SCOTUS News: Court nixes private enforcement action under ICA

The federal Investment Company Act does not create an implied private right of action for rescission of contracts under a provision limiting a court’s authority to order such remedies for violations of the Act, the U.S. Supreme Court has ruled in a 6-3 decision.

Section 47 of the ICA addresses the validity of contracts. The statute provides that any contractual waiver of compliance with the Act “shall be void” and that contracts made in violation of the ICA are generally unenforceable unless specific circumstances are met. Section 47(b) provides that if a contract that violates the Act “has been performed, a court may not deny rescission at the instance of any party unless such court finds that under the circumstances the denial of rescission would produce a more equitable result than its grant and would not be inconsistent with the purposes of this subchapter.”

The petitioners in the case are Maryland-based investment companies that manage closed-end mutual funds. In the course of their business, the petitioners adopted resolutions opting into the Maryland Control Share Acquisition Act provisions limiting the voting rights for so-called “activist” investors holding a disproportionate number of shares unless other shareholders approve.

In June 2023, two entities that engage in activist investing — Saba Capital Master Fund, Ltd. and Saba Capital Management, L. P. — sued the petitioners, alleging that their resolutions incorporating Maryland securities law violated the ICA’s requirement that every share of stock shall be a voting stock with equal voting rights.

The Saba entities cited §47(b) as providing authority for their private enforcement action. A federal judge agreed that §47(b) creates an implied private right of action to sue for contract rescission and granted the Saba entities’ motion for summary judgment. The 2nd U.S. Circuit Court of Appeals affirmed.

In reversing the 2nd Circuit, the Supreme Court held §47(b) does not impliedly empower private parties to sue for rescission of contracts that allegedly violate the Act.

Click here to read the full text of the Supreme Court’s June 11 decision in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd.

To the point

“Congress, not the Judiciary, decides who may enforce the law. The Investment Company Act designates the Securities and Exchange Commission as its primary enforcer and expressly permits shareholders and issuers of securities to enforce two of its provisions. We must decide whether another provision of the Act impliedly empowers private parties to sue for rescission of any contract that allegedly violates the Act. The answer is no.…

“Section 47(b) is a ‘mandate directed to . . . courts,’ rather than a provision that ‘confer[s] a right on a specified class of persons.’ The key actor is ‘a court,’ not an

individual. And a court is told that it ‘may not deny’ the remedy of rescission to parties who request it for performed contracts unless the equities and statutory purposes favor a different result. Section 47(b)’s wording thus presupposes that parties are already before the court and directs the court’s use of its remedial authority. It says not a word about individual rights.”

— Justice Amy Coney Barrett, joined by Chief Justice John G. Roberts Jr., and Justices Clarence Thomas, Samuel A. Alito Jr., Neil M. Gorsuch and Brett M. Kavanaugh, opinion of the court

“My views about the proper use of legislative history in statutory interpretation fall someplace in between the majority’s and the principal dissent’s. The one-sentence version is: Reliance on legislative history may be appropriate when statutory text in context remains, after careful review, stubbornly ambiguous. I do not find Section 47(b) to exhibit such a lack of clarity. For the reasons JUSTICE JACKSON gives in Parts I and II of her dissenting opinion, the text, structure, and statutory history of Section 47(b) support recognition of a private right of action. I therefore gladly join those parts of JUSTICE JACKSON’s dissent, while abstaining from the opinions’ further debate about the meaning of the House and Senate Reports.”

—Justice Elena Kagan, dissenting

“I agree with the Court that ‘Congress, not the Judiciary, decides who may enforce the law.’ It is for that very reason that I think courts should consult all reliable indicia of Congress’s intent when interpreting its statutes. Had the Court done so here, it

would have acknowledged that Congress amended Section 47(b) of the Investment Company Act in reliance on a prior decision of ours that had interpreted the original text to contain an implied private right of action for rescission. It would also have wrestled with legislative Committee Reports that unequivocally expressed Congress’s ‘wish’ that the statute continue to be interpreted to allow private suits, notwithstanding this Court’s increasing penchant for refusing to recognize implied rights of action.

“The majority today misreads the text of Section 47(b). It also deftly sidesteps compelling evidence of Congress’s actual intent and opts instead to draw inferences about Congress’s objectives. In so doing, the majority assumes for itself the prerogative to foreclose contract-rescission suits that Congress intended to authorize.””

— Justice Ketanji Brown Jackson, joined by Justice Sonia Sotomayor and by Justice Elena Kagan, in part, dissenting