Closed-End Funds at the US Supreme Court

Hey Matt, Ann and Mike here for another thrilling show. hopefully you like it. Okay? Glad to hear it. All right, Ann 3, 2, 1. Welcome to Shareholder Privacy from Free Float Media, a podcast about activist investing, securities law, and all the ways the financial and legal worlds intersect and collide in real life. After a couple weeks away to take care of some stuff. Ann Lipton and I have returned. Anne is a law professor at the University of Colorado, as we all know. She teaches and researches securities and business law. She looks after the legal end of our little podcast here. And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of our podcast. It has. So it's it's been a bit, been a been a minute, as they say. coup couple of weeks. How's it going? Are you all wrapped up? Are you all the grades are in? All the students have submitted their evaluations and Yeah, yeah, all the grades. Yes, they have. All the grades are in. so now it's just the research that one normally does over the summer. Right. So s just re writing and is there any conferences over this summer? Not really, right? Not the ones. okay. Not that I'm going to now, but so so I just am gonna stay here and try to get work done. Yeah. And what are you up to? Get your papers done. Cool. Well, I spent the last two weeks trying to put in my order for my SpaceX shares. No, not really. Though though and we'll talk about this at some point. I think we should Yeah, no, no, no, no, no, no. And not about the experience, no, no, no, no. Though you you wrote something, and we'll have to return to this, that 'cause I'm a Tesla shareholder, I think I'm gonna become a SpaceX shareholder. Did you? That that's my sign that I've been kidnapped. Yeah. Yeah, well I mean I'm I'm not predicting whether or not SpaceX is gonna acquire Tesla. Everyone seems to say they will. Reuters was reporting that Musk has talked about it internally. But yeah, but it it's possible that getting SpaceX just means buying Tesla at this point. I don't know. Right. Or or or and we talked about how SpaceX has a peculiar one of many parts of its share structure that seems targeted at setting aside shares to acquire Tesla. But who knows. So anyway, so I I otherwise I've been, you know, working on activist stuff and kinda wrapping up the as we say, proxy season and thinking it think thinking of new proxy new new activist situations to to un unleash Yeah. Hm. Cool. in the coming months. 'Cause this is actually you know, there's no no we we've talked about this. It there's it it's it's it's continues to be busy. I'll take a few weeks off a little later in the summer to kinda chill out, but we're planning and thinking and looking forward and trying to figure out what's what's next. So yeah. Yeah. that's great. Yeah. Anyway, so but that's not for today. We're not even gonna talk about SpaceX or Elon Musk today. We will we no, no, no he I don't think he gets involved in close in close end funds though. Right. but that's the subject of this yeah, cu yes, it does. Right, exactly. So let's talk about close in funds. Well, maybe not much. Maybe a little. It yeah, but I well, we'll see. As it turns out, everything comes back to Musk in the end, but we'll see. we and the the motivating factor, the proximate cause as we say, is a long awaited and not I think entirely surprising decision that affects close in funds and activist investors that try to compel change at close in funds. from of all places, the US Supreme Court. Yeah. Yes. So we'll talk about the case, which is interesting in many ways. and there's some important implications for it. But we're gonna begin first with some stuff about kind of closing funds a little more generally. 'cause they're it's it's a lesser known kind of corner of both the investing world and the activist world. So a little bit of of discussion about kind of who they are and sort of set some context, I think. that would be would you like that? Let's do that. All right. Yep. Let's do that. And once again, I'll just mention we have this mailbag. We have an email address. We get emails. we respond to emails and we read them. We read even and We read them. We read them. We got a couple last week. Who knows? Our email address is Sheraldoprimacy at freefloat.lc Excellent. Well yeah, keep just keep on letting us know what you want to hear from us. So, Wait, I'm sorry, I'm gonna have to pause so I can cough. Matt, when you hear this, please edit out my coughing. God. It's just bad this morning. All right. Yeah. So the Supreme Court decided this case, FS credit opportunities versus Saba Capital. And we actually, I'll just remind everyone, we talked about this case once before. Yeah, right. That's right. Right. let's let's okay. Mailbag at sharehold L L C. Okay. Over to you. Pretty much exactly a year ago, on our June eleven we did, on our June eleventh, twenty twenty-five show, June eleventh, twenty twenty five. at that and but when we did, because we were talking about activists, like what companies do to mess with activists. And so we were talking about some of the fights it was having. And but at that point, this particular case, the Supreme Court was still deciding whether it was even gonna hear it. well We did? man. Okay. They did decide to hear it and they heard it and we just got a decision. And we begin. Yeah. Yeah. It w I think December or something like that. So it was our it was argued sometime over the winter. And then and and and they they sent out their opinion last week. I think last week. All right. Yeah. Yeah. Yeah. It was la last Thursday. so this is a case we've got closed-end funds. So first we have to explain what a closed-end fund actually is. Right, right, yeah, yes, yes. Let me let me let me do that for a sec. some folks who are listening here know this, but there's probably a bunch who don't. and they're they're in investment funds. They're not like operating companies. Okay, it's it's big pots of money that get invested in different ways. And there's a whole different part of the law that apply to them. We'll talk about that in a little while. I like to think of them the the the analogy is