Closed-End Funds at the US Supreme Court

Summary

Shareholder Primacy — Episode Summary

Episode Title: Closed-End Funds at the US Supreme Court
Hosts: Mike Levin & Ann Lipton
Date: June 18, 2026
Podcast: Shareholder Primacy (Free Float Media Inc.)

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Overview

In this episode, activist investor Mike Levin and Colorado Law professor Ann Lipton revisit a landmark Supreme Court ruling involving closed-end funds and the extent to which activist investors can use federal securities law to challenge anti-takeover measures. The hosts break down the FS Credit Opportunities v. Saba Capital case, exploring what closed-end funds are, why activists target them, and the profound legal and practical implications of the Supreme Court’s decision for investors and federal securities litigation at large.

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Episode Breakdown & Key Insights

1. Setting the Scene: What Are Closed-End Funds?

[05:06–14:15]

• Closed-End Funds Basics

  • Closed-end funds (CEFs) are investment funds traded on public exchanges; they are similar to public mutual funds in some respects but differ structurally.
  • Unlike open-end mutual funds, CEF shares are bought and sold between investors on exchanges, not from the fund itself.
  • Most CEFs are managed by large asset managers (e.g., BlackRock, Nuveen) and not major in market cap relative to large corporations.
  • They frequently trade at a discount to the net asset value (NAV) of the fund’s underlying assets, making them a niche target for activist investing.

• Why Activists Target CEFs

  • CEFs’ typical trading at a discount to NAV creates opportunities for activists to push for changes (like liquidation, governance reforms) that close the discount and unlock value.
  • "There's various tactics...the play would be you have X amount of time to close the discount, to try to manage this better, cut your fees, improve investment performance, whatever, and get that discount down..." (Mike Levin, 11:22)
  • The sector is relatively small and specialized, with few players such as Saba Capital (run by Boaz Weinstein) and Bulldog Investors (Phil Goldstein).

• Structural & Legal Peculiarities

  • CEFs are often domiciled in Maryland or Massachusetts, which have more management-friendly laws hostile to activists compared to Delaware.
  • They are regulated by the federal Investment Company Act of 1940 (ICA), not the Delaware General Corporation Law, introducing another legal framework for activism.

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2. The Supreme Court Case: FS Credit Opportunities v. Saba Capital

[04:08–15:53] and [16:27–22:00]

• Background

  • The controversy involved Maryland’s control share acquisition statute, which limits voting power for shareholders exceeding a 10% holding, unless two-thirds of other shareholders approve.
  • Saba Capital argued this bylaw (enabled by Maryland statute) violates the ICA’s one-share/one-vote requirement and sought a judicial ruling before it crossed the 10% threshold.

• Activist Workarounds & Legal Tactics

  • Saba, stymied at the state level (where Maryland/Massachusetts laws are very board-friendly), attempted to use the federal ICA to challenge anti-takeover provisions.
  • The key question became whether private plaintiffs — as opposed to the SEC — could enforce the relevant federal statute.

  "The only question [for the Supreme Court] is whether Saba is allowed to file a complaint that says you violated the Investment Company Act and I want you to rescind your bylaw." (Ann Lipton, 24:34)

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3. The Supreme Court's Ruling: Who Can Sue?

[24:03–35:19]

• The Legal Issue: Private Right of Action

  • The Supreme Court did not address whether the control share bylaw itself violates the ICA.
  • Instead, it focused on whether the ICA gives private litigants like Saba the right to sue for enforcement (i.e., standing).
  • The Court adopted a restrictive approach: unless a federal statute explicitly authorizes private lawsuits, enforcement is reserved for the government.

  "Just because someone violates federal law doesn't mean a private individual gets to sue. Usually, federal law is only enforced by the federal government." (Ann Lipton, 26:15)

• Section 47 of the ICA — Interpreted Narrowly

  • Section 47, which makes certain contracts violating the ICA unenforceable, was argued by Saba as grounds for private action.
  • The Supreme Court disagreed, holding that the section merely adds rescission as a remedy when a contract already violates other law — not as a standalone basis to sue.

  "The court says, rescission...is a remedy that the court grants when there's been some other legal wrong." (Ann Lipton, 31:48)

• Practical Impact

  • Going forward, only the SEC can directly enforce these anti-takeover limitations via the ICA.
  • Activists must either convince the SEC to act or identify other legal grounds (such as fraud or breach of fiduciary duty) before invoking rescission via the ICA.

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4. Tactical and Broader Effects

[36:04–44:36]

• Can Activists Work Around the Ruling?

  • Saba might trigger a “live controversy” by first crossing the 10% threshold, then being denied voting rights, and then suing under state law with the ICA as a supplementary argument.
  • However, this elevates risk and cost, discouraging some activist campaigns before they even start.

  "The fact that it's there and you have to litigate it is another barrier, obstacle...But I think if they acquire actually more than 10%, they can try again." (Ann Lipton, 38:28)

• Implications for All Securities Lawsuits

  • The ruling underscores that unless Congress expressly creates a private right of action in a federal securities law (as in the PSLRA for 10b-5 fraud cases), courts may deny standing to private litigants.
  • Some legal observers fear this portends more existential challenges to private securities litigation — though Ann notes the PSLRA likely insulates 10b-5 actions.

  "Is this at risk? I don't think it actually is at risk. And there are a couple of reasons why, but the main one is this: in 1995, Congress passed the Private Securities Litigation Reform Act, the PSLRA..." (Ann Lipton, 39:33)

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5. Bylaws as Contracts: A Looming Danger?

[41:06–44:36]

• The Subtle Long-Term Risk

  • Both sides in this case assumed bylaws are “contracts” between company and shareholder, a view Ann finds troubling and legally unstable.
  • This could fuel future enforcement of arbitration clauses and other limiting measures via bylaw, closing courthouse doors to aggrieved shareholders.
  • Example cited: SpaceX’s proposed bylaw forcing shareholders to arbitrate federal claims, potentially making it much harder to challenge wrongdoing in open court.

