The U.S. Supreme Court ruled 6-3 that private parties cannot sue under a key provision of the Investment Company Act of 1940 to void corporate bylaws restricting shareholder voting power. The decision sided with investment funds, including those affiliated with BlackRock, against hedge fund Saba Capital.
This ruling restricts shareholder activism by limiting the avenues for private lawsuits to challenge corporate governance provisions, potentially impacting how activist investors can exert influence over closed-end funds.
The U.S. Supreme Court on Thursday sided with investment funds, including those affiliated with BlackRock, in a significant ruling that limits the ability of private parties to bring lawsuits under a key federal securities law. In a 6-3 decision, the justices reversed a lower court's ruling that had allowed hedge fund Saba Capital Master Fund to sue under the Investment Company Act of 1940.
Saba Capital had challenged bylaws adopted by closed-end funds, which restrict the voting power of large shareholders. The hedge fund argued that these "control share bylaws" violated the Act's requirement for equal voting power per share and that private parties, not just the SEC, could sue to void such provisions.
A federal judge and the 2nd U.S. Circuit Court of Appeals had initially ruled in favor of Saba Capital. However, the investment funds appealed to the Supreme Court, contending that the Investment Company Act does not grant a "private right of action" for these types of suits. The Trump administration had supported the funds' position.
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