basically to a publicly traded mutual fund. and it's not a mu not a mutual fund family, mutual fund company. It's the actual fund itself, as if it were publicly traded. So you can buy and sell shares in the individual fund entity. All right. so they have tickers, they're on the exchanges, they have a share price. Right. Yeah. But but what you're buying and selling if you're in there is just your share of the assets, of the financial assets in that particular fund. yeah, go ahead. Right. And I'll just say really quickly: this differs from an open-end mutual fund where you buy and sell shares from the fund. Like you buy and sell shares, but you buy them from the fund. These trade. So when you buy and sell shares, you're not buying from the fund, you're buying from another investor. And just with the Right. Right, right. Sh it's just like with any other publicly traded listing. Right. But what you're what you're you go. And they're a little different from ETFs, which also trade on an exchange, but they operate a little differently. So they're just they're its own thing. Right. Yeah, and they're and they're in that sense, because they're publicly traded pools of assets, they're a a a little alike, but the whole management of them starts to differ in some interesting ways, which will become a feature of our discussion here. it's not a very big sector. It's not. It mostly retail. There's it's like two hundred and fifty you're right. It's all retail yeah, right. It's like two hundred fifty I looked it up this morning. There's two hundred and fifty million or billion with a B on AUM in the US kind of today. The biggest one of these is about three billion dollars. So they're so they're not, you know, speak speaking of of Musk, you know, the whole sector market cap is approximately an eighth Because Mm-hmm. Right. of of the market cap of SpaceX. So, but it's all financial assets. So that's what's that's what's kind of interesting. And they're and they're and they're run largely by like big asset managers. So BlackRock has a whole group of these. I don't think Vanguard has many, but the New Veen has a bunch. There's a whole bunch of fund families that set up, you know, it's as if they decided to set up a new mutual fund but allowed people to buy and trade the shares of the fund on a market. So Yeah, in s yeah, instead of having sh people buy and sell from the fund directly like in an open fund. yeah. No, and buy so the price is set by the market, which is once again it's different from ETFs, which but it's so the price is set by the market, and this is why they're an activist. They're activists in the space. So there are a couple of Right, and to redeem re to redeem the shares. You just if you want it, you just gotta go on a market. You enter the ticker and you go buy Right. Right. And I Right. Well this I'm glad you brought that up 'cause the pr the price again is a market determined market clearing price. And you know, you could you know, I suppose you could find that trade exactly at the value of the assets. So if you're if right Which is what the minus fees they should, right? Like in a if in an efficient world, they should trade at exactly the price of the assets minus fees. Minus the fees. And the fees of course are for the management company to you know, to hire their people and to do compliance and to, you know, do a little bit of marketing and so forth. a few of these do trade at a premium. People actually pay more than the value of the assets to, you know, be able Right. Exactly. most of the time they trade at a discount. And this is again, this is a knock on, you know, mutual funds everywhere and Yeah, 'cause sometimes they get like hot s private companies, right? Like there was one yeah. these kind of funds is that, you know, y why would you need to go bu buy the fund? You could just you know, the the the assets are known. They know you you you can look up exactly how many shares they have of one or another publicly traded company. Sometimes you can't get access to some of the you know private entities there that are in this but most of the time it's collections of publicly traded equities, at least the ones we're looking at. sometimes there's debt instruments and there there's a whole range of things you can put in a close in fund. and they'll trade at a discount to the value of the assets. And sometimes the discount i well right and what you're paying for is sort of the convenience or the the management acting. Some there's a lot of dividend plays here that it's basically a way to get access to a collection of dividend paying So people think the fund is worth less than what it's actually holding. Assets. Anyway, so there's very again, I y I do you own a cl I don't own it. Do I don't do own closed and fund? I've bought a closed hand fund. No, I never bought one before. Right, yeah, right. Right, right. Okay. So so and there's an argument, you know, should these even exist? Are these are these even like a rational way to invest money? And again Okay. God no. No, just e e t e because they traded a discount. Because they're worth less than what they're holding. I let this say academics many think no because they traded a discount. Right. And and I don't and I don't think so either. Anyway, so that discount, which, you know, sometimes it's, you know, three, four, five percent, sometimes it's, you know, really does account for the fees. Sometimes it gets really low, ten, fifteen, twenty percent. Okay, and that attracts activism, attracts opportunists, okay? who are essentially the play for them is to Sometimes try to improve management. Try to s you know, tell the the fund to you gotta swap out a manager. That's hard if it's you know, the managers like BlackRock or something. but most of the time they're basically saying, you we're going to change out some of the board. Again, it's just like a they have a they have boards, they have or trustees or whatever, they have leadership and we're g right. Absolutely. Right. And Okay. Mm-hmm. Yeah, yeah. They're they may be formed as an actual corporation, so they have like a corporate structure. The ones we're trying to talk about are. the play would be you