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The US Supreme Court has restricted a key tactic used by activist investors, ruling that the Investment Company Act of 1940 does not broadly allow shareholders to bring private lawsuits over fund governance. The 6-3 decision blocks Saba Capital, led by Boaz Weinstein, from pursuing claims against 11 closed-end funds linked to FS Credit Opportunities Corp. and BlackRock.
The judgment removes a legal route activists had begun to test in challenges to fund boards, particularly in closed-end funds trading at persistent discounts to net asset value. By limiting private enforcement, the Court shifts responsibility for policing governance back toward the Securities and Exchange Commission (SEC).
At the centre of the case was whether shareholders could rely on an implied “private right of action” under the Investment Company Act to contest governance decisions and unwind contractual arrangements. A federal appeals court had previously endorsed that approach. Writing for the majority, Justice Amy Coney Barrett said the statute’s text does not support broad private enforcement, reinforcing the Court’s increasingly narrow interpretation of such rights in federal law.
The dispute stemmed from Saba’s campaign against funds using Maryland’s control-share statutes, which allow boards to restrict the voting power of investors exceeding ownership thresholds, typically around 10%. Activists have argued these provisions entrench boards and limit accountability. Fund groups, including BlackRock-affiliated vehicles, maintain they protect portfolios from short-term trading pressure.
With the federal litigation route now closed, those state-level protections face less risk of challenge in court. That has immediate implications for the funds involved. FS Credit Opportunities Corp. and the BlackRock-linked vehicles targeted by Saba avoid a potentially precedent-setting case, while BlackRock’s wider closed-end fund platform gains clarity on the legal framework governing its governance structures.
Read Minerva’s latest Proxy Update for more information on the activities of Saba Capital this proxy season
The ruling also changes the balance of tactics available to activist investors. Closed-end funds have long attracted attention because discounts to net asset value can create opportunities for intervention. Litigation under the Investment Company Act had begun to complement traditional strategies such as proxy fights and public campaigns. That avenue is now effectively off the table.
The economic effects are likely to be felt across the sector. Lower litigation risk reduces the cost of defending governance arrangements and may allow boards to take a longer-term approach to portfolio management. At the same time, the constraint on private lawsuits shifts more weight onto regulatory oversight.
Saba Capital has argued that the decision addresses who can bring claims, not whether the underlying practices comply with the law. That distinction leaves the SEC as the primary enforcer. If regulatory scrutiny does not increase, some governance structures may face less practical challenge than before.
For investors, the implications are uneven. Reduced litigation risk may support stability and lower fund expenses. But it also removes one mechanism activists have used to push for changes aimed at narrowing discounts or reshaping boards. The effectiveness of future campaigns will depend more heavily on proxy contests, shareholder alliances and market pressure.
The dissenting justices said the ruling departs from Congress’s intent to protect investors, highlighting a continuing debate over the role of private enforcement in financial regulation. That debate is now likely to play out through the SEC rather than the courts.
In practical terms, the decision redraws the boundaries of governance disputes in the closed-end fund market. Activists retain economic incentives to target underperforming funds, but with fewer legal tools at their disposal. Boards and sponsors, including BlackRock and FS Credit Opportunities Corp., gain greater certainty. What happens next will depend largely on how actively the SEC chooses to police the space.
