Saba’s proposed plan to oust the boards of seven investment trusts and replace them with their own candidates could be in breach of the Financial Conduct Authority’s (FCA) rules around board independence if more independents are not added, according to Edison.
The US hedge fund has nominated its own partner and portfolio manager Paul Kazarian as director to most of these boards, as well as Saba’s founder and chief investment officer Boaz Weinstein as a director candidate at the Baillie Gifford US Growth Trust PLC.
According to the FCA, a director is not deemed independent by the City watchdog if they “represent a significant shareholder” or have “a material business relationship with the company”. Saba currently owns between 19% to 29% of the shares in each trust. In a previous statement, the firm has said it “intend[s] toadd one or more additional independent directors to each board as soon as reasonably possible following the trusts’ general meetings,” which would be in addition to the seven other independent candidates already put forth by Saba across each trust.
See also: AIC raises concerns over Saba with FCA
While Saba has also pledged that Weinstein and Kazarian would not vote on board decisions relating to Saba, Edison was sceptical that this would ensure independence.
“If these board members fail to adhere to Saba’s plans, the hedge fund could try to oust them in the same way it is currently trying to remove existing board members,” it said.
“Even if the proposed board members who are not part of Saba’s team have no formal business ties to the latter, we believe it is very likely that they will pursue Saba’s agenda rather than provide an independent perspective on the best way forward for these targeted trusts.”
The FCA has attempted to prevent external influence on decision making, and the AIC’s governance code notes that boards “should take action to identify and manage conflicts of interest, including those resulting from significant shareholdings, and ensure that the influence of third parties does not compromise or override independent judgement”.
See also: Trusts targeted by Saba campaign urge shareholders ‘take no action’
It is provisions such as these in the AIC’s Corporate Governance Code that make Edison unconvinced that board independence can be reached under Saba’s plans.
“A scenario in which an activist hedge fund is a significant shareholder driving the replacement of the current boards with its proposed directors, and subsequently appointed as the trust’s investment manager, creates a conflict of interest, especially when setting the terms of the management agreement,” it said.
According to a statement from Saba Capital, “If Saba’s nominees are elected, the board of each trust will be legally compliant at all times under the FCA Listing Rules and will ensure compliance with the highest standards of governance. Following the general meetings, each board will comply with the AIC Code of Corporate Governance as soon as practicable, as the nominees intend to appoint one or more additional independent directors with suitable experience. Saba and its nominees are focused on providing shareholders reliable returns, boards that advocate for shareholders’ best interests and managers that are focused on delivering value.”
Edison is not the only concerned party to raise alarms around this matter – the Association of Investment Companies (AIC) reported Saba’s potential corporate governance breach to the FCA last week.
Baillie Gifford US Growth Trust and Henderson Opportunities Trust are clients of Edison Investment Research.