of Stradley, Ronon, Stevens & Young, LLP, dated the Effective Date of the Reorganization, addressed to and in form and substance reasonably satisfactory to the Trust, to the effect that: (i) the Fund is duly incorporated, validly existing, and in good standing under the laws of the State of Maryland; (ii) the Fund is an open-end investment company of the management type registered under the 1940 Act; and (iii) this Agreement and the transactions contemplated hereby and the execution and delivery of this Agreement have been duly authorized and approved by all requisite corporate action of the Fund and this Agreement has been duly executed and delivered by the Fund and is a legal, valid and binding agreement of the Fund in accordance with its terms; (f) The shares of the Trust are eligible for offering to the public in those states of the United States and jurisdictions in which the shares of the Fund are currently eligible for offering to the public so as to permit the issuance and delivery by the Trust of the shares contemplated by this Agreement to be consummated; (g) This Agreement and the transactions contemplated hereby shall have been duly adopted and approved by the appropriate action of the Board of Directors and the shareholders of the Fund; (h) The shareholders of the Fund shall have voted to direct the Fund to vote, and the Fund shall have voted, as sole shareholder of each class of the Trust, to: (1) Elect as Trustees of the Trust the following individuals: Harris J. Ashton, Nicholas F. Brady, Harmon E. Burns, Frank J. Crothers, S. Joseph Fortunato, Edith E. Holiday, Charles B. Johnson, Gordon S. Macklin, Fred R. Millsaps, Frank A. Olson, and Constantine D. Tseretopoulos; (2) Approve an Investment Management Agreement between Templeton Investment Counsel, LLC ("TICL") and the Trust which is B-4 substantially identical to the then-current Investment Management Agreement, as amended and restated to date, between TICL and the Fund; and (3) Approve a Sub-Advisory Agreement between TICL and Franklin Templeton Investments (Asia) Limited ("FTIA") which is substantially identical to the then-current Sub-Advisory Agreement between TICL and FTIA; (i) The Trustees of the Trust shall have duly adopted and approved this Agreement and the transactions contemplated hereby and shall have taken the following actions at a meeting duly called for such purposes: (1) Approval of the Investment Management Agreement described in paragraph (h)(2) of this Section 3 between TICL and the Trust; (2) Approval of the Sub-Advisory Agreement described in paragraph (h)(3) of this Section 3 hereof between TICL and FTIA; (3) Approval of the assignment to the Trust of the Restated Custody Agreement, dated June 1, 1984, as amended and restated to date, between The Chase Manhattan Bank, N.A. (now JPMorgan Chase Bank), and the Fund; (4) Selection of PricewaterhouseCoopers LLP as the Trust's independent auditors for the fiscal year ending August 31, 2004; (5) Approval of a Fund Administration Agreement between the Trust and Franklin Templeton Services, LLC; (6) Approval of a Distribution Agreement between the Trust and Franklin Templeton Distributors, Inc.; (7) Approval of a Form of Dealer Agreement between the Trust and Franklin Templeton Distributors, Inc. and securities dealers dated March 1, 1998, including the Amendment to the Form of Dealer Agreement dated May 15, 1998; (8) Approval of the following Distribution Plans by the Trust pursuant to Rule 12b-1 under the 1940 Act: (a) Class A Distribution Plan pursuant to Rule 12b-1; (b) Class B Distribution Plan pursuant to Rule 12b-1; (c) Class C Distribution Plan pursuant to Rule 12b-1; and (d) Multiple Class Plan pursuant to Rule 18f-3; (9) Approval of a Transfer Agent and Shareholder Services Agreement between the Trust and Franklin Templeton Investor Services, LLC; B-5 (10) Approval of the assignment to the Trust of the Sub-Transfer Agent Services Agreement among Franklin Templeton Investor Services, LLC, The Shareholder Services Group, Inc. and the Fund; (11) Approval of the assignment to the Trust of the Sub-Accounting Services Agreement among Franklin Templeton Investor Services, LLC, Financial Data Services, Inc., Merrill Lynch, Pierce, Fenner and Smith Inc. and the Fund; (12) Authorization of the issuance by the Trust, prior to the Effective Date of the Reorganization, of one share of each class of shares of beneficial interest of the Trust to the Fund in consideration for the payment of $1.00 for each such share for the purpose of enabling the Fund to vote on the matters referred to in paragraph (h) of this Section 3; (13) Submission of the matters referred to in paragraph (h) of this Section 3 to the Fund as sole shareholder of each class of the Trust; and (14) Authorization of the issuance and delivery by the Trust of shares of the Trust on the Effective Date of the Reorganization and the assumption by the Trust of the Liabilities of the Fund in exchange for the Assets of the Fund pursuant to the terms and provisions of this Agreement. At any time prior to the Closing, any of the foregoing conditions may be waived or amended, or any additional terms and conditions may be fixed by the Board of Directors if, in the judgment of such Board, such waiver, amendment, term or condition will not affect in a materially adverse way the benefits intended to be accorded the shareholders of the Fund under this Agreement. 4. Dissolution of the Company. Promptly following the consummation of the distribution of each class of shares of the Trust to holders of the corresponding class of shares of the Fund under this Agreement, the officers of the Fund shall take all steps necessary under Maryland law to dissolve its corporate status, including publication of any necessary notices to creditors, receipt of any necessary pre-dissolution clearances from the State of Maryland, and filing for record with the State Department of Assessments and Taxation of Maryland of Articles of Dissolution. 5. Termination. The Board of Directors may terminate this Agreement and abandon the reorganization contemplated hereby, notwithstanding approval thereof by the B-6 shareholders of the Fund, at any time prior to the Effective Date of the Reorganization if, in the judgment of such Board, the facts and circumstances make proceeding with this Agreement inadvisable. 6. Entire Agreement. This Agreement embodies the entire agreement between the parties hereto and there are no agreements, understandings, restrictions or warranties among the parties hereto other than those set forth herein or herein provided for. 7. Further Assurances. The Fund and the Trust shall take such further action as may be necessary or desirable and proper to consummate the transactions contemplated hereby. 8. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 9. Governing Law. This Agreement and the transactions contemplated hereby shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware. B-7 IN WITNESS WHEREOF, the Fund and the Trust have each caused this Agreement and Plan of Reorganization to be executed on its behalf by its Chairman, President or a Vice President and attested by its Secretary or an Assistant Secretary, all as of the day and year first-above written. Attest: TEMPLETON GLOBAL SMALLERCOMPANIES FUND, INC. (a Maryland corporation) By By ------------------------------------ ----------------------------------- Name: Name: Title: Title: TEMPLETON GLOBAL SMALLERCOMPANIES FUND Attest: (a Delaware statutory trust) By By ------------------------------------ ----------------------------------- Name: Name: Title: Title:

B-8 EXHIBIT C A COMPARISON OF GOVERNING DOCUMENTS AND STATE LAW A Comparison of: The Law Governing Delaware Statutory Trusts and The Charter Documents of Templeton Global Smaller Companies Fund Under Such Law With The Law Governing Maryland Corporations and The Charter Documents of Templeton Global Smaller Companies Fund, Inc. Under Such Law
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- Governing A Delaware statutory trust (a A Maryland corporation is created Documents/ "DST") is formed by a governing by filing articles of incorporation Governing instrument and the filing of a with the Maryland State Body certificate of trust with the Department of Assessments and Delaware Secretary of State Taxation ("MSDAT"). The ("Secretary of State"). The Maryland law governing Delaware law governing a DST is corporations is referred to in this referred to in this analysis as analysis as "Maryland Law." the "Delaware Act." A DST is an unincorporated A corporation is incorporated association organized under the under Maryland Law. A Delaware Act whose operations corporation's operations are are governed by its governing governed by its charter and by- instrument (which may consist of laws, and its business and affairs one or more instruments). Its are managed by or under the business and affairs are managed direction of a board of directors by or under the direction of one (the "board" or "board of or more trustees. directors" or collectively, the "directors"). No public filing of the by-laws is required. If a DST is, becomes, or will become prior to or within 180 days following its first issuance of beneficial interests, a registered investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), such DST is not required to have a
C-1
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- trustee who is a resident of Delaware or who has a principal place of business in Delaware provided that notice that the DST is or will become an investment company is set forth in the DST's certificate of trust and the DST has a registered office and a registered agent for service of process in Delaware. The governing instrument for the Templeton Global Smaller DST, Templeton Global Smaller Companies Fund, Inc., a Maryland Companies Fund (the "Trust"), is corporation, is referred to in this comprised of an agreement and analysis as the "Corporation." The declaration of trust ("Declaration") Corporation is governed by its and by-laws ("By-Laws"). The Articles of Incorporation, as Trust's governing body is a board amended and supplemented of trustees (the "board" or "board ("Charter"), and by-laws ("By- of trustees" or collectively, the Laws") and the Corporation's "trustees"). governing body is a board of directors. Each trustee of the Trust shall hold Directors of the Corporation are office for the lifetime of the Trust elected at an annual meeting of the or until such trustee's earlier stockholders, if held, and each death, resignation, removal or director is elected to serve for one inability otherwise to serve, or, if year and until his or her successor sooner than any such events, until shall be elected and shall qualify the next meeting of shareholders or until his or her earlier death, called for the purpose of electing resignation or removal. trustees or consent of shareholders in lieu thereof for the election of trustees, and until the election and qualification of his or her successor. Designation of Under the Delaware Act, the Equity securities of a corporation Ownership Shares ownership interests in a DST are are generally denominated as or Interests denominated as "beneficial shares of stock. Record owners of interests" and are held by shares of stock are stockholders. "beneficial owners." However, Generally, equity securities that there is flexibility as to how a have voting rights and are entitled governing instrument refers to to the residual assets of the "beneficial interests" and corporation, after payment of "beneficial owners" and the liabilities, are referred to as governing instrument may identify "common stock." "beneficial interests" and "beneficial owners" as "shares" and "shareholders," respectively.
