The conflict between activist investor Saba Capital and Edinburgh Worldwide Investment Trust has exposed gaps in the UK listing rules that must be addressed to protect shareholders, according to the Association of Investment Companies (AIC).
The Financial Conduct Authority (FCA) has brought forward its review of the Listing Rules, including targeted work to assess how investment trust boards are supporting shareholder rights and attempting to prevent conflicts of interest.
The FCA’s proposals are set to be published in a consultation paper, with work to be finished by the end of the year.
Richard Stone, chief executive of the AIC, said: “Saba’s admission this week that it wants to replace Baillie Gifford and become the investment manager for Edinburgh Worldwide highlights a potential conflict of interest that the current Listing Rules are not designed to tackle.
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“The current rules for investment companies consider potential conflicts between a board and its manager, but do not cover situations where a substantial shareholder may be using its influence to replace the board and become the manager.”
On top of this, the US activist’s intention to gain control by replacing all the directors raises “urgent questions” about the nature of board independence.
To address this, the AIC proposed three main suggestions. First, the FCA should consider amending the rules so that a substantial shareholder can only become an asset manager through a vote. As a related party, the shareholder in question should be unable to vote on this, the AIC suggested.
Second, the FCA should take more steps to maintain director independence.
The trust body argued an activist which nominates directors and determines the outcome of the vote on their appointment can exert a “disproportionate influence” on who wins the contract at the expense of other shareholders.
Finally, the AIC said the FCA should consider preventing managers who are also substantial shareholders from voting to change the trust’s policies.
Stone concluded: “The current Listing Rules need amending to ensure shareholder activism remains a positive influence in corporate culture, not a route to riches at the expense of other shareholders.”
