Supreme Court Hears Oral Arguments on Whether Activist Shareholders of Closed-End Funds Have Private Rights of Action under the Investment Company Act of 1940

Who may be interested: Registered Investment Companies; Directors of Registered Investment Companies; Investment Advisers; Hedge Funds 

Quick Take: The U.S. Supreme Court heard oral arguments on December 10, 2025, in FS Credit Opportunities Corp. v. Saba Capital Master Fund as to whether activist shareholders have a private right of action to sue closed-end funds under the Investment Company Act of 1940, as amended. A decision is expected by July 2026.

On December 10, 2025, the U.S. Supreme Court heard oral arguments in FS Credit Opportunities Corp. v. Saba Capital Master Fund (No. 24-345) (“FS Credit”). The FS Credit case is on appeal from the U.S. Second Circuit Court of Appeals that held a private right of action under the Investment Company Act of 1940, as amended (the “1940 Act”) exists to allow Saba Capital Master Fund and its affiliates, as activist shareholders (“Saba” or “respondents”), to sue 11 closed-end funds affiliated with FS Credit Opportunities Corp. and BlackRock, Inc. (“petitioners”). The Solicitor General for the United States appeared as amicus curiae supporting the petitioners.

Specifically, Saba sued the closed-end funds under the 1940 Act to invalidate their adoption in their charter documents of protections offered by the Maryland Control Share Acquisition Act (the “MCSAA”) that would block investors like Saba from acquiring more than 10% of a closed-end fund’s outstanding shares. Activists like Saba acquire closed-end fund shares on the open market at a discount to the fund’s net asset value (“NAV”) and then seek control of the fund to cause it to liquidate at its NAV or become an open-end fund that redeems its shares at NAV. A closed-end fund’s use of the MCSAA would thwart the activist’s ability to acquire control and thereby extract an arbitrage profit.

Petitioners argued that Section 47(b) of the 1940 Act (rendering unenforceable any contract that violates the 1940 Act or its rules) is not a clear and unambiguous statement by Congress that it was creating a private right of action citing Sections 30(h) (applying short swing profits liability under the Securities Exchange Act of 1934, as amended, to closed-end fund insiders) and 36(b) (allowing fund shareholders to sue for excessive management fees) for the opposite proposition. In other words, petitioners argued that Section 47(b) applies to litigants already before a court where a party uses contract unenforceability as a defense.

Respondents argued that the plain text of Section 47(b) creates an express private right of action. They argued that the point of the 1940 Act was to protect shareholders from fund managers who have “bad incentives.” Respondents want the opportunity to “do things differently and get this [fund’s]” trading prices closer to its NAV. Respondents contend that the invocation of the MCSAA 10% control limit and severing shareholder voting rights to deny that opportunity is a violation of Section 18(i) of the 1940 Act, which requires every share of stock of an investment company to be voting stock with equal voting rights with every other outstanding voting stock.

In closing, petitioners stated:

These closed-end funds are ones that provide a reliable and important long-term stream of income for retirees and the strategy on the other side is to acquire a significant share, go in, change the investment strategy of the fund, and then cash out. That's precisely one of the things that Section 1 of the [1940 Act] says that Congress was concerned about when it passed this statute.

A decision in the FS Credit case is expected by July 2026.

For more detailed information on the matter of FS Credit Opportunities Corp. v. Saba Capital Master Fund (No. 24-345), the full record is available here.