  "Courts, especially federal courts...just assume bylaws are contracts without really thinking about it. And sooner or later that's going to get so woven into the doctrine...it will be very hard to kick loose, even though the premise has never been really examined. And that's what really scares me." (Ann Lipton, 44:04)

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Notable Quotes & Moments

• On the Supreme Court’s narrow focus:

  • "The issue is not whether this violates the Investment Company Act. That is not what the Supreme Court is deciding. What the Supreme Court is deciding is whether Saba specifically is allowed to sue under the Investment Company Act at all." — Ann Lipton (24:05)

• On CEFs as activist targets:

  • "You could find them that trade exactly at the value of the assets... but most of the time they trade at a discount. And that attracts activism, attracts opportunists." — Mike Levin (09:02)

• On the strange logic of the Supreme Court’s ruling:

  • "The idea that Congress is like, yeah, this contract violates the Investment Company Act, but we don't care unless it also violates some other random state law...that can't possibly be what they held. But that's what...they said in the opinion." — Ann Lipton (34:35)

• On the looming threat to shareholder rights:

  • "This could have wide-ranging implications for all sorts of federal securities law litigation." — Mike Levin (44:15)

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Key Timestamps (MM:SS)

• 05:06–14:15: Explanation of closed-end funds, their structure, and activist approach
• 16:27–22:00: Maryland control share statutes, activist workaround, and litigation setup
• 24:03–35:19: The Supreme Court’s decision, private rights of action, and Section 47
• 36:04–39:12: Tactical consequences and CEF activism moving forward
• 39:31–41:00: Implications for broader private securities litigation, PSLRA context
• 41:06–44:36: Bylaws as contracts and the risk of forced arbitration for shareholders

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Conclusion: Implications and Cautions

• The episode moves from technical details of closed-end funds and activist strategies through the legal technicalities at the Supreme Court, to the still-uncertain future for shareholder litigation.
• While the ruling specifically impacts activists using federal law to challenge CEF anti-takeover bylaws, the reasoning has much wider potential, especially if courts increasingly treat bylaws as contracts to shut down shareholder lawsuits.
• The hosts emphasize this "small" case's potential to shape investor rights far beyond closed-end funds.
• Ann Lipton warns: "I've been arguing that bylaws are not contracts for 10 years." (44:50)

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For further information, contact:

• Mike: [e-mail]
• Ann: [e-mail]
• Podcast produced by Free Float Media

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[End of Summary]

Transcript

[Ann Lipton]

Foreign.

[Mike Levin]

Welcome to Shareholder Primacy from Free Float Media, a podcast about activist investing, securities law and all the ways the financial and legal worlds intersect and collide in real life. After a couple weeks away to take care of some stuff, Ann Lipton and I have returned. Ann is a law professor at the University of Colorado. As we all know, she teaches and researches securities and business law. She looks after the legal end of our little podcast here.

[Ann Lipton]

And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of our podcast.

[Mike Levin]

So it's been a bit, been a minute as they say. A couple weeks. How's it going? Are you all wrapped up? All the grades are in. All the students have submitted their evaluations.

[Ann Lipton]

Yeah, all the grades. Yes, they have. All the grades are in. So now it's just the research that one normally does over the summer.

[Mike Levin]

Right. Just, just rewriting and. Is there any conferences over this summer? Not really.

[Ann Lipton]

Right. Not that I'm going to now, but so, so I just am going to stay here and try to get work done.

[Mike Levin]

Get your papers done. Cool.

[Ann Lipton]

Yeah. What are you up to?

[Mike Levin]

Well, I spent the last two weeks trying to put in my order for my SpaceX shares.

[Ann Lipton]

Did you?

[Mike Levin]

No, not really though, though. And we'll talk about this at some point.

[Ann Lipton]

That's my sign that I've been kidnapped.

[Mike Levin]

Yeah. No, no, no, no. An out of body experience. No, no, no, no though you, you wrote something and we'll have to return to this. That because I'm a Tesla shareholder, I think I'm going to become a SpaceX shareholder.

[Ann Lipton]

Yeah, well, I mean I'm not predicting whether or not SpaceX is going to acquire Tesla. Everyone seems to say they will. Reuters was reporting that Musk has talked about it internally, but. Yeah, but it's possible that getting SpaceX just means buying Tesla at this point. I don't know. Right.

[Mike Levin]

And we Talked about how SpaceX has a peculiar one of many parts of its share structure that seems targeted at setting aside shares to acquire Tesla. But who knows? So anyway, so I, otherwise I've been, you know, working on activist stuff and kind of wrapping up the, as we say, proxy season and thinking it, think, thinking a new proxy, new new activist situations to, to unleash in the coming months because this is actually, you know, there's no, no, we've talked about this. It continues to be busy. I'll take a few weeks off a little later in the summer to kind of chill out. But we're planning and thinking and looking forward and trying to Figure out what's, what's next.

[Ann Lipton]

So.

[Mike Levin]

Yeah.

[Ann Lipton]

Oh, that's great.

[Mike Levin]

Yeah. Anyway, so, but that's not for today. We're not even going to talk about SpaceX or Elon Musk today. We will.

[Ann Lipton]

Maybe not.

[Mike Levin]

No, no, I don't think he gets involved in close end funds though.

[Ann Lipton]

Yeah, but. Well, we'll see.

[Mike Levin]

Right, but that's the subject.

[Ann Lipton]

It turns out everything comes back to muscular.

[Mike Levin]

Yes, it does. Right, exactly. So let's talk about closed end funds. We and the, the motivating factor, the proximate cause, as we say, is a long awaited and not, I think entirely surprising decision that affects close end funds and activist investors that try to compel change in close end funds from of all places, the U.S. supreme Court. Yes. So we'll talk about the case, which is interesting in many ways and there's some important implications for it. But we're going to begin first with some stuff about kind of closed in funds a little more generally because they're, it's, it's a lesser known kind of corner of both the investing world and the activist world. So a little bit of, of discussion about kind of who they are and sort of set some context, I think that would be. Would you like that? Let's do that.

[Ann Lipton]

Let's do that. And once again, I'll just mention we have this mailbag, we have an email address. We get emails, we respond.

[Mike Levin]

We read them. We read them.

[Ann Lipton]

We read them. We read.

[Mike Levin]

Even we got a couple last week who knows.

[Ann Lipton]

Our email address is Shareholder Primacy Free Float llc.

