Plans for Schiehallion (MNTN), the £1.1bn Baillie Gifford private equity fund, to become an investment trust hang in the balance after influential proxy vote adviser Institutional Shareholder Services recommended investors vote against the investment company at an extraordinary general meeting next week.
Schiehallion, an investor in Tik-Tok owner ByteDance and SpaceX and other unquoted tech companies, needs 75% of votes in favour of a special resolution for the Guernsey closed-end fund to be admitted to the main market of the London Stock Exchange (LSE).
It also needs 50% of votes for a second ordinary resolution granting a waiver of rule 9 of the Takeover Code which requires anyone with a significant holding in a company’s shares to make a mandatory bid.
ISS is recommending shareholders vote against both claiming Schiehhalion has published insufficient information for it to properly assess whether the proposals, part of a long-awaited move from an institutional investor focus to one that embraces retail investors, meet corporate governance standards.
At issue is the proposal for a new class of special voting “B”-shares designed to make the dollar-denominated specialist investment company eligible for admission to the LSE’s closed-end investment fund category while avoiding the risk of losing its US status as a “foreign private issuer” (FPI). That could see it fall under the onerous regulation of the Securities and Exchange Commission with an increase in costs and greater interference.
Schiehallion was launched in 2019 with the support of North American pension funds. To ensure it did not fall foul of US rules, its articles of association include a “voting cramdown” to keep voting rights of American investors below 50%.
However, that mechanism clashes with LSE rules so Schiehallion has said it will remove it and issue the “B”-shares which will be designed to ensure US shareholders’ voting rights never exceed 35%.
In response to ISS, Schiehallion said all the information had been publicly available in its prospectus, and the announcement and circular for the EGM on 8 December.
It stated that while special voting shares are unusual in the UK stock market, they were more common in the “narrower set of investment trusts with significant US shareholder bases”.
It emphasised that the principles of good governance around one-share, one vote and the protection of minority shareholders’ interests were not at issue in the proposals.
“The company’s proposed arrangement is explicitly designed to avoid a regulatory risk, the triggering of which would likely not be in the interests of all shareholders,” it said, urging shareholders to vote in favour of both resolutions.
Schiehallion shares added 0.5% to 113 US cents. This leaves them on a 30% discount to their latest net asset value of 160.9 cents. Like other Baillie Gifford trusts, the shares were hit hard in the 2022 growth crash, peaking at 293 cents in November 2021 before falling to a low of 48 cents in October 2023 and recovering to their current level.
Our view
James Carthew, head of investment company research at QuotedData, said: “It’s not often that I’d tell you to vote against the recommendations of one of the big proxy advisers but they are not infallible. This issue with Schiehallion illustrates that. While special voting arrangements are open to abuse –third Point Investors springs to mind – they do solve the FPI issue.”
