The US Supreme Court has agreed to hear a pivotal case that could reshape how activist hedge funds challenge corporate governance practices in closed-end funds – with potentially far-reaching consequences for controlling shareholders and fund sponsors, according to a report by Bloomberg.
At the heart of the dispute is Saba Capital Master Fund, led by hedge fund manager Boaz Weinstein, which successfully sued FS Credit Opportunities Corp and others, including BlackRock, under the Investment Company Act of 1940. Saba argued that FS and its affiliates improperly used Maryland law to shield themselves from shareholder influence, in violation of the 1940 Act’s protections for minority investors.
An appeals court sided with Saba, ruling that activist investors can use the 85-year-old statute to sue fund managers over control-enhancing provisions. FS Credit appealed, and the Supreme Court has now agreed to take up the case.
The Investment Company Act, originally designed to promote transparency and protect fund investors, is now being tested as a legal tool for shareholder activism. Saba alleges that “control share” provisions adopted by FS made it harder for shareholders to accumulate voting power – a direct threat to activist strategies reliant on gaining board influence.
While BlackRock did not join FS’s appeal, it reserved the right to participate in the proceedings. The US government, at the Court’s request, weighed in – siding with FS and warning that the lower court’s ruling could upend regulatory enforcement and destabilise contractual certainty across investment funds.
