The argument between investments trusts and the City regulator over the Saba crisis has escalated with Glen Suarez, chair of Impax Environmental Markets (IEM), joining Edinburgh Worldwide (EWI) in demanding the Financial Conduct Authority take their calls for intervention against the hostile US hedge fund seriously.

Like EWI chair Jonathan Dent-Simpson, Suarez and the IEM board have had to resort to a 100% tender offer that is likely to end the investment trust in order to give investors a chance to get their money out before Saba, a 21% holder, eventually takes control.

Recent comments by Simon Walls, the FCA’s interim executive director for markets, that investment trusts risked appearing “self interested” and “short sighted” by urging the regulator to prevent large shareholders wearing down boards with repeated attempts to replace them, have infuriated both chairs.

Suarez told The Times: “The FCA have to worry about this. Investment trusts play a very, very important role in financial markets. If all of us are pointing out to them that there is a fracture in the quality of investor protection, then they ought to take it damned seriously.”

He said the problem was that current rules did not prevent activists like Saba from repeatedly filing resolutions to vote off a company’s board even when a majority of shareholders had expressed their support and defeated the motions. Over time, Saba could expect shareholders to tire and for turnout at the general meetings it called to diminish, allowing it to secure a majority for its nominees.

“The question is, who prevails? Does the minority shareholder prevail, by constant nagging and pressure and imposing costs on everyone else, or should the majority prevail. That’s a regulatory question,” Suarez said.

Walls, however, shows no sign of backing down. In an FCA blog on Friday, he repeated his call for investment trusts to use their existing legal powers to prevent a shareholder abusing resolutions and meetings to mount “vexatious” campaigns to destabilise a company. Although there was a high bar to do so, Walls said investment company boards could “set aside” such resolutions.

“The law also gives companies the ability to design voting arrangements through their articles of association if enough shareholders agree. For example, by tailoring their articles to effectively opt shareholders into specific voting mechanisms and notifications, and by adopting electronic voting options,” he wrote.

Amid this argument, Impax Environmental Markets (IEM) has published what could be its last annual report. Chair Glen Suarez said in the document it was with “profound regret” the trust had launched the 100% tender offer to let investors avoid risk of 21% hostile shareholder Saba gaining control. This followed a “disappointing” year in which IEM made an underlying investment return of just 0.9%.

He again urged shareholders to vote for the resolution enabling the exit tender offer to proceed using the forms sent in the circular this month. “The directors will be tendering all of their own shares, underscoring our conviction that this is the right outcome for IEM’s shareholders,” he said.

Our view

James Carthew of QuotedData said: “A couple of times now, the FCA has suggested that trusts treat repeated requisitions by Saba as ‘vexatious’. That would give trusts a reason to refuse to put Saba’s proposals to shareholders. However, as far as I can tell from looking at what has been written on the topic, the main aim of vexatious actions seems to be to annoy, harass, or disrupt the target. There also seems to be a requirement that the subject matter is without merit. It feels to me as though if Saba disputed whether its actions were vexatious, there is a good chance that a judge would side with them. That implies that the trust might incur substantial legal fees for no ultimate benefit, and it would be no use running crying to the FCA that it was all its idea. As a route to shutting down Saba, this feels like a dead end.”

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