[Mike Levin]

Excellent. Well, yeah, keep, just keep on letting us know what you want to hear from us.

[Ann Lipton]

So the Supreme Court decided this case, FS Credit Opportunities versus Saba Capital. And we actually, I'll just remind everyone, we talked about this case once before pretty much exactly a year ago on our, we did on our June 11, 2025 show. June 11, 2025 at that. And but when we did, because we were talking about activists, like what companies do to mess with activists. And so we were talking about some of the fights it was having. But that point, this particular case, the Supreme Court was still deciding whether it was even going to hear it. Well, they did decide to hear it and they heard it and we just got a decision.

[Mike Levin]

So it was, it was argued sometime over the winter.

[Ann Lipton]

Yeah.

[Mike Levin]

And they sent out their opinion last week, I think. Last week.

[Ann Lipton]

Yeah, yeah.

[Mike Levin]

All right.

[Ann Lipton]

It was last Thursday. So this is a case without closed end funds. So first we have to explain what a closed end fund actually is.

[Mike Levin]

Right, Right, Yes. Yes, Let me, let me, let me do that for, for a sec. Some folks who are listening here know this, but there's probably a bunch who don't. And they're, they're investment funds. They're not like operating companies. Okay. It's, it's big pots of money that get invested in different ways and there's a whole different part of the law that apply to them. We'll talk about that in a little while. I like to think of them. The, the, the analogy is basically to a publicly traded mutual fund. And it's not a mu, not a mutual fund, family mutual fund company. It's the actual fund itself as if it were publicly traded. So you can buy and sell shares in the individual fund entity. All right, so they have tickers, they're on the exchanges, they have a share price. But what you're buying and selling, if you're in there, is just your share of the assets of the financial assets in that particular fund.

[Ann Lipton]

And I'll just say really quickly, this differs from an open end mutual fund where you buy and sell shares from the fund. Like you buy and sell shares, but you buy them from the fund. These trade. So when you buy and sell shares, you're not buying from the fund, you're buying from another investor.

[Mike Levin]

Right, right. Just like with any other publicly traded, just listing. Right. But what.

[Ann Lipton]

You're a little different from ETFs, which also trade on an exchange, but they operate a little differently. So they're just, they're its own thing.

[Mike Levin]

Yeah. And they're in that sense because they're publicly traded pools of assets. They're a little alike, but the whole management of them starts to differ in some interesting ways, which will become a feature of our discussion here. It's not a very big sector.

[Ann Lipton]

It's not, it's like mostly retail. You're right.

[Mike Levin]

It's all. Yeah, right. It's like 200. I looked it up this morning. There's 250 million or billion with a B on AUM in the US kind of today. The biggest one of these is about $3 billion. So they're. So they're not, you know, speaking of musk, you know, the whole sector market cap is approximately an eighth of the market cap of SpaceX, but it's all financial assets. So that's what's kind of interesting. And they're run largely by big asset managers. So BlackRock has a whole group of these. I don't think Vanguard has many, but nuveen has a bunch. There's a whole Bunch of fund families that set up. It's as if they decided to set up a new mutual fund but allowed people to buy and trade the shares of the fund on a market.

[Ann Lipton]

Yeah. Instead of having people buy and sell from the fund directly like in an open fund.

[Mike Levin]

Right. And to redeem the shares if you want it, you just gotta go on a market, enter the ticker and you go buy em.

[Ann Lipton]

So the price is set by the market which is once again it's different from ETFs, which. But so the price is set by the market. And this is why they're an activist, they're activists.

[Mike Levin]

Right. Well this, I'm glad you brought that up. Cause the price again is a market determined market clearing price. And you know, you could, you know, I suppose you could find them that trade exactly at the value of the assets, which is what they.

[Ann Lipton]

Minus fees. They should. Right. Like in an efficient world they should trade at exactly the price of the assets minus fees.

[Mike Levin]

Minus the fees. And the fees of course are for the management company, you know, to hire their people and to do compliance and to, you know, do a little bit of marketing and so forth. A few of these do trade at a premium. People actually pay more than the value of the assets to, you know.

[Ann Lipton]

Yeah. Cause sometimes they get like hot private companies. Right. Like there was one. Yeah.

[Mike Levin]

Most of the time they trade at a discount. And this is again, this is a knock on, you know, mutual funds everywhere and these kind of funds is that, you know, why would you need to go buy the fund? You could just, you know, the assets are known. They know you can look up exactly how many shares they have of one or another publicly traded company. Sometimes you can't get access to some of the private entities that are in this. But most of the time it's collections of publicly traded equities, at least the ones we're looking at. Sometimes there's debt instruments in there. There's a whole range of things you can put in a closed end fund and they'll trade at a discount to the value of the assets. And sometimes so people think the fund

[Ann Lipton]

is worth less than what it's actually

[Mike Levin]

holding and what you're paying for is sort of the convenience or the management acumen. There's a lot of dividend plays here that it's basically a way to get access to a collection of dividend paying assets anyway. So there's very. Again, do you own a. I don't own. Do you own clothes on funds? I've never bought a closed fund. No, I never Bought one before because

[Ann Lipton]

they traded a discount, right?

[Mike Levin]

Yeah.

[Ann Lipton]

Because they're worth less than what they're holding.

[Mike Levin]

Right, right.

[Ann Lipton]

Okay.

[Mike Levin]

So. And there's an argument, you know, should these even exist? Are these even like a rational way to invest money?

[Ann Lipton]

And then I just say academics, many think no, because they trade at a discount.

[Mike Levin]

And I don't. And I don't think so either. Anyway, so that discount, which, you know, sometimes it's, you know, 3, 4, 5%, sometimes it's, you know, really does account for the fees. Sometimes it gets really low. 10, 15, 20%. Okay. And that attracts activism, attracts opportunists. Okay. Who are essentially, the play for them is to sometimes try to improve management. Try to, you know, tell the fund to. You got to swap out a manager. That's hard if it's, you know, the managers, like BlackRock or something.

[Ann Lipton]

Okay.

[Mike Levin]

But most of the time they're basically saying, yeah, we're going to change out some of the board again. It's just like they have. They have boards, they have. Or trustees or whatever. They have leadership.

