(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Alison Frankel

June 26 (Reuters) - Saba Capital Management lost its bid

on Tuesday to bar a BlackRock investment fund from holding a

trustee election under what Saba contends are illegal rules.

But the hedge fund defeated BlackRock's attempt to squelch

Saba's entire lawsuit, which challenges election rules that Saba

alleges to have been designed to entrench BlackRock's ( BLK ) handpicked

trustees.

U.S. District Judge Margaret Garnett of Manhattan ruled that

Saba, which owns about 26% of the BlackRock fund's shares, could

not show that it would face irreparable harm from an imminent

trustee election under the prevailing rules, in part because

Saba was aware of the election rules when it acquired its stake

in the fund yet delayed its motion to block the proceeding.

Without a showing of irreparable harm, Garnett said, Saba was

not entitled to enjoin a vote scheduled to take place on

Wednesday.

The judge also ruled, however, that Saba offered

sufficiently strong allegations to keep alive its claim that the

BlackRock election rules deprive shareholders of their right

under federal law to pick trustees to head the fund. BlackRock's ( BLK )

arguments to the contrary, the judge said, rely on a "pinched

and parched" reading of the Investment Company Act.

Saba, which is led by prominent investor Boaz Weinstein and

is represented in the BlackRock case by Susman Godfrey,

characterized Garnett's decision as a victory, in an email

statement.

"The court has paved a clear path for Saba to win at trial,"

the statement said. "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."

In addition, Saba on Wednesday won a ruling from the 2nd

U.S. Circuit Court of Appeals in a separate challenge to a

different election bylaw at 11 BlackRock funds. As I'll explain

below, the appeals court affirmed a trial court decision that

requires the funds to rescind those rules.

BlackRock did not provide a statement on the Garnett and 2nd

Circuit decisions. Its lawyers at Willkie Farr & Gallagher did

not respond to a query.

The case before Garnett, as you've probably discerned, is

part of a much broader fight between Saba and BlackRock over

control of several BlackRock closed-end investment funds with

roughly $10 billion in assets. (Closed-end funds are a kind of

mutual fund, but with a set number of shares that are initially

offered in an IPO and can thereafter trade on public markets.)

Saba, which has acquired sizeable stakes in at least 10 of

the funds, contends that BlackRock's ( BLK ) mismanagement is depressing

the funds' profitability. As my Reuters colleague Svea

Herbst-Bayliss has reported, Saba chief Weinstein has said that

$1.4 billion in value could be unlocked if the funds cut their

discount to their net asset value.

BlackRock, meanwhile, said on webpage for investors that is

dedicated to its dispute with Saba that it is "committed to

delivering long-term value and created tangible gains for

our shareholders through our years of expertise." It fleshed out

that assertion in a filing last month at the U.S. Securities and

Exchange Commission, arguing that unlike Saba, its goal is to

manage these funds for the benefit of all shareholders, not just

one activist hedge fund.

Over the last year or so, Saba has put considerable energy

into hotly contested proxy campaigns to oust trustees who were

selected by BlackRock when the behemoth asset management firm

initially sponsored the funds. The proxy advisory firm Glass

Lewis urged shareholders to support all of BlackRock's ( BLK )

candidates. ISS, a different advisory firm, backed some of

Saba's candidates. Both firms urged shareholders to vote against

replacing BlackRock as the funds' investment adviser.

Six of the BlackRock funds held shareholder meetings last

week. Reuters reported on Tuesday that Saba failed to secure

enough votes to install its candidates or to replace BlackRock

as investment manager. Additional shareholder votes - including

a vote for trustees of the fund at issue in Garnett's ruling on

Tuesday - will take place later this week.

Saba, of course, argues that the outcome of the shareholder

votes was effectively predetermined by the very rules it is

contesting in litigation.

It has brought two different lawsuits in Manhattan federal

courts to force the BlackRock funds to rescind voting rules

that, according to Saba, violate the Investment Company Act.

In the case before Garnett, Saba is challenging a fund rule

that allows uncontested trustees to be re-elected just by a

plurality of shareholders who vote at the annual meeting but

requires trustee candidates in contested elections to garner a

majority of all outstanding shares.

The rule, in Saba's telling, has served to entrench

BlackRock's ( BLK ) originally appointed trustees, who have been "held

over" when investors failed to muster a quorum in previous

shareholder meetings.

At a hearing earlier this month, Garnett questioned whether

the issue was more shareholder apathy than voter suppression,

noting that shareholders did not turn out in sufficient numbers

for previous votes "despite enormous effort and resources

expended by both Saba and BlackRock."

But in Tuesday's ruling, the judge said it is "simply not

plausible" that federal law permits a fund to structure

elections in a way that leaves the board composed "in

perpetuity" of holdover trustees.

"Saba may well not succeed in showing that this point has

been reached in this case," Garnett said. "But the allegations

in the complaint are sufficient to allow them to try."

In a previously filed case, Saba sued 16 BlackRock funds

over a bylaw that allegedly diluted the voting power of

shareholders with a stake of more than 10%. U.S. District Judge

Jed Rakoff of Manhattan tossed claims against five funds on

jurisdictional grounds but granted summary judgment to Saba on

claims against 11 Maryland-based funds, holding in a written

opinion issued last January that the rule violated the

Investment Company Act provision assuring equal rights to all

shareholders.

The 2nd Circuit agreed with Rakoff in its ruling on

Wednesday, rejecting BlackRock's ( BLK ) argument that the provision was

justified under Maryland law. The appeals court also held that

Rakoff acted within his discretion when he ordered the funds to

rescind the bylaw before either side engaged in discovery.

Read more:

BlackRock directors keep seats at six funds in proxy battle

with Saba