Supreme Court Rejects Private Lawsuits Under Investment Company Act in Closed-End Fund Dispute

The U.S. Supreme Court on June 11 issued a 6-3 decision backing a set of closed-end investment funds in a dispute over whether private parties may bring suits under the Investment Company Act of 1940 to void fund bylaws that limit shareholder voting power.

The justices reversed a lower court ruling that had permitted hedge fund Saba Capital Master Fund to challenge bylaw provisions that capped the voting influence of large, activist shareholders. The funds involved include vehicles affiliated with BlackRock, FS Credit Opportunities and other asset managers, among them Adams Diversified Equity Fund, Adams Natural Resources Fund and Royce Global Trust.

At issue were so-called "control share bylaws," adopted by funds organized under Maryland law, which reduce the voting weight of shareholders who accumulate significant positions. Saba, an activist hedge fund managed by Boaz Weinstein, owns positions in several of the funds and filed challenges against 11 of them, arguing the bylaws contravened the Investment Company Actrequirement that each share carry equal voting power. Saba also argued that the statute grants private parties the right to bring suits seeking to void bylaws or contractual provisions that violate the Act.

A federal judge in New York sided with Saba in 2024, finding that the challenged control share bylaws violated the Investment Company Act and ordering their removal. The U.S. Court of Appeals for the 2nd Circuit, based in New York, subsequently affirmed that judgment, which prompted several of the funds to seek review by the Supreme Court.

Those funds urged the high court to conclude that the Investment Company Act does not create a private right of action for private litigants to seek invalidation of fund bylaws. The Supreme Court's ruling reversed the lower courts and rejected the view that private parties can bring such suits under the statute.

The Biden or Trump administration reference in prior filings is specific to this dispute - President Donald Trumps administration filed a brief supporting the funds named in the case. The Supreme Court's decision thus resolves a split created by the lower courts on whether private plaintiffs may invoke the Investment Company Act as a vehicle to challenge internal governance rules adopted by closed-end funds.

Closed-end funds differ from open-end mutual funds in that they issue a fixed number of shares that trade in the market and often trade at prices below the value of their underlying assets. The adoption of voting restrictions by some of these Maryland-organized funds prompted the litigation brought by Saba, which contended that the provisions undermined the Act's equal-vote requirement.

With the Supreme Court reversing the lower-court rulings, the immediate result is to curtail the use of private lawsuits under the Investment Company Act to void fund bylaws of the type at issue. The decision leaves in place the argument advanced by the funds that the statute does not confer a private right of action for this form of relief.

Summary

The Supreme Court reversed lower-court decisions that had allowed a private hedge fund to sue under the Investment Company Act to invalidate bylaws that limit shareholder voting power in certain closed-end funds. The funds had contended that the statute does not provide a private right of action; the Court agreed in a 6-3 decision.

Key points

• The Supreme Court reversed a lower court and appeals court ruling, deciding 6-3 in favor of the funds challenging private suits under the Investment Company Act.
• The litigation involved closed-end funds organized under Maryland law that adopted bylaws limiting the voting power of large shareholders; Saba sued to void those bylaws.
• Sectors affected include asset management and securities litigation, with potential implications for governance disputes involving closed-end funds.

Risks and uncertainties

• It remains uncertain how the absence of a private right of action under the Act will change enforcement dynamics - enforcement may be concentrated with the U.S. Securities and Exchange Commission rather than private litigants, affecting the securities enforcement landscape.
• Closed-end fund governance practices could continue to prompt disputes about shareholder rights, leaving market participants and activists to determine alternative legal or regulatory avenues to challenge bylaws.