C-2
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- The Trust's beneficial interests, The Corporation's equity without par value, are designated securities are shares of common as "shares" and its beneficial stock, par value $0.20 per share, owners are designated as and the owners of such stock are "shareholders." This analysis will "stockholders." use the "share" and "shareholder" terminology. Series and Under the Delaware Act, the The Maryland Law permits a Classes governing instrument may provide corporation to issue one or more for classes, groups or series of series and classes of stock. If the shares, shareholders or trustees, stock is to be divided into series or having such relative rights, powers classes, the charter must describe and duties as set forth in the each series and class, including governing instrument. Such series, any preferences, conversion or classes or groups may be other rights, voting powers, described in the DST's governing restrictions, limitations as to instrument or in resolutions dividends, qualifications and terms adopted by its trustees. No state or conditions of redemption filing is necessary and, unless among such classes and series. To required by the governing change the terms of an existing instrument, shareholder approval series or class or create a new is not needed. Except to the extent series or class, the charter must be otherwise provided in the amended. Generally, amendments governing instrument of a DST, to the charter must receive board where the DST is a registered and stockholder approval. investment company under the 1940 Act, any class, group or Under Maryland Law, the charter series of shares established by the may also authorize the board to governing instrument shall be a classify or reclassify any unissued class, group or series preferred as stock from time to time, without to distributions or dividends over stockholder approval, by setting or all other classes, groups or series changing the preferences, with respect to assets specifically conversion or other rights, voting allocated to such class, group or powers, restrictions, limitations as series as contemplated by Section to dividends, qualifications, or 18 (or any amendment or terms and conditions of successor provision) of the 1940 redemption, by filing articles Act and any regulations issued supplementary to the charter with thereunder. the MSDAT. The Declaration authorizes the The Charter authorizes the board, board of trustees to divide the subject to any applicable Trust's shares into separate and provisions of the 1940 Act, to distinct series and to divide a classify or to reclassify, from time series into separate classes of to time, any unissued shares of shares as permitted by the stock of the Corporation, by Delaware Act. Such series and setting, changing or eliminating classes will have the rights, the preference, conversion or
C-3
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- powers and duties set forth in the rights, voting powers, restrictions Declaration unless otherwise or limitations as to dividends, and provided in resolutions of the qualifications or terms and board with respect to such series conditions of or rights to require or class. The board of trustees may redemption of the stock and classify or reclassify any unissued pursuant to such classification, or shares or any shares of the Trust or reclassification, to increase or any series or class, that were decrease the number of authorized previously issued and are shares but the number of shares of reacquired, into one or more series any class shall not be reduced by or classes that may be established the board below the number of and designated from time to time. shares outstanding. The Declaration provides that the The Charter provides that, at such establishment and designation of times as may be determined by the any series or class shall be board (or with the authorization of effective, without the requirement the board, the officers of the of shareholder approval, upon the Corporation) in accordance with adoption of a resolution by not the 1940 Act, including Rule 18f-3 less than a majority of the then thereunder, and applicable rules board of trustees, which resolution and regulations of the National shall set forth such establishment Association of Securities Dealers, and designation and may provide, Inc., and reflected in the to the extent permitted by the Corporation's registration Delaware Act, for rights, powers statement, Class B shares may be and duties of such series or class converted automatically into Class (including variations in the A shares based on the relative net relative rights and preferences as asset values of such classes at the between the different series and time of conversion, subject, classes) otherwise than as however, to any conditions of provided in the Declaration. The conversion that may be imposed board of trustees has approved by the board (or with the resolutions that provide the authorization of the board, the shareholders of each series and officers of the Corporation) and class of the Trust with the same reflected in the registration conversion rights, and subject to statement. the same conditions of conversion, as the shareholders of the corresponding series and class of the Corporation. Assets and Liabilities Assets and Liabilities The Declaration also provides that The Charter also provides that the each series of the Trust shall be allocation of investment income, separate and distinct from any realized and unrealized capital other series of the Trust, shall gains and losses, and expenses and maintain separate and distinct liabilities of the Corporation records on the books of the Trust, among the classes of the and shall hold and account for the Corporation's shares and the
C-4
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- assets and liabilities belonging to determination of their respective any such series separately from the net asset values and rights upon assets and liabilities of the Trust or liquidation or dissolution of the any other series. Each class of a Corporation shall be determined series shall be separate and distinct conclusively by the board in a from any other class of the series. manner that is consistent with If any assets or liabilities which Rule 18f-3 of the 1940 Act and are not readily identifiable as any existing or future amendment assets or liabilities of a particular to that rule or any rule or series, then the board of trustees, interpretation under the 1940 Act or an appropriate officer as that modifies, is an authorized determined by the board of alternative to, or supersedes that trustees, shall allocate such assets rule. or liabilities to, between or among any one or more of the series in such manner and on such basis as the board of trustees, in its sole discretion, deems fair and equitable. Each such allocation by or under the direction of the board of trustees shall be conclusive and binding upon the shareholders of all series for all purposes. Liabilities, debts, obligations, costs, charges, reserves and expenses related to the distribution of, and other identified expenses that should properly be allocated to, the shares of a particular class may be charged to and borne solely by such class. The bearing of expenses solely by a particular class of shares may be appropriately reflected in (in a manner determined by the board of trustees), and may affect the net asset value attributable to, and the dividend, redemption and liquidation rights of, such class. Each allocation of liabilities, debts, obligations, costs, charges, reserves and expenses by or under the direction of the board of trustees shall be conclusive and binding upon the shareholders of all classes for all purposes.
C-5
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- Dividends and Distributions Dividends and Distributions The Declaration provides that no The Charter provides that the dividend or distribution including, dividends and distributions of without limitation, any distribution investment income and capital paid upon dissolution of the Trust gains with respect to each class of or of any series, nor any the stock of the Corporation shall redemption of, the shares of any be in such amount as may be series or class of such series shall declared from time to time by the be effected by the Trust other than board, and such dividends and from the assets held with respect distributions may vary from class to such series, nor, except as to class to reflect differing specifically provided in the allocations of the expenses of the Declaration, shall any shareholder Corporation among the classes, of any particular series otherwise and any resultant difference have any right or claim against the among the net asset value per assets held with respect to any share of the classes, to such extent other series or the Trust generally and for such purposes as the board except, in the case of a right or may deem appropriate. claim against the assets held with respect to any other series, to the The By-Laws provide that extent that such shareholder has dividends upon the capital stock of such a right or claim under the the Corporation, subject to the Declaration as a shareholder of provisions of the Charter, may be such other series. The shareholders declared by the board at any of the Trust or any series or class, regular or special meeting, if any, shall be entitled to receive pursuant to law. Before payment dividends and distributions when, of any dividend, there may be set if and as declared by the board of aside out of the net profits of the trustees, provided that with respect Corporation available for to classes, such dividends and dividends such sum or sums as the distributions shall comply with the board from time to time in its 1940 Act. The right of absolute discretion thinks proper shareholders to receive dividends as a reserve fund to meet or other distributions on shares of contingencies, or for equalizing any class may be set forth in a dividends, or for repairing or plan adopted by the board of maintaining any property of the trustees and amended from time to Corporation, or for such other time pursuant to the 1940 Act. purpose as the board shall think conducive to the interests of the No share shall have any priority or Corporation, and the board may preference over any other share of modify or abolish any such reserve the same series with respect to in the manner in which it was dividends or distributions paid in created. the ordinary course of business or distributions upon dissolution of the Trust or of such series made pursuant to the provisions of the Declaration; provided however, that if the shares of a series are
C-6
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- divided into classes, no share of a particular class shall have any priority or preference over any other share of the same class with respect to dividends or distributions paid in the ordinary course of business or distributions upon dissolution of the Trust or of such series made pursuant to the provisions of the Declaration. All dividends and distributions shall be made ratably among all shareholders of the Trust or a particular series from the property of the Trust held with respect to the Trust or such series; provided however, that if the shares of a series are divided into classes, all dividends and distributions from the property of the Trust held with respect to such series shall be distributed to each class of such series according to the net asset value computed for such class and within such particular class, shall be distributed ratably to the shareholders of such class. Dividends may be paid in cash or in kind. Before payment of any dividend there may be set aside out of any funds of the Trust, or the applicable series, available for dividends such sum or sums as the board of trustees may from time to time, in its absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Trust, or any series, or for such other lawful purpose as the board of trustees shall deem to be in the best interests of the Trust, or the applicable series, as the case may be, and the board of trustees may abolish any such reserve in the manner in which it was created.