have X amount of you got a year to close the discount to try to manage this better, cut your fees, improve the investment performance, whatever, and get that discount, you know, down from ten per s you know, from twenty percent down to five percent or something like that. Because, you know, that means when the discount goes down, the price is going up. And it's the value of the publicly traded the price of the equity is going you're getting closer to what the value of the assets are. Okay. So so that's the play. And there's various tactics that you know you could try to do to try to close that discount if you're the management company. But anyway, so that's kind of the core of the activism. there's j just like it's not a very big sector in the whole, you know, realm of investments, there's not a whole lot of activists that do this. I know a couple. we'll talk about them the biggie, which is Saba. Okay. Okay. Right, that's the sovereign. Hmm. run by a guy been but right r r run by Boaz Weinstein who's a a fairly notable Wall Street a really good guy. I mean just very aggressive. I have a friend of mine, named Phil Goldstein, who runs a fund called Bulldog, which just in itself is a great name for a an activist an activist fund. And Phil's got a wonderful story himself. He was I don't know if you know this guy. He was a started life as a as an engineer. Okay. Wow. with the MTA in New York City. And he r he retired and he took his retirement money and he started investing it wisely. And now he's got like nine figures under management. So he's got a whole whole second career. Phil's a great guy. Anyway, he does closed end fund activism too. and again it's not for everybody. You gotta understand as we're about to see, a lot of nuance and how the law works and how the discounts work and how the funds are structured. So it's it's it's a little more of a specialty. Okay, right. Yeah. relative to the kind of stuff I do. I've never done a c n not only do I not invest in close in funds, I've never done a close in fund activist project. I've got some friends of mine. But yeah, go ahead. Right, yeah, I mean a lot of the time it's yeah, yeah, I mean that they close the discount, they I mean I think don't some of them just they just want to liquidate the you know, they go for liquidating the whole fund. Because if you sell the ass yeah, if you sell the assets for more than the share price is worth, then that's beneficial. Yeah, right. Yeah, or like exactly. That's it's and that's that's not a whole lot Right. Right. And that's not so dissimilar to, you know, an and A activist project where you say, Yeah, just s you gotta sell it or something. Exactly. So that's that's kind of it. A couple other kind of quick comments about Because they're investment companies and not like ordinary industrial or business entities or whatever, they're not subject to the universal proxy rule. Yeah, but for breaking up a company where the assets are worth yeah. So any of this activism, if you're tr and again, there's a lot of it where you're trying to threaten to change out trustees or directors, you don't benefit from universal proxy. so that's the and there's a couple other things along those lines, but the solicitation and so forth and the actual act tact activist tactics are a little a little more specialized. Mm-hmm. And and because they're and because they're retail shareholders who are holding the funds, they're harder to reach. I mean, the whole point, like you're not going to get control until you have board you have board seats and you don't have universal proxy. yeah, right. Yeah. That's right. So, and then because they're f you know, investment companies and so forth, they tend to be domiciled not necessarily in Delaware, but in other places. Maryland, just like with REITs, I think we've talked about this. Maryland's a very popular place to domicile these kind of vanities. And Maryland is famously investor hostile in its in its corp corporate code. Yeah, yeah. Yeah. Yeah. And Massa, yeah, also Massachusetts, right? Because that's the thing that like these states, their business and chartering is in these funds, not Delaware, where it's like general different kinds of companies, which means they can afford to set up a kind of law that's really protective of boards and really hostile to activism in a way that Delaware can't, because Delaware, since it's catering to a lot of different kinds of companies, you know, it can't really. Yeah, right. Put its thumb on the scale that way, but in or that far. But Maryland and Massachusetts much more hostile to activists. Right. Right. And and and and and in the case here involving F F S credit or whatever, which is, you know, the the the fund that in this case Saba Boaz Weinstein sued. I think they're Maryland. I thought they were Maryland. Yeah, okay. so that's that's kinda the context for this case. and you know, Saba does several of these a year. Yeah. There was Maryland. I mean there's there's many hundreds of of closed end funds with lots of rich discounts to try to go after. So Saba has made a bit of a specialty of trying to do that. They made a bunch of money doing it. You know, closing discounts and winding up funds and so forth and they're they're kind of feared here. so anyway, so so maybe this is a good time to talk a little bit about the case. So Yeah. Yeah. So I mean, well, what these funds are doing is they adopt takeover defenses, and these are very similar to the kinds of takeover defenses that you would see in any other ordinary corporation. They're just like But sometimes they go much further than what an ordinary corporation could do, because an ordinary corporation, which is likely organized in Delaware, Delaware, I mean, it's pretty board-friendly, but there are limits to how far far a board can go to fend off a proxy contest. So, however, Saba has tried this when it's you know, the way this would work in an ordinary corporation is you would sue for breach of fiduciary duty, that the board is, you know, entrenching itself to the point where you can't dislodge them. Right. And that's a violation of fiduciary duty. And sometimes that's somewhat successful in