The chair of the Baillie Gifford-managed £860 million Edinburgh Worldwide Investment Trust plc (EWIT) has hit back at Financial Conduct Authority (FCA) comments suggesting the UK’s £250 billion investment trust company sector risks appearing “self-interested” or “short-sighted” in its fight against New York hedge fund Saba Capital.

Edinburgh Worldwide chair Jonathan Simpson-Dent issued an open letter arguing the regulator is “missing the central issue” and warned that “retail investors deserve better safeguards from activist campaigns.”

Simpson-Dent said investment trust companies remain “vulnerable to sustained campaigns from activists.”

He said: “The current regulatory framework warrants closer scrutiny, and there are practical steps that could be implemented relatively easily that would be in the interests of all shareholders …

” … the regulatory framework should provide clearer definitions and stronger safeguards around board independence, conflicts of interest and related-party transactions, to prevent outcomes that undermine the spirit of shareholder democracy.”

Edinburgh Worldwide has been facing a third attempt by New York hedge fund Saba Capital Management to oust the Edinburgh Worldwide board and elect three new directors nominated by Saba.

The fund has strongly recommended that shareholders vote in favour of its controversial tender offer for up to 100% of EWIT’s issued share capital, which “is being carefully timed to pre-empt the high probability that Saba Capital is likely to succeed in imposing its new board at the next AGM.”

EWIT said on March 10 the tender offer would provide eligible shareholders with the opportunity to receive a significant initial cash exit and also retain access to the potential future value from EWIT’s largest shareholding, SpaceX.

“This is a key differentiator to Saba’s recent proposal which would force shareholders to either give up SpaceX or become trapped in a Saba-controlled vehicle,” said EWIT on March 10.

“The board has exhausted every reasonable and equitable solution with Saba Capital Management, L.P. (Saba) and now seeks to ensure that those shareholders who have overwhelmingly rejected Saba’s proposals twice, have a clean, deliverable and fair exit option to avoid ending up in a Saba controlled vehicle.”

Simpson-Dent’s open letter read:

Retail investors deserve better safeguards from activist campaigns

Recent comments by the Financial Conduct Authority including in the Sunday Times (“FCA: we won’t pick sides in Saba row”) suggesting that the investment trust sector risks appearing “self-interested” or “short-sighted” in raising concerns about activist shareholder campaigns risks missing the central issue.

Here’s the reality under the current legal and regulatory framework: a minority holder can impose a new board – given typically low retail shareholder voting turnouts, a 30% stake can be sufficient to force out and replace an entire board because that change only requires approval from more than 50% of shareholders who actually vote.

Investor platforms often do not deem such a move to be a corporate action and therefore do not notify their customers of such a vote. Once in situ, the new board has the power to appoint a new manager with a different goal and approach. The new manager could be the firm that has just nominated the new directors through its minority holding. 

This self-fulfilling circularity is often in conflict with the objectives of the majority of shareholders. This is why Impax and Edinburgh Worldwide are proposing tender offers to provide shareholders with the opportunity to exit these trusts.

No one is seeking protection from legitimate shareholder scrutiny. The right to requisition meetings, propose resolutions and vote on board composition is fundamental to the UK’s corporate governance framework and should remain so.

The real question is whether those rights are operating fairly for all investors, particularly the tens of thousands of retail shareholders who dominate ownership of the investment trust sector.

The article in the Sunday Times suggested that companies already have sufficient tools to deal with repeated shareholder requisitions, including changing their articles of association or relying on the courts where resolutions may be deemed “vexatious”.

In practice, neither approach offers meaningful protection. The board of Edinburgh Worldwide, which I chair, has explored all such options.

Amending a company’s articles requires approval from at least 75 per cent of votes cast. While this threshold is (rightly) designed to protect shareholders, in practice it means a determined minority investor holding a significant stake can block any amendments.

The legal bar for resolutions to be considered “vexatious” is extremely high. Courts are, quite rightly, reluctant to restrict the ability of shareholders to propose resolutions. However, this leaves companies vulnerable to sustained campaigns from activists. 

A third requisition at Edinburgh Worldwide, launched just weeks after shareholders had rejected an identical proposal, could not be prevented from proceeding.

This creates a structural vulnerability. Edinburgh Worldwide has around 24,000 shareholders, with retail investors owning roughly half of the trust. Yet retail voting turnout is typically lower than that of institutional investors. A minority shareholder can ultimately exploit this imbalance to remove an entire independent board and install its own nominees.

Whilst principles of board independence, conflicts of interest and related-party status should ordinarily prevent this from happening, the current regulatory framework applicable to investments trusts does not do so. Shareholders may therefore be left to rely on intervention or challenge after the event, by which point the vehicle may already have undergone significant disruption.

The current regulatory framework warrants closer scrutiny, and there are practical steps that could be implemented relatively easily that would be in the interests of all shareholders.

First, the way retail investors are notified of shareholder votes is inconsistent and often inadequate. On many platforms, investors only receive notifications if they have actively opted in, something many may not realise they need to do. When investors are being asked to vote on matters as significant as the replacement of an entire board, it is difficult to argue that the current arrangements represent an effective system of shareholder engagement.

Second, shareholders should be given clear and consistent information about those seeking to take control of a company. In the case of Edinburgh Worldwide, the proposed nominees did not engage with shareholders and did not attend the meetings at which they were proposed for office. 

Third, the regulatory framework should provide clearer definitions and stronger safeguards around board independence, conflicts of interest and related-party transactions, to prevent outcomes that undermine the spirit of shareholder democracy.

These are not arguments against activism. They are arguments for transparency, fairness and for a regulatory framework that protects all investors, not just the most powerful. That is by no means either short-sighted or self-serving. 

In comparison, absent a proper review of the framework that investment trusts operate within, retail shareholders can expect to see a further erosion of choice, and unique trusts such as Edinburgh Worldwide disappear. 

Retail investors deserve a system that works for them, as well as for the most powerful shareholders. I therefore welcome the FCA’s consultation later this year, though for the shareholders of Edinburgh Worldwide, any changes will come too late.