Time for UK Regulators to Act Against Saba Capital's Siege Tactics
Nils Pratley argues that the Financial Conduct Authority should introduce new rules to protect investment trusts from overaggressive activist investors attempting to seize control.
The Miserable Seven Campaign
A year ago, the typically quiet world of UK investment trusts – companies that invest in other companies – experienced genuine drama. A vocal New York raider, Boaz Weinstein of hedge fund Saba Capital, acquired significant stakes in seven trusts and hurled insults at their boards, primarily criticizing poor investment performance or failure to close the gap between asset value and share price.
Despite the fireworks, the campaign flopped. Saba filed various shake-up motions at what it dubbed the Miserable Seven and lost every single one. A 7-0 defeat might prompt most to retreat in embarrassment, but as quickly became apparent, that is not Weinstein's style.
Edinburgh Worldwide Under Siege
Thus Edinburgh Worldwide – a trust famous for its substantial holding in Elon Musk's SpaceX – found itself in the spotlight again in January when Saba forced a vote to install three nominees on the board. It lost that one too: 94% of non-Saba votes backed the existing board and strategy. However, because Saba owns 30% of the stock, the actual margin of defeat was narrower at 53% to 47%, which is uncomfortably close from the defending board's perspective.
Sure enough, Saba returned three weeks later for yet another attempt, presumably hoping or expecting that one more push would get it across the line. It tabled a motion, set to be voted on next month, to appoint the same three nominees who had just been rejected.
A Desperate and Imaginative Response
Cue Edinburgh's response on Tuesday, which blended imagination with desperation: it will offer to effectively blow itself up via a 100% tender for its own shares. Shareholders will be able to cash out at close to the value of the assets, with the wrinkle that the SpaceX holding, comprising 16.6% of the portfolio, will be retained until a crystallization event occurs, referencing Musk's plan to list the rocket firm this summer.
The imaginative element is that the plan could stymie Saba's back-door attempt to take control. The majority of Edinburgh's shareholders clearly do not want what Weinstein is selling – namely a change of investment manager, with Saba itself the likely replacement, and a new investment strategy. Therefore, those investors should be able to exit if they wish rather than be trapped inside a Saba-controlled vehicle, while still capturing the likely upside in the SpaceX holding.
Regulatory Gaps Exposed
But the desperate part is that such radical measures are necessary at all. Jonathan Simpson-Dent, the trust's chairman, did not hold back. We have reached the end of the road with Saba's obsession to break the status quo and its continuing disregard for the expressed wishes of other shareholders, he said, lamenting the costs of dealing with the raider's repeat smash and grab cycle.
He is absolutely right. The Financial Conduct Authority's rules are not designed to handle aggressively belligerent actors who refuse to take no for an answer. Activist investors obviously have their uses – they serve as a check against bad and lazy boards – but Saba's tactics come from a different playbook. The hedge fund attempted to gain control by grinding away ceaselessly and offered little real scrutiny of its nominees.
Call for Regulatory Action
The FCA has promised a review, which will conclude too late for Edinburgh's purposes. However, the regulator still needs to get this right. The listing rules provide regular trading companies with protections against perpetual sieges by failed bidders. Investment trusts deserve something similar to safeguard against relentless campaigns that undermine shareholder interests and trust stability.