Delaware. But in Maryland and Massachusetts, where Saba has tried that, they have had less success in arguing that the takeover defenses are a violation of fiduciary duty. So instead, what they've done is they've turned to another argument that because these funds they're they're investment companies, they're regulated under federal law, and in particular, the Investment Company Act of 1940. Right. And that statute has some certain hard limits on fund structure. so Saba's been arguing that the fund takeover defenses, at least some of them, violate the limits on fund structure that are set out in the Investment Company Act, the ICA. And this partic yeah. interesting. Okay, so let me make make sure I get this. So, 'cause again I'm not a close on fund investor, so I'm I really so normally they would all be organized and in these two states, Massachusetts and Maryland, and there's lots of very strong takeover defenses. And Yeah. Saba, instead of trying to challenge those defenses, because clearly, you know, Maryland's not gonna Yeah, right, they're not gonna, you know, go away. So his tactic was to try to enforce or try to get change by enforcing provisions of the federal law, the ICA. Okay. It has. It it just Yeah. Exactly, because federal law has some hard limits on what you can do with an investment company that don't exist for ordinary corporations. Well, in this particular, there are a couple of different limits, but because basically, you know, they they investment companies regulated under federal law have a lot more hard limits on like how each share has to be equivalent to other shares. So in this particular case, the one that went to the Supreme Court, we're dealing with Maryland's control share acquisition statute. Okay, okay. And what and what are those involved? Go ahead. Now, a lot of states have these. The issue is just how it applies in the context of an investment company. So a lot of states have a control share acquisition statute. And a control share acquisition statute says if someone acquires more than a specified percentage of shares, they aren't allowed to vote the excess unless the remaining shareholders vote to allow them to do so. So you can buy as many shares as you like and you have the economic exposure of as many shares as you like. Yeah. But in a control share acquisition situation, after some threshold percentage, you can't vote your shares unless all the other shareholders vote to allow you to do that. So Maryland, you no, well it depends. In in Maryland, is it's by two-thirds. So these funds, they were incorporated in Maryland, and Maryland's statute is really draconian. The fund has to opt in by passing a bylaw. Like unanimous, unanimous approval. Fine. Okay. We take advantage of the c closed end oppos of the of the of the control share acquisition statute, which they did. When they passed that bylaw, then if you get more than 10% of the shares, you can't vote anything over 10% unless the remaining shares, which again are retail, they're hard to corral, vote by two-thirds to let you. So these funds opted into the control share acquisition statute. And the problem is, and this is the argument that Saba made, is that This statute is potentially illegal under the Investment Company Act as applied to funds, not as applied to ordinary companies, because the Investment Company Act has a provision that says all shares have to have equal voting rights. So Saba's claim is that if you neutralize the shares that we hold over 10%, that you know violates the act, which requires all shares have the same voting rights. It violates federal law. So interesting. Okay. So s y go ahead. Yeah. No, so what happens then is Saba decides that it wants to challenge these funds that have opted into this control share acquisition statute by passing bylaws, but it doesn't actually acquire more than 10%. Instead, Saba goes to court and argues: look, we don't know for sure if you're going to invalidate this statute. And if you're going to keep this statute in place, there is no point to us acquiring more than 10%. And we need to know before we invest our money. sure. in this comp in these companies, whether or not this statute is enforceable. So it sues the funds under federal law, not Maryland corporate law, not Maryland fiduciary law. It sues under federal law, under the Investment Company Act, and argues that up for a declaration that this control share provision is illegal, which would then free them up to buy more than 10%. Okay, right. More more than ten percent. Okay, and that's that's what gets kind of interesting here. Be And that and the second circuit, yeah, and the second circuit agrees with them. The second circuit says, yep, we agree with you. This violate these are we're and we're gonna, you know, we we will, you know, rescind the bylaw, whatever. You the they can't take advantage of the control share acquisition statute. And that's what goes to the Supreme Court. But when it goes to the Yeah, go, no, you yeah. Mm-hmm. That's right. It's invalid. Alright, so li go ahead, go to the Supreme Court. Okay, so I just wanna backtrack in sec. So because this is really interesting. 'Cause these are publicly traded, it's it may take a while, but Saba or anybody can accumulate shares. Okay. Okay. whatever, right, but you can go by and and if you wanted to go by if if if Saba wanted to buy ten, fifteen, sixteen percent, you just gotta bid. Well, yeah, except some funds have done poison pills and other things, but yes. Yeah, you just gotta buy them. But he doesn't wanna do right. a bit of premium. Right. But it didn't want to do that unless they knew they could vote all fifteen, let's say it's fifteen percent. Okay. you know, they're never going to get to the two thirds to invalidate this, but they wanted to be able to get enough of a stake where their votes could matter. Exactly. Exactly. So they wanted to be able to get to twenty per something like that. Okay. It wouldn't be that difficult over a period of weeks or maybe a very small number of months to just accumulate or maybe buy blocks. Again, these are all retail shareholders. Okay. So so they wanted to be able to get enough so that