Supreme Court to Weigh Private Party Suits Against Investment Funds
The U.S. Supreme Court has agreed to hear a case, FS Credit Opportunities Corp., et al., Petitioners v. Saba Capital Master Fund, Ltd., et al., i.e., Case No. 24-345, that could significantly reshape the landscape for private parties seeking to assert contract violations against investment funds.
The High Court’s decision should resolve a split among federal appellate courts regarding whether Section 47(b) of the Investment Company Act of 1940 creates an implied private right of action for such lawsuits.
A ruling against a private right of action would limit the avenues for private parties to challenge alleged contract violations, potentially shifting the enforcement burden more heavily onto regulatory bodies. Conversely, affirming such a right would empower shareholders to pursue direct litigation, potentially leading to increased accountability for investment fund practices.
At the heart of the dispute is an activist investor, Saba Capital Master Fund Ltd., which initiated legal action against FS Credit Opportunities Corp. (NYSE:FSCO) and other closed-end funds. Saba alleged that these funds violated the Investment Company Act, or ICA, by adopting a Maryland law designed to make it more difficult for new shareholders to acquire a controlling interest, thereby infringing upon existing shareholders’ voting rights.
FS Credit Opportunities is managed by an affiliate of FS Investments, formerly known as Franklin Square Capital Partners.
The legal journey to the Supreme Court began with Saba’s lawsuit in June 2023 in the U.S. District Court for the Southern District of New York. In January 2024, the district court sided with Saba, declaring that the funds’ resolutions violated Section 18(i) of the ICA, which generally requires common stock shares of registered investment companies to have equal voting rights.
This ruling was subsequently upheld by the Second Circuit Court of Appeals in June 2024. The Second Circuit’s decision, however, created a direct conflict with rulings from the Third Circuit and Ninth Circuit, which have held that no private right of action exists under Section 47(b) of the ICA.
The conflicts between rulings led to a series of procedural events. FS Credit Opportunities and others petitioned for a writ of certiorari in September 2024. In October of that year, amicus briefs in support of the petitioners were filed by organizations such as the U.S. Chamber of Commerce and the Investment Company Institute. Saba filed its own brief in opposition to the petition in December 2024.
The Solicitor General was invited by the Supreme Court to file a brief expressing the views of the United States in January 2025. The U.S. government filed its amicus brief, urging the Supreme Court to hear the case and arguing against a private right of action last month stating that such lawsuits could have an “unpredictable impact” on the private fund industry.
The “circuit split” and aforementioned events prompted the Supreme Court to grant certiorari on June 10, 2025, agreeing to hear the case and provide a definitive interpretation of the statute.
Oral arguments are to be scheduled, likely in the upcoming term, and a decision is expected by June 2026.
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