[Ann Lipton]

They might be formed as an actual corporation. So they have like a corporate structure. The ones we're going to talk about are, right.

[Mike Levin]

And the play would be you have X amount of. Got a year to close the discount to try to manage this better, Cut your fees, improve the investment performance, whatever, and get that discount, you know, down from 10%, you know, from 20% down to 5% or something like that. Because, you know, that means when the discount goes down, the price is going up and it's the value of the publicly traded, the price of the equity is going, getting closer to what the value of the assets are. Okay? So. So that's the play. And there's various tactics that, you know, you could try to do to try to close that discount if you're the management company. But anyway, so that's kind of the core of the activism. There's just like, it's not a very big sector in the whole, you know, realm of investments. There's not a whole lot of activists that do this. I know a couple. We'll talk about the biggie, which is Saba, right? That's run by a guy run by Boaz Weinstein, who's a fairly notable Wall Street. A really good guy. I mean, just very aggressive. I have a friend of mine named Phil Goldstein who runs a fund called Bulldog, which just in itself is a great name for an activist fund. And Phil's got a wonderful story himself. He was, I don't know if, you know, this guy, he was. Started life as an engineer with the MTA in New York City.

[Ann Lipton]

Okay.

[Mike Levin]

Wow. He retired and he took his retirement money and he started investing it wisely. And now he's got like nine figures under management, so he's got a whole second career. Phil's great guy. Anyway, he does close end fund activities. And again, it's not for everybody. You got to understand, as we're about to see a lot of nuance and how the law works and how the discounts work and how the funds are structured. So it's, it's, it's a little more of a specialty relative to the kind of stuff I do. I've never done it. Not only do I not invest in closing funds, I've never done a close and fun activist project.

[Ann Lipton]

Right. Yeah.

[Mike Levin]

I mean, a lot of the time. Yeah, go ahead.

[Ann Lipton]

Yeah.

Yeah.

I mean that they close the discount. They, I mean, I think don't. Some of them just, they just want to liquidate the, you know, they go for liquidating the whole thing.

[Mike Levin]

Exactly that. And that's, that's not a whole.

[Ann Lipton]

Yeah. If you sell the assets for more than the share price is worth, then that's beneficial.

[Mike Levin]

And that's not so dissimilar to, you know, an M and a activist project.

[Ann Lipton]

Yeah. So breaking up a company.

[Mike Levin]

Got to sell it or something. Exactly. So that's, that's kind of it. A couple other kind of quick comments about them. Because they're investment companies and not like ordinary industrial or business entities or whatever, they're not subject to the universal proxy rule. So any of this activism, if you're. And again, there's a lot of it where you're trying to threaten to change out trustees or directors. You don't benefit from universal proxy. So that's. And there's a couple other things along those lines, but the solicitation and so forth. In the actual act, activist tactics are a little.

[Ann Lipton]

And because they're, and because they're retail shareholders who are holding the funds, they're harder to reach. I mean, the whole point, like, you're not going to get control until you have board. You have board seats and you don't have universal proxy.

[Mike Levin]

That's right. So. And then because they're, you know, investment companies and so forth, they tend to be domiciled. Not necessarily in Delaware.

[Ann Lipton]

Yeah.

[Mike Levin]

But in other places. Maryland, just like with REITs. I think we've talked about this. Maryland's a very popular place to domicile these kind of entities. And Maryland is famously investor hostile in its Corporate code.

[Ann Lipton]

And that's. Yeah. Also Massachusetts. Right. Because that's the thing that like these states, their business and chartering is in these funds, not Delaware, where it's like general. Different kinds of companies, which means they can afford to set up a kind of law to. That's really protective of boards and really hostile to activism in a way that Delaware can't. Because Delaware, since it's catering to a lot of different kinds of companies, you know, it can't really put its thumb on the scale that way, but. Or that far. But Maryland and Massachusetts, much more hostile to activists.

[Mike Levin]

And in the case here involving FS Credit or whatever, which is, you know, the fund that in this case, Saba Boaz Weinstein sued, I think they're Maryland. I thought they were Maryland.

[Ann Lipton]

There was Maryland.

[Mike Levin]

Yeah. Okay. So that's, that's kind of the context for this case. And you know, Saba does several of these a year. I mean, there's, there's many hundreds of, of closed end funds with lots of rich discounts to try to go after. So Saba has made a bit of a specialty of trying to do. They made a bunch of money doing it, you know, closing discounts and winding up funds and so forth. And they're, they're kind of feared here. So anyway, so. So maybe this is a good time to talk a little bit about the case.

[Ann Lipton]

Yeah. So, I mean, well, what these funds are doing is they adopt takeover defenses. And these are very similar to the kinds of takeover defenses that you would see in any other ordinary corporation. They're just like. But sometimes they go much further than what an ordinary corporation could do because an ordinary corporation, which is organized in Delaware. Delaware. I mean, it's pretty board friendly, but there are limits to how far a board can go to send off a proxy contest. So however, Saba has tried this when it's, you know, the way this would work in ordinary corporation is you would sue for breach of fiduciary duty that the board is, you know, entrenching itself to the point where you can't dislodge them, and that's a violation of fiduciary duty. And sometimes that's somewhat successful in Delaware. But in Maryland and Massachusetts, where Saba has tried that, they have had less success in arguing that the takeover defenses are a violation of fiduciary duty. So instead what they've done is they've turned to another argument that because these funds, they're investment companies, they're regulated under federal law and in particular the Investment company Act of 1940. And that statute has some certain hard limits on fund structure. So Saba's been arguing that the fund takeover defenses, at least some of them, violate the limits on fund structure that are set out in the Investment Company act, the ica.

[Mike Levin]

Oh, interesting.

[Ann Lipton]

Yeah.

[Mike Levin]

Okay, so let me make sure I get this. So, because again, I'm not a close end fund, so I'm, I really. So normally they would all be organized and in these two states, Massachusetts and Maryland, and there's lots of very strong takeover defenses. And Saba, instead of trying to challenge those defenses, because clearly it has. Yeah, right. They're not going to, you know, go away. So his tactic was to try to enforce or try to get change by enforcing provisions of the federal law.

[Ann Lipton]

Exactly. Because federal law has some hard limits on what you can do with an investment company that don't exist for ordinary corporations.