C-7
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- Amendments to The Delaware Act provides broad Under Maryland Law, Governing flexibility as to the manner of amendments to the charter must Documents amending and/or restating the generally be approved by the governing instrument of a DST. board and by the affirmative vote Amendments to the Declaration of two-thirds of all votes entitled that do not change the information to be cast (unless the charter in the DST's certificate of trust are permits amendment by a higher or not required to be filed with the lesser proportion of the voting Secretary of State. stock, but not less than a majority of the shares outstanding). Declaration of Trust Charter The Declaration may be restated The Charter provides that the and/or amended at any time by a Charter may be amended, altered, written instrument signed by a repealed, or added to (including majority of the board of trustees any amendment which changes the and, if required by the Declaration, terms of any of the outstanding the 1940 Act or any securities stock by classification, exchange on which outstanding reclassification or otherwise) upon shares are listed for trading, by the vote of the holders of a approval of such amendment by majority of the shares outstanding the shareholders, by the and entitled to vote thereon. affirmative "vote of a majority of the outstanding voting securities" (as defined in the 1940 Act) of the Trust entitled to vote at a shareholders' meeting at which a quorum is present, subject to Article III, Section 6 of the Declaration relating to voting by series and classes. By-Laws By-Laws The By-Laws may be amended, Under Maryland Law, after the restated or repealed or new By- organizational meeting, the power Laws may be adopted by the to adopt, alter or repeal the by- affirmative vote of a majority of laws is vested in the stockholders, the outstanding shares entitled to except to the extent that the vote. The By-Laws may also be charter or by-laws vest such power amended, restated or repealed or in the board. new By-Laws may be adopted by the board of trustees, by a vote of The By-Laws may be adopted, a majority of the trustees present amended or repealed by "vote of at a meeting at which a quorum is the holders of a majority of the present. [Corporation's] stock" (as defined in the 1940 Act) at any annual or Certificate of Trust special meeting of the Pursuant to the Declaration, stockholders at which a quorum is amendments and/or restatements present or represented, provided of the certificate of trust shall be notice of the proposed amendment made at any time by the board of shall have been contained in the
C-8
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- trustees, without approval of the notice of the meeting. Directors shareholders, to correct any may adopt, amend or repeal any inaccuracy contained therein. Any By-Law (which is not inconsistent such amendments/restatements of with any By-Law adopted, the certificate of trust must be amended or repealed by executed by at least one (1) trustee stockholders) by majority vote of and filed with the Secretary of all of the directors in office at any State in order to become effective. regular meeting, or at any special meeting, in accordance with applicable law. Preemptive Under the Delaware Act, a Under Maryland Law, a Rights and governing instrument may contain stockholder does not have Redemption any provision relating to the preemptive rights unless the of Shares rights, duties and obligations of charter expressly grants such the shareholders. Unless otherwise rights. provided in the governing instrument, a shareholder shall have no preemptive right to subscribe to any additional issue of shares or another interest in a DST. The Declaration provides that no The Corporation does not provide shareholder shall have the stockholders with preemptive preemptive or other right to rights. subscribe for new or additional shares or other securities issued by the Trust or any series thereof. Unless otherwise provided in the The Charter provides stockholders Trust's prospectus relating to the the right to require the Corporation outstanding shares, as such to redeem outstanding shares prospectus may be amended from offered by the stockholder upon time to time, the Trust shall the stockholder's compliance with purchase the outstanding shares procedures set forth in the Charter. offered by any shareholder for The Corporation shall pay the net redemption upon such asset value of such shares, less any shareholder's compliance with the redemption fee fixed by the board procedures set forth in the and payable to the Corporation not Declaration and/or such other exceeding 1% of the net asset procedures as the board may value of the shares redeemed. authorize. The Trust shall pay the However, the board may suspend net asset value for such stockholders' redemption rights outstanding shares, subject to when permitted or required to do certain reductions for fees and so by the 1940 Act. The sales charges, in accordance with Corporation may pay a redeeming the Declaration, the By-Laws, the stockholder in portfolio securities 1940 Act and other applicable law. of the Corporation and/or cash, as The Trust's payments for such the board deems advisable, but outstanding shares shall be made stockholders do not have the right
C-9
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- in cash, but may, at the option of to require that the shares be the board of trustees or an redeemed in kind. In addition, the authorized officer, be made in board may cause the Corporation kind or partially in cash and to redeem the shares held in any partially in kind. In addition, at the account if the aggregate net asset option of the board of trustees, the value of such shares (taken at cost Trust may, from time to time, or value, as determined by the without the vote of the board) is less than such amount as shareholders, but subject to the the board may fix and, upon 1940 Act, redeem outstanding notice, the stockholder does not shares or authorize the closing of comply with such other terms and any shareholder account, subject conditions as may be fixed by the to such conditions as may be board, subject to the 1940 Act. established by the board of trustees. Dissolution and The Trust shall be dissolved upon See Voting Rights, Meetings, Termination the first to occur of the following: Notice, Quorum, Record Dates Events (i) upon the vote of the holders of and Proxies--Stockholder Vote a majority of the outstanding for the Maryland Law as to the shares of the Trust entitled to vote; stockholder vote required to (ii) at the discretion of the board of voluntarily dissolve a corporation. trustees at any time there are no shares outstanding of the Trust; Depending on the grounds for (iii) upon the sale, conveyance and involuntary dissolution, under transfer of all of the assets of the Maryland Law (i) stockholders Trust to another entity; or entitled to cast at least 25% of all (iv) upon the occurrence of a the votes entitled to be cast in the dissolution or termination event election of directors; (ii) any pursuant to any provision of the stockholder entitled to vote in the Delaware Act. election of directors; or (iii) any stockholder or creditor of the A particular series shall be corporation, may petition a court dissolved upon the first to occur of of equity to dissolve the the following: (i) upon the vote of corporation. the holders of a majority of the outstanding shares of that series entitled to vote; (ii) at the discretion of the board of trustees at any time there are no shares outstanding of that series; or (iii) upon any event that causes the dissolution of the Trust. A particular class shall be terminated upon the first to occur of the following: (i) upon the vote of the holders of a majority of the outstanding shares of that class entitled to vote; (ii) at the discretion of the board of trustees
C-10
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- at any time there are no shares outstanding of that class; or (iii) upon the dissolution of the series of which the class is a part. Liquidation Under the Delaware Act, a DST Under Maryland Law, a upon that has dissolved shall first pay corporation that has voluntarily Dissolution or make reasonable provision to pay dissolved shall pay, satisfy and or all known claims and obligations, discharge the existing debts and Termination including those that are obligations of the corporation, contingent, conditional and including necessary expenses of unmatured, and all known claims liquidation, before distributing the and obligations for which the remaining assets to the claimant is unknown. Any stockholders. remaining assets shall be distributed to the shareholders or as otherwise provided in the governing instrument. Under the Delaware Act, a series that has dissolved shall first pay or make reasonable provision to pay all known claims and obligations of the series, including those that are contingent, conditional and unmatured, and all known claims and obligations of the series for which the claimant is unknown. Any remaining assets of the series shall be distributed to the shareholders of such series or as otherwise provided in the governing instrument. The Declaration provides that any remaining assets of the dissolved Trust and/or each series thereof (or the particular dissolved series, as the case may be) shall be distributed to the shareholders of the Trust and/or each series thereof (or the particular dissolved series, as the case may be) ratably according to the number of outstanding shares of the Trust and/or such series thereof (or the particular dissolved series, as the case may be) held of record by the several shareholders on the date for such dissolution distribution;
C-11
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- provided, however, that if the outstanding shares of a series are divided into classes, any remaining assets held with respect to such series shall be distributed to each class of such series according to the net asset value computed for such class and within such particular class, shall be distributed ratably to the shareholders of such class according to the number of outstanding shares of such class held of record by the several shareholders on the date for such dissolution distribution. Voting Rights, Under the Delaware Act, the Meetings, governing instrument may set Notice, Quorum, forth any provision relating to Record Dates trustee and shareholder voting and Proxies rights, including the withholding of such rights from certain trustees or shareholders. If voting rights are granted, the governing instrument may contain any provision relating to meetings, notice requirements, written consents, record dates, quorum requirements, voting by proxy and any other matter pertaining to the exercise of voting rights. The governing instrument may also provide for the establishment of record dates for allocations and distributions by the DST. One Vote Per Share One Vote Per Share Subject to Article III, Section 6 of Under Maryland Law, unless a the Declaration relating to voting corporation's charter provides for by series and classes, the a greater or lesser number of votes Declaration provides that each per share, or limits or denies outstanding share is entitled to one voting rights, each outstanding vote and each outstanding share of stock is entitled to one fractional share is entitled to a vote on each matter submitted to a fractional vote. vote at a meeting of stockholders. A corporation may issue fractional shares of stock.
