US Supreme Court Holds That Section 47(b) of the Investment Company Act Does Not Create a Private Right of Action for Investors

On June 11, in an opinion written by Justice Amy Coney Barrett, the U.S. Supreme Court released its 6-3 decision in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., No. 24-345, 2026 U.S. LEXIS 2466 (June 11, 2026) (FS Credit Opportunities), holding that Section 47(b) of the Investment Company Act of 1940 (the Investment Company Act) does not create a private right of action for parties to rescind contracts (including advisory contracts) that violate the Investment Company Act. The ruling is a substantial victory for registered funds and their shareholders who are concerned about the threat of activist investors.

Background and Case History

In recent years, closed-end fund managers and boards have been increasingly concerned with protecting long-term investors (e.g., those saving for retirement) from aggressive takeover measures by activist investors, such as Saba Capital Management, L.P. and its affiliates (Saba). Saba and other activist investors typically acquire a closed-end fund’s shares at a discount to net asset value and then seek to obtain board seats in order to either replace the fund’s investment adviser or force a “liquidity event” such as a conversion to an open-end fund, a large tender offer or a liquidation.

Section 47(b) of the Investment Company Act provides that “[a] contract that is made, or whose performance involves” a violation of its substantive provisions is unenforceable and that “a court may not deny rescission” of such contract unless to do so would produce a less equitable result inconsistent with the Investment Company Act. In FS Credit Opportunities, Saba sued 16 closed-end funds alleging that they had violated the requirement under Section 18(i) of the Investment Company Act that “every share of stock ... shall be a voting stock and have equal voting rights with every other outstanding voting stock.” The funds at issue were organized under Maryland law and had opted into Maryland’s Control Share Acquisition Act (MCSAA), a legal provision under Maryland corporate law that effectively limits takeover measures by large stakeholders by restricting them from voting above 10% of their shares unless approved by a two-thirds vote of other shareholders. Saba argued that the MSCSAA violates the Investment Company Act requirement that each share of voting stock have equal voting rights, and that Saba thus had a cause of action to sue to rescind the funds’ bylaws under Section 47(b) of the Investment Company Act where the funds had opted into the MCSAA.

The District Court and 2nd Circuit Court of Appeals agreed with Saba’s argument, ordered the funds’ bylaws to be rescinded and, in so ordering, concluded that Section 47(b) of the Investment Company Act creates a private right of action for litigants seeking recission of contracts made in violation of the Investment Company Act.[1] Two other courts of appeal had concluded, on the contrary, that no private right of action was created under Section 47(b) for private litigants, thereby creating a circuit split for the Supreme Court to resolve.[2]

Writing for the majority, Justice Barrett explained that “Congress determines who may sue to enforce federal law” and that “[t]o create a private right, a statute must use ‘rights-creating language’ aimed at protecting a ‘particular class of persons.’”[3] In reasoning that Section 47(b) does not create a private right of action for litigants, she further explained that Section 47(b) is a mandate directed to courts, not individual private litigants, and thus that “nothing in the text or structure of the [Investment Company Act] indicates that Congress authorized private parties to enforce virtually every provision in the statute.”[4] The Court noted, “[w]hen Congress creates a private right of action, it usually does so expressly.”[5] For example, the majority opinion noted that the Investment Company Act expressly authorizes private rights of action in Sections 30(h) and 36(b), noting that “these provisions demonstrate that ‘when Congress wished to provide a private ... remedy’ to enforce the [Investment Company Act], ‘it knew how to do so and did so expressly.’”[6]

Key Takeaways

• Significant Defeat for Activist Investors. Closed-end fund managers and boards will take comfort that FS Credit Opportunities eliminates Section 47(b) as a litigation mechanism for activist investors to take over funds. The Supreme Court decision clarifies that federal courts may not imply a right of action under Section 47(b) for private litigants to enforce the provisions of the Investment Company Act and that the overall statutory scheme contemplates that the Securities and Exchange Commission (the SEC) has been vested as the primary enforcer of the Act’s provisions. As a result, activist investors will have one fewer tool in their arsenal to assert control over closed-end funds, and fund managers should be reassured that FS Credit Opportunities eliminates the risk of private litigation from investors seeking to enforce the numerous substantive provisions of the Investment Company Act in order to rescind advisory contracts or other fund contracts.
• Private Claims Under Section 30(h) and 36(b) Remain. While FS Credit Opportunities largely forecloses the possibility of implied private rights of action under the Investment Company Act, the threat of civil litigation from private actors remains under Sections 30(h) and 36(b) for short-swing profits and excessive fees, respectively, because these sections expressly create causes of action for investors to sue. Fund boards and managers should continue to focus on these potential claims and the appropriate governance and management measures to minimize risk in these areas.
• Remaining Uncertainty Regarding the MSCAA and State Law Claims or Other Potential Claims.
  • Although FS Credit Opportunities is a significant win for closed-end funds and their boards against activist investors, it bears noting that the Supreme Court did not address the question of whether the MCSAA violates Section 18(i) of the Investment Company Act. Because the decisions of the District Court and 2nd Circuit were vacated by the Supreme Court, the controlling guidance on the validity of the MSCAA and other state control share act statutes largely should follow the SEC’s current position that closed-end funds opting into the MSCAA or utilizing other control share statutes do not automatically violate Section 18(i), and that under certain circumstances, the use of such provisions may be advisable considering the board’s fiduciary duties and applicable law.[7] However, closed‑end fund boards and managers should remain aware of the remaining regulatory risks and uncertainties that accompany the use of control share statutes and whether regulators or other actors may seek to invalidate such an anti-takeover defense measure — no matter how well-intentioned — as inconsistent with the Investment Company Act.
  • Although the Supreme Court decision creates more certainty for fund boards and managers with respect to private litigation arising under the Investment Company Act, it does not foreclose the possibility of private litigants seeking to enforce claims under state law or other federal statutes, such as state securities law claims, breaches of fiduciary law duty or other common law claims. Therefore, fund boards and managers should still expect and be prepared for activist investors to explore other potential litigation mechanisms and tools to target closed-end funds outside of the Investment Company Act.

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