The chair of Edinburgh Worldwide (EWI) has hit out at the Financial Conduct Authority after one of its senior officials said the regulator should not be expected to “pick sides” in investment trusts’ battles with activist hedge fund Saba.

Jonathan Simpson-Dent (pictured) said smaller investors needed “meaningful protection” after Simon Walls, interim executive director for markets at the FCA, told the Sunday Times that the investment trust sector risked appearing “self interested” and “short sighted” in calling for the regulator to intervene with rules to prevent large shareholders like Saba Capital taking control of London-listed funds.

In an article on 15 March that only appeared in the Sunday Times’ print edition, Walls expressed reluctance for the regulator to get involved in preventing Saba from using its 20%-30% stakes in investment companies such as EWI, Herald (HRI) and Impax Environmental Markets (IEM) to repeatedly file resolutions to remove their boards as a step to the firm being appointed fund manager. 

He suggested changes to company law and the rules for general shareholder meetings were a matter for the government and not the FCA.

“We do expect shareholders to put motions forward and don’t expect the FCA to come in and pick sides,” said Walls. “Most of the focus is on the votes and that isn’t a process that has direct relevance to the FCA.” 

His comment casts doubt on whether the regulator’s review of the rules announced this month will offer any help for Edinburgh Worldwide or other investment trusts under attack by Saba. The £730m global equities fund managed by Baillie Gifford has effectively set in motion its own wind-down in response to the hedge fund’s war of attrition. A 100% tender offer formally launched two weeks ago will enable shareholders to sell out before the firm founded by Boaz Weinstein possibly takes control at next month’s annual general meeting when a third vote requisitioned by Saba for its nominees to be elected takes place.

In the past year EWI shareholders have twice rejected Saba’s attempts to remove the current directors. However, a smaller majority in the latest vote raised the real possibility that Saba would eventually win and gain control of the board.

In a comment likely to infuriate investment trust supporters, Walls said that the calls for the regulator to intervene were “at the very least short-sighted to the chilling effect on shareholder rights, which sit right at the heart of the [FCA] regime.”

He suggested investment companies, which he praised for doing an “extremely good” job in mobilising shareholders to stop Saba so far, could amend their articles of association to limit the number of votes submitted or take legal action if they believed the hedge fund’s actions were “vexatious”.

In subsequent remarks to CityAM, Walls also took a dim view of what he called “special pleading”.

“The special pleading doesn’t necessarily put shareholders’ interests at heart,” he told the paper.

“Structural vulnerability”

In an open letter responding to Walls, Simpson-Dent said: “Amending a company’s articles requires approval from at least 75% of votes cast. While this threshold is (rightly) designed to protect shareholders, in practice it means a determined minority investor holding a signifiant stake can block any amendments.”

He said the legal bar for resolutions to be deemed “vexatious” was extremely high and courts were reluctant to restrict shareholders’ ability to propose resolutions. “However, this leaves companies vulnerable to sustained campaigns from activists,” he said, referring to EWI’s lack of power to prevent a third Saba requisition even though it was launched just weeks after shareholders had rejected an identical proposal. 

EWI’s chair said this created a “structural vulnerability” that required closer scrutiny of the current regulatory framework which could be strengthened by:

• improving investment platforms’ notifications to shareholders of impending corporate votes;
• requiring board nominees, such as Saba’s, to communicate with shareholders before votes to elect them;
• providing clear definitions and safeguards around board independence, conflicts of interest and related party transactions.

“These are not arguments against activism,” said Simpson-Dent. “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.”

Without a proper review of corporate governance rules, which Herald and the Association of Investment Companies have also called for, “retail shareholders can expect to see a further erosion of choice, and unique trusts such as Edinburgh Worldwide disappear”.

Simpson-Dent concluded: “I therefore welcome the FCA’s consultation paper later this year, though for the shareholders of Edinburgh Worldwide, any changes will come too late.”

Our view

Matthew Read, senior analyst at QuotedData, said: “We agree with Walls that the FCA should not be expected to pick sides in a dispute with an activist. However, in our view, this is not what is being asked by EWI chair Simpson-Dent. Saba’s actions across multiple funds have exposed a clear gap in the regulatory framework: smaller shareholders are at a disadvantage to large institutional holders in terms of voting power, enabling an activist to return repeatedly with the same resolutions, imposing costs on all shareholders.

“This issue needs to be addressed. Where existing rules offer inadequate protection, the FCA should recognise this and consider how best to close the gap. While, in theory, Walls’ suggestion that trusts can turn to the courts if repeated votes are ‘vexatious’ has merit, in practice it is not a workable solution given the time and complexity involved. Trusts such as Herald, Impax Environmental Markets and Edinburgh Worldwide have clearly explored all options and rejected this route, instead opting for extreme measures to protect shareholders. In our view, boards should not have been forced into this position; it would be far better to address the underlying problem.

“We also agree that it would be inappropriate for the regulator to intervene in individual cases, as this would undermine fundamental shareholder rights. However, the industry is not seeking case-by-case intervention, but a structural fix. The government and the FCA should acknowledge that there are issues and work towards a solution that is fair to all. It is just unfortunate that it has taken the loss of some unique investment vehicles to bring the problem into focus.”

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