On January 14, 2021, certain institutional investors brought an action against a group of closed-end funds organized as Massachusetts business trusts and their trustees seeking rescission of a control share bylaw provision and a declaratory judgment to the effect that the control share bylaw is illegal. The control share bylaw provision in question generally provides that an acquisition of shares that results in a shareholder owning more than 10 percent of a fund’s outstanding shares prevents that shareholder from voting shares in excess of 10 percent unless specifically authorized by the affirmative vote of fund’s other shareholders. The control share bylaw is intended to operate in a manner similar to control share provisions under state corporate statutes.

Plaintiffs contended that the control share bylaw was inconsistent with Section 18(i) of the Investment Company Act of 1940, which provides that “every share of stock . . . issued by a registered management company . . . shall be a voting stock and have equal voting rights with every other outstanding voting stock . . . .” The defendants presented numerous arguments against the plaintiffs’ contention, and in particular noted the staff of the SEC’s recission in May 2020 of a 2010 no-action letter (the Boulder letter) setting forth the staff’s former view that a closed-end fund opting into a state control share statute would be inconsistent with Section 18(i). On February 17, 2022, the U.S. District Court for the Southern District of New York granted a motion for summary judgment in favor of the plaintiffs on their claims for rescission of the control share bylaw and a declaratory judgment, concluding that the control share bylaw was inconsistent with Section 18(i) of the 1940 Act. In so deciding, the court focused on the plain language of Section 18(i), concluding that what makes a stock “voting” depends on its holder’s ability to “presently vote the stock,” and that a control share bylaw that deprives a shareholder of this ability, even temporarily, renders the stock not a “voting security” under the 1940 Act.

The order was issued under the caption Saba Capital CEF Opportunities 1, Ltd., et al. v. Nuveen Floating Rate Income Fund, et al., No. 21-cv-327. On February 25, 2022, the funds and their trustees filed a notice of their intention to appeal the district court’s order.