Herald (HRI), the £1.2bn global technology trust in a fight for survival with Saba Capital, has complained to the Financial Conduct Authority (FCA) about the actions of its 31% shareholder, which it “deplores”.
Saba, an activist hedge fund with stakes in dozens of UK investment companies, was pushing to take control of Herald by “a process of attrition”, the investment trust said, despite having had its proposals to oust the board decisively rejected by shareholders on two occasions.
“The consistent theme of Saba’s actions is the threat to seek to replace the company’s board with their own nominees (requiring only a 50% approval of those voting), with the likely intention that the new board then appoint Saba in due course to run the company.
“The board naturally deplores such an approach, as it oppresses the interests of the numerous small shareholders who collectively make up a majority of the register and it has therefore raised the matter with the Financial Conduct Authority.
“In the board’s view, where a substantial shareholder nominates a director to the board of a company, and such substantial shareholder is then also proposed to be appointed as the investment manager of that company … that director should not be entitled to vote on the appointment of the investment manager who appointed them in the first place.
“This would bring such a decision in line with the general guidance that non-independent directors cannot vote on matters between the company and the investment manager,” chair Andrew Joy said.
Herald’s call for action from the FCA follows a similar plea from its trade body, the Association of Investment Companies, which last week urged the regulator to limit the number of times one shareholder could submit the same proposal to a vote. That would prevent Saba’s war of attrition against investment trusts like Herald through repeated votes to replace their boards.
Joy said “the almost unanimous desire of non-Saba shareholders to avoid being in a Saba-controlled vehicle” had been demonstrated by the 99.8% and 99.9% non-Saba votes against the US firm’s attempts to replace its directors last March and in January.
He said the board was working hard to find a solution with Saba, which this month rejected a 100% tender offer that required a 75% vote to pass. It would have enabled Saba and other investors to withdraw all their money at close to net asset value.
Joy said if an agreement could not be reached, the board would have no choice but to push through a “backstop” tender as an ordinary resolution. That would require 50% of votes which Saba would find harder to block. This would give shareholders an exit but “would in all probability spell the end of the company with its current mandate and management” under Katie Potts at Herald Investment Management.
His comments came in annual results showing Herald’s investments returned 8.5% last year to beat the 0.3% dip in sterling terms in the US Russell 2000 Technology index but behind the 11.8% return of the Deutsche Numis Smaller Companies plus AIM benchmark.
Shareholders suffered a 1% drop as their shares saw their discount to NAV widen from 2.3% after the March vote to 10.9%. The discount has narrowed slightly this year to 7.8%.
Herald’s long-term performance has been excellent. Since launch in February 1994 up to 31 January, it has generated a 2,926% total return to shareholders, well ahead of the 746% and 781% returns of the Numis and Russell indices.
Our view
James Carthew, head of investment company research at QuoteData, said: “This is a decent set of numbers from Herald. However, it is incredibly frustrating that the uncertainty that Saba has created means that investors who ticked the cash exit box at Smithson (freeing up almost £1bn) will most likely not consider reinvesting it into this much better-performing trust. We wholeheartedly support the Herald board’s call for clarity from the FCA on related party rules. Minority investors need to be better protected.”
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