July 4, 2022

Volume XII, Number 185

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District Court Rules in Favor of Investor in Closed End Fund Litigation

On January 14, 2021, certain institutional investors brought an action against a group of closed-end funds organized as Massachusetts business trusts and their trustees seeking rescission of a control share bylaw provision and a declaratory judgment to the effect that the control share bylaw is illegal. The control share bylaw provision in question generally provides that an acquisition of shares that results in a shareholder owning more than 10 percent of a fund’s outstanding shares prevents that shareholder from voting shares in excess of 10 percent unless specifically authorized by the affirmative vote of fund’s other shareholders. The control share bylaw is intended to operate in a manner similar to control share provisions under state corporate statutes.

Plaintiffs contended that the control share bylaw was inconsistent with Section 18(i) of the Investment Company Act of 1940, which provides that “every share of stock . . . issued by a registered management company . . . shall be a voting stock and have equal voting rights with every other outstanding voting stock . . . .” The defendants presented numerous arguments against the plaintiffs’ contention, and in particular noted the staff of the SEC’s recission in May 2020 of a 2010 no-action letter (the Boulder letter) setting forth the staff’s former view that a closed-end fund opting into a state control share statute would be inconsistent with Section 18(i). On February 17, 2022, the U.S. District Court for the Southern District of New York granted a motion for summary judgment in favor of the plaintiffs on their claims for rescission of the control share bylaw and a declaratory judgment, concluding that the control share bylaw was inconsistent with Section 18(i) of the 1940 Act. In so deciding, the court focused on the plain language of Section 18(i), concluding that what makes a stock “voting” depends on its holder’s ability to “presently vote the stock,” and that a control share bylaw that deprives a shareholder of this ability, even temporarily, renders the stock not a “voting security” under the 1940 Act.

The order was issued under the caption Saba Capital CEF Opportunities 1, Ltd., et al. v. Nuveen Floating Rate Income Fund, et al., No. 21-cv-327. On February 25, 2022, the funds and their trustees filed a notice of their intention to appeal the district court’s order.

© 2022 Vedder PriceNational Law Review, Volume XII, Number 111
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About this Author

Deborah Bielicke Eades, Vedder Price Law Firm, Finance Attorney
Shareholder

Deborah Bielicke Eades joined Vedder Price P.C. as a shareholder and is a member of the firm’s Investment Services Group.

Ms. Eades has extensive experience in all aspects of mutual fund and investment adviser regulation and compliance, including product design, federal and state registration, representation of fund boards, portfolio compliance, derivative instruments, affiliated transactions, electronic commerce and Web site design, privacy matters and general regulatory matters.

312-609-7661
John Marten Investment Attorney Vedder Price Law FIrm
Shareholder

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

(312) 609 7753
Nathaniel Segal Investment Attorney Vedder Price Law Firm
Counsel

Nathaniel Segal is counsel at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due diligence...

(312) 609 7747
Jacob Tiedt,Vedder Price law firm investment services attorney
Shareholder

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

312-609-7697
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