Alliance vs. Elliott – closing arguments

First – Karin Forseke (Alliance Trust’s Chairman)’s message to shareholders in the circular convening the meeting:

“Dear Shareholder, 

Who are Elliott and what do they really want? 

Our Company has been requisitioned by Elliott Advisors (UK) Ltd. to appoint three additional directors to the Board of Alliance Trust. Your Board believes this is just the thin end of the wedge and they would then pursue disruptive actions, to the detriment of other shareholders, focused on helping them to sell their shareholding quickly. Elliott is an affiliate of a U.S. based hedge fund manager with a controversial track record and a number of recent regulatory sanctions. In the UK, Elliott has had limited success in recent disruptive campaigns against public companies, such as Morrisons Supermarkets and National Express (which also included a requisition to appoint three additional non-executive directors). 

Elliott’s interests are at odds with those of other shareholders 

Elliott has previously made clear to us that they see little or no value in the Company’s dividend distributions, putting them at odds with the objectives of the majority of our shareholders. Furthermore, we believe that if these directors were appointed to your Board, Elliott would be likely to pursue disruptive actions to allow them to sell their shares quickly. In previous meetings with us, and as recently as last year, Elliott proposed that the Company launch a tender offer for 40% of its shares at a narrow discount. Such a tender may well engineer an exit for Elliott, but would require a significant liquidation of our Company’s assets, jeopardising the Company’s future and long-term value for shareholders. 

Our Company already has a clear and differentiated strategy which consistently delivers strong shareholder returns 

Our aim is to deliver strong and sustainable investment performance for our shareholders over the longer term. Alliance Trust has delivered above median Total Shareholder Return (TSR) since the appointment of its new equities leadership 6 months ago. Our TSR ranks in the top half of the Global sector a) for the last year (17%), b) since we became aware of Elliott’s shareholding four years ago (60%) and c) since Katherine Garrett-Cox became CEO (92%). Alliance Trust has also delivered an unbroken track record of dividend growth over the last 48 years, including 14% growth in 2014, and our share price reached an all-time high earlier this year. This should not be jeopardised. 

Alliance Trust adheres to high standards of corporate governance 

Alliance Trust has an experienced, diverse and dynamic Board with the requisite skills, selected through a robust process. The Board has been extensively renewed since my appointment and takes corporate governance matters extremely seriously. The Board regularly reviews all aspects of the Company’s strategy, challenging the status quo and the management team in the interests of all shareholders, which is why we believe the independence of your non-executive directors is of paramount importance. 

We do not believe that the proposed directors can be judged to be independent 

Elliott instructed the search firm and did not consult with the Company on the brief for the search, or on the identities of the proposed directors. Given that process, the Board is of the view that the nominees cannot be judged to be independent and is concerned that Elliott may seek to exert undue influence. Strong, independent non-executive representation on the Board is key to good governance. 

For these reasons, your Board unanimously recommends that you VOTE AGAINST the Elliott Resolutions as they intend to do in respect of their own shareholdings – and urges all shareholders to vote as every vote counts.”

and Elliott’s response:

“Elliott has carefully studied the circular to shareholders which was published by Alliance Trust plc (“Alliance Trust”, or the “Company”) dated 26 March regarding our proposal to elect Anthony Brooke, Peter Chambers, and Rory Macnamara as new independent non-executive directors of the Company.

In response to Elliott’s proposals to add experience and expertise to the Board, the Company’s circular fails to engage on matters of substance and resorts to personal attacks in a manner unbecoming of directors of a public company. Recent public comments by a former director of the Company about the lack of open debate in the Board room has strengthened our view that added independence and a fresh perspective is needed to improve Alliance Trust.