C-12
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- Voting by Series or Class The Charter provides that each In addition, the Declaration outstanding share of stock is provides that all outstanding entitled to one vote and each shares of the Trust entitled to vote outstanding fractional share of on a matter shall vote on the stock is entitled to a fractional matter, separately by series and, if vote, subject to Maryland Law and applicable, by class, provided that: 1940 Act requirements regarding (1) where the 1940 Act requires all voting by class. outstanding shares of the Trust to be voted in the aggregate without differentiation between the separate series or classes, then all of the Trust's outstanding shares shall vote in the aggregate; and (2) if any matter affects only the interests of some but not all series or classes, then only the shareholders of such affected series or classes shall be entitled to vote on the matter. Shareholders' Meetings Stockholders' Meetings The Delaware Act does not Under Maryland Law, every mandate annual shareholders' corporation must hold an annual meetings. stockholders' meeting to elect directors and transact other business, except that the charter or by-laws of a corporation registered under the 1940 Act may provide that an annual meeting is not required in any year in which the election of directors is not required by the 1940 Act. Maryland Law authorizes, and permits the charter and by-laws to authorize, certain persons to call special meetings of stockholders. The By-Laws authorize the calling The By-Laws do not require the of a shareholders' meeting: Corporation to hold an annual (i) when deemed necessary or meeting of stockholders in any desirable by the board of trustees; year in which the election of or (ii) to the extent permitted by directors is not required by the the 1940 Act, by the chairperson 1940 Act. Otherwise, the board is of the board, or at the request of authorized to hold annual holders of 10% of the outstanding meetings of stockholders for the shares if such shareholders pay the election of directors and the reasonably estimated cost of transaction of other business as it preparing and mailing the notice may determine. The By-Laws also thereof, for the purpose of electing authorize the calling of a special
C-13
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- trustees. However, no meeting meeting for any purpose or may be called at the request of purposes, unless otherwise shareholders to consider any "prescribed" by statute or the matter that is substantially the Charter, by resolution of the board same as a matter voted upon at a or the president, and shall be shareholders' meeting held during called by the president or the the preceding twelve (12) months, secretary upon the written request unless requested by holders of a of a majority of the directors or at majority of all outstanding shares the written request of stockholders entitled to vote at such meeting. owning 10% "in amount of the entire capital stock" of the Corporation then issued and outstanding, if (1) the request states the purpose of such meeting and the matters proposed to be acted on and (2) the stockholders requesting such meeting pay the reasonably estimated cost of preparing and mailing the notice thereof. However, no special meeting will be called at the request of stockholders to consider any matter that is substantially the same as a matter voted upon at a stockholders' special meeting held during the preceding 12 months, unless requested by holders of a majority of all outstanding shares entitled to vote at such meeting. Record Dates Record Dates As set forth above, the Delaware Under Maryland Law, unless the Act authorizes the governing by-laws otherwise provide, the instrument of a DST to set forth board may set a record date, which any provision relating to record date must be set within the dates. parameters outlined by the Maryland statute, for determining stockholders entitled to notice of a meeting, vote at a meeting, receive dividends or be allotted other rights. In order to determine the In order to determine the shareholders entitled to notice of, stockholders entitled to notice of, and to vote at, a shareholders' and to vote at, a stockholders' meeting, the Declaration meeting, the By-Laws authorize authorizes the board of trustees to the board of directors to fix a fix a record date. The record date record date not less than ten (10) may not precede the date on which nor more than ninety (90) days it is fixed by the board and it may prior to the date of the meeting or not be more than one hundred and prior to the last day on which the
C-14
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- twenty (120) days nor less than ten consent or dissent of stockholders (10) days before the date of the may be effectively expressed for shareholders' meeting. The By- any purpose without a meeting. Laws provide that notice of a shareholders' meeting shall be given to shareholders entitled to vote at such meeting not less than ten (10) nor more than one hundred and twenty (120) days before the date of the meeting. To determine the shareholders If the board does not fix a record entitled to vote on any action date, the record date shall be the without a meeting, the Declaration later of the close of business on authorizes the board of trustees to the day on which notice of the fix a record date. The record date meeting is mailed or the 30th day may not precede the date on which before the meeting, except if all it is fixed by the board nor may it stockholders waive notice, the be more than thirty (30) days after record date is the close of business the date on which it is fixed by the on the 10th day next preceding the board. day the meeting is held. Pursuant to the Declaration, if the board of trustees does not fix a record date: (a) the record date for determining shareholders entitled to notice of, and to vote at, a meeting will be the day before the date on which notice is given or, if notice is waived, on the day before the date of the meeting; (b) the record date for determining shareholders entitled to vote on any action by consent in writing without a meeting, (i) when no prior action by the board of trustees has been taken, shall be the day on which the first signed written consent is delivered to the Trust, or (ii) when prior action of the board of trustees has been taken, shall be the day on which the board of trustees adopts the resolution taking such prior action. To determine the shareholders of To determine the stockholders the Trust or any series or class entitled to a dividend, any other thereof entitled to a dividend or distribution, or delivery of any other distribution of assets of evidences of rights or other the Trust or any series or class interests from the Corporation, the thereof, the Declaration authorizes By-Laws authorize the board to
C-15
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- the board of trustees to fix a record fix a record date not exceeding date. The record date may not ninety (90) days preceding the precede the date on which it is date fixed for the payment of the fixed by the board nor may it be dividend or distribution or more than sixty (60) days before delivery of the evidences. the date such dividend or distribution is to be paid. The board may set different record dates for different series or classes. Quorum for Shareholders' Quorum for Stockholders' Meeting Meeting To transact business at a Under Maryland Law, unless the shareholders' meeting, the charter or Maryland Law provides Declaration provides that forty otherwise, in order to constitute a percent (40%) of the outstanding quorum for a meeting, there must shares entitled to vote at the be present in person or by proxy, meeting, which are present in stockholders entitled to cast a person or represented by proxy, majority of all the votes entitled to shall constitute a quorum at such be cast at the meeting. meeting, except when a larger quorum is required by the To transact business at a meeting, Declaration, the By-Laws, the By-Laws provide that a applicable law or any securities majority of the outstanding shares exchange on which such shares entitled to vote, which are present are listed for trading, in which in person or represented by proxy, case such quorum shall comply shall constitute a quorum at a with such requirements. When a stockholders' meeting. separate vote by one or more series or classes is required, forty percent (40%) of the outstanding shares of each such series or class entitled to vote at a shareholders' meeting of such series or class, which are present in person or represented by proxy, shall constitute a quorum at such series or class meeting, except when a larger quorum is required by the Declaration, the By-Laws, applicable law or the requirements of any securities exchange on which outstanding shares of such series or class are listed for trading, in which case such quorum shall comply with such requirements.
