Supreme Court to Decide Key Case on Private Shareholder Lawsuits Against Registered Investment Funds

Introduction

On June 30, 2025, the U.S. Supreme Court granted cert to hear a case that could significantly impact how registered investment funds—particularly closed-end funds—manage shareholder rights and defend against activist investors.  The case, Trends and Updates from the 2025 Proxy Season.

Why This Matters to Investment Funds and Investment Advisers

If the Supreme Court sides with Saba, it could:

• Empower activist investors to challenge fund governance provisions and decisions in court, particularly for closed-end funds.
• Increase litigation risk for funds that adopt control share provisions or other defensive measures and potentially for funds’ investment advisers that facilitate the adoption of such measures.
• Increase the burdens and potential liability for funds, fund directors, and their investment advisers generally.  While the closed-end funds most affected by this litigation are not the type of registered funds that sponsors have typically used to increase retail investors’ and registered funds’ access to alternative investments, a decision that alters investment company governance and litigation more broadly could impact such retailization efforts by sponsors.
• Undermine the SEC’s role as the primary enforcer of the ICA.

If the Court rules in favor of the closed-end funds, it would:

• Reinforce the SEC’s exclusive authority to enforce the ICA.  Importantly, investment funds and investment advisers would still be subject to oversight by the SEC, including exams by SEC exam staff, to confirm that funds’ governance is consistent with applicable fiduciary duties in light of the particular facts and circumstances.
• Limit fund investors’ litigation under Section 47(b).
• Provide greater certainty for funds adopting governance protections.

Key Questions Going Forward

• Will the Court interpret Section 47(b) as a standalone right for investors to bring a private right of action?
• Could a ruling for Saba lead to challenges against other fund practices, such as fee arrangements^[1] or board structures?
• How will this affect state corporate laws, like Maryland’s control share statute, when applied to funds that are subject to the ICA?

What Should Funds Be Doing Now?

• Review your bylaws and governance policies, especially if you’ve adopted control share provisions.^[2]
• Monitor the Supreme Court’s docket—a decision is expected in the 2025 term.
• Engage with counsel to assess litigation risk and regulatory risk.

If you have questions about how this case may affect your fund or would like assistance reviewing your governance framework, please contact us.

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[1] Section 36(b) of the ICA authorizes investment fund shareholders to bring a private right of action against a fund’s investment adviser, directors, and officers, among others, for a breach of fiduciary duty with respect to the receipt or payment of compensation for investment advisory and other services. However, Section 36(b) claims typically have been resolved in favor of the defendants rather than the shareholder plaintiffs.

[2] Approximately half of the States have control share provisions similar to the Maryland statute at issue in the FS Credit Opportunities Corp. litigation, including the States where the substantial majority of closed-end funds are organized – Maryland, Delaware, and Massachusetts.  The specific control share provisions vary by State.  Generally a control share statute applies to closed-end funds and other companies organized in that State, but not to open-end funds (i.e. mutual funds and ETFs) organized in that State.  Some States’ control share statutes apply automatically to companies formed under the laws of that State but permit a company to opt-out of the control share limitations.  In other States, a company must affirmatively opt into the statute’s control share provisions.