At a Glance
- Shareholders can no longer invoke Section 47(b) as a basis for suing to rescind governance arrangements — including control share resolutions adopted under the Maryland Control Share Acquisition Act or similar state statutes.
- Shareholders may still bring claims under the two express private rights of action in the 1940 Act (fiduciary duty suits under Section 36(b) and short-swing profit recovery). Additionally, state-law claims remain available.
- While the pathway for private suits under Section 47(b) is closed, the 1940 Act's substantive requirements — including the equal voting rights provision — remain fully in force. Funds should continue to ensure compliance, as the SEC may still act.
On June 11, 2026, the US Supreme Court issued its decision in FS Credit Opportunities Corp. et al. v. Saba Capital Master Fund, Ltd. et al., ruling in favor of closed-end funds and finding that Section 47(b) of the Investment Company Act of 1940 (the 1940 Act) does not impliedly authorize shareholders to sue funds in federal court for alleged violations of the 1940 Act. The decision resolves a circuit split and carries significant implications for closed-end fund governance, shareholder activism, and shareholder litigation.
Background
The petitioners, a group of closed-end funds incorporated in Maryland (the Funds), adopted resolutions opting into the Maryland Control Share Acquisition Act (MCSAA). The MCSAA is a control share statute that limits voting rights for shareholders who acquire a disproportionate number of shares — such as activist investors — unless other shareholders vote to approve those rights. The MCSAA is designed to prevent rapid shifts in fund control by requiring that shareholders holding significant stakes obtain the approval of other shareholders before exercising full voting rights. This mechanism is particularly relevant for closed-end funds, whose fixed-share structure and long-term investment horizon make them frequent targets of activist campaigns.
The respondent, Saba Capital (Saba), is an activist investor in the Funds. In June 2023, after the Funds adopted the MCSAA resolutions, Saba sued the Funds for allegedly restricting its voting rights and violating the 1940 Act's requirement that every share of stock be a voting stock with equal voting rights under Section 18(i) of the 1940 Act. As its basis for bringing the lawsuit, Saba invoked Section 47(b) of the 1940 Act, seeking rescission of the contracts implementing the resolutions.
The Southern District of New York held that Section 47(b) creates an implied private right of action to sue for contract rescission, and the Second Circuit affirmed. The US Supreme Court granted certiorari to resolve a circuit split on whether Section 47(b) contains an implied private right of action. Other circuits — including the Third and Ninth Circuits — had previously declined to find such an implied right.
The Court's Holding and Reasoning
The Court found that Section 47(b) of the 1940 Act does not impliedly empower private parties to sue for rescission of contracts that allegedly violate the 1940 Act. In so doing, the Court relied on the following key reasons.
No Rights-Creating Language
First, the Court emphasized that Congress, not the judiciary, decides who may enforce federal law. To create a private right, a statute must use "rights-creating language" aimed at protecting a particular class of persons. Applying this framework, the Court concluded that Section 47(b) is a "mandate directed to courts" rather than a provision conferring rights on a specified class of persons. The key actor in the provision is "a court," not an individual, and the provision instructs courts not to deny the remedy of rescission to parties who request it for performed contracts unless the equities and statutory purposes favor a different result. In other words, Section 47(b) presupposes that parties are already before the court and directs the court's use of its remedial authority — it says nothing about creating a right to sue in the first instance.
Rescission Is a Remedy, Not a Cause of Action
The Court further noted that contract law has always treated rescission as a remedy, not a cause of action. Suits seeking rescission are more appropriate under state law claims, and Section 47(b) overrides the common-law rule that disfavors rescission of fully performed contracts.
SEC Enforcement
The Court emphasized that Congress entrusted the SEC with primary responsibility for enforcing the 1940 Act, including the authority to investigate violations and bring actions in federal court for injunctive relief or civil monetary penalties. The existence of this comprehensive enforcement scheme — combined with Congress's decision to expressly authorize only two narrow private rights of action elsewhere in the 1940 Act — further confirmed that Section 47(b) does not create an additional, implied private cause of action.
What This Means for Your Fund
Reduced Private Litigation Risk
Shareholders can no longer invoke Section 47(b) as a basis for suing to rescind governance arrangements — including control share resolutions adopted under the MCSAA or similar state statutes. This eliminates a legal theory that had been used to challenge fund governance structures in federal court.
Greater Certainty for Governance Decisions
Funds that have opted into the MCSAA or comparable state-law protections can take comfort that these arrangements are now far less susceptible to private attack under the 1940 Act. Funds considering whether to adopt similar resolutions now face a significantly more favorable litigation landscape.
Remaining Channels for Challenge
The decision does not eliminate all avenues of challenge. The SEC retains full authority to investigate and bring enforcement actions for any violation of the 1940 Act. Shareholders may also bring claims under the two express private rights of action in the 1940 Act (fiduciary duty suits under Section 36(b) and short-swing profit recovery). Additionally, state-law claims remain available. The underlying question of whether MCSAA resolutions violate Section 18(i)'s equal-voting-rights requirement was not addressed on the merits.
Compliance Remains Essential
While the pathway for private suits under Section 47(b) is closed, the 1940 Act's substantive requirements — including the equal voting rights provision — remain fully in force. Funds should continue to ensure compliance, as the SEC may still act.