C-16
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- Shareholder Vote Stockholder Vote The Declaration provides that, Under Maryland Law, for most subject to any provision of the stockholder actions, unless the Declaration, the By-Laws, the charter or Maryland Law provides 1940 Act or other applicable law otherwise, a majority of all votes that requires a different vote: (i) in cast at a meeting at which a all matters other than the election quorum is present is required to of trustees, the affirmative "vote approve any matter. Actions such of a majority of the outstanding as (i) amendments to the voting securities" (as defined in corporation's charter, (ii) mergers, the 1940 Act) of the Trust entitled (iii) consolidations, (iv) statutory to vote at a shareholders' meeting share exchanges, (v) transfers of at which a quorum is present, shall assets and (vi) dissolutions require be the act of the shareholders; and the affirmative vote of two-thirds (ii) trustees shall be elected by a of all votes entitled to be cast on plurality of the votes cast of the the matter unless the charter holders of outstanding shares provides for a lesser proportion entitled to vote present in person which may not be less than a or represented by proxy at a majority of all votes entitled to be shareholders' meeting at which a cast on the matter. Unless the quorum is present. Pursuant to the charter or by-laws require a Declaration, where a separate vote greater vote, a plurality of all votes by series and, if applicable, by cast at a meeting at which a classes is required, the preceding quorum is present is required to sentence shall apply to such elect a director. separate votes by series and classes. Election of Directors. Under the By-Laws, at a stockholders' meeting at which a quorum is present, a majority of the votes cast shall be required to fill any vacancy on the board, unless express provisions of applicable statutes, of the Charter or of the By-Laws require a different vote. As described in Vacancies on Board of Trustees/Directors below, the By-Laws provide for a different vote to fill vacancies after shareholders have voted to increase the number of directors or to remove a director.
C-17
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- Other matters for which the vote is not expressly designated otherwise. For all other matters, other than any specific matter for which the Charter or By-Laws expressly provides for a different vote, the affirmative vote of the holders of a majority of the shares cast, at a stockholders' meeting at which a quorum is present, shall be the act of the stockholders. Shareholder Vote on Certain Transactions Pursuant to the Declaration, the board of trustees, by vote of a majority of the trustees, may cause the merger, consolidation, conversion, share exchange or reorganization of the Trust, or the conversion, share exchange or reorganization of any series of the Trust, without the vote of the shareholders of the Trust or such series, as applicable, unless such vote is required by the 1940 Act; provided however, that the board of trustees shall provide 30 days' prior written notice to the shareholders of the Trust or such series, as applicable, of such merger, consolidation, conversion, share exchange or reorganization. If permitted by the 1940 Act, the board of trustees, by vote of a majority of the trustees, and without a shareholder vote, may cause the Trust to convert to a master feeder structure and thereby cause series of the Trust to either become feeders into a master fund, or to become master funds into which other funds are feeders. Cumulative Voting Cumulative Voting The Declaration provides that Maryland Law provides that the shareholders are not entitled to charter may authorize cumulative cumulate their votes on any voting for the election of the matter. directors and if the charter does not so provide, then the stockholders are not entitled to cumulative voting rights.
C-18
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- The Charter and By-Laws do not have any provisions as to whether stockholders are entitled to cumulate their votes on any matter and consequently, the stockholders are not entitled to cumulate their votes on any matter. Proxies Proxies Under the Delaware Act, unless Under Maryland Law, a otherwise provided in the stockholder may sign a writing governing instrument of a DST, on authorizing another person to act any matter that is to be voted on as a proxy or may transmit such by the trustees or the shareholders, authorization by telegram, the trustees or shareholders (as cablegram, datagram, electronic applicable) may vote in person or mail, or any other electronic or by proxy and such proxy may be telephonic means. granted in writing, by means of "electronic transmission" (as defined in the Delaware Act) or as otherwise permitted by applicable law. Under the Delaware Act, the term "electronic transmission" is defined as any form of communication not directly involving the physical transmission of paper that creates a record that may be retained, retrieved and reviewed by a recipient thereof and that may be directly reproduced in paper form by such a recipient through an automated process. The By-Laws permit a shareholder The By-Laws require a proxy to to authorize another person to act be executed in writing by the as proxy by the following stockholder or by a duly methods: execution of a written authorized attorney-in-fact. Unless instrument or by "electronic a proxy provides otherwise, it is transmission" (as defined in the not valid more than 11 months Delaware Act), telephonic, after its date. A proxy is revocable computerized, telecommunications by the person executing it or by or another reasonable alternative his or her personal representatives to the execution of a written or assigns. Proxies shall be instrument. Unless a proxy delivered prior to the meeting to provides otherwise, it is not valid the Secretary of the Corporation or more than 11 months after its date. to the person acting as Secretary In addition, the By-Laws provide of the meeting before being voted. that the revocability of a proxy A proxy with respect to stock held that states on its face that it is in the name of two or more irrevocable shall be governed by persons will be valid if executed the provisions of the general by one of them, unless at or prior
C-19
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- corporation law of the State of to its exercise, the Corporation Delaware. receives specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless it is challenged at or prior to its exercise. Action by Written Consent Action by Written Consent Under the Delaware Act, unless Maryland Law provides that any otherwise provided in the action required or permitted to be governing instrument of a DST, on taken at a stockholders' meeting any matter that is to be voted on may be taken without a meeting, if by the trustees or the shareholders, a unanimous written consent is such action may be taken without signed by each stockholder a meeting, without prior notice entitled to vote on the matter. and without a vote if a written consent(s), setting forth the action taken, is signed by the trustees or shareholders (as applicable) having the minimum number of votes that would be necessary to take such action at a meeting at which all trustees or interests in the DST (as applicable) entitled to vote on such action were present and voted. Unless otherwise provided in the governing instrument, a consent transmitted by "electronic transmission" (as defined in the Delaware Act) by a trustee or shareholder (as applicable) or by a person authorized to act for a trustee or shareholder (as applicable) will be deemed to be written and signed for this purpose. Shareholders. The Declaration Stockholders. The By-Laws authorizes shareholders to take provide that any action to be taken action without a meeting and by stockholders may be taken without prior notice if written without a meeting if: (1) all consents setting forth the action stockholders entitled to vote on the taken are signed by the holders of matter consent to the action in all outstanding shares entitled to writing; (2) all stockholders vote on that action. A consent entitled to notice of the meeting transmitted by "electronic but not entitled to vote at it sign a transmission" (as defined in the written waiver of any right to Delaware Act) by a shareholder or dissent; and (3) the consents and by a person(s) authorized to act for waivers are filed with the record a shareholder shall be deemed to of the meetings of stockholders.
C-20
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- be written and signed for purposes Such consent shall be treated for of this provision. all purposes as a vote of the meeting. Board of Trustees. The Board of Directors. The By-Laws Declaration also authorizes the also provide that, except as board of trustees or any committee otherwise required by statute, the of the board of trustees to take board or any committee of the action without a meeting and board may act by written consent without prior written notice if signed by all the members of the written consents setting forth the board or committee, respectively, action taken are executed by if the consent is filed with the trustees having the number of minutes of the proceedings of the votes necessary to take that action board or committee. at a meeting at which the entire board of trustees or any committee thereof, as applicable, is present and voting. A consent transmitted by "electronic transmission" (as defined in the Delaware Act) by a trustee shall be deemed to be written and signed for purposes of this provision. Removal of Trustees/ The governing instrument of a Under Maryland Law, unless Directors DST may contain any provision otherwise provided in the charter, relating to the removal of trustees; a director may generally be provided however, that there shall removed with or without cause by at all times be at least one trustee the vote of a majority of all the of the DST. votes entitled to be cast generally for the election of directors unless (i) such director is elected by a certain class or series, (ii) the charter provides for cumulative voting or (iii) the board is classified. Under the Declaration, any trustee Under the By-Laws, stockholders may be removed, with or without may remove any director or cause, by the board of trustees, by directors with or without cause at action of a majority of the trustees. a meeting of stockholders duly Shareholders shall have the power called and at which a quorum is to remove a trustee only to the present, by the affirmative vote of extent provided by the 1940 Act. the holders of a majority of the votes entitled to be cast thereon, remove any director or directors from office, and may elect a successor or successors to fill any resulting vacancies for the unexpired terms of the removed directors. A stockholders' meeting shall be called for such purpose by
C-21
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- board if requested in writing by holders of not less than 10% of the outstanding shares of the Corporation. Vacancies on Board Subject to the 1940 Act, vacancies Under Maryland Law, of Trustees/ on the board of trustees may be stockholders may elect persons to Directors filled by not less than a majority fill vacancies that result from the vote of the trustee(s) then in removal of directors. Unless the office, regardless of the number charter or by-laws provide and even if less than a quorum. otherwise, a majority of the However, a shareholders' meeting directors in office, whether or not shall be called to elect trustees if comprising a quorum, may fill required by the 1940 Act. vacancies that result from any cause except an increase in the number of directors. A majority of the entire board of directors may fill vacancies that result from an increase in the number of directors. In the event all trustee offices Under the By-Laws, directors may become vacant, the investment increase or decrease their number; adviser shall serve as the sole if the number is increased, the remaining trustee, subject to the added directors may be elected by provisions of the 1940 Act, and a majority of directors in office at shall, as soon as practicable, fill all the time of the increase. For other of the vacancies on the board. vacancies, the directors then in Thereupon, the investment adviser office (although less than a shall resign as trustee and a quorum) shall continue to act and shareholders' meeting shall be may by a majority vote fill any called to elect trustees. vacancy until the next meeting of stockholders, subject to the 1940 Act. The number of directors may also be increased or decreased by vote of stockholders at any meeting called for that purpose and if the vote is to increase the number, stockholders will vote by plurality to elect the directors to fill the new vacancies as well as any then existing vacancies. The By-Laws further provide that "[a]ny vacancy may be filled by the [s]tockholders at any meeting thereof."
