Hedge fund defeated by Herald Trust shareholders

The board of Herald Investment Trust plc announced that requisitioned resolutions to oust the current board put forward by US activist hedge fund Saba Capital Management were defeated on a poll at a general meeting of the company held on Wednesday.

Herald said 65.10% of the total votes cast were voted against the requisitioned resolutions. The votes against totalled more than 26.4 million and represented a majority of the company’s total voting rights.

Excluding the votes Saba cast in favour of their own Requisitioned Resolutions (being 14.1 million votes, representing approximately 34.75% of the votes cast), only a further 59,221 Shares, representing just 0.15% of the votes cast, voted in favour of the Requisitioned Resolutions,” said Herald.

“This is a damning indictment of Saba’s proposals by the company’s non-Saba shareholders.”

Andrew Joy, Chairman of Herald Investment Trust plc, said: “Today non-Saba shareholders have almost unanimously rejected Saba’s self-interested proposals.

The fact that 99.78% of all votes cast by non-Saba shareholders were voted against Saba’s resolutions and in favour of the existing Board provides a clear, complete and incontrovertible rebuttal of Saba’s attempt to take control of your company and change its strategy against the wishes and interests of its non-Saba shareholders.

The votes against Saba’s proposals were supported by independent proxy advisers including Glass Lewis and ISS. It is perfectly clear that the reason Saba’s proposals were rejected is that they were intended to lead to an outcome, namely Saba managing Herald, which the existing shareholders were simply not interested in.

“The reason shareholders invested, and continue to invest, in Herald is for long-term capital appreciation through investing in smaller technology companies, and they do not wish to be deprived of the opportunity to enjoy more of the same. They did not invest in Herald to become part of a short-term trading strategy.

I would like to thank all Herald’s shareholders, both large and small, for their support. I very much regret that this episode has already cost shareholders money, which unfortunately we cannot reclaim from Saba. We look forward to engaging with our shareholders, including Saba, now that our shareholders have voted resoundingly in favour of the Board and by extension, the mandate and the Manager.  

The Board will be taking advice from our advisers on the next steps. Shareholders have voted overwhelmingly to continue with what has been a unique and highly successful strategy, and we look forward to discussing future developments further with them.

We are well aware of the environment in which investment companies operate and the need to have regard for creating value not just by multi-year patient growth in NAV, which to remind people, has enabled a 27x NAV total return since launch in 1994, but also by ensuring that capital allocation is optimised, again for the long term.

“As evidence, Herald has bought back its own shares every year since 2007, including approximately 10% of the Company’s share capital in each of the last two years.

“The Company has only ever issued £95m of stock and has bought back over £465m already, and still has net assets of £1.2bn. The Board, working with the Manager, will continue to be alive to the best use of the Company’s funds at any particular time.”

Saba Capital Management has requisitioned the boards of seven UK investment trusts “to convene general meetings of shareholders to provide shareholders the opportunity to vote on resolutions to remove the Trusts’ existing directors” and appoint “highly qualified directors” to replace them.

Three of the seven funds are managed by Edinburgh-based Baillie Gifford.

The funds being targeted are: Baillie Gifford US Growth Trust, Baillie Gifford’s Edinburgh Worldwide Investment Trust, Baillie Gifford’s Keystone Positive Change Investment Trust, European Smaller Companies Trust, CQS Natural Resources Growth & Income, Henderson Opportunities Trust and Herald Investment Trust.

Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “It’s very encouraging to see Herald shareholders turn out to vote in such numbers.

“This is a victory for shareholder democracy. There are six other trusts with votes just around the corner. It’s vital that all shareholders vote on the future of their investment trust. Shareholders need to act now.”

Voting dates for the other six investment trusts targeted by Saba are here.  

Meanwhile, the Financial Conduct Authority (FCA) has responded to concerns raised by the AIC about the protection of retail shareholders’ interests following the attack by Saba Capital.

AIC CEO Stone said: “The FCA has confirmed to us that they have written to the platforms to understand how they have engaged with customers on the Saba vote.

“We welcome this intervention by the FCA and their support for retail investors to engage with their investments. But we need to remove the barriers which prevent retail investors voting. Voting must be straightforward and easy for everyone.

“Saba’s action has highlighted that this is critical if retail investors are to have a say on what happens to their investment trust.

“It’s reassuring that the FCA has reaffirmed their powers to investigate and take action if they see evidence of a breach of the Listing Rules.

“The FCA also stated that the Listing Rules aim to ensure investment trust boards can act independently from the manager. Investors must receive adequate information on the investment policy and the FCA and shareholders must approve any material changes to the company’s investment policy.”

Saba Capital Management issued the following statement on the “announced outcome” at Herald Investment Trust:

“We appreciate the thoughtful engagement from fellow HRI shareholders in recent weeks, which only reinforces the dire state of the U.K. investment trust industry and need for Saba’s presence in the market.

“Over a brief period, our campaign has already enhanced value for shareholders and incited positive change at HRI – and elsewhere in the U.K. market – as evidenced by discounts to net asset value narrowing and numerous trusts announcing shareholder-friendly actions.

“While these developments are encouraging, more change is required. As told in countless U.K. financial press articles over the past three years, the industry’s failure to protect shareholders from losses due to poor performance and widening discounts cannot remain unaddressed.

“At HRI, we will continue to pursue the changes that we believe are necessary to improve the Trust after three years of poor returns and two decades of abysmal discount management by Katie Potts.

“Saba remains committed to putting shareholders’ interests first, delivering returns for U.K. trust investors and ultimately rehabilitating this broken sector.

“We urge shareholders of the six other trusts at which we have requisitioned General Meetings to support Saba’s resolutions in order to set these trusts on the path to meaningful value creation.”