Facts of the Case

Provided by Oyez

Investment funds organized as closed-end mutual funds under Maryland law adopted “control share provisions” that stripped voting rights from shareholders who owned 10% or more of a fund’s shares. These provisions were adopted in response to activist investor Saba Capital, which had been acquiring large positions in underperforming closed-end funds with the goal of unlocking shareholder value through various strategies, including electing new directors and advocating for share buybacks.

Saba Capital sued sixteen closed-end funds in June 2023, seeking rescission of these control share provisions. Saba argued that the provisions violated Section 18(i) of the Investment Company Act (ICA), which requires that “every share of stock shall be a voting stock and have equal voting rights with every other outstanding stock.” Saba brought its lawsuit under Section 47(b) of the ICA, relying on Second Circuit precedent that recognized an implied private right of action for parties seeking to rescind contracts that violate the ICA.

The U.S. District Court for the Southern District of New York granted summary judgment in favor of Saba against eleven of the funds (five were dismissed due to forum selection clauses requiring suit in Maryland). The district court held that the control share provisions violated the ICA’s equal voting rights mandate and ordered their rescission. The U.S. Court of Appeals for the Second Circuit affirmed this decision in a summary order.

Questions

  1. Does Section 47(b) of the ICA, 15 U.S.C. § 80a-46 (b), create an implied private right of action?

Conclusions

  1. Section 47(b) of the Investment Company Act (ICA) does not give private individuals the power to sue for rescission—meaning a court order canceling a contract—when they allege a contract violates the Act; that enforcement power belongs to the Securities and Exchange Commission. Justice Barrett authored the 6-3 majority opinion, joined by Chief Justice Roberts and Justices Thomas, Alito, Gorsuch, and Kavanaugh.

    For a statute to create a private right of action, it must use "rights-creating language" that focuses on protecting a specific class of people, not merely a directive aimed at regulating courts or other institutions. Section 47(b)'s operative phrase—"a court may not deny rescission at the instance of any party"—places a court, not an individual, at the center of the provision. The phrase "at the instance of any party" means "at the urging of" a party already before the court, not a grant of authority for anyone to file a new lawsuit. Crucially, rescission is a remedy under contract law, not a standalone cause of action; parties typically reach court seeking rescission through some other underlying legal claim, such as a breach-of-contract suit. Section 47(b)'s actual function is to override a common-law rule that generally prevented courts from unwinding contracts that had already been fully carried out—it unlocks a remedy, it does not create a right to sue.

    The ICA's broader structure reinforces this conclusion. Congress built a comprehensive enforcement scheme centered on the SEC and expressly created only two narrow private rights of action elsewhere in the statute. When Congress wanted private enforcement in the ICA, it said so explicitly and in detail, assigning burdens of proof, capping damages, and designating forums. The existence of that express scheme makes it implausible that Congress silently created a sweeping third private right through Section 47(b). Saba's reliance on Transamerica Mortgage Advisors, Inc. v. Lewis (TAMA)—which found an implied private right of action in parallel language in the Investment Advisers Act based on the phrase "shall be void"—also fails because Congress specifically deleted that "shall be void" language when it rewrote Section 47(b) in 1980, replacing it with court-directed language while retaining "shall be void" in the immediately adjacent provision. That deliberate change signals a deliberate difference in meaning.

    Justice Elena Kagan dissented, arguing that the text, structure, and statutory history of Section 47(b) support recognizing a private right of action, and joining Parts I and II of Justice Ketanji Brown Jackson's dissent while declining to engage in the legislative history debate.

    Justice Jackson dissented (joined by Justice Sonia Sotomayor, and by Justice Kagan as to Parts I and II), arguing that the majority misreads Section 47(b)'s text, that Congress amended the statute one year after TAMA with full awareness of that decision and chose language that preserved—rather than eliminated—the implied private right of action for rescission, and that the majority's refusal to consult legislative history causes it to ignore explicit congressional committee statements expressing intent to preserve private suits under the amended statute.