they would have a a significant influence over the voting outcome at the next, you know, shareholder meeting. Right, right. Okay, but the problem was is the state law that these that and F S and a bunch of others had opted into said, no no no no no. Anything more than ten percent ain't gonna count in the vote. So you're gonna have all this econom it's like the opposite of of of dual class shares. Where where where you you have a small economic interest and an outsized voting interest, here you'll you could have a huge economic interest and a much smaller voting interest. Yeah. Exactly. Okay. And so and what I heard you say was that the Investment Company Act or the idea was the Investment Company Act made these structures illegal because it wasn't one share, one vote. Okay. Exactly. And that's what the Second Circuit held. But then it goes to the Supreme Court. And when it gets to Yeah but when it gets to the Supreme Court, the issue is not whether this violates the Investment Company Act. That is not what the Supreme Court is deciding. What the Supreme Court is deciding is whether Saba specifically is allowed to sue under the Investment Company Act at all. All right, the w yeah, go ahead, go to the Supreme Court. Okay. Like whether it's illegal under the Investment Company Act is a completely separate question. It's not on the table. The only question is whether Saba's allowed to file a complaint that says, you violated the Investment Company Act and I want you to rescind your bylaw. All right, let's take a look at that in a minute. After a quick break. Here. All right? Here at shareholder primacy. All right. that was good. why don't you cough? you were really you were really kinda you're really kinda holding off there. Matt, Matt, you this poor poor Anne. Anne's like Anne's in a bad way today. So all right, okay. Okay. Did you okay All right. Well, that's what we're here for. Okay. Absolutely. god. I'm so like that. I really have to cough. god. I mean I'm fine. I don't even have a cold. I just have this cough. It's ridiculous. And it's worse when I talk. All right. Let me let me do are you ready? You're good? Alright, good. all right. three, two, one, over to you, Anne. Welcome back to Sherald Primacy. I'm Ann Litton here with Mike Levin, and we're looking at this case, FS Credit Opportunities versus Saba Capital, that the Supreme Court just decided. Mm-hmm. Prevailed. Right. And it was at the Supreme Court, on appeal after Saba prevailed in in at at appellate court, probably district and appellate the whole process. And they did and they did di w in the in the appeals court did they win on the merits of whether okay, so the so so the the appeals court said absolutely, the investment company act supersedes In the second circuit. Yeah. So the side The the these terms of the Investment Company Act made illegal the Maryland statute that allows them to limit your voting power to ten percent, no matter whether you own twenty or thirty or eighty percent of the shares. That is illegal and wrong and is contradicted by federal statute. Great. And then they went to the Supreme Court and what they argue. Mm-hmm. That's exactly what Yes. And but then but it goes to the Supreme Court. But well the Supreme Court once again is not deciding if this violates the Investment Company Act. They're deciding whether Saba can sue under the Investment Company Act. We will stipulate that for sure the SEC can. Anytime the SEC wants to, it can come in and say this violates federal law. The question is whether SABA, as not the SEC, is just a random investor gets to sue as a private party. And now we have to talk a little bit about the history here of this concept of whether a statute, whether a federal statute lets private parties sue. For many years, for a long time. Right. As a pr as a priv private party, a private action. Yeah, right. The Supreme Court made it very easy for private plaintiffs like Saba to bring a lawsuit claiming that someone violated federal law. And starting in the 1970s, the Supreme Court took a different view. In the 70s, the Supreme Court started to say, no, just because someone violates federal law doesn't mean a private individual gets to sue. Usually, federal law is only enforced by the federal government. And the Supreme Court starts taking a new approach. Now it says we will only let private plaintiffs sue if the statute itself is clear that Congress intended to let private plaintiffs sue. If the statute doesn't make that clear, the law can be enforced only by the feds and not private plaintiffs. So it used to be like openly, like if the statute just prohibited someone and a pri prohibited some act, and a private plaintiff said, You engaged in the prohibited act, and by the way, it hurt me, the Supreme Court was pretty much like, yeah, feel free to sue. But now the Supreme Court is saying no. If Congress wants a private plaintiff to be able to sue, Congress has to make that clear in the text of the statute. So the issue that gets to the Supreme Court is whether Sabah, who doesn't even have 10%, they just maybe want to acquire 10%. Does Saba get to sue under the Investment Company Act? Well, yeah, so you have to get to the actual text of the ICA. And this is where this conversation gets difficult. W w what Yeah. Right, yeah. So what does the ICA say here? Because it's hard to talk about actual text without like putting it on a screen for my students and let's go through the actual text. Yeah. Right. No, no, no. It's just that it's just you've got to Yeah, you have to have the you've got to have the text in your head. No, this is not like awkward, like, no, I'm gonna reveal the secrets of the ICA. No, it's just that it's it explaining what the text says in this audio only medium is not the best way. d di di di diff difficult to comprehend, not like you and I like have some sort of trouble talking about it with each other. Okay. 