Saba Capital Master Fund v. ClearBridge Energy Midstream Opportunity Fund Inc.

Background

Saba Capital Master Fund, Ltd., together with its investment manager, Saba Capital Management, L.P., sued 16 funds organized under Maryland law and 11 individual trustees. Saba alleged that each fund adopted a resolution violating Section 18(i) of the Investment Company Act of 1940. Saba held shares in each defendant fund.

The resolutions adopted a provision of the Maryland Control Share Acquisition Act. That provision allowed the funds to remove the voting rights of “control shares”—shares that would give the holder at least 10% of a fund’s voting power.

Before the ruling addressed in this opinion, the court granted a forum-selection dismissal motion in part. It dismissed claims against five of the 16 funds, including related claims against their individual trustees, and denied dismissal as to the remaining defendants. One individual trustee was also voluntarily dismissed. The rulings in this opinion concern the remaining defendants.

Motions to Dismiss

The remaining defendants filed motions raising standing, personal-jurisdiction, venue, failure-to-state-a-claim, and misjoinder arguments.

The court held that Saba had standing to seek a declaration and rescission of the resolutions. Although Saba owned less than 10% of some funds, it submitted sworn evidence that it would have acquired additional shares but for the resolutions and the risk that its voting rights would be removed. The court held that the resulting threat to Saba’s voting rights and investment strategy was sufficiently concrete and imminent.

The Adams and Tortoise funds argued that they lacked sufficient contacts with New York for personal jurisdiction and that venue was improper. The court rejected those arguments. The Investment Company Act authorizes nationwide service of process, so the relevant contacts for personal jurisdiction could be evaluated in relation to the United States as a whole. The court also held that the funds transacted business in New York because their shares were listed on the New York Stock Exchange and they used New York brokers and service providers in managing their investments.

The individual trustees argued that the complaint did not allege their personal involvement and that they were improperly joined. The court denied those arguments because the complaint alleged that the trustees participated in ECAT’s adoption of its control-share resolution and sought relief against them for the same conduct.

Summary Judgment and Merits

The court granted summary judgment for Saba on all claims against the remaining defendants. Summary judgment is a decision based on undisputed facts when one side is entitled to judgment as a matter of law.

Section 18(i) of the Investment Company Act provides that, subject to specified exceptions, shares issued by a registered management investment company must be voting stock and must have equal voting rights with other outstanding voting stock. Relying substantially on a Second Circuit decision involving similar resolutions, the court held that the resolutions violated Section 18(i) in two ways. They prevented affected shares from being voted and denied some shares voting power that other shares retained.

The defendants argued that Maryland law made the resolutions permissible and that this meant they were “otherwise required by law,” an exception in Section 18(i). The court rejected that argument, explaining that Maryland law allowed—but did not require—the funds to adopt the resolutions.

The court also rejected the defendants’ request for discovery to develop an equitable argument against rescission. It held that rescission was required under the Investment Company Act and that further discovery would not change the result. The court ordered each offending resolution rescinded.

Disposition

The court denied each of the motions to dismiss and granted summary judgment for Saba on all claims against the remaining defendants. It declared that the control-share resolutions violated Section 18(i) of the Investment Company Act, ordered the resolutions rescinded forthwith, directed the Clerk to enter final judgment, and closed the case.