Activist shareholders have become a significant issue for closed-end fund boards and fund advisers. However, several notable developments have arisen over the last year that may lessen the burden on these funds. Read on for an outline of recent litigation, legislation, regulatory proposals, and other key matters that closed-end fund boards and advisers need to know—and the impact they may have on activism and the closed-end fund industry in the future.

U.S. Supreme Court Litigation

• What Is Happening? The U.S. Supreme Court granted certiorari in June in FS Credit Opportunities v. Saba Capital Master Fund, a case involving several closed-end funds and activist Saba Capital (along with related parties, Saba). The case originated with Saba bringing litigation in the U.S. District Court for the Southern District of New York, arguing that the funds’ adoption of the Maryland control share statute violated the Investment Company Act of 1940. 

The issue on appeal is whether there is an implied right of action under Section 47(b) of the 1940 Act that allows shareholders such as Saba to bring litigation against funds. The U.S. Court of Appeals for the Second Circuit has repeatedly allowed Saba to bring such claims, but the Third and Ninth Circuits have denied other shareholders the ability to bring implied-right-of-action claims under the 1940 Act.   

• Recent Developments: Arguments are scheduled for Dec. 10. The U.S. government, Investment Company Institute, U.S. Chamber of Commerce, Mutual Fund Directors Forum, and others filed amicus briefs in support of the funds’ position, arguing that a ruling in favor of Saba would open the door to more lawsuits. A group of 14 corporate and securities law scholars and former Securities and Exchange Commission officials, among others, filed an amicus brief in support of Saba’s arguments.

• Why Is This Noteworthy? If the funds are successful, Saba and other shareholders would no longer be able to bring claims for violations of the 1940 Act against closed-end (and open-end) funds, except where there is an express right of action written into the 1940 Act. Shareholders would still be able to bring claims in state court for violations of applicable state law.

Status of ECAT Litigation

• What Is Happening? In Saba Capital Master Fund v. BlackRock ESG Capital Allocation Term Trust, Saba sued BlackRock ESG Capital Allocation Term Trust (ECAT) and ECAT’s board of trustees in the U.S. District Court for the Southern District of New York, arguing that ECAT’s majority vote standard violates Section 16 of the 1940 Act. The majority vote standard is common among closed-end funds and has two applicable parts, with one vote standard for uncontested elections and another vote standard for contested elections.

• Recent Developments: The District Court judge recently granted a stay, against Saba’s objection, to delay deciding on the case until after the Supreme Court has ruled in the FS Credit Opportunities case discussed above.

• Why Is This Noteworthy? This case provides an example of the potential impact of the Supreme Court’s decision in the FS Credit Opportunities case. Theoretically, if the funds are successful in FS Credit Opportunities, this case would be dismissed due to the lack of a related right of action under the federal securities laws.

Saba Takeover of ASA Gold and Precious Metals Fund 

• What Is Happening? In a press release issued in August, a closed-end fund, ASA Gold and Precious Metals Ltd., announced the resignation of two directors and the appointment of a new director. ASA’s directors nominated a new fifth director for the fund’s 2025 annual general meeting on Nov. 6. As of Nov. 13, Saba owns over 27% of ASA.

• Why Is This Noteworthy? All of the fund’s directors are either directly associated with or were nominated by Saba.

ASA joins the closed-end funds formerly known as Templeton Global Income Fund and Voya Prime Rate Trust as being the only funds with their boards entirely taken over by directors affiliated with and nominated by Saba. The Saba-selected Templeton and Voya boards later changed the funds’ investment strategies and replaced the funds’ legacy investment advisers with Saba.  

Shareholder Rights Plan Litigation

• What Is Happening? Saba brought litigation in 2024 against ASA, the closed-end fund described above, related to the adoption of a shareholder rights plan (also known as a “poison pill”). On March 28, in Saba Capital Master Fund v. ASA Gold and Precious Metals, the U.S. District Court for the Southern District of New York ruled that shareholder rights plans are legal for closed-end funds under the 1940 Act. However, the court also found that the ASA shareholder rights plan had been unlawfully extended beyond the 120-day period referenced in Section 18(d) of the 1940 Act. ASA appealed this ruling, but the appeal was subsequently withdrawn as the fund was being taken over by directors associated with Saba.

• Why Is This Noteworthy? Shareholder rights plans can serve as a strong protection for closed-end funds and are explicitly permitted by the 1940 Act. Shareholder rights plans work by preventing shareholders from accruing controlling stakes of funds. A shareholder rights plan may protect long-term shareholders from activist shareholders who seek to accumulate large stakes and potentially make changes to the fund that are not favored by other shareholders. 

Status of Congressional Increasing Investor Opportunities Act Bill

• What Is Happening? The Increasing Investor Opportunities Act (H.R. 3383 in the 119th Congress) is legislation that aims to remove the SEC's 15% limit on a closed-end fund's investments in private funds and restrict activist investors to a 10% ownership limit in a closed-end fund. 