'Cause you know, you and I we get we get along pretty well. I think So so so we're we're gonna ask our followers here to kind of indulge us with a slight bit of patience as we help with the ICA. Yeah, yeah, follow along or Google it. It's section forty-seven of the ICA. but the so if you want to go look at it, you can. But Saba argues there's a specific provision, section 47, of the ICA, that gives it the right to sue. And here's what that provision says. The provision concerns the validity of contracts, and it has two parts. The first part says if a contract involves a violation Great. Of the investment company act, it's unenforceable unless, and there's an exception, it would be more equitable to enforce the contract, and the contract can be enforced without undermining the I the Act itself. But basically, it says contracts that involve the vi a violation of the ICA are unenforceable most of the time. That's the first part. The second part of the statute says if the contract has already been performed. So it's not like someone's seeking to enforce the contract. This the contract's already happened. You've done everybody's acted under the contract. If it's already been performed, then the statute says a court may not deny rescission to a party unless, again, it would be inequitable to rescind the contract. So the statute deals with these two circumstances. Somebody's seeking to enforce a contract that would would involve a violation of the of the act. Yeah, right. Or someone seeking rescission to rescind the contract that's already per been performed that would violate the ICA. Now, this is not Saba suing to enforce the contract. That's the last thing they want to do. They want to rescind it. The Saba says this corporation adopted this control share acquisition bylaw, and I am seeking to rescind it on the ground that it violates the act. And remember, the act says a court may not deny rescission to a party. y pff the right. No, right. If the contract violates the act, unless doing so would be inequitable. So again, the question isn't whether this provision violates the act. The question is whether the statute that says a court may not deny recession to a party is something that Saba can sue over to get that recession. Okay. This is what this that's that's what's before the Supreme Court. And the Supreme Court says, no. Okay. I think I follow. But yeah, right. So so so that's what so that's what they argued. Okay, go ahead. No, this does not allow Saba to sue. And it is very that second part does not allow Saba to sue. And without looking at the precise wording, without like holding it up, it's really difficult to convey just how wacky the reasoning was. Because anyone looking at this statute would say, it seems really clear that the statute has two parts. A party can't be forced to comply with an unlawful contract. That's the first part of the statute. And the second part is. The si tha that second part was in fact is not a Okay. A party gets to rescind an unlawful contract that's already been performed. That's the second part. Two parts: mirror images. You can't be forced to comply with the contract that hasn't actually been performed. And you get to rescind the unlawful contract that's already been performed. Right with the act that these contracts are unenforceable in advance, and you can rescind them if they've already been performed. But the court decides actually. On un on a full contract, right. Right. Right. Right. So th that seems like a fairly complete way to compel and for compel compliance with this law. Right. Okay. That second part, the part about rescission, does not give Saba a freestanding right to sue. Instead, the court says, and I try to follow, which is hard to explain because it's so crazy. The court says, rescission, rescinding a contract, it's a remedy. It's a remedy that the court grants when there's been some other legal wrong. And that remedy is undo the contract, restore everyone to their prior positions. Usually, Yes. Yes. says the Supreme Court, under state contract law, you cannot get recession for a contract that's already been performed. It is not a remedy that's available in an ordinary contract under state law. And we have had this conversation before and this is why I say Elon Musk keeps making these random appearances. Remember we talked about Elon Musk's pay package at the Delaware Supreme Court. Chancellor McCormick rescinded the pay and the Delaware Court reversed. And the reason the court gave was yeah, okay. Yes. Yes. Sure. You can't get rescission for a contract that's already been performed because you can't restore everyone to their original position. So the Supreme Court says that's right. That's what state law usually says. It says that if you have a contract that is bad for some reason, you can't get recision as a remedy after it's already been performed. It's not available. So what the Investment Company Act does, it says if there's a contract that's been performed. Right. And a party finds some other basis to sue over it, then federal law steps in and says, I'm adding recision to the possible remedies because this contract also violates the Investment Company Act. All the law does is change the usual rule. The usual rule is if you sue on a contract for some reason, like the contract that that's already been performed, you can't get recession. This act says, but if you sue on a contract for some Okay. Yeah. random grounds and it's already been performed and it also violates the investment company act. Then what the act does is it gives you this extra remedy. Recession gets added to the list of available remedies, which means you have to find a contract that violates two laws. It violates the investment company act and then you have to have some other reason to sue over it. At which point the investment company act says this is also a contract that violates federal law. We can rescind it Right. Recession. Right. both the federal and the state. So you have to find a contract that's illegal for some other reason, like it was fraudulent or it was a breach of fiduciary duty. And then you can sue under right, right, whatever that other grounds is to sue, and then you sue on the contract, and then the Investment Company Act comes in and says, you get an extra remedy that you might not otherwise have had under state law. We will rescind the whole contract. And that's crazy. Why would you think Congress wanted