Court Upholds Legality of Poison Pills for Closed-End Funds but Limits Successive Plans
On March 28, 2025, the U.S. District Court for the Southern District of New York (SDNY) held that it was legal under the Investment Company Act of 1940 (1940 Act) for a closed-end fund to use a shareholder rights plan (colloquially known as a “poison pill”) to fend off a hedge fund seeking to take […]
Eben P. Colby, Kevin T. Hardy, and Elizabeth R. Gonzalez-Sussman are Partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Colby, Mr. Hardy, Ms. Gonzalez-Sussman, Scott D. Musoff, Marley Ann Brumme, and Cameron Jordan.
On March 28, 2025, the U.S. District Court for the Southern District of New York (SDNY) held that it was legal under the Investment Company Act of 1940 (1940 Act) for a closed-end fund to use a shareholder rights plan (colloquially known as a “poison pill”) to fend off a hedge fund seeking to take control of the fund. However, the court disapproved of the use of successive plans if substantively the same, for the same purpose and adopted while a prior plan was still in effect.
The case, initiated by hedge fund Saba Capital Master Fund, Ltd. (Saba) in January 2024, challenged the adoption of a series of poison pills under Sections 18(d) and 23(b) of the 1940 Act. Skadden represented the target of Saba’s suit, ASA Gold and Precious Metals Ltd. (ASA), in the implementation of the rights plan and briefing its legality under the 1940 Act. [1]
The decision represents a significant development in the ongoing legal battle between closed-end funds and hedge funds, and validates the use of an important defense that can be employed by closed-end funds targeted by activists.
The court was clear that a shareholder rights plan, in and of itself, does not violate the 1940 Act, and endorsed the long-accepted principle that shareholder rights plans serve a “legitimate role” of providing a board with “an opportunity to consider alternatives” when faced with a hostile tender offer, creeping control or similar threat.
