Saba Capital Master Fund, LTD. v. BlackRock ESG Capital Allocation Trust

Background

Saba Capital Master Fund, Ltd. sued BlackRock ESG Capital Allocation Term Trust (ECAT) and the individuals serving as ECAT trustees. The opinion states that Saba beneficially owned 25.89% of ECAT with other investment funds. ECAT is a registered, non-diversified, closed-end investment fund.

ECAT’s bylaws use different voting rules for contested and uncontested trustee elections. In an uncontested election, a candidate can win with a plurality of the shares actually voted, provided a quorum is present. In a contested election, a candidate must receive a majority of all outstanding shares entitled to vote. If there is no quorum or no candidate receives the required majority, the incumbent trustee remains in office as a holdover.

In 2023, Saba nominated candidates against four incumbent trustees. Three attempted shareholder meetings failed to reach a quorum, and the four incumbents remained in their seats. For the 2024 meeting, Saba had nominated candidates against seven incumbent trustees and sought to prevent ECAT from applying the contested-election voting rule.

Claims and Motions

Saba asserted claims under the Investment Company Act of 1940. It sought rescission and a declaration that ECAT’s voting bylaw was invalid. Saba argued that the bylaw violated Section 16(a) because it did not provide shareholders a meaningful opportunity to elect trustees, and violated Section 18(i) because the shares allegedly did not function as voting stock with equal voting rights in practice.

Saba moved for a preliminary injunction, which is a temporary court order issued before the case is finally decided. Defendants moved to dismiss under Rule 12(b)(6), arguing that the complaint did not state a legally sufficient claim. Defendants also argued that the claims were barred by the earlier round of this dispute, the statute of limitations, or unreasonable delay known as laches.

Preliminary Injunction

The court denied the preliminary-injunction motion. Because the requested order would change the existing voting rules, the court applied a heightened standard requiring a clear or substantial likelihood of success and a strong showing of irreparable harm. Irreparable harm means an injury that is actual and imminent and cannot adequately be repaired later.

The court held that Saba had not met that requirement. It identified three considerations: Saba sought to change rules that were already in place when it bought its shares; Saba waited about seven months after the last unsuccessful 2023 meeting before filing suit; and, if Saba ultimately prevailed, a new election under different rules could largely address the alleged harm. Because Saba failed to show irreparable harm, the court did not decide the other preliminary-injunction factors.

Motion to Dismiss

The court denied Defendants’ motion to dismiss. At this stage, the court had to accept the complaint’s factual allegations as true and draw reasonable inferences for Saba. The court held that Saba had alleged enough facts to make at least one theory plausible, even though the claims were novel and Saba might not ultimately prevail.

The court emphasized that Saba was bringing an as-applied challenge: it alleged that the bylaw’s practical operation deprived shareholders of a meaningful ability to select trustees, even if the bylaw did not violate the Investment Company Act when read only word by word. The court concluded that Saba’s allegations were sufficient to allow the case to proceed and rejected Defendants’ argument that facial compliance with the statute necessarily defeated the claims.

The court also rejected Defendants’ procedural defenses at this stage. It held that the current lawsuit involved different governing documents and later events than the earlier related proceeding, so claim preclusion did not bar the claims. The court further held that the rescission claims were not shown to be untimely because, according to the opinion, the claims accrued no earlier than the failed contested election in 2023. It also held that laches did not bar the case because Saba filed after it became clear that the 2023 election attempts had failed and that ECAT intended to use the same rules for the 2024 meeting.

Disposition

Judge Margaret M. Garnett denied Plaintiff’s motion for a preliminary injunction and denied Defendants’ motion to dismiss. The opinion did not finally determine whether ECAT’s voting bylaw violates the Investment Company Act. The court stated that it would schedule an initial pretrial conference by separate order.