[Mike Levin]

Okay, okay. And what. And what are those involved? Go ahead.

[Ann Lipton]

Well, in this particular, there are a couple of different limits, but because basically investment companies regulated under federal law have a lot more hard limits on how each share has to be equivalent to other shares. So in this particular case, the one that went to the Supreme Court, we're dealing with Maryland's control share acquisition statute. Now, a lot of states have these. The issue is just how it applies in the context of an investment company. So a lot of states have a control share acquisition statute. And a control share acquisition statute says if someone acquires more than a specified percentage of shares, they aren't allowed to vote the excess unless the remaining shareholders vote to allow them to do so. So you can buy as many shares as you like, and you have the economic exposure of as many shares as you like. But in a control share acquisition situation, after some threshold percentage, you can't vote your shares unless all the other shareholders vote to allow you to do that.

[Mike Levin]

So unanimous. Unanimous approval?

[Ann Lipton]

No. Well, it depends. In Maryland is. It's by two thirds.

[Mike Levin]

Fine. Okay.

[Ann Lipton]

So these funds, they were incorporated in Maryland, and Maryland's statute is really draconian. The fund has to opt in. By passing a bylaw, we take advantage of the closed end of the, of the, of the control share acquisition statute, which they did when they pass that bylaw. Then if you get more than 10% of the shares, you can't vote anything over 10% unless the remaining shares, which again are retail, they're hard to corral, vote by two thirds to let you. So these funds opted into the control share acquisition statute. And the problem is, and this is the argument that Saba made, is that this statute is potentially illegal under the Investment Company act as applied to funds, not as applied to ordinary companies, because the Investment Company act has a provision that says all shares have to have equal voting rights. So saba's claim is that if you neutralize the shares that we hold over 10%, that violates the act, which requires all shares have the same voting rights. It violates federal.

[Mike Levin]

Oh, interesting. Okay, so go ahead.

[Ann Lipton]

No, so what happens then is Saba decides that it wants to challenge these funds that have opted into this control share acquisition statute by tax bylaws, but it doesn't actually acquire more than 10%. Instead, Saba goes to court and argues, look, we don't know for sure if you're going to invalidate this statute and if you're going to keep this statute in place, there is no point to us acquiring more than 10%. And we need to know before we invest our money in this, in these companies, whether or not this statute is enforceable. So it sues the funds under federal law, not Maryland corporate law, not Maryland fiduciary law. It sues under federal law under the Investment Company act and argues that for a declaration that this control share provision is illegal, which would then free them up to buy more than 10%.

[Mike Levin]

More than 10%. Okay. And that's what gets kind of interesting here.

[Ann Lipton]

And that. And the Second Circuit. Yeah, and the Second Circuit agrees with them. The Second Circuit says. Yep.

[Mike Levin]

We're invalid.

[Ann Lipton]

It's violent. These are. And we're going to, you know, we will, you know, rescind the bylaw, whatever. They can't take advantage of the control share acquisition statute. And that's what goes to the Supreme Court. All right, but when it goes to this.

[Mike Levin]

Okay, so I just want to backtrack and sec so, because this is really interesting because these are publicly traded. It's. It may take a while, but Saba or anybody can accumulate shares.

[Ann Lipton]

Well, yeah, except some funds have done poison pills and other things or whatever.

[Mike Levin]

Right. But you can go buy. And if you wanted to go by. If, if, if Saba wanted to buy 10, 15, 16%, you just got a bid.

[Ann Lipton]

Yeah, you just got to buy them. But it doesn't want to do.

[Mike Levin]

Right, right. But he didn't want to do that unless they knew they could vote all 15. Let's say it's 15%. Okay. You know, they're never going to get to the two thirds to invalidate this, but they wanted to be able to get enough of a stake where their votes could matter. So they wanted to be able to get to 20%, something like that. Okay. It wouldn't be that difficult over a period of weeks or maybe a very small number of months to just accumulate or maybe buy blocks. Again, these are all retail shareholders.

[Ann Lipton]

Right, Right.

[Mike Levin]

Okay. So, so they wanted to be able to get enough so that they would have a significant influence over the voting outcome at the next, you know, shareholder meeting. Okay. But the problem was is the state law that these, that in FS and a bunch of others had opted into said, no, no, no, no, no. Anything more than 10% ain't going to count in the vote. So you're going to have all the second. It's like the opposite of, of, of dual class shares where, where you, you have a small economic interest and an outsized voting interest. Here you could have a huge economic interest and a much smaller voting interest.

[Ann Lipton]

Exactly.

[Mike Levin]

Okay. And so, and what I heard you say was that the Investment Company act, or the idea was the Investment Company act made these structures illegal because it wasn't one share, one vote.

[Ann Lipton]

Exactly. And that's what the Second Circuit held. But then it goes to the Supreme Court. And when it gets to.

[Mike Levin]

Yeah, go ahead. Goes to the court.

[Ann Lipton]

But when it gets to the Supreme Court, the issue is not whether this violates the Investment Company Act. That is not what the Supreme Court is deciding. What the Supreme Court is deciding is whether Saba specifically is allowed to sue under the Investment Company act at all. Like whether it's illegal under the Investment Company act is a completely separate question. It's not on the table. The only question is whether Saba is allowed to file a complaint that says you violated the Investment Company Act. And I want you to rescind your bylaw.

[Mike Levin]

All right. Let's take a look at that in a minute after a quick break here.

[Ann Lipton]

Absolutely.

[Mike Levin]

Right here at Shareholder Primacy.

[Ann Lipton]

Shareholder Primacy is brought to you by free flow analytics.com the only free database of corporate directors, their influence and their performance. If you own a stock or retirement plan, go to free flow analytics.com and look up which of your elected directors are performing well and which aren't. Use your vote in the alternative democracy and get your data @free flow analytics.com now back to the show.

Welcome back to Shareholder Primacy. I'm Ann Lichten here with Mike Levin. And we're looking at this case, FS Credit Opportunities versus Saba Capital, that the Supreme Court just decided.