We have today published a forensic study of the shareholder circular, which dispels the Company’s arguments about its investment performance, costs, and dividend policy. These matters, which will be of serious concern to all long-term shareholders, include:

• Using authoritative third party data, over all relevant return periods Alliance Trust has underperformed its sector peers and relevant benchmarks. For example, £1000 invested by Alliance Trust when the current Chief Executive was appointed would have grown to £1671, compared to £1848 if invested in the global stock market. This represents a shortfall of 2% annually which, over the longer term, materially impacts shareholder wealth.
• The Company’s published “ongoing charges ratio” of 0.6% is distorted by excluding the cost of certain forms of compensation, inexplicably excludes a number of cost items in the accounts, and excludes costs which are recharged from the Company to its loss-making subsidiaries. The true cost to shareholders of managing the trust was 0.9% last year, and was 1.0% on average over the past five years, undermining shareholder returns over the longer term.
• Elliott recognises the importance of high and growing regular dividends to shareholders, as part of attractive total returns, and would like to see Alliance Trust improve the sustainability of its dividend policy and dividend growth ambitions. Shareholders should be aware that the Company’s earnings per share and total dividend cover would have fallen last year absent a temporary and unsustainable revenue increase from legacy assets and an unsustainable and unusual accounting treatment related to a dormant subsidiary.

We also question the Board’s claim that it “maintains strong oversight of the executive team and is pleased with the Company’s recent performance”. Despite underperforming the sector in five of the last six years, the Chief Executive has never been awarded less than half the maximum available bonus. Similarly, the Chairman’s remuneration is nearly three times that of the chairman of the sector’s best performing trust of equivalent size. Interdependence of high levels of remuneration between executive and non-executive Board members is an area of concern.

Our detailed response also refutes the unsubstantiated attacks the Company has made on Elliott and the independence of Messrs Brooke, Chambers, and Macnamara. By any standard of accepted governance principles, the nominated directors are truly and fully independent and, if elected, would not countenance being unduly influenced by any particular shareholder in any way.

As a long-term and engaged major shareholder in Alliance Trust, Elliott has repeatedly sought to express legitimate concerns and initiate discussions with the Company in private. When the Board failed to address matters of substance, we availed ourselves, as a last resort, of the minority protection provisions enshrined in legislation to make a requisition directly to shareholders. The debate with fellow shareholders in recent weeks has proven that our criticisms are widely shared. The Company’s heavy-handed response to our proposals has served to validate our concerns of complacency, entrenchment and a lack of true independence on the Board. We urge all shareholders to vote in favour of the new independent non-executive director candidates at the Annual General Meeting on 29 April.”

Alliance responds, again!

“The Board of Alliance Trust PLC (“Alliance Trust” or the “Company”) notes the statement made on 31 March 2015 by Elliott Advisors (UK) Ltd. (“Elliott”) in response to the Company’s shareholder circular (the “Circular”) of 26 March 2015. The Circular set out the key reasons why
the Board recommends that shareholders vote against Elliott’s requisition to appoint three additional directors to the Board (“Elliott’s Resolutions”). We do not intend to restate all of these reasons, but we have a responsibility to correct and clarify some of the more misleading assertions in Elliott’s most recent statement. 

Investment Performance 

In our Circular we set out details of our investment performance and we stand by this information. This shows that our performance to 24 March 2015 as measured on both a NAV total return and on a TSR basis ranks in the top half of our peer group for the majority of the time periods most commonly referred to by investment professionals. 

We remain of the view that Total Shareholder Return remains the most relevant performance metric for the majority of our shareholders and that by delivering sustained, strong investment performance the Company can narrow its discount to NAV further and continue to drive returns for our shareholders.

We are very encouraged that since the changes to the investment management team at the end of September 2014, the Company has delivered strong performance which ranks it 9(th) out of the 35 Trusts in the Morningstar global sector investment trust index (the “Global Sector”) on a NAV Total Return basis and 11(th) out of 35 on a TSR basis. We are confident the investment team will continue this strong performance. 