C-22
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- Shareholder Under the Delaware Act, except to The stockholders of a corporation Liability the extent otherwise provided in are not liable for the obligations of the governing instrument of a the corporation. DST, shareholders of a DST are entitled to the same limitation of personal liability extended to shareholders of a private corporation organized for profit under the General Corporation Law of the State of Delaware (such shareholders are generally not liable for the obligations of the corporation). Under the Declaration, shareholders are entitled to the same limitation of personal liability as that extended to shareholders of a private corporation organized for profit under the General Corporation Law of the State of Delaware. However, the board of trustees may cause any shareholder to pay for charges of the trust's custodian or transfer, dividend disbursing, shareholder servicing or similar agent for services provided to such shareholder. Trustee/Director/ Subject to the provisions in the Maryland Law requires a director Agent Liability governing instrument, the to perform his or her duties in Delaware Act provides that a good faith, in a manner he or she trustee or any other person reasonably believes to be in the managing the DST, when acting in best interests of the corporation such capacity, will not be and with the care that an ordinarily personally liable to any person prudent person in a like position other than the DST or a would use under similar shareholder of the DST for any circumstances. A director who act, omission or obligation of the performs his or her duties in DST or any trustee. To the extent accordance with this standard has that at law or in equity, a trustee no liability to the corporation, its has duties (including fiduciary stockholders or to third persons by duties) and liabilities to the DST reason of being or having been a and its shareholders, such duties director. A corporation may and liabilities may be expanded or include in its charter a provision restricted by the governing expanding or limiting the liability instrument. of its directors and officers for money damages to the corporation or its stockholders, provided
C-23
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- however, that liability may not be limited to the extent the person has received an improper benefit or profit in money, property or services or where such person has been actively and deliberately dishonest. The Declaration provides that any The Charter provides that no person who is or was a trustee, director or officer shall be officer, employee or other agent of personally liable to the the Trust or is or was serving at Corporation or its stockholders for the request of the Trust as a monetary damages except: (i) a trustee, director, officer, employee director or officer is liable for the or other agent of another amount of any improper benefit or corporation, partnership, joint profit in money, property or venture, trust or other enterprise services actually received; and (an "Agent") will be liable to the (ii) where a judgment or other Trust and to any shareholder final adjudication adverse to the solely for such Agent's own director or officer is entered in a willful misfeasance, bad faith, proceeding based on a finding that gross negligence or reckless such person's action, or failure to disregard of the duties involved in act, was the result of active and the conduct of such Agent (such deliberate dishonesty and was conduct referred to as material to the cause of action "Disqualifying Conduct"). Subject adjudicated in the proceeding. The to the preceding sentence, Agents Charter further provides that no will not be liable for any act or director or officer will be omission of any other Agent or protected from liability to the any investment adviser or Corporation or its stockholders principal underwriter of the Trust. arising from such director's or No Agent, when acting in such officer's Disqualifying Conduct. capacity, shall be personally liable to any person (other than the Trust or its shareholders as described above) for any act, omission or obligation of the Trust or any trustee. Indemnification Subject to such standards and Unless limited by its charter, restrictions contained in the Maryland Law requires a governing instrument of a DST, corporation to indemnify a the Delaware Act authorizes a director who has successfully DST to indemnify and hold defended a proceeding to which harmless any trustee, shareholder such person was a party because or other person from and against of such person's service in such any and all claims and demands. capacity, against reasonable expenses incurred in connection with the proceeding.
C-24
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- Maryland Law permits a corporation to indemnify a director, officer, employee or agent who is a party or threatened to be a party, by reason of service in that capacity, to any threatened, pending or completed action, suit or proceeding, against judgments, penalties, fines, settlements and reasonable expenses unless it is established that: (i) the act or omission of such person was material to the matter giving rise to the proceeding, and was committed in bad faith or was the result of active and deliberate dishonesty; (ii) such person actually received an improper personal benefit; or (iii) such person had reasonable cause to believe that the act or omission was unlawful. This permissible indemnification obligation may be provided for, or may be prohibited, through a corporation's charter, by-laws, a board resolution or another agreement. However, if the proceeding is a derivative suit or was brought by the corporation, the corporation may not indemnify a person who has been adjudged to be liable to the corporation. Corporations are authorized to advance payment of reasonable expenses upon compliance with certain requirements. Pursuant to the Declaration, the The By-Laws provide that the Trust will indemnify any Agent Corporation will indemnify its: who was or is a party or is (i) directors to the fullest extent threatened to be made a party to that indemnification of directors is any proceeding by reason of such permitted by Maryland Law; Agent's capacity, against (ii) officers to the same extent as attorneys' fees and other certain its directors and to such further expenses, judgments, fines, extent as is consistent with law; settlements and other amounts and (iii) directors and officers incurred in connection with such who, while serving as directors or proceeding if such Agent acted in officers, also serve at the request
C-25
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- good faith or in the case of a of the Corporation as a director, criminal proceeding, had no officer, partner, trustee, employee, reasonable cause to believe such agent or fiduciary of another Agent's conduct was unlawful. corporation, partnership, joint However, there is no right to venture, trust, other enterprise or indemnification for any liability employee benefit plan to the arising from the Agent's fullest extent consistent with law. Disqualifying Conduct. As to any This indemnification (and other matter for which such Agent is rights) provided by the By-Laws found to be liable in the will continue as to persons who performance of such Agent's duty have ceased to be a director or to the Trust or its shareholders, officer, includes the advance of indemnification will be made only reasonable expenses subject to to the extent that the court in certain conditions, and will inure which that action was brought to the benefit of the heirs, determines that in view of all the executors and administrators of circumstances of the case, the such persons, but such persons Agent was not liable by reason of will not be protected against any such Agent's Disqualifying liability to the Corporation or its Conduct. Note that the Securities stockholders arising from his or Act of 1933, as amended (the her Disqualifying Conduct. The "1933 Act"), in the opinion of the Corporation may indemnify, and U.S. Securities and Exchange advance reasonable expenses to, Commission ("SEC"), and the its employees and agents who are 1940 Act also limit the ability of not officers or directors of the the Trust to indemnify an Agent. Corporation as may be provided by the board of directors or by Expenses incurred by an Agent in contract, subject to any limitations defending any proceeding may be imposed by the 1940 Act. The By- advanced by the Trust before the Laws permit the board of directors final disposition of the proceeding to make such additional provisions on receipt of an undertaking by or for the indemnification and on behalf of the Agent to repay the advancement of expenses to amount of the advance if it is directors, officers, employees and ultimately determined that the agents, as are consistent with the Agent is not entitled to law. The indemnification provided indemnification by the Trust. by the By-Laws is not exclusive of any other right, with respect to indemnification or otherwise, to which those seeking indemnification may be entitled under any insurance or other agreement or resolution of stockholders or disinterested directors or otherwise. Insurance The Delaware Act is silent as to Under Maryland Law, a the right of a DST to purchase corporation may purchase insurance on behalf of its trustees insurance on behalf of any person
C-26
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- or other persons. However, as the who is or was a director, officer, policy of the Delaware Act is to employee or agent against any give maximum effect to the liability asserted against and principle of freedom of contract incurred by such person in any and to the enforceability of such capacity whether or not the governing instruments, the corporation would have the power Declaration authorizes the board to indemnify such person against of trustees, to the fullest extent such liability. permitted by applicable law, to purchase with Trust assets, The By-Laws authorize the insurance for liability and for all Corporation to purchase and expenses of an Agent in maintain insurance on behalf of connection with any proceeding in any person who is or was a which such Agent becomes director, officer, employee or involved by virtue of such Agent's agent of the Corporation or who, actions, or omissions to act, in its while a director, officer, capacity or former capacity with employee, or agent of the the Trust, whether or not the Trust Corporation, is or was serving at would have the power to the request of the Corporation as a indemnify such Agent against director, officer, partner, trustee, such liability. employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan against any liability asserted against and incurred by such person in any such capacity or arising out of such person's position. However, no insurance may be purchased which would indemnify any director or officer against any liability to the Corporation or its stockholders arising from such person's Disqualifying Conduct. Shareholder Under the Delaware Act, except to Under Maryland Law, a Right of the extent otherwise provided in stockholder may inspect, during Inspection the governing instrument and usual business hours, the subject to reasonable standards corporation's by-laws, stockholder established by the trustees, each proceeding minutes, annual shareholder has the right, upon statements of affairs and voting reasonable demand for any trust agreements. In addition, purpose reasonably related to the stockholders who have shareholder's interest as a individually or together been shareholder, to obtain from the holders of at least 5% of the DST certain information regarding outstanding stock of any class for the governance and affairs of the at least 6 months, may inspect and DST. copy the corporation's books of account, its stock ledger and its statement of affairs.
