BlackRock Must Face Saba Capital Lawsuit Over Voting Bylaws

(Bloomberg) -- BlackRock Inc. must face a lawsuit from Boaz Weinstein’s Saba Capital Management over a bylaw Saba claims will restrict its voice in a closed-end fund in which it holds a substantial stake, but a federal judge declined to block the world’s largest asset manager from employing the rule.

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US District Judge Margaret Garnett on Tuesday rejected BlackRock’s request to throw out the case. However, she denied Saba’s bid for a preliminary injunction preventing BlackRock from using the bylaw, which requires challengers for board seats to win the votes of a majority of shareholders.

Saba had argued that BlackRock is using the bylaw to keep un-elected trustees at its ESG Capital Allocation Trust in place indefinitely, skirting a federal law requiring at least two-thirds of a fund board to be elected by shareholders. Saba acquired a stake in the $1.9 billion fund in 2022, but says the entire board was appointed by BlackRock.

The case is one of several moves Weinstein has made against the $250 billion closed-end fund industry and its biggest names, including BlackRock, Nuveen and Franklin Resources Inc. Saba generally focuses on funds trading at large discounts to the value of their assets and pushes money managers to boost returns through steps such as buying back shares and liquidating funds.

BlackRock had asked Garnett to dismiss the case, saying it seeks an “unprecedented interpretation” of the 1940 Investment Company Act. A ruling for Saba, BlackRock argued in a court filing, “would have sweeping effects across the closed-end fund industry, improperly federalize decades of state law regarding corporate internal affairs, and risk leaving millions of retail investors vulnerable to modern-day corporate raiders.”

Garnett said Saba has sufficiently alleged that “there is a point where the voting bylaws of ECAT operate to deprive shareholders of their right to select the trustees of the fund, and to circumvent the ICA’s requirement that trustees be ‘elected’ at shareholder ‘meetings’ and that a certain number of directors be resubmitted for shareholder approval each year.”

The judge said Saba may not succeed in proving the point at trial, “but the allegations in the complaint are sufficient to allow them to try.”

She also said BlackRock’s argument is “not plausible: that even where a fund fails to have successful elections for years and where a fund’s board is composed primarily or entirely of holdovers selected by the sole initial shareholder who is affiliated with the investment adviser, even in perpetuity, there is no circumstance where such a fund could be found to be in violation of the ICA’s requirements for shareholder elections and board composition, so long as the rules are facially compliant on a word-by-word basis,” she said.

Michael D’Angelo, partner and general counsel of Saba, said the decision paves a clear path for Saba to win at trial.

“There, we will show why this entrenched manager and its trustees cannot continue to act as if federal law does not apply to their closed-end funds,” D’Angelo said in a statement. “Failed elections and holdover trustees cannot exist in perpetuity at any closed-end fund.”

Weinstein said at the Bloomberg Invest conference on Tuesday that his campaign received strong support from shareholders to have new board members overseeing a separate BlackRock fund, Innovation & Growth Term Trust. Saba has a 23% stake in the fund.

A BlackRock spokesperson said in a statement that, “based on the preliminary results from last week’s shareholder meetings, it is clear that shareholders have rejected both Saba’s nominees and its efforts to displace BlackRock as investment advisor to the funds. The independent, preliminary results for BIGZ aren’t yet available, but we believe that a majority of the votes in Saba’s favor are coming from Saba itself, and not other shareholders.”

The asset manager has maintained all along that it’s the one looking out for shareholders, not Saba, and expressed confidence about prevailing in a battle over board seats for funds.

In denying the injunction, Garnett acknowledged Saba’s arguments that the bylaw makes it “very difficult or perhaps ‘impossible’” for shareholders to cast meaningful votes in a contested election, but said the suit is different than cases where executives concoct methods to suppress investors’ votes.

While Saba “may well prevail on that argument in the ordinary course, this is a different type of harm than that caused by the corporate action at issue in many of the cases Saba cited, in which corporate management instituted new procedural barriers intended to subvert elections, limit the value of votes, or eliminate existing shareholder rights,” the judge wrote.

Saba, which owns about 27% of ESG Capital Allocation, sued BlackRock in March. According to the suit, BlackRock adopted the bylaw to make it harder for newcomers seeking to serve as fund trustees.

The case is Saba Capital Master Fund Ltd. v. BlackRock ESG Capital Allocation Trust, 24-cv-01701, US District Court, Southern District of New York (Manhattan).

--With assistance from Silla Brush.

(Updates with statements by Weinstein, BlackRock.)

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