Costs 

We believe that the Company provides a high level of transparency over its cost base and refute Elliott’s allegation that the true cost to
shareholders is higher than reported. Our ongoing charges ratio (“OCR”) is audited and is calculated in accordance with the Association of
Investment Companies guidelines, which ensures comparability across the sector. We set out in our Annual Report how the
OCR is calculated.  We set out below the specifics of the OCR calculation. 

The AIC’s recommended methodology for the calculation of an ongoing charges figure states that, for self-managed companies, costs relating to compensation schemes which are linked directly to investment performance should be excluded from the calculation of the principal ongoing charges figure. We also disclose the OCR including capital incentives in our annual report. 

As disclosed in our annual report and in accordance with the AIC’s recommended methodology we have also included in the OCR the appropriate proportion of the ongoing charges of any underlying funds which represent substantial investments, defined as more than 5% of our portfolio. Our investment in the Alliance Trust Investments Global Thematic Opportunities fund constitutes a substantial investment. The comparable figure is higher in 2013 as in that year Alliance Trust Investments Monthly Income Bond Fund also constituted a substantial investment because at the end of December 2013 it exceeded 5% of the portfolio. 

Non-recurring expenses in 2014 included costs associated with implications for the Company of the referendum on Scottish independence
and the staff redundancy costs associated with the GBP2m cost saving initiatives undertaken during the year.  The latter related to the
reorganisation of the equity team and associated support functions such as our former in-house economic research team. The non-recurring expenses in 2013 included staff redundancy costs following the restructuring announced in July 2012 of the four regional equity portfolios into one global portfolio. The redundancies associated with two of such former regional equity teams were not completed until 2013. 

We have also stated that the Company’s share of the cost saving initiatives undertaken in 2014 will amount to GBP2m, or 9% of 2013
expenses, of which GBP0.7m has been achieved in 2014. The Company’s costs reduced by 3% as a result in 2014. Had the Company cost savings been achieved in full during 2014 the OCR would have been 0.56%. We believe that the Company’s OCR compares favourably with the rest of the Global Sector and our peer group as we outlined in our Circular. 

Dividends 

Our 48 year increasing dividend track record is almost unequalled by any FTSE listed company in the UK. In line with our dividend policy we distribute the net income earned from the investment portfolio as dividends to shareholders, with the excess above our minimum dividend guidance treated as a special dividend.  We have highlighted that the special dividend will by its nature be variable. In 2014 this resulted in a 3% increase in the ordinary dividend and a total dividend increase of 14.3%. 

We manage net income in its entirety from all the various constituents of our portfolio including mineral rights and not just the equity
portfolio. We fully disclosed in our annual report that our 2014 special dividend included GBP8m from Alliance Trust Finance, a subsidiary which is no longer required and which we have started the process to wind up. Alliance Trust Finance paid this dividend out of its own retained revenue reserves to Alliance Trust PLC. In the audited Accounts of Alliance Trust PLC, the Company correctly accounted for this as Revenue Income as it related to revenue income and was not a return of capital. 

Our 2014 ordinary dividend was 1.1 times covered by the net revenue earnings per share, excluding the above dividend from Alliance Trust
Finance.  This demonstrates the 2014 ordinary dividend was more than covered by the net revenue earned excluding the Alliance Trust Finance dividend. 

We believe our strong track record of dividend income is an important factor for the vast majority of our shareholders. 

Corporate Governance 

The Board’s recommendation to vote against the additional directors is based on the process through which they have been proposed, which means that we believe they cannot be judged to be independent, and is not a reflection on the nominees themselves or their track records. As stated in our Circular, the Board intends to initiate a search for an additional Independent Non-Executive Director in the summer and would be happy to meet with and consider any candidates put forward by any shareholder, so long as they are subject to the same rigorous and robust selection processes the Company always employs. 

As we explained in our Circular, we welcome shareholder engagement, but this does not mean that we have to agree with all proposals put to us by individual shareholders, for instance a large tender offer which we believe could jeopardise the Company’s future and is not in the
interests of all our shareholders.”

ATST : Alliance vs. Elliott – closing arguments