[Mike Levin]

Right. And it was at the Supreme Court on appeal after Saba prevailed. Prevailed in, in, at appellate, probably district. In appellate. The whole process and they did. And they did in the appeals court. Did they win on the merits of whether. Okay, so this is. So the appeals court said. Absolutely. The Investment Company act supersedes these terms of the Investment Company act made illegal the Maryland statute that allows them to limit your voting power to 10%, no matter whether you own 20 or 30 or 80% of the shares.

[Ann Lipton]

That's exactly.

[Mike Levin]

That is illegal and wrong and is contradicted by federal statute. Yes, great.

[Ann Lipton]

But that. But it goes.

[Mike Levin]

And then they went to the Supreme Court and what they argued.

[Ann Lipton]

Well, the Supreme Court once again, is not deciding if this violates the Investment Company Act. They're deciding whether Saba can sue under the Investment Company Act. Right. We will stipulate that for sure. The SEC can. Anytime the SEC wants to, it can come in and say this violates federal law. The question is whether Saba as not the sec, is just a random investor

[Mike Levin]

as a private party, private action. Yeah. Right.

[Ann Lipton]

And now we have to talk a little bit about the history here of this concept of whether a statute, whether a federal statute lets private parties sue. For many years, for a long time, the Supreme Court made it very easy for private plaintiffs like Saba to bring a lawsuit claiming that someone violated federal law. And Starting in the 1970s, the Supreme Court took a different view. In the 70s, the Supreme Court started to say, no. Just because someone violates federal law doesn't mean a private individual gets to sue. Usually, federal law is only enforced by the federal government. And the Supreme Court starts taking a new approach. Now. It says, we will only let private plaintiffs sue if the statute itself is clear that Congress intended to let private plaintiffs sue. If the statute doesn't make that clear, the law can be enforced only by the feds and not private plaintiffs. So it used to be, like, openly, like if the statute just prohibited someone and prohibited some act, and a private plaintiff said, you engaged in the prohibited act. And by the way, it hurt me. The Supreme Court was pretty much like, yeah, feel free to sue. But now the Supreme Court is saying, no. If Congress wants a private plaintiff to be able to sue, Congress has to make that clear in the text of the statute. So the issue that gets to the Supreme Court is whether Saba, who doesn't even have 10%, they just maybe want to acquire 10%.

[Mike Levin]

Right.

[Ann Lipton]

Does Saba get to sue under the Investment Company Act?

[Mike Levin]

So what does the ICA say here?

[Ann Lipton]

Well, yeah, so you have to get to the actual text of the ica. And this is where this conversation gets difficult, because it's hard to talk about actual text without, like, putting it on a screen for my students.

[Mike Levin]

Difficult to comprehend. Not like you and I, like, have some sort of trouble talking about it with each other. Okay. Because, you know, you and we get along pretty well.

[Ann Lipton]

This is not like, awkward, like, oh, no, I'm going to reveal the secrets of the ica. No, it's just that it's explaining what the text says in this audio or medium.

[Mike Levin]

So we're going to ask our followers here to kind of indulge us with a slight bit of patience as we help with the ICA.

[Ann Lipton]

Google it. It's section 47 of the ICA, but the. So if you want to go look at it, you can. But Saba argues there's a specific provision, Section 47 of the ICA, that gives it the right to sue. And here's what that provision says. The provision concerns the validity of contracts and it has two parts. The first part says if a contract involves a violation of the Investment Company act, it's unenforceable unless. And there's an exception, it would be more equitable to enforce the contract and the contract can be enforced without undermining the act itself. But basically it says contracts that involve a violation of the ICA are unenforceable most of the time. That's the first part. The second part of the statute says if the contract has already been performed, so it's not like someone's seeking to enforce the contract, the contract's already happened. You've done everything acted under the contract. If it's already been performed, then the statute says a court may not deny rescission to a party unless, again, it would be inequitable to rescind the contract. So the statute deals with these two circumstances. Somebody seeking to enforce a contract that would involve a violation of the act or. Or someone seeking resistant to rescind the contract that's already been performed.

[Mike Levin]

Right.

[Ann Lipton]

That would violate the ica. Now, this is not Saba suing to enforce the contract. That's the last thing they want to do.

[Mike Levin]

No right.

[Ann Lipton]

Rescind it. The Casaba says, this corporation adopted this Control Share Acquisition bylaw, and I am seeking to rescind it on the ground that it violates the Act. And remember the access. A court may not deny rescission to a party if the contract violates the act, unless doing so would be inequitable. So again, the question, again, isn't whether this provision violates the Act. The question is whether the statute that says a court may not deny rescission to A party is something that Saba can sue over to get that rescission.

[Mike Levin]

Okay, I think I follow. Yeah. So. So, so that's. So that's what they argued. Okay, go ahead. That's.

[Ann Lipton]

That's what's before the Supreme Court. And the Supreme Court says, no, no, this does not allow Saba to sue.

[Mike Levin]

And that second part was.

[Ann Lipton]

That second part does not allow Saba to sue. And without looking at the precise wording, without, like, holding it up, it's really difficult to convey just how wacky the reasoning was, because anyone looking at the statute would say, it seems really clear that. That the statute is two parts. A party can't be forced to comply with an unlawful contract. That's the first part of the statute. And the second part is a party gets to rescind an unlawful contract that's already been performed. That's the second part. Two parts, mirror images. You can't be forced to comply with the contract that hasn't actually been performed, and you get to rescind the unlawful contract that's already been performed.

[Mike Levin]

It seems like a fairly complete way to compel. Compel compliance.

[Ann Lipton]

Right?

[Mike Levin]

Yeah.

[Ann Lipton]

These contracts, they are unenforceable in advance, and you can rescind them if they've already been performed. But the court decides, actually that second part, the part about rescission, does not give Saba a freestanding right to sue. Instead, the court says, and try to follow, which is hard to explain because it's so crazy. The court says, rescission, rescinding a contract, it's a remedy. It's a remedy that the court grants when there's been some other legal wrong. And that remedy is undo the contract, restore everyone to their prior positions. Usually, says the Supreme Court, under state contract law, you cannot get rescission for a contract that's already been performed. It is not a remedy that's available in an ordinary contract under state law. And we have had this conversation before, and this is why I say Elon Musk keeps making these random appearances. Remember we talked about Elon Musk's pay package at the Delaware supreme court?

