Saba Capital CEF Opportunities 1, Ltd. v. Nuveen Floating Rate Income Fund

Background

Saba Capital Management and Saba Capital CEF Opportunities 1, Limited, together called “Saba,” sued several closed-end Massachusetts business trusts and their trustees, together called “the Trusts.” Saba alleged that the Trusts’ adoption of a control-share provision violated Section 18(i) of the Investment Company Act of 1940. Saba sought rescission, meaning cancellation, of the provision and a declaration that it was unlawful. Saba also asserted a derivative claim but acknowledged that claim was moot.

On October 5, 2020, the Trusts adopted amended bylaws containing a control-share provision. The provision treated a shareholder’s later acquisition as a “control share acquisition” if, combined with shares the shareholder already owned, the shareholder would own 10% or more of a Trust’s shares. The shareholder could not vote the newly acquired shares unless a majority of the shares held by non-control shareholders authorized those voting rights. The provision did not impose the same condition on non-control shareholders’ stock.

The Trusts moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that Saba had not stated a legally sufficient claim. Saba opposed that motion and moved for summary judgment, which is judgment without a trial when there is no genuine dispute over a fact important to the outcome.

Section 18(i) and the Rescission Claim

Section 18(i) requires every share of stock issued by a registered management company to be voting stock and to have equal voting rights with every other outstanding voting stock. The court relied on the Investment Company Act’s definition of a “voting security” as a security that presently entitles its owner or holder to vote for directors. The Act separately defines “security” to include stock.

The court held that the control-share provision violated the requirement that every share be voting stock. When a shareholder’s acquisition caused the shareholder to hold a control share, the newly acquired stock did not presently entitle the shareholder to vote. Instead, voting depended on a future vote by other shareholders. The court rejected the Trusts’ argument that the provision affected only the shareholder’s ability to exercise voting rights, rather than the voting rights of the shares themselves. The court concluded that whether stock is voting stock depends on whether its current holder can presently vote it.

The court also held that the provision violated Section 18(i)’s equal-voting-rights requirement. Stock held by control shareholders could lose its voting rights if the bylaw’s conditions were not met, while stock held by non-control shareholders was not subject to the same restriction. The court therefore found that the control-share provision created unequal voting rights.

The court rejected the Trusts’ reliance on a 2020 Securities and Exchange Commission staff statement, noting that the statement said it had no legal force or effect and did not provide legal analysis of Section 18(i). The court also distinguished a prior case involving a “poison pill” because that measure did not revoke voting rights from any shares.

The Trusts’ motion to dismiss Saba’s rescission claim was denied.

Declaratory-Judgment Claim

The Trusts argued that Saba’s request for a declaratory judgment was premature because Saba had not alleged that it acquired a control share after the bylaw was adopted. The court held that Saba had adequately pleaded an actual controversy. Saba owned at least 9.9% of each Trust’s outstanding shares, so acquiring any additional shares would bring its holdings within the control-share provision. Saba also alleged that it would have acquired more shares but for the provision.

The court concluded that Saba did not have to purchase shares subject to the disputed voting restriction before seeking a declaration. It denied the Trusts’ motion to dismiss the declaratory-judgment claim.

Summary Judgment and Disposition

Because the court had concluded that the control-share provision violated Section 18(i), it held that Saba was entitled to summary judgment on both its rescission claim and its declaratory-judgment claim. The parties did not dispute the Trusts’ adoption or the contents of the provision. The court found that any dispute about whether Saba’s investment strategies harmed the Trusts or their long-term investors was not material to the clear statutory requirements.

Judge J. Paul Oetken denied the Trusts’ motion to dismiss and granted Saba’s motion for summary judgment. The court granted Saba judgment on its rescission and declaratory-judgment claims, declared that the control-share provision violated Section 18(i) of the Investment Company Act of 1940, and directed the clerk to close the case.