Relations between Hipgnosis Songs Fund (SONG ) and fund manager Merck Mercuriadis have sunk to a new low after Mercuriadis’ firm refused to drop its right to buy its songs portfolio in the event of a bid.

And the royalty fund’s new board is also separately investigating whether Hipgnosis Songs Management (HSM) fully informed the previous board about the quality of 29 catalogues it bought for $23.1m (£18m) last month.

Last week, the board said it would seek shareholder approval for a special fee of up to £20m to cover due diligence costs of any bidders for the investment company, which launched a strategic review last October after losing a continuation vote.

The unusual proposal is designed to circumvent a controversial call option giving Blackstone-owned HSM the right to match any bid for the assets, which the board and shareholders fear will discourage approaches from interested third parties.

Publishing a shareholder circular for the extraordinary general meeting – to be held in London on 7 February – to vote on the proposal, SONG said it had requested HSM to remove the option from its investment advisory agreement ‘with immediate effect to act in the best interests of shareholders as a whole.

‘This request has been refused,’ it said.

Meanwhile, Robert Naylor, the new chair appointed in an overhaul of the board after shareholders voted against the fund’s continuation, said the board was investigating analyst claims that HSM had ‘cherry picked’ catalogues with ‘materially higher’ growth rates than the rest of the portfolio for the secondary asset sale completed in December.

‘The newly constituted board is investigating whether this is the case, and if so, whether this was properly and fully disclosed to the previous board in the investment papers, which included the recommendation provided by Hipgnosis Song Management, and therefore whether the previous board were provided with the relevant information to enable them to make a decision in the best interests of shareholders,’ Naylor said.

The songs had been bought by SONG as part of its earlier acquisition of Kobalt Fund One in 2020. At their sale in December to Hipgnosis Songs Capital – a separate fund HSM runs for Blackstone – the songs were described as ‘non-core’ and requiring intensive work.

They were sold at a 14.2% discount to their previous valuation at 9.6 times their net publisher share. Proceeds of around $22.6m were used to reduce some of the fund’s large debts.

A much bigger proposed transaction to sell a fifth of SONG’s assets to Hipgnosis Songs Capital for $440m was blocked in October by shareholders who objected to the 17.5% discount at which they were being sold back to the fund manager.