C-27
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- To the extent permitted by The Charter grants stockholders Delaware law and the By-Laws, a inspection rights only to the extent shareholder, upon reasonable provided by Maryland Law. Such written demand to the Trust for rights are subject to reasonable any purpose reasonably related to regulations of the board of such shareholder's interest as a directors not contrary to Maryland shareholder, may inspect certain Law. information as to the governance and affairs of the Trust during regular business hours. However, reasonable standards governing, without limitation, the information and documents to be furnished and the time and location of furnishing the same, will be established by the board or any officer to whom such power is delegated in the By- Laws. In addition, as permitted by the Delaware Act, the By-Laws also authorize the board or an officer to whom the board delegates such powers to keep confidential from shareholders for such period of time as deemed reasonable any information that the board or such officer in good faith believes would not be in the best interest of the Trust to disclose or that could damage the Trust or that the Trust is required by law or by agreement with a third party to keep confidential. Derivative Under the Delaware Act, a Under Maryland Law, in order to Actions shareholder may bring a derivative bring a derivative action, a action if trustees with authority to stockholder (or his or her do so have refused to bring the predecessor if he or she became a action or if a demand upon the stockholder by operation of law) trustees to bring the action is not must be a stockholder (a) at the likely to succeed. A shareholder time of the acts or omissions may bring a derivative action only complained about, (b) at the time if the shareholder is a shareholder the action is brought, and (c) until at the time the action is brought the completion of the litigation. A and: (i) was a shareholder at the derivative action may be brought time of the transaction complained by a stockholder if (i) a demand about or (ii) acquired the status of upon the board of directors to shareholder by operation of law or bring the action is improperly pursuant to the governing refused or (ii) a request upon the instrument from a person who was board of directors would be futile. a shareholder at the time of the
C-28
Delaware Statutory Trust Maryland Corporation ------------------------ -------------------- Derivative transaction. A shareholder's right Under Maryland Law, a director Actions to bring a derivative action may be of an investment company who "is subject to such additional not an interested person, as standards and restrictions, if any, defined by the 1940 Act, shall be as are set forth in the governing deemed to be independent and instrument. disinterested when making any determination or taking any action The Declaration provides that, as a director." subject to the requirements set forth in the Delaware Act, a shareholder may bring a derivative action on behalf of the Trust only if the shareholder first makes a pre-suit demand upon the board of trustees to bring the subject action unless an effort to cause the board of trustees to bring such action is excused. A demand on the board of trustees shall only be excused if a majority of the board of trustees, or a majority of any committee established to consider the merits of such action, has a material personal financial interest in the action at issue. A trustee shall not be deemed to have a material personal financial interest in an action or otherwise be disqualified from ruling on a shareholder demand by virtue of the fact that such trustee receives remuneration from his service on the board of trustees of the Trust or on the boards of one or more investment companies with the same or an affiliated investment advisor or underwriter. Management The Trust is an open-end The Corporation is an open-end Investment management investment company management investment company Company under the 1940 Act (i.e., a under the 1940 Act (i.e., a Classification management investment company management investment company whose securities are redeemable). whose securities are redeemable).
C-29 EXHIBIT D FUNDAMENTAL INVESTMENT RESTRICTIONS PROPOSED TO BE AMENDED OR ELIMINATED
CURRENT INVESTMENT CURRENT PROPOSED RESTRICTION FUNDAMENTAL FUNDAMENTAL PROPOSAL OR NUMBER & RESTRICTION RESTRICTION SUB-PROPOSAL SUBJECT The Fund may not: The Fund may not: ------------ ------------------- --------------------------------- -------------------------------- 3a 1. (Diversification Invest more than 5% of its Purchase the securities of any of investments) total assets in the securities of one issuer (other than the U.S. any one issuer (exclusive of government or any of its U.S. government securities). agencies or instrumentalities or securities of other investment companies, whether registered or excluded from registration under Section 3(c) of the 1940 Act) if immediately after such investment (a) more than 5% of the value of the Fund's total assets would be invested in such issuer or (b) more than 10% of the outstanding voting securities of such issuer would be owned by the Fund, except that up to 25% of the value of the Fund's total assets may be invested without regard to such 5% and 10% limitations. 3b 2. (Real Estate) Invest in real estate or Purchase or sell real estate mortgages on real estate unless acquired as a result of (although the Fund may ownership of securities or invest in marketable other instruments and securities secured by real provided that this restriction estate or interests therein). does not prevent the Fund from purchasing or selling securities secured by real estate or interests therein or securities of issuers that invest, deal or otherwise engage in transactions in real estate or interests therein. 4 2. (Investment in Invest in other open-end Proposed to be Eliminated. Other Investment investment companies Companies) (except in connection with a Note: The Fund will still be merger, consolidation, subject to the restrictions of acquisition or reorganization) (S) 12(d) of the 1940 Act, or or, as an operating policy any rules or exemptions or
D-1
CURRENT INVESTMENT CURRENT PROPOSED RESTRICTION FUNDAMENTAL FUNDAMENTAL PROPOSAL OR NUMBER & RESTRICTION RESTRICTION SUB-PROPOSAL SUBJECT The Fund may not: The Fund may not: ------------ ---------------- ------------------------------- -------------------------------- approved by the board, invest interpretations thereunder that in closed-end investment may be adopted, granted or companies. issued by the SEC, which restrict an investment company's investments in other investment companies. 4 2. (Oil and Gas Invest in interests (other than Proposed to be Eliminated. Programs) publicly issued debentures or equity stock interests) in oil, gas or other mineral exploration or development programs. 3c 2. (Commodities) Purchase or sell commodity Purchase or sell physical contracts. commodities, unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from engaging in transactions involving currencies and futures contracts and options thereon or investing in securities or other instruments that are secured by physical commodities. 4 3. (Management Purchase or retain securities Proposed to be Eliminated. Ownership of of any company in which Securities) directors or officers of the Fund or of the manager, individually owning more than 1/2 of 1% of the securities of such company, in the aggregate own more than 5% of the securities of such company. 4 4. (Control) Purchase more than 10% of Proposed to be Eliminated. any class of securities of any Note: The Fund will be one company, including more subject to the fundamental than 10% of its outstanding investment restriction on voting securities, or invest in diversification described in any company for the purpose Sub-Proposal 3a above. of exercising control or management.
