The Association of Investment Companies (AIC) has urged the UK’s Financial Conduct Authority (FCA) to tighten UK Listing Rules after New York hedge fund activist investor Saba Capital exposed “gaps” in protections for shareholders of investment trust companies.
The Baillie Gifford-managed £860 million Edinburgh Worldwide Investment Trust plc (EWIT) has been facing a third attempt by Saba Capital to oust the Edinburgh Worldwide board and elect three new directors nominated by Saba.
Exasperated EWIT has now strongly recommended that shareholders vote in favour of its controversial tender offer for up to 100% of EWIT’s issued share capital that “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.”
The AIC has 275 member companies and the investment trust industry has total assets of £270 billion.
The AIC said: “The Association of Investment Companies (AIC) has put forward a series of suggestions to help address gaps in the UK Listing Rules that have been exposed by activist investor Saba Capital.
“The Financial Conduct Authority (FCA) is currently reviewing the Listing Rules and how they relate to investment entities such as investment trusts, with a particular focus on board independence and potential conflicts of interest.”
The AIC said it is seeking to encourage debate on how the legislation could be changed by putting forward ideas for reform, including:
- Addressing potential conflicts of interest, specifically around substantial shareholders (defined as those who own 20% or more of the company’s shares)
- Amending rules around the independence of board directors
- Preventing investment managers that are also substantial shareholders from voting on changes to a trust’s policies
AIC CEO Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “Saba’s admission this week that it wants to replace Baillie Gifford and become the investment manager for Edinburgh Worldwide highlights a potential conflict of interest that the current Listing Rules are not designed to tackle.
“The current rules for investment companies consider potential conflicts between a board and its manager, but do not cover situations where a substantial shareholder may be using its influence to replace the board and become the manager. Saba’s intention to gain control by replacing all the directors also raises urgent questions about the nature of board independence.
“The current Listing Rules need amending to ensure shareholder activism remains a positive influence in corporate culture, not a route to riches at the expense of other shareholders. Our priority is to prevent potential conflicts of interest and better protect the rights of all shareholders.”
AIC suggestions for reform include:
- Addressing potential conflicts of interest
“The FCA should consider amending the related party rules so that any proposal for a substantial shareholder to become the asset manager is subject to a vote. The substantial shareholder itself, as a related party, should be excluded from that vote.”
- Protecting board independence
“The FCA should consider strengthening the independence requirements for directors of investment companies to ensure they cannot be beholden to any large shareholder or the investment manager. An activist which nominates directors and determines the outcome of the vote on their appointment could exercise a disproportionate influence on who wins the management contract and potentially change the overall direction of the company. There is insufficient protection in the rules to ensure that this is not done at the expense of other shareholders.”
- Protecting shareholders’ interests on material policy changes
“The FCA should consider preventing investment managers that are also substantial shareholders from voting on changes to a trust’s policies.”
A spokesperson for Saba Capital said: “The Association of Investment Companies only has one priority: to protect its paying members, who are the investment trusts and their managers, at all costs.
“Its recent self-serving actions make clear it has no interest in shareholder democracy or in holding boards and managers accountable for chronically underperforming funds that have delivered such poor outcomes for pensioners.
“Its defence of Edinburgh Worldwide — a trust that has lost more than 30% of its value over the last five years and underperformed its benchmarks by double digits — perfectly sums up its blind commitment to keeping shareholders trapped in its members’ poorly performing products.”