Saba legal victories bolster case against CEF activist defense

Rulings against the use of control-share laws by Nuveen, BlackRock could discourage use of a once-promising defense against the takeover of CEF boards

Activist hedge fund Saba Capital Management, L.P. scored two legal victories within two weeks that could put an end to closed-end funds’ hopes for using control share provisions to defend against activist takeovers.

In a decision handed down on Nov. 30, the United States Court of Appeals, Second Circuit, affirmed a February 2022 ruling that found that the trustees of five Nuveen closed-end funds violated the Investment Company Act (ICA) by adding control-share rules to their bylaws to deter proxy attacks by limiting the voting power of large, activist shareholders.

On Dec. 5, a federal judge in the Southern District of New York issued summary judgement confirming Saba’s contention that the control-share provisions adopted by the boards of 11 closed-end funds, including two managed by BlackRock, had also violated the ICA.

The two victories came amid a wave of challenges Saba launched since 2020, when the SEC lifted its prohibition on funds’ use of laws in some states that allow funds to use control-share provisions.

While many closed-end funds embraced control share provisions as a viable activist defense, Saba has argued such provisions violated the Investment Company Act’s requirement that all shares have equal voting rights.

Previous rulings, like the 2022 Nuveen decision, involved only funds based in Massachusetts, which does not have a state control share statute. This had led some to hope that closed-end funds could still use the defense as long as they were domiciled in Delaware or Maryland, which both have control share acquisitions statutes.

In the BlackRock case — which also involved funds managed by Franklin Templeton, Adams Funds, TortoiseEcofin, and FS Global Advisor —  the judge ruled that the funds violated the ICA despite their having been domiciled in Maryland, whose laws specifically allow the approach.

Saba, which has long criticized anti-activist defenses as antidemocratic, celebrated the BlackRock ruling as vindication of its position.

“We are pleased to have brought this lawsuit for the benefit of all investors in closed-end funds managed by BlackRock to put an end to the practice of robbing shareholders of their right to vote all of their shares,” Saba CIO Boaz Weinstein said in a statement following the ruling, which can only help burnish Saba’s reputation as the most-feared activist in the industry.

“By illegally stripping votes in an attempt to rig the election in their favor, BlackRock trustees broke the law and deprived shareholders of their right to a fair and democratic election,” Weinstein said

Rejection by the courts is disappointing because it undermines the protection securities regulations are supposed to provide especially to retail investors, according to a Dec. 1 statement from Investment Company Institute CEO Eric Pan following the Nuveen decision.

“Retail investors are currently being harmed by closed-end fund activism,” Pan said. “As a result, closed-end funds need to have access to meaningful defenses to protect against self-interested activists. We call on Congress to protect everyday American investors from these abuses by passing legislation including the Increasing Investor Opportunities Act.”

Two days after the BlackRock decision, Skadden Arps, a prominent law firm that has counseled closed-end funds, published a blog post suggesting closed-end funds pivot away from relying on control share provisions and toward shareholder rights plans, which would be a relatively novel and untested closed-end fund activism defense. “In light of these SDNY and Second Circuit decisions, closed-end funds may want to consider shareholder rights plans as an alternative to relying on state control share statutes or control share bylaws,” the post said.