D-2
CURRENT INVESTMENT CURRENT PROPOSED RESTRICTION FUNDAMENTAL FUNDAMENTAL PROPOSAL OR NUMBER & RESTRICTION RESTRICTION SUB-PROPOSAL SUBJECT The Fund may not: The Fund may not: ------------ ----------------- ------------------------------- -------------------------------- 3d 5. (Underwriting) Act as an underwriter. Act as an underwriter except to the extent the Fund may be deemed to be an underwriter when disposing of securities it owns or when selling its own shares. 3e 5. (Senior Issue senior securities. Issue senior securities, except Securities) to the extent permitted by the 1940 Act and any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC. 4 5. (Purchase Purchase on margin or sell Proposed to be Eliminated. Securities on short; write, buy or sell puts, Margin, Short calls, straddles or spreads. Note: The Fund will still be Sales and Write, subject to the fundamental Buy or Sell investment restriction on Options) issuing senior securities described in Sub-Proposal 3e above. 3f 6. (Lending) Loan money, apart from the Make loans to other persons purchase of a portion of an except (a) through the lending issue of publicly distributed of its portfolio securities, bonds, debentures, notes and (b) through the purchase of other evidences of debt securities, loan indebtedness, although the participations and/or engaging Fund may buy U.S. in direct corporate loans in government obligations with accordance with its investment a simultaneous agreement objectives and policies, and with the seller to repurchase (c) to the extent the entry into them within no more than a repurchase agreement is seven days at the original deemed to be a loan. The Fund repurchase price plus accrued may also make loans to other interest. investment companies to the extent permitted by the 1940 Act or any rules or exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC. 3g 7. (Borrowing) Borrow money for any Borrow money, except to the purpose other than redeeming extent permitted by the its shares for cancellation, 1940 Act or any rules,
D-3
CURRENT INVESTMENT CURRENT PROPOSED RESTRICTION FUNDAMENTAL FUNDAMENTAL PROPOSAL OR NUMBER & RESTRICTION RESTRICTION SUB-PROPOSAL SUBJECT The Fund may not: The Fund may not: ------------ ------------------ ------------------------------- ------------------------------- and then only as a temporary exemptions or interpretations measure up to an amount not thereunder that may be exceeding 5% of the value of adopted, granted or issued by its total assets; or pledge, the SEC. mortgage, or hypothecate its assets for any purpose other than to secure such borrowings, and then only to such extent not exceeding 10% of the value of its total assets as the board of directors may by resolution approve. The Fund will not pledge, mortgage or hypothecate its assets to the extent that at any time the percentage of pledged assets plus the sales commission will exceed 10% of the offering price of its shares. 4 8. (Three Years of Invest more than 5% of the Proposed to be Eliminated. Company value of its total assets in Operation) securities of issuers which have been in continuous operation less than three years. 4 9. (Warrants) Invest more than 5% of its Proposed to be Eliminated. total assets in warrants whether or not listed on the New York Stock Exchange or American Stock Exchange, and more than 2% of its total assets in warrants that are not listed on those exchanges. Warrants acquired by the Fund in units or attached to securities are not included in this restriction. 4 10. (Illiquid and Invest more than 10% of its Proposed to be Eliminated. Restricted total assets in restricted Securities) securities, securities with a Note: The Board has adopted limited trading market (which the non-fundamental Illiquid the Fund may not be able to Securities Restriction, dispose of at the current consistent with the SEC staff's
D-4
CURRENT INVESTMENT CURRENT PROPOSED RESTRICTION FUNDAMENTAL FUNDAMENTAL PROPOSAL OR NUMBER & RESTRICTION RESTRICTION SUB-PROPOSAL SUBJECT The Fund may not: The Fund may not: ------------ -------------- ------------------------------- -------------------------------- market price) or those which current position on illiquid are not otherwise readily securities, which prohibits the marketable with readily Fund from investing more available current market than 15% of its net assets in quotations. illiquid securities. 3h 11. (Industry Invest more than 25% of its Invest more than 25% of its Concentration) total assets in a single net assets in securities of industry. issuers in any one industry (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities of other investment companies). 4 12. ("Letter" Invest in "letter" stocks or Proposed to be Eliminated. Stocks) securities on which there are any sales restrictions under a Note: The Board has adopted purchase agreement. the non-fundamental Illiquid Securities Restriction, consistent with the SEC staff's current position on illiquid securities, which prohibits the Fund from investing more than 15% of its net assets in illiquid securities. 4 13. (Joint Participate on a joint or a Proposed to be Eliminated. Accounts) joint and several basis in any trading account in securities. (See "Portfolio Transactions" [in the SAI] as to transactions in the same securities for the Fund, other clients and/or other mutual funds within Franklin Templeton Investments.)*
-------- * This disclosure states that if purchases or sales of securities of the Fund and one or more other investment companies or clients supervised by the [Investment Manager] are considered at or about the same time, transactions in these securities will be allocated among the several investment companies and clients in a manner deemed equitable to all by the [Investment Manager], taking into account the respective sizes of the funds and the amount of securities to be purchased or sold. D-5 103 PROXY 01/04 PROXY PROXY TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. SPECIAL MEETING OF SHAREHOLDERS - MARCH 19, 2004 The undersigned hereby revokes all previous proxies for his/her shares and appoints BARBARA J. GREEN, ROBERT C. ROSSELOT and LORI A. WEBER, and each of them, proxies of the undersigned with full power of substitution to vote all shares of Templeton Global Smaller Companies Fund, Inc. (the "Fund"), that the undersigned is entitled to vote at the Fund's Special Meeting of Shareholders (the "Meeting") to be held at 500 East Broward Blvd., 12th Floor, Fort Lauderdale, Florida 33394 at 2:00 p.m., Eastern time, on the 19th day of March 2004, including any postponements or adjournments thereof, upon the matters set forth below and instructs them to vote upon any matters that may properly be acted upon at the Meeting. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. IT WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS PROXY SHALL BE VOTED FOR PROPOSALS 1 (INCLUDING ALL NOMINEES FOR DIRECTOR), 2, 3 (INCLUDING EIGHT (8) SUB-PROPOSALS) AND 4. IF ANY OTHER MATTERS PROPERLY COME BEFORE THE MEETING TO BE VOTED ON, THE PROXY HOLDERS WILL VOTE, ACT AND CONSENT ON THOSE MATTERS IN ACCORDANCE WITH THE VIEWS OF MANAGEMENT. VOTE VIA THE INTERNET: WWW.FRANKLINTEMPLETON.COM VOTE VIA THE TELEPHONE: 1-866-241-6192 999 9999 9999 999 PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ON THIS PROXY. IF SIGNING FOR ESTATES, TRUSTS OR CORPORATIONS, TITLE OR CAPACITY SHOULD BE STATED. IF SHARES ARE HELD JOINTLY, EACH HOLDER SHOULD SIGN. ------------------------------------------------------ Signature ------------------------------------------------------ Signature ------------------------------------------------, 2004 Dated TGSCF_13893 I PLAN TO ATTEND THE MEETING. YES NO [ ] [ ] (CONTINUED ON THE OTHER SIDE) PLEASE MARK YOURS VOTES AS INDICATED IN THIS EXAMPLE: [X] THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSALS 1 THROUGH 4.
PROPOSAL 1 - To elect a Board of Directors of the Fund: 01 Harris J. Ashton 05 Gordon S. Macklin 09 Nicholas F. Brady FOR all nominees WITHHOLD AUTHORITY 02 Frank J. Crothers 06 Fred R. Millsaps 10 Harmon E. Burns listed (except as to vote for all 03 S. Joseph Fortunato 07 Frank A. Olson 11 Charles B. Johnson marked to the left) nominees listed. 04 Edith E. Holiday 08 Constantine D. Tseretopoulos [ ] [ ]
TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S NAME ON THE LINE BELOW. ------------------------------------------------------------------------- PROPOSAL 2 - To approve an Agreement and Plan of Reorganization that provides for the Reorganization of the Fund from a Maryland corporation to a Delaware statutory trust. FOR AGAINST ABSTAIN [ ] [ ] [ ] PROPOSAL 3 - To approve amendments to certain of the Fund's fundamental investment restrictions (includes eight (8) Sub-Proposals): Sub-Proposal 3a. To amend the Fund's fundamental investment restriction regarding diversification of investments. FOR AGAINST ABSTAIN [ ] [ ] [ ] Sub-Proposal 3b. To amend the Fund's fundamental investment restriction regarding investments in real estate. FOR AGAINST ABSTAIN [ ] [ ] [ ] Sub-Proposal 3c. To amend the Fund's fundamental investment restriction regarding investments in commodities. FOR AGAINST ABSTAIN [ ] [ ] [ ] Sub-Proposal 3d. To amend the Fund's fundamental investment restriction regarding underwriting. FOR AGAINST ABSTAIN [ ] [ ] [ ] Sub-Proposal 3e. To amend the Fund's fundamental investment restriction regarding issuing senior securities. FOR AGAINST ABSTAIN [ ] [ ] [ ] Sub-Proposal 3f. To amend the Fund's fundamental investment restriction regarding lending. FOR AGAINST ABSTAIN [ ] [ ] [ ] Sub-Proposal 3g. To amend the Fund's fundamental investment restriction regarding borrowing. FOR AGAINST ABSTAIN [ ] [ ] [ ] Sub-Proposal 3h. To amend the Fund's fundamental investment restriction regarding industry concentration. FOR AGAINST ABSTAIN [ ] [ ] [ ] PROPOSAL 4 - To approve the elimination of certain of the Fund's fundamental investment restrictions. FOR AGAINST ABSTAIN [ ] [ ] [ ] IMPORTANT: PLEASE SIGN, DATE AND RETURN YOUR PROXY...TODAY