Activist Investor Sues Closed-End Fund Over Poison Pill Provision

Who may be interested: Closed-End Funds; Investment Advisers

Quick Take: An investment manager and offshore fund have sued a closed-end fund for adopting a “poison pill” provision that prevents shareholders with more than a 15% stake in the fund from acquiring additional common shares at a discounted price available to other shareholders.

Saba Capital Management, L.P., a New York-based investment manager, and Saba Capital Master Fund, Ltd., a Cayman Islands fund (together, “Saba”), filed suit on January 31, 2024 in the U.S. District Court for the Southern District of New York against Maine-based ASA Gold and Precious Metals, Ltd. (“ASA”) and its directors, seeking rescission of the provision under the Investment Company Act of 1940 (“40 Act”) and a declaratory judgment.

In December 2023, ASA, a closed-end precious metals and mining fund registered under the 40 Act, adopted a provision giving common shareholders the right to acquire one additional ASA common share at $1 per share for each common share owned, but preventing shareholders with beneficial ownership of more than 15% of ASA from participating. Announcing the poison pill, ASA stated it was adopted “in response to the rapid and significant accumulation of ASA shares by Saba Capital Management, LP.” Saba holds 16.9% of ASA. An additional purchase by Saba of .25% of ASA common stock would trigger the poison pill.

Saba alleges that the poison pill violates Section 18(d) of the 40 Act because the subscription rights are not ratable to the entire class of common shareholders. Saba says the provision conflicts with the 40 Act’s stated purposes, including preventing discrimination among shareholders, entrenched insider management, and inequitable distribution of control.

Saba previously won a declaratory judgment that the control share provision of a different closed-end fund violated Section 18(i) of the 40 Act.¹

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¹ Saba Capital CEF Opportunities 1, Ltd. v. Nuveen Floating Rate Income Fund, 2022 U.S. Dist. LEXIS 29252 (S.D.N.Y. Feb. 17, 2022), aff’d, 99 F.4th 103 (2d Cir. 2023), previously reported on the 40 Act Blog at https://40actblog.sewkis.com/u-s-district-court-rules-that-control-share-acquisition-provision-of-closed-end-fund-bylaws-violates-the-investment-company-act-of-1940.