Saba’s tactics raise some tricky questions about corporate governance
The attack by hedge fund manager Saba Capital on UK investment trusts is by no means over.
Last month, Saba suffered its eighth consecutive defeat at a general meeting of an investment trust. Its proposals to change the board of Edinburgh Worldwide were defeated by a margin of 53% to 47%. Not counting Saba’s own stake in the trust, 93% of other shareholders rejected its proposals.
But Saba still holds a stake in Edinburgh Worldwide – and more than 30 other investment trusts. Some of these stakes are small: others are straining at the Takeover Code’s 30% limit, meaning that Saba cannot buy another share without having to make a formal offer for the company.
Nobody really knows what Saba wants. It goes beyond just investing at discounts and agitating to get money back close to net asset value (though it has succeeded in doing that at some trusts). It has talked about taking control of an investment trust – though at the latest Edinburgh Worldwide vote, it was silent about its intentions beyond replacing the board with its own nominated directors.
See also from Portfolio Adviser: Saba Capital calls for managed wind-down of Workspace Group
Being heard
Having an activist like Saba on the register raises thorny questions for investment trust boards, who are required to uphold the interests of all shareholders. As a shareholder, Saba has a voice and should be listened to. But that voice shouldn’t drown out the voices of other shareholders.
This problem has been brought into focus by the eight general meetings which Saba has requisitioned, at which other shareholders have overwhelmingly rejected its proposals.
The idea that it is a “white knight” fighting for the interests of ordinary investors is belied by the fact that these ordinary shareholders – many of them retail investors – don’t seem to want what Saba wants. In fact they have come out in force to say so – turnouts at the Saba-requisitioned meetings have been 60% to 80%, compared to an average of 43% for all AGMs.
Ignoring Saba is not an option. UK company law allows a 5% shareholder to requisition a general meeting, and while the request may be refused if it is deemed frivolous or vexatious, this may be hard to prove. Even if it doesn’t requisition a meeting, Saba may turn up at AGMs and vote against the re-election of board members. Galvanising retail shareholders to vote is costly and time-consuming (the AIC is pushing for the government to including promised voting legislation in the King’s Speech to help address this problem).
In practice, boards need to agree a way forward with shareholders or get unhappy minority shareholders off their register. The board of Herald Investment Trust has come up with one potential solution. It put forward a 100% tender offer to shareholders, which was conditional on Saba tendering its shares, together with a “backstop” tender offer if Saba rejected the first one. The idea was that the backstop tender offer would allow shareholders to exit rather than remain in a Saba-controlled company. Saba declined to support the first tender offer, and the board is now in discussions with the activist about a way forward.
Impax Environmental Markets, another significant Saba shareholding, has adopted a similar plan, with the first vote due to take place on 23 February.
See also: AIC proposes company law amendments to widen voting access
The AIC Corporate Governance Code says the board of an investment trust, and the chair in particular, should seek regular engagement with major shareholders to understand their views. This can, of course, be difficult if shareholders prefer not to engage. Saba’s tactics have often involved an element of surprise: for example, requisitioning seven general meetings just before Christmas in 2024.
However, early intervention from some boards has averted time-consuming and costly battles. For example, Montanaro UK Smaller Companies bought back Saba’s stake both times the activist invested in the trust.
Dealing with a determined activist remains challenging, and is likely to be an asymmetric fight for a non-executive board which faces legal, regulatory and compliance constraints that are not faced by the activist.
While activism is a normal and healthy element of public markets, it’s essential that the UK’s legal and regulatory framework supports boards’ ability to look after the interests of all shareholders, not just large institutional investors with their own agendas. The AIC continues to raise these issues with policymakers.