[Mike Levin]

Yeah.

[Ann Lipton]

Chancellor McCormick rescinded the pay, and the Delaware Supreme Court reversed. And the reason the court gave was you can't get rescission for a contract that's already been performed because you can't restore everyone to their original position.

[Mike Levin]

Right.

[Ann Lipton]

So the Supreme Court says that's right. That's what state law usually says. It says that if you have a contract that is bad, for some reason, you can't get rescission as a remedy after it's already been performed, it's not available. So what the Investment Company act does, it says, if there's a contract that's been performed and a party finds some other basis to sue over it, then federal law steps in and says, I'm adding rescission to the possible remedies because this contract also violates the Investment Company Act.

[Mike Levin]

Okay?

[Ann Lipton]

All the law does is change the usual rule. The usual rule is if you sue on a contract for some reason, like the contract that's already been performed, you can't get rescission. This act says, but if you sue on a contract for some random grounds and it's already been performed and it also violates the Investment Company act, then what the act does is it gives you this extra remedy. Recision gets added to the list of available remedies. Which means you have to find a contract that violates two laws.

[Mike Levin]

Oh, both the federal and the state.

[Ann Lipton]

Well, it violates the Investment Company act. And then you have to have some other reason to sue over it. At which point the Investment Company act says, oh, this is also a contract that violates federal law. We can rescind it. So you have to find a contract that's illegal for some other reason, like it was fraudulent or it was a breach of fiduciary duty.

[Mike Levin]

Right. Or is against public policy or whatever,

[Ann Lipton]

whatever that other grounds is to sue, and then you sue on the contract and then the Investment Company act comes in and says, oh, you get an extra remedy that you might not otherwise have had under state law, we will rescind the whole contract. And that's crazy. Why would you think Congress wanted this? The idea that Congress is like, yeah, this contract violates the Investment Company act, but we don't care. Unless it also violates some other random states that we don't know what it is. I mean, if you just say it out loud, it sounds like that can't possibly be what they held. But that's what they, that's what, that's

[Mike Levin]

what it said in the opinion.

[Ann Lipton]

So the SEC can still sue, but SABA can't sue under the act directly. It has to find some other reason this contract is bad, and then it

[Mike Levin]

gets reset and then that, and then that rescission remedy is, is, is, Is available. All right, so, so importantly, I think it's fair to summarize that the SABA was right, that the, that the 10% threshold provisions in the Maryland code, Maryland statute, in fact are contradicted by the ica.

[Ann Lipton]

That's certainly what the Second Circuit held.

[Mike Levin]

Right, right, right. So all the judges who've looked at this cases have agreed with them.

[Ann Lipton]

Yes.

[Mike Levin]

Right. The Supreme Court didn't consider that case. They just considered whether Saba kind of had the standing right to sue.

[Ann Lipton]

Exactly that standing.

[Mike Levin]

Right. And they said, look, if the SEC wants to go after fs, have at it. But we both know that the SEC is the SEC.

[Ann Lipton]

Not only that, like the government weighed in on FS's side, that SABA.

[Mike Levin]

They did. They did an amicus briefing.

[Ann Lipton]

Yeah, they filed it. Yeah, they did.

[Mike Levin]

No kidding. So, all right, so. So. So Saba either has to find another law they broke.

[Ann Lipton]

Well, that's the thing. That's that. Well, that's actually. So this is what. How I understand it, although I'm not sure I'm getting it right, because the Supreme Court doesn't understand card corporate law. And I don't know that they thought this far ahead. But here's what I think Saba could do. Remember, Saba doesn't actually have 10%. It's suing in advance to get a court to rescind the bylaw.

[Mike Levin]

Right.

[Ann Lipton]

So now we know it can't do that. But as I understand the court's opinion, I think if Saba did actually acquire more than 10%, then it would be able to sue. Because here's how I see it play out. Saba gets 15%, as you said. Then there's a proxy contest, and it tries to vote all 15% of its shares. And at that point, the company says, we are not acknowledging the extra.

[Mike Levin]

Right, Right, right, right. We're gonna. We're gonna only count 10%, 2/3 of your shares.

[Ann Lipton]

Right. And that. And then Saba sues, and under state corporate law, Maryland corporate law, and says, this fund is denying my right to vote my shares. That's ridiculous. You can't just ignore somebody's votes. The fund is illegally refusing to let me vote my shares. And then the fund says, aha, we don't have to let you vote your

[Mike Levin]

shares because we opted into this part of the law.

[Ann Lipton]

And that's when Saba says, aha. That provision violates the Investment Company act, and you cannot deny my right to recision. I'm not sure, but I think that might work. I can't be sure because the Supreme Court doesn't understand.

[Mike Levin]

You Can Be sure is a resourceful and aggressive and does not like to lose type of fund that if they're listening, and they could be, I have friends of mine that represent them. They may be trying that they might.

[Ann Lipton]

But the whole point is they didn't want to buy the 10%. So I feel like this is the same dynamics of things like the advanced notice bylaws that we've talked about.

[Mike Levin]

Yes. Where it needs to be ripe.

[Ann Lipton]

Yeah, well, it's not. No, it's not. It's just that you don't want to, like, get into the engagement to begin with unless you know that you're not going to have to comply with the stupid bylaw. And the fact that it's there and that you have to litigate it is another barrier obstacle. Right. But I think if they acquire actually more than 10%, they can try again. So that's the first thing.

[Mike Levin]

Okay, go ahead.

[Ann Lipton]

The second issue is what does this mean for other securities law provisions? Because, remember, we're here to. Because the Supreme Court has since the 1970s, said we're not going to just assume private parties can sue if someone randomly violates federal law. Instead, the law actually has to say private parties can sue, otherwise only the feds can sue. So the big issue here, and I've seen people comment on this, is section 10B of the exchange Act.

[Mike Levin]

Oh, that's the anti fraud. That's the fraud.

[Ann Lipton]

Right, right. The big anti fraud provision. And it doesn't say anything about private parties suing. It just prohibits fraud. Courts have assumed since like the early forties that private parties can sue, but it doesn't actually say that. So is this at risk?

[Mike Levin]

Interesting.

