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Background
The Supreme Court agreed to hear FS Credit Opportunities Corp., et al. v. Saba Capital Master fund, et al. to resolve whether Section 47(b) of the Investment Company Act of 1940 (Act) allows private parties to bring lawsuits against registered investment companies to rescind contracts (including corporate bylaws) that allegedly violate the Act.
In FS Credit, Saba Capital (a hedge fund investor) sued several closed-end funds under Section 47(b), arguing that the funds’ “control-share” provisions violated the Act’s equal voting rights provision and seeking rescission. The district court held—and the Second Circuit affirmed—that Section 47(b) provided a vehicle for Saba’s claims and that the control-share provisions were unlawful. The closed-end funds sought Supreme Court review to resolve the existing circuit split and provide clarity on this issue.
On 11 June 2026, the Supreme Court held that Section 47(b) does not impliedly empower private parties to sue for rescission of contracts that allegedly violate the Act.
High-Level Takeaways
The central question was how to interpret Section 47(b), which provides that a “court may not deny rescission at the instance of any party,” where a contract allegedly violates the Act.
The Court held that Section 47(b) does not create a private right of action enabling investors or other parties to sue registrants to void contracts that may violate the Act. Accepting the petitioners’ position, the Court refused to derive an implied private right of action from the statutory text and rejected the argument—advanced by Saba and the dissent—that the Act’s legislative history indicated Congressional intent for such a right.
This holding significantly reduces litigation risk by precluding shareholders from filing suits in federal court under Section 47(b). Enforcement authority under the Act—with two noted statutory exceptions—will remain squarely under the SEC’s purview. Nonetheless, investment companies should continue to review governance documents with counsel, reevaluate litigation exposure under the Act, monitor activist-investor strategies, and track any SEC response or congressional proposals that may follow.
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