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Closed-end funds have been the target of significant shareholder activism. In its June 11 opinion in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., the U.S. Supreme Court curtailed a potent activist weapon and provided new protections for closed-end funds, holding that private parties cannot sue for rescission of contracts that allegedly violate the Investment Company Act (ICA).
The action was brought by Saba Capital, a regular closed-end fund activist. Saba challenged a common closed-end fund practice: opting into state control share statutes, which are anti-takeover laws that limit voting rights for blockholders unless other shareholders vote to restore them.
Saba’s argument was simple. The ICA requires every share of stock to “have equal voting rights with every other outstanding stock.” It also says, in Section 47(b), that “a court may not deny rescission at the instance of any party” of contracts that violate the ICA, unless denial of rescission would produce a more equitable result. Saba thus sued for rescission of the defendant funds’ decisions to opt into Maryland’s control share statute.
The U.S. District Court for the Southern District of New York and the U.S. Court of Appeals for the Second Circuit sided with Saba, but the Supreme Court reversed, holding that there is no implied private right of action under Section 47(b) of the ICA. In other words, shareholders like Saba cannot sue to rescind contracts that allegedly violate the ICA.
Things I'm watching:
1. The decision is part of a larger trend that has seen a significant transition of power from shareholders to management. We've seen this with Delaware, the SEC, and the Supreme Court — including this decision.
2. The Supreme Court’s decision was based in part on the lack of express language providing for a private right of action. You know what else doesn’t have an express private right of action? Section 10(b) and Rule 10b-5. A private right of action to enforce those provisions has been implied since the 1940s. Will that change?
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