[Ann Lipton]

I don't think it actually is at risk. And there are a couple of reasons why, but the main one is this. In 1995, Congress passed the Private Securities Litigation Reform act, the PSLRA.

[Mike Levin]

PSLRA, right, right.

[Ann Lipton]

It adopts a lot of new procedural provisions for how private securities fraud lawsuits, and 10B lawsuits in particular, proceed. Ever since that Statute passed in 1995, the Supreme Court has held the PSLRA represents Congress ratifying the private right of action under 10B. It's not implied anymore. Like, once upon a time, courts just kind of assumed private plaintiffs could sue under 10B. But after Congress passed this whole structure of how private litigation should proceed, that was Congress saying, yes, in fact, they can sue. So it's not really like we're just implying that private right of action anymore. So, so that's the second.

[Mike Levin]

So that's not, that's not necessarily in the ica, but it's in the pslra, which. Was that an amendment to the ica?

[Ann Lipton]

No, the PSLRA is completely different. It's completely. It's A completely.

[Mike Levin]

Okay. But. But it. Basically, it was as if, for our purposes, it was as if the ICA permitted. Yeah, the 10B case.

[Ann Lipton]

Yeah, yeah. It's actually the investment. Yeah. The PSLRA actually means the Exchange Act. The 10B is part of the Exchange act, which is. Yeah, but. Yeah, but yeah, it's as though. It's as if Congress had come along and said, oh, by the way, when private plaintiffs sue under the ica, here are the rules they have to follow. That would be Congress suggesting that you can in fact sue under the ica.

[Mike Levin]

Okay, cool.

[Ann Lipton]

But that leads to thing three, and this is what scares me.

[Mike Levin]

Okay.

[Ann Lipton]

Remember this entire case, whether SABA can sue. The whole issue was whether SABA can sue based on a provision that says contracts to violate the Investment Company act are invalid. Where's the contract? What's the contract here?

[Mike Levin]

Oh, I was going to ask that. Is the contract is the bylaw. Oh.

[Ann Lipton]

These funds, by adopting a bylaw, opting into Maryland's control share statute, formed a contract with fund shareholders. And in this case, everyone, both sides, SABA and everybody else agreed this bylaw is a contract and therefore potentially subject to the statutory provisions that invalidate contracts to violate the Act. That wasn't something the Supreme Court questioned. It was assumed a bylaw is a contract. It didn't even ask that question because all the parties agreed. But I don't think bylaws are contracts. And I think. I think the reason Saba, by the way, shouldn't have been able to sue. I don't mean, I think as a policy matter, they should have. But legally, the argument that I find persuasive is it's not a contract. It's not what the ICA had in mind. The ICA was thinking about actual contracts, like, you know, like contracts between two

[Mike Levin]

parties, where there's all the contract that you learn in law school.

[Ann Lipton]

Exactly. Like where this has come up before is things like the fund as a contract with an investment advisor. Those kinds of contracts, not bylaws. But in this case, everyone agreed that bylaws are contracts. And the case kind of proceeded on that basis. And here's why It's a problem. SpaceX. Because we can never get away from Elon Musk. SpaceX just went public with a bylaw that says all shareholders have to arbitrate federal securities claims. And someday someone's going to challenge that bylaw. And when they do, the critical question is going to be whether bylaws are contracts, whether this was the equivalent of a contract to arbitrate and what's been happening, and I've been tearing my hair over this for several years now, is courts are just assuming bylaws or contracts without really asking about whether they actually

[Mike Levin]

are looking into the element of contract,

[Ann Lipton]

exactly what creates a contract. And that's what the Supreme Court did here. So one day, when the SpaceX bylaws get challenged, for sure, plaintiffs are going

[Mike Levin]

to say, under the federal. You're right.

[Ann Lipton]

Yeah. The bylaws get challenged and they say, and the shareholders are going to say, this is not really a contract to arbitrate and therefore it's not binding. And the plaintiffs are going to say bylaws are not contracts. And SpaceX is going to say, didn't you read the Saba case? And at that point the plaintiffs are going to say, but the Supreme Court didn't ask about whether bylaws or contracts in that case, they just assumed they were. And that's a reasonable argument. But this keeps happening. Courts, especially federal courts, especially the ones that don't specialize in corporate law, they just assume bylaws or contracts without really thinking about it. And sooner or later that's going to get so woven into the doctrine that, that it will be very hard to kick loose, even though the premise has never been really examined. And that's what really scares me. It's the aspect of this case that's a real threat to 10B actions, that this is going to be cited for arbitration, bylaws or contracts, and therefore they're binding on all shareholders.

[Mike Levin]

Oh. So this, this is not merely of interest to like Boaz Weinstein and the 10 funds he wanted, or to all closed end fund litigation, but this could have wide ranging implications for all sorts of federal securities law litigation.

[Ann Lipton]

Sadly, yes.

[Mike Levin]

Sadly, yes. Oh, no. Oh, man. All right. Well, this is, this is instructive. Wow. I hadn't quite focused on the deeper implications, but I'm glad at least somebody's thinking about it, namely you.

[Ann Lipton]

I've been writing, I've been arguing that bylaws are not contracts for 10 years

[Mike Levin]

and which is kind of fun because I said, and. Cause I've said before to like very naive shareholders read the bylaws. It's kind of like your contract.

[Ann Lipton]

Well, they're interpreting. So one of the things that was said, like in the lower court decisions, by the way, I'll just mention this because courts do this all the time, is the lower court decisions say things like bylaws are contracts, and then they cite for that proposition a case that says we interpret bylaws like contracts. That's not the same thing at all. How you interpret something like there are rules of construction. That's not the same thing.

[Mike Levin]

But anyway, all right, let's, let's set this aside for now, maybe move on some other stuff.

[Ann Lipton]

Yes.

[Mike Levin]

All righty. This is Shareholder Primacy, hosted by Ann Lipton and me, Mike Levin. I'm an independent activist, investor and advisor to investors about their activist situations, and is professor of law and The Lawrence W. DeMuth Chair of Business Lives, the University of Colorado Law School. You can find me, [e-mail] you can find Ann@Law. Colorado. Edu. Our podcast is produced and distributed by Free Float Media. Thanks for listening. We'll talk again soon.