The US Supreme Court’s choice to take up a dispute next term over activist investors’ ability to challenge corporate resolutions signals the justices are eager to clarify a major tenet of investment fund operations.
The high court this week agreed to scrutinize a ruling by the US Court of Appeals for the Second Circuit holding that Saba Capital, run by hedge fund manager Boaz Weinstein, had the right to sue a series of closed-end funds under the 1940 Investment Company Act.
The case sparked interest from government lawyers defending the exclusive right of the Securities and Exchange Commission to regulate investment companies under the 85-year-old law. Powerhouse industry groups such as the US Chamber of Commerce argued the Second Circuit’s ruling enables private litigants to challenge a vast array of common business contracts.
A ruling by the justices in favor of the funds, on the other hand, would remove an avenue for investors such as Saba that say they’re trying to unlock more value for shareholders.
Saba was challenging a move by closed-end fund provider FS Credit Opportunities Corp. to adopt a resolution making it harder for outside investors to gain control of the funds through shareholder voting rights.
“One of the things that makes activism in this space difficult is that most of the people who hold closed-end funds are retail investors, who are sort of infamous for not voting at all,” said Ann Lipton, a professor at University of Colorado Law School focused on corporate governance.
Saba declined to comment. A spokesperson for FS didn’t respond to a request for comment.
The case raises broad questions about who’s in charge of overseeing mutual funds, exchange-traded funds, and additional funds managed by BlackRock Inc. and other US-registered companies that together handle nearly $40 trillion in assets, including for long-term retail investors.
Closed-end funds such as the petitioners have leeway to trade at various prices depending on how much investors are willing to pay for the shares. That enables investors like Saba to buy when shares are low, take steps to inflate the price, and then sell for a short-term profit.
“Given how both the solicitor general and SEC have weighed in expressing the views of the current administration, I think the argument made there about a potential impact on funds, advisers, shareholders, all industry participants writ large will likely be of acute interest to the more conservative members of the bench,” said Amy Roy, a partner in Ropes & Gray LLP’s securities litigation group.
Roy represented the Securities Industry and Financial Markets Association and the Investment Company Institute in briefs supporting the funds’ petition to the high court.
Litigation ‘Floodgates’?
Saba’s right to sue fund managers and the funds’ use of defensive tactics to bolster controlling shareholders over activists now hang in the balance as the Supreme Court prepares to take up the case.
If the justices rule in Saba’s favor, it would result in “the floodgates being opened with all these people coming in and effectively asking the courts to opine on violations of the Investment Company Act,” said Kristin Ornstein, member at Dykema Gossett PLLC who has represented fund managers.
“The definition of what constitutes an investment company itself is unbelievably complex,” she added. “All of that is supposed to be enforced and regulated by the SEC, but then you’d be allowing all these courts to make that decision themselves.”
The petitioners and their backers also said a win for Saba would lead to an avalanche of cases, especially in the Second Circuit covering New York, where most investment funds can be sued.
A ruling in favor of the closed-end fund managers, on the other hand, wouldn’t entirely strip activist investors of tools to sway how funds operate through voting and other means, according to Ornstein.
“It really keeps things par for the course,” she said.
Lipton disagreed, saying a Supreme Court win for the funds could significantly harm the strategy Saba has employed and leave it with limited options through the proxy voting process.
But at least some of the justices may be wary of interfering with how funds serve other investors.
“Having a private right of action to challenge effectively anything having to do with the funds could really create open season for the plaintiffs’ bar,” Roy said. “This doesn’t just have implications for these closed-end funds, but it has implications for shareholders of these products if there is significant disruption to the management of these products through broad-based litigation.”
Skadden, Arps, Slate, Meagher & Flom LLP represents FS Credit Opportunities Corp. Susman Godfrey LLP represents the Saba respondents.
The case is FS Credit Opportunities Corp. v. Saba Capital Master Fund Ltd., U.S., No. 24-345, order 6/30/25.
