(Article from Registered Funds Regulatory Update, July 2025)
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On March 28, 2025, the U.S. District Court for the Southern District of New York ruled that shareholder rights plans (commonly known as “poison pills”) are legal for closed-end funds under the 1940 Act, thereby affirming the important role that shareholder rights plans can play for closed-end funds when faced with hostile threats by well-funded activist arbitrageurs. Nonetheless, the Court granted summary judgement to Plaintiffs because the Court found that the shareholder rights plans had been “unlawfully” extended beyond the 120-day limit contained in Section 18(d) of the 1940 Act.
The case was initiated when well-known activist Saba Capital Management, L.P. and certain of its affiliates filed suit in January 2024 to challenge a fund’s adoption of a series of rights plans in response to Saba’s attempt to gain “creeping control” of the fund. In 2023, Saba began increasing its aggregate ownership of the fund, ultimately accumulating 16.87% of the outstanding shares, and submitted notice to the fund of its intent to nominate a full slate to the fund’s board of directors. In response, on December 31, 2023, the fund announced its intent to adopt a shareholder rights plan. Shareholder rights plans are designed to make a hostile takeover more difficult by granting existing shareholders the right to purchase additional shares at a discounted price. A rights plan is triggered when an acquiring person surpasses a certain ownership threshold, which then allows all of the shareholders except for the acquiring person that triggered the plan to purchase additional shares thereby diluting the acquiring person’s shares.
In this case, the rights plan gave each shareholder the right to purchase the fund’s common shares at a price of $1.00 per share (such shares’ par value) upon the event of: (i) a person acquiring 15% or more beneficial ownership of the fund, or (ii) a current shareholder with a pre-existing holding in excess of 15% acquiring an additional 0.25% or more of the fund’s outstanding shares. The plan was set to expire 120 days after its adoption; however, prior to its expiration, a board committee of the fund adopted a substantively identical shareholder rights plan. The committee then proceeded to review and approve, in each instance prior to the expiration of the previous plan, two successive, substantively identical rights plans, which remained in place through April 18, 2025, thereby effectively barring Saba from purchasing any new shares of the fund without triggering the “poison pill” from the initial rights plan’s adoption on December 31, 2023.
In its Complaint, Saba alleged that the rights plans violated Sections 18(d) and 23(b) of the 1940 Act. Section 18(d) requires that subscription rights (i) be issued ratably, and (ii) expire no later than 120 days after their issuance, whereas Section 23(b) generally prohibits a closed-end fund from selling its shares at a price below NAV unless a statutory exception applies. Section 23(b)(4) provides one such exception in connection with the exercise of a warrant issued in accordance with Section 18(d). Addressing Saba’s arguments in turn, the Court first concluded that the shareholder rights plans were issued “ratably” in accordance with the 1940 Act because each shareholder was proportionally issued subscription rights under the plans based on the number of shares owned, including Saba. The Court specifically rejected Saba’s arguments seeking to analogize a rights plan to the control share statute at issue in Saba Cap. CEF Opportunities 1, Ltd. v. Nuveen Floating Rate Income Fund,[1] and Saba’s attempt to focus the Court’s analysis on the exercise of the rights rather than the issuance of the rights. Since the Court found that there was no violation of Section 18(d), the Court also held that there was no violation of Section 23(b). Next, the Court considered the 120-day expiration requirement and found that the initial rights plan adopted in December 2023, together with the subsequent rights plans adopted during the pendency of the applicable predecessor plan, never truly expired and thus, violated Section 18(d). The Court reasoned that a different finding “would render the expiration requirement meaningless” and concluded that Section 18(d) was intended to limit the actual durational existence of a subscription right, rather than just the terms of such a plan. The Court ordered that the rights plans be voided and granted rescission to Saba.
The Court explicitly did not reach the question of whether successive shareholder rights plans, adopted after the prior plan expired, would violate Section 18(d). Following the Court’s ruling on Friday, March 28, 2025, which terminated the existing rights plan, and before market hours on Monday, March 31, 2025, the fund adopted a substantively similar shareholder rights plan to which Saba filed an instant motion to sanction the fund, arguing that the plan violated the Court’s Order. However, given that the Court did not address whether successive rights plans issued after the expiration of a prior rights plan on nearly identical terms was a Section 18(d) violation, the Court dismissed Saba’s request to sanction and indicated that Saba needed to challenge the new rights plan by a means other than a motion to enforce the prior Order. Thereafter, on April 18, 2025, Saba filed a new lawsuit seeking to void the most recently adopted rights plan and an injunction preventing the fund from implementing or adopting any rights plans. The fund also filed suit challenging the District Court’s initial ruling.
Importantly, this is the second time a court has determined that closed-end funds may use rights plans consistent with Sections 18(d) and 23(b)(4).[2] What now remains to be settled is under what circumstances a closed-end fund may adopt successive rights plan in a manner consistent with Section 18(d)’s 120-day limitation.
Saba Cap. Master Fund, Ltd., et al. v. ASA Gold & Precious Metals, Ltd., et al., No. 24-CV-690 (JGLC) (S.D.N.Y. Mar. 28, 2025).
Saba Cap. Master Fund, Ltd., et al. v. ASA Gold & Precious Metals, Ltd., et al., No. 24-CV-690 (JGLC)
(S.D.N.Y. Apr. 15, 2025).
Complaint, Saba Cap. Master Fund, Ltd., et al. v. ASA Gold & Precious Metals, Ltd., et al., No. 25-3265 (S.D.N.Y. Apr. 18, 2025).
[1] 88 F.4th 103 (2d Cir. 2023).
[2] See Neuberger Berman Real Estate Income Fund Inc. v. Lola Brown Trust No. 1B, 342 F. Supp. 2d 371 (D. Md. 2004); Neuberger Berman Real Estate Income Fund Inc. v. Lola Brown Trust No. 1B, 485 F. Supp. 2d 631 (D. Md. 2007).