this? Right, or it's against public policy or whatever, yeah, right. Right, yeah, I did. The idea that Congress is like, yeah, this contract violates the Investment Company Act, but we don't care unless it also violates some other random state law that we don't know what it is. I mean, if you just say it out loud, it sounds like that can't possibly be what they held, but that's what they held. So the SEC can still sue, but Saba can't sue under the Act directly. It has to find some other reason this contract is bad, and then it gets rescission. Some other some other some other st statute. That's what they that's what that's what it said in the in the in the opinion. wow. And then that get and then that and then that rescission remedy is is is po is available. all right. So so importantly, I think it's fair to summarize that the Saba was right that the the the ten percent threshold provisions in the Maryland code, Maryland statute, in fact ca are are contradicted by the ICA. As as a remedy. Well that's certainly what the Second Circuit held. It's not what the Supreme Court even answered that question. Yes. Right, right, right. So so so all the judges who've looked at this case has have agreed with them. Right. The Supreme Court didn't consider that case, they just considered whether Saba kinda had the standing to s to sue. And said you said you can't be and they c they said, look, if the SEC wants to go after FS, Kev at it. But we both know that the SEC has got other bigger bigger f Right to sue. Exactly. Not standing as but you're right. The SEC could. Well, the SEC not only that, like the government weighed in on FS's side that Saba can't suit. Yeah, they filed an they did. So Or they did they did an amicus brief or something. no kidding. all right. So so so Saba either has to find another law that they broke. Well, that's the thing. That's that, well, that's actually so this is what how I understand it. Although I'm not sure I'm getting it right because the Supreme Court doesn't understand corporate law, and I don't know that they thought this far ahead. But here's what I think Saba could do. Remember, Saba doesn't actually have 10%. It's suing in advance to get a court to rescind the bylaw. So now we know it can't do that. But as I understand the court's opinion, I think if Saba did Actually acquire more than 10%, then it would be able to sue. Because here's how I see it play out. Saba gets 15%, as you say. Then there's a proxy contest and it tries to vote all 15% of its shares. And at that point, the company says, we are not acknowledging the extra 5%. And it right. Right. And then Saba sues. And under state corporate law, Maryland corporate law. Right. Right, you can o right, right, right, right. We're gonna we're gonna only count ten percent. Well, can only count two thirds of your shares. Right. And says, this fund is denying my right to vote my shares. That's ridiculous. You can't just ignore somebody's votes. The fund is illegally refusing to let me vote my shares. And then the fund says, aha, we don't have to let you vote your shares because we have this bylaw. And that's when Saba says, Aha, that provision violates the Investment Company Act. And you cannot deny my right to recession. I'm not sure, but I think that might work. Yes. Right. 'Cause we opted into this part of the law. Yeah, right, right, right. Yeah the I okay, got it. Okay. I can't be sure because the Supreme Court doesn't understand corporate law and doesn't clarify. I can't be sure. Okay. You can you can be sure that Saba is a resourceful and aggressive and does not like to lose type of fund. That if they're listening and they could be, I have friends of mine that represent them. they they may be trying that. They may that may be their next move. So They they might, but but but the whole point is they didn't want to buy the 10%. So I feel like this is the same dynamics of things like the advanced notice bylaws that we've talked about, where you want yeah, you like well it's not no, it's not it's just that you don't want to like get into the engagement to begin with unless you know that you're not gonna have to comply with this stupid bylaw and the fact that it's there and that you have to litigate it is another Yes, right. Where it's it needs to be ripe kind of thing. barrier. But right, but I think if they acquire actually more than 10%, they can try again. So that's the first thing. The second issue is what does this mean for other securities law provisions? Because remember, we're here because the Supreme Court has, since the 1970s, said we're not going to just assume private parties can sue if someone randomly violates federal law. Instead, the law actually has to say private parties can sue, otherwise, only the feds can sue. Like an obstacle. Okay, go ahead. So the big issue here, and I've seen people comment on this, is Section 10B of the Exchange Act. That is right, right, the big anti-fraud provision, and it doesn't say anything about private parties suing. It just prohibits fraud. Courts have assumed since like the early 40s that private parties can sue, but it doesn't actually say that. So is this at risk? My I don't think it actually is at risk. that's the fra anti fraud. That's the fraud right. Interesting. And there are couple of reasons why, but the main one is this. In 1995, Congress passed the Private Securities Litigation Reform Act, the PSLRA. Right. It adopts a lot of new procedural provisions for how private securities fraud lawsuits and 10B lawsuits in particular proceed. Ever since that statute passed in 1995, the Supreme Court has held the PSLRA represents Congress ratifying. PS LR, right. the private right of action under 10 B. It's not an impl it it's not implied anymore. Like once upon a time courts just kind of assumed private plaintiffs could sue under 10 B. But after Congress passed this whole structure of how private litigation should proceed, that was Congress saying, yes, in fact they can sue. So it's not really like we're just implying that private right of action anymore. So that's the second thing. Yeah, it's the pe Okay. So it's that's not that's not necessarily in the ICA, but it's in the P S L R A, which was that an amendment to the ICA? Or was that a separate law? Okay, but but it basically i i i it was as if for our purposes it was as if the ICA permitted the the ten B cases from private parties. Okay. No, the PSL array is a completely different s it's completely s it's a completely satisfaction. 