AIC recommends changes to listing rules to protect shareholders
Gaps need to be addressed.
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 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
“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.”
Richard Stone, Chief Executive of the Association of Investment Companies (AIC)
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
1. 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.
2. 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.
3. 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.
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Notes to editors
- The Association of Investment Companies (AIC) represents a broad range of investment trusts and VCTs, collectively known as investment companies. The AIC’s vision is for closed-ended investment companies to be understood and considered by every investor. The AIC has 275 members and the industry has total assets of approximately £270 billion.
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