Association of Investment Companies calls for FCA to reform listing rules ‘exposed’ by Saba Capital

The AIC proposed that when a substantial shareholder seeks to take control of the management contract of an investment trust, this should be subject to the approval of all other shareholders.

It urged the FCA not to build in a four-week delay before the implementation of its new rules to protect shareholders, following the recent campaign by Boaz Weinstein’s firm on Scottish investment trusts.

Earlier this month, Aberdeen paid an undisclosed sum to enter into a three-year standstill agreement to prevent Saba from calling for a change at seven investment trusts.

The agreement covers Aberdeen UK Smaller Companies Growth, Aberdeen Equity Income, Murray International, Aberdeen New India, Dunedin Income Growth, Aberdeen Asian Income, and Aberdeen Asia Focus.

Weinstein’s hedge fund agreed not to put forward any proposals to the companie’s shareholders or requisition any resolution or general meeting of the company.

It came after Saba led a successful shareholder campaign to oust the board of the Baillie Gifford managed Edinburgh Worldwide Investment Trust in April. Weinstein targeted the trust over ‘governance concerns and performance, eventually managing to install their own nominees and initiating plans for a shareholder exit tender offers.

The AIC warned that the campaign revealed how “a substantial shareholder might be able to use its own voting power to gain access to management fees: a benefit which does not accrue to other shareholders.

“Saba has also proposed radical changes to the investment policies of the targeted companies: replacing investment mandates based on sectoral or geographic exposures with a strategy of investing in investment companies whose shares trade at a discount to their net asset value (NAV).

“These steps could allow it to accrue benefits that do not apply to other investors. This possibility requires a targeted and urgent regulatory response.”

Richard Stone, chief executive of the Association of Investment Companies (AIC), said: “We support reform of the Listing Rules to manage conflicts of interest and the FCA has come up with some good proposals. However, we believe that the regulator needs to go further to close gaps in the rules exposed by Saba Capital.

“This is not about weakening traditional activism. It’s about dealing with situations where one substantial shareholder stands to gain at the expense of others – for example, by taking over the management contract of an investment trust. It’s not just a Saba issue – any prospective manager could exploit the same loophole. 

“We are proposing targeted reform of the rules so that when a substantial shareholder seeks to become the manager of an investment trust, a majority of all other shareholders need to approve that change of manager. This doesn’t stop a shareholder taking over as manager, but it does make sure that this can’t happen against the wishes of other shareholders.

“Another crucial point in our submission is the need for speed. The FCA has proposed a four-week delay before any changes to the Listing Rules come into effect. We think the negative consequences of this measure far outweigh any positive ones, and shareholder protections should be implemented as soon as the FCA has made its final decision. 

“The management contract of an investment trust is a substantial prize. As recent events have shown, existing rules do not provide enough protection for ordinary shareholders against one substantial shareholder who is motivated to take over that contract. Our targeted proposals would ensure shareholders are better protected without getting in the way of traditional activism that benefits all shareholders equally.”