'Cause the Yeah. Yeah. Yeah, yeah. It's actually the investment company, yeah. The PSLRA actually meant the Exchange Act. The 10B is part of the Exchange Act, which is, yeah, but yeah, but yeah. It's as though it's as if Congress had come along and said, by the way, when private plaintiffs sue under the ICA, here are the rules they have to follow. That would be Congress suggesting that you can in fact sue under the ICA. but that leads to thing three, and this is what scares me. Remember. Whatever. Okay, great. Okay, cool. Okay. This entire case, whether Sabah can sue. The whole issue was whether Sabah can sue based on a provision that says contracts to violate the investment company act are invalid. Where's the contract? What's the contract here? The bylaw! The bylaw! These funds, by adopting a bylaw, opting into Maryland's control share statute, formed a contract with fund shareholders. I was gonna ask that. Is the contract is the bylaw it's okay. And in this case, everyone, both sides, Saba and everybody else agreed. This bylaw is a contract and therefore potentially subject to the statutory provisions that invalidate contracts to violate the act. That wasn't something the Supreme Court questioned. It was assumed a bylaw is a contract. It didn't even ask that question because all the parties agreed. But I don't think bylaws are contracts. And I think I think the reason Saba, by the way, shouldn't have been able to sue, I don't mean I think as a policy matter they should have, but legally, the argument that I find persuasive is it's not a contract. It's not what the ICA had in mind. The ICA was thinking about actual contracts, like in yeah, you know, like an actual yeah Yeah, like, like, like exactly like where this has come up before is things like the fund has a contract with an investment advisor. Those kinds of contracts, not bylaws. Like contracts between two parties where there's all the elements of contract that you learn in law school. But in this case, everyone agreed that bylaws are contracts, and the case kind of proceeded on that basis. And here's why it's a problem: SpaceX, because we can never get away from Elon Musk, SpaceX just went public with a bylaw that says all shareholders have to arbitrate federal securities claims. And someday someone's gonna challenge that bylaw. And when they do, the critical question is gonna be whether bylaws are contracts. Yes. Whether this was the equivalent of a contract to arbitrate. And what's been happening, and I've been tearing my hair over this for several years now, is courts are just assuming bylaws are contracts without really asking about whether they actually are. Contract, exactly, what creates a contract. And that's what the Supreme Court did here. So one day, when the SpaceX bylaws get challenged, for sure, plaintiffs are going to say, We're w right looking into the element of c c comparing a bylaw to the kind right, yeah, yeah, yeah. under under the federal yeah, right. Okay. Yeah, they're th though the bylaws get challenged and they say and and share and the shareholders are gonna say this is not really a contract to arbitrate and therefore it's not binding. And the plaintiffs are gonna say bylaws are not contracts. And SpaceX is gonna say, didn't you read the Sabah case? And at that point the plaintiffs are gonna say, but the Supreme Court didn't ask about whether bylaws are contracts in that case. They just assumed they were. But the Yeah, right. Right. That's reasonable argument, but this keeps happening. Courts, especially federal courts, especially the ones that don't specialize in corporate law, they just assume bylaws or contracts without really thinking about it. And sooner or later, that's gonna get so woven into the doctrine that it will be very hard to kick loose, even though the premise has never been really examined. And that's what really scares me. It's the aspect of this case that's a real threat to 10B actions, that this is gonna be cited for arbitration bylaws or contracts, and therefore they're binding on all shareholders. so this this is not merely of interest to like Boaz Weinstein and the ten funds he wanted or to all closed end fund litigation, but this could have wide ranging implications for all sorts of federal securities law litigation. R on this sadly, yes. no. Okay. man. All right, well this is this is instructive. Wow. No. Sadly, yes. I've been writing I've been arguing that bylaws are not contracts for ten years. I didn't I hadn't quite focused on the deeper implications, but I'm glad at least somebody's thinking about it, namely you. So For a long time, I know. And which is kinda fun because I said 'cause I've said before to like very naive shareholders, read the bylaws, it's kinda like your contract. But Yeah. Yeah. Interpret like like so one of the things that was said, like in the lower court decisions, by the way, I'll just mention this because courts do this all the time. Is the court like the lower court decisions say things like bylaws are contracts, and then for the they cite for that proposition a case that says we interpret bylaws like contracts. That's not the same thing at all. How you interpret something, it's like there are rules of construction. That's not the same thing. But anyway. Right. R anyway, cool. All right, let's let's set this aside for now. Maybe move on to some other stuff. All right. Cool. Yes. Alrighty, this is Shareholder Primacy, hosted by Ann Lipton and me, Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations. Anne is Professor of Law and the Lawrence W. Demuth Chair of Business Law at the University of Colorado Law School. You can find me, Mike, at the activistinvestor.com. You can find Anne at Law.colorado.edu. Our podcast is produced and distributed by FreeFloat Media. Thanks for listening. We'll talk again soon. Let me stop our recording.