Court Rejects Activist Hedge Fund’s Challenge to Closed-End Fund Majority Voting Standard

On October 21, 2024, the Massachusetts Superior Court issued a final ruling in favor of four Eaton Vance closed-end funds and their trustees, rejecting “activist” investor Saba Capital’s challenge to the funds’ voting standard requiring the support of a majority of outstanding shares to win a contested board election.¹ The ruling followed a seven-day bench trial in which Saba asserted that the majority standard was so difficult to achieve in practice that it denied shareholders a “meaningful opportunity” to elect trustees, relying in large part on evidence of past contested election results. Saba pressed two legal theories as to why the by-law amendment adopting the majority standard (the “Majority Rule Amendment”) should be rescinded, including that it: (i) breached the funds’ declarations of trust which grant shareholders the power to vote for the election of trustees and require an annual election of trustees; and (ii) violated Section 18(i) of the Investment Company Act of 1940 (“ICA”) which requires all shares to have equal voting rights.

The Court’s Ruling

Superior Court judge, Judge Debra Squires-Lee, rejected Saba’s theories. She concluded that, “[t]he Majority Rule Amendment – while it creates a hurdle for the election of dissident or challenger trustees – does not strip shareholders of a meaningful right to elect trustees.” Indeed, “while it may be difficult to elect a dissident or challenger trustee depending on the particular mix of retail and shareholder investors in any particular fund, it is not impossible or impracticable to obtain the votes of a majority of outstanding shares with sufficient direct shareholder outreach via fight letters, emails, telephone calls, and traditional media and social media outreach.”

The court likewise rejected Saba’s assertion that the possibility of “holdover” incumbent trustees (if no candidate meets the majority standard) violated the requirement under the funds’ declarations that trustees “shall be elected at an annual meeting of the Shareholders.” The judge reasoned, “[t]here are many situations in which the voting standard applicable to an election affects the results. Such an impact, however, does not mean an election was not held, or that the successful candidate, under that voting standard, was not elected.” And indeed, the declarations themselves contemplated holdover trustees, by providing that “a Trustee will hold office until a successor shall have been elected and qualified.”

In response to Saba’s reliance on its own lack of success in meeting the majority standard in past contests as support that the majority standard is too difficult to achieve, the judge concluded that “is not evidence that the voting standard can never be achieved or is impracticable.” Instead, “Saba’s results may well have more to do with Saba’s activist agenda,” which the court found to be “contrary to and inconsistent with the stated investment objectives of the Funds.” Moreover, “Saba has conceded that it does not routinely engage in the type of direct shareholder outreach that is most likely to increase shareholder participation and make attaining the votes of a majority of outstanding shares feasible.”

Regarding Saba’s argument under the “equal voting rights” provision in Section 18(i) of the ICA, the court ruled “the Majority Rule Amendment is [not] inconsistent with the unambiguous terms of the ICA.” Simply put, “[t]he Majority Rule Amendment does not remove or eliminate a shareholder’s right to vote for trustees nor does it weigh the votes of any particular shareholder or any class of shares more or less than any other.”

Ultimately, the court concluded that “[r]equiring a higher voting standard to elect a dissident / challenger trustee does not disenfranchise shareholders. Rather, it ensures that a majority of the Fund’s owners support the stated goals and objectives of the dissident candidates and / or the activist shareholder which proposed the slate of candidates.”

Implications of the Ruling

The Massachusetts decision could impose significant limitations on activist hedge funds’ ability to challenge similar voting standards adopted by other closed-end funds. Such activists have repeatedly premised its litigation attacks on non-plurality voting standards as being impossible or infeasible to achieve, and thus illegal “entrenchment” mechanisms. The Massachusetts court’s carefully-reasoned rejection of Saba’s theories following a thorough review of its proposed evidence of impossibility stands as a firm – and likely replicable – rejection of Saba’s core theories.

Similarly, the Massachusetts court ruled earlier in the case at the summary judgment stage that Saba’s claims against the funds’ trustees for breach of fiduciary duty failed as a matter of law. The court found that the trustees had a legitimate business reason for adopting the Majority Rule Amendment, namely to protect the funds’ retail shareholders from the harm they perceived that “activist” hedge funds could cause.

Ropes & Gray litigators served as trial counsel for the Eaton Vance funds in this matter, and we would be happy to discuss with you the decision and its implications.