• Recent Developments: The House Committee on Financial Services passed the Increasing Investor Opportunities Act, and it moved to the full House for consideration on June 25. Nothing has happened since.

• Why Is This Noteworthy? If this bill were passed by Congress, it would potentially make closed-end funds both more attractive and easier to protect from activists. However, the bill has also been unsuccessfully introduced in several prior Congresses and still may not be a priority.

Status of NYSE Proposals

• What Is Happening? The New York Stock Exchange filed a proposed rule change on June 6 with the SEC to amend the NYSE Listed Company Manual to exempt new closed-end funds registered under the 1940 Act from the NYSE requirement to hold annual shareholder meetings. Without this requirement, newly listed closed-end funds would only need to hold shareholder meetings as required by the 1940 Act or state law.

• Recent Developments: The SEC has instituted proceedings to consider the proposed rule change.

• Why Is This Noteworthy? Removing the annual shareholder meeting requirement would allow listed closed-end funds to hold shareholder meetings when needed, as open-end funds do, rather than on an annual basis. In 2024, the NYSE submitted, and later in January 2025, withdrew, a more far-reaching proposal to exempt all closed-end funds from the annual meeting requirement.

The NYSE has asserted that the 1940 Act provides protections to the shareholders of listed closed-end funds, which justifies treating listed closed-end funds differently than public operating companies listed on the NYSE (which would still be subject to the annual shareholder meeting requirement). The SEC initially indicated that the potential for closed-end fund discounts may differentiate closed-end funds from exchange-traded funds, which are also listed but do not require annual meetings. The SEC invited further comment.

ExxonMobil No-Action Letter

• What Is Happening? On Sept. 15, the SEC staff issued a no-action letter to ExxonMobil stating that the agency would not bring action if ExxonMobil incorporated a voting program that offered retail shareholders the ability to authorize a standing voting instruction that allowed ExxonMobil to vote their shares for them at each meeting of shareholders. Such a program would be expected to increase retail shareholder voting. Among other things, the SEC staff noted the importance of the following attributes of the voting program:
  • That all aspects of the program are free.
  • That shareholders will receive an annual reminder of their participation in the program and have the ability to opt out or cancel.
  • That shareholders will have the ability to override the voting instruction with respect to specific proposals.
  • That shareholders will still get the related proxy materials, and shareholders can still vote after they receive the materials, if desired.
  • That the voting program will be described on the company website and proxy materials.

• Recent Developments: Other companies are potentially interested in creating similar programs, including open-end and closed-end funds. The SEC staff has requested that firms speak to agency staff before relying on the ExxonMobil no-action letter.

• Why Is This Noteworthy? Retail shareholders traditionally have relatively low voting participation. Because closed-end funds are required to have a shareholder meeting every year, increasing the participation of retail shareholders would be particularly important and impactful.

Atkins’ Statement on Precatory Shareholder Proposals

• What Is Happening? SEC Chair Paul Atkins gave a keynote address in October where he stated that the SEC will no longer support precatory (i.e., non-binding) shareholder proposals when state law does not require that they be included in a proxy statement.

• Why Is This Noteworthy? Rule 14a-8(i)(1) under the Securities Exchange Act of 1934 already states that a fund can exclude a shareholder proposal if it is improper under state law. What has changed with Atkins’ remarks is the extent of deference the SEC will give to state law counsel. The SEC’s new posture should make it easier for closed-end funds to exclude precatory shareholder proposals for being improper under state law. However, funds would still need to go through the no-action process in order to exclude such proposals.

Glass Lewis Announcement Halting Recommendations

• What Is Happening? Glass Lewis, a proxy advisor that issues recommendations on how institutions should vote their shares, announced in October that it will cease producing standard proxy voting recommendations in 2027 and move to offering multiple recommendations to reflect differing client priorities.

• Why Is This Noteworthy? Many institutional shareholders rely on the recommendations of proxy advisors such as Glass Lewis, and a proxy advisor’s recommendation on how to vote for a closed-end fund shareholder meeting can have significant impact. Therefore, having the potential for varied vote recommendations may affect closed-end funds in the future.

These developments present a mix of positive and negative outcomes, and many remain possibilities rather than actualized rulings or changes. Nonetheless, it may only take a few enhancements being realized to significantly lessen the current pressure on closed-end fund boards and advisers.

Taylor Brody is a partner at Stradley Ronon Stevens & Young in Philadelphia. She counsels closed-end fund advisers and boards on day-to-day operations, including how they should prepare for and respond to activist shareholder attacks, and, more generally, investment advisers with respect to their obligations under federal securities laws. Brody also advises boards of directors on issues arising under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, as well as corporate governance matters.