Shareholder Activist Update - December 2025

Permissibility of Poison Pills for Closed-End Funds

The United States District Court for the Southern District of New York recently evaluated a modern form of the classic “poison pill” as adopted by a closed-ended investment fund for the alleged purpose of entrenching fund management against activist shareholders.  In Saba Capital Master Fund, Ltd. v. ASA Gold and Precious Metals, Ltd. (S.D.N.Y. Mar. 28, 2025) (“ASA Gold”), the Court found that although such poison pills do not violate the ratability requirement of the Investment Company Act (“ICA”), poison pills under the ICA must be time-limited to no more than 120 days in duration, and successive authorizations of the poison pill will be deemed to violate the 120-day limit.  This case raises important implications for activists seeking sustained pressure on funds governed by the ICA.

Section 18(d) of the ICA, which regulates closed-end investment funds, provides that “[i]t shall be unlawful for any registered management company to issue any warrant or right to subscribe to or purchase a security of which such company is the issuer, except in the form of warrants or rights to subscribe expiring not later than one hundred and twenty days after their issuance.”  Congress created this prohibition (with the limited 120-day exception) to address previous abuses in investment company management practices—particularly entrenchment by management and attendant self-dealing by management—for the benefit of the owners of those companies’ funds.

It was in this context that Saba Capital rapidly increased its ownership stake in ASA Gold and Precious Metals (a closed-end investment fund) from 5% to over 16% during 2023.  To prevent Saba's “creeping control,” ASA's board adopted a shareholder rights plan in December 2023 that would have substantially diluted Saba's shares if triggered (i.e., a classic poison pill rights plan).  ASA continuously extended this “poison pill” plan through identical successive adoptions—in April 2024, August 2024, and December 2024—with each new plan adopted before the prior one expired.  Saba brought suit in the Southern District of New York in response, asserting primarily that the ICA’s 120-day limit was violated for each rights plan adopted by ASA Gold after December 2023.

Finding that it did not require discovery to resolve a pure question of law, the district court in ASA Gold granted summary judgment to Saba and invalidated the then-operative poison pill, finding that all plans entered during and after April 2024 violated the ICA’s 120-day maximum length for shareholder rights plans. Specifically, because each successive plan was substantively identical and was adopted before its predecessor expired, the December 2023 plan never truly expired, and was found to effectively be in continuous operation well beyond 120 days.  Allowing a successive poison pill plan to be adopted while a prior plan remained in effect, the court reasoned, would render the expiration requirement “meaningless” and allow funds to maintain poison pills “ad infinitum,” contrary to the ICA’s purpose of preventing management entrenchment and self-dealing.

Importantly, however, the district court in ASA Gold did not reach the question of whether successive rights plans, adopted after a prior one has expired, would violate the 120-day requirement.  The court thus left open the question of whether a company could allow a plan to expire for some de minimis amount of time beyond 120 days in order to avoid the statutory 120-day prohibition before immediately reimposing a substantially similar plan.  Doing so would, seemingly, satisfy a court strictly undertaking a plain language analysis of the ICA text, though it remains to be seen whether a future court considering such a fact pattern would look beyond form to the function of type of regulation-eschewing gambit. 

Regardless, ASA Gold is an important decision to be considered for activists considering challenges to incumbent management, as it demonstrates that not all investment structures are alike from the perspective of activist/management relations.  Although poison pills have been an accepted and lawful form of takeover protection for typical public companies for several decades, ASA Gold shows that investment companies regulated under the ICA are subject to a different scheme that affects both management and shareholder rights.  Other tradeable securities may be subject to a different regime still.  Thus, it is imperative that activists deeply analyze their particular investment and its associated regulatory regime when formulating strategy and executing it.