Axed activist-investor takeover leaves Supreme Court at loggerheads over legislative intent

WASHINGTON (CN) — In a low-profile ruling quashing a lawsuit from activist investors on Thursday, Justice Amy Coney Barrett and Justice Ketanji Brown Jackson went head-to-head over the role of Congress in their decisionmaking.

The squabble between the court’s two junior members highlighted a larger conflict on the bench about how the justices referee policy disputes. For the conservative majority, Barrett, a Donald Trump appointee, said the court’s rulings should rest on the text in front of them, not assumptions about lawmakers’ intent while drafting a law.

“Congress expresses itself as a body through the text it enacts,” Barrett wrote for the 6-3 majority.

The liberal wing led by Jackson, a Joe Biden appointee, said this “classic criticism” of the court’s use of legislative history stemmed from the assumption that Congress’ subjective intent is unknowable.

“But it is hard to take that criticism seriously when the modern court nonetheless routinely interprets statutes by speculating about what Congress must have wanted,” Jackson wrote in dissent, citing rulings striking down Biden’s student loan forgiveness plan and rules for regulating coal-fired power plants.

At issue in FS Credit Opportunities Corp v. Saba Capital Master Fundwas whether a provision of the Investment Company Act created a right of action allowing shareholders of an investment fund to challenge the fund’s contracts for statutory violations.

Enacted in the wake of the financial crash of 1929 and the Great Depression, the Investment Company Act aimed to protect third-party investors against conflicts of interest and shady business practices. The statute requires investment companies and their advisers to eliminate unethical practices, requiring that investors be able to escape unlawful contract terms.

In 1979, the Supreme Court created a path for investors to sue funds that violated the Investment Advisers Act — a sister statute enacted alongside the Investment Company Act. If limited private rights of action were allowed under Transamerica Mortgage Advisors, Inc. v. Lewis, then Saba Capital Master Fund, a group of investors, argued similar suits should be allowed under the Investment Company Act.

Saba sued FS Credit Opportunities Corp., an investment fund, over a rule limiting voting rights for shareholders with a disproportionate number of shares without the approval of other shareholders.

FS Credit manages closed-end mutual funds, which were named for their fixed number of shares issued at one time that prevent capital from fluctuating when investors buy or sell shares. In contrast, Saba manages open-end mutual funds, which continually issue new shares to investors, allowing capital to continuously flow in and out as trading occurs.

Through a practice known as activist investing, shareholders can purchase a large stake in closed-end funds to change their behavior. This allows investors to change the fund’s strategies for a short-term profit.

By incorporating in Maryland, FS Credit was able to use the state’s laws to avoid activist-investor takeovers. Saba’s suit targeted FS Credit’s adoption of resolutions under Maryland’s law.

A lower court said the Investment Company Act created a right of action, allowing Saba’s suit. But the Supreme Court reversed, holding that the Congress only creates rights of action expressly.

“For a cause of action to exist, we would have to create it,” Barrett wrote. “And having ‘sworn off the habit’ of implying private rights of action, ‘we will not accept [Saba’s] invitation to have one last drink.’”

Boaz Weinstein, founder and chief investment officer of Saba, said the court’s ruling did not find that closed-end fund managers followed the law. Instead, he said, the justices’ decision put a bigger burden on the Securities and Exchange Commission to enforce the protections Congress wrote into law.

“All today’s opinion changes is that future legal challenges against entrenched fund managers will come in other forms,” Weinstein said in a statement following the ruling. “Saba will pursue every avenue available to defend shareholders’ rights — including lawsuits under other provisions of the ’40 Act and under state law.”

Jackson, joined by justices Sonia Sotomayor and Elena Kagan, both Barack Obama appointees, said the decision sidestepped evidence of Congress’ intent. The liberal justices noted that lawmakers amended the Investment Company Act after the Supreme Court refused to imply a right of action.

“In so doing, the majority assumes for itself the prerogative to foreclose contract-rescission suits that Congress intended to authorize,” Jackson wrote. “Because the court’s proper role is to give effect to the will of the people, not supplant it, I respectfully dissent.”

Looking to the legislative history, she wrote, prevented judges from supplanting their views for lawmakers’. Jackson said that committee reports accompanying federal statutes are a first-rate indicator of Congress’ intent when the text is ambiguous.

“For an institution that purports to ‘follow the law as written by Congress,’ it is strange, to say the least, that we give ‘scant consideration’ to ‘how Congress actually functions,’” Jackson wrote.

Barrett described Jackson’s review of the legislative history as “a mission impossible,” stating that the dissent’s theory depended on the fictional premise that hundreds of legislators shared a unified private view of how the statute should apply.

“Worse, it violates the fundamental precept that ‘[w]e are governed by laws, not by the intentions of legislators,’” Barrett wrote.

In response to Jackson’s criticism of the majority’s consideration of Congress’ intent, Barrett said courts look for “objectified intent” or the intent that a reasonable person would gather from the text.

“Put differently: The judicial task is to read words, not minds,” Barrett wrote in a footnote.

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