Supreme Court to Rule on Investor Suits Over Fund Governance Laws

The U.S. Supreme Court is considering a pivotal case that could reshape the legal landscape for investment fund governance. At the heart of the dispute is whether investors can use the 1940 Investment Company Act to sue over management decisions in closed-end funds. The case has drawn sharp attention from Wall Street, particularly from activists like Saba Capital Master Fund, which argues that certain fund governance structures violate federal law according to Bloomberg.

The court is reviewing a 2nd U.S. Circuit Court of Appeals decision that allowed activist investors to sue funds over their use of a Maryland law that limits shareholder voting power once they exceed a 10% ownership threshold. Saba Capital claims this law lets underperforming funds evade accountability, while fund managers like BlackRock and FS Credit Opportunities Corp. argue it helps protect long-term strategies from short-term arbitrageurs according to Bloomberg.

Justices spent 80 minutes deliberating the case, with no clear path toward a decision. Justice Brett Kavanaugh called the case "extremely close", highlighting the difficulty in balancing fund governance with investor rights.

Why the Standoff Happened

The case stems from a long-standing debate over how the 1940 Investment Company Act should be interpreted in the context of private lawsuits. Saba Capital is using Section 47(b) of the Act, which states that contracts violating the law are unenforceable. The firm argues that the Maryland control-share law conflicts with the Act's requirement that all shares in a fund have equal voting rights.

Fund managers, however, say the law is a necessary tool to prevent activist takeovers and ensure stable fund management. They assert that the Act was never intended to authorize broad private lawsuits for every perceived violation. The Supreme Court's decision will determine whether investors can now sue over a wide range of fund governance issues or whether the SEC and federal courts remain the primary enforcement channels.

What This Means for Investors

The outcome of the case could significantly impact how investment funds operate and how investors engage with them. If the Supreme Court upholds the 2nd Circuit's ruling, it could open the door for more lawsuits against funds over governance issues, including voting rights, redemption rules, and fund structure. This could lead to higher legal costs for fund managers and more scrutiny from activist investors.

On the other hand, if the court sides with the funds, it would reaffirm the view that the 1940 Act was not designed to authorize broad private enforcement. This would give fund managers greater legal certainty when implementing governance rules and reduce the risk of costly litigation over shareholder disputes according to Bloomberg.

Investors and industry groups are closely watching how the court balances investor rights with fund governance needs. With a new regulatory environment emerging under a deregulatory-focused SEC, the ruling could also influence how enforcement is carried out in the future .

Risks to the Outlook

Beyond the legal implications, the case could influence broader trends in fund management and investor activism. Activist investors have increasingly used legal and regulatory channels to challenge fund structures, arguing that traditional governance rules fail to hold underperforming funds accountable. The Supreme Court's decision could either embolden or discourage this strategy.

Additionally, the outcome will have ripple effects on the private fund industry, including business development companies and private equity vehicles. If private investors gain the right to sue over fund governance, it could lead to more litigation and force fund managers to reconsider their use of state laws and bylaws to limit shareholder influence .

As the case proceeds, all eyes will be on the Supreme Court's final decision, expected by the end of its current term in June 2026 according to Bloomberg.