The investment adviser for Hipgnosis Songs Fund has refused to remove the call option from its advisory agreement, despite calls from the trust’s new board.
Hipgnosis Songs Management, which is majority owned by funds run by Blackstone, has faced concerns raised by the trust’s board regarding its call option, which allows HSM to purchase the trust’s portfolio if its position as investment adviser is terminated.
In a stock exchange announcement published last week, trust chair Robert Naylor said the call option that the call option “not only acts as a structural conflict between the interests of our shareholders and the investment adviser”, but creates a “significant deterrent to potential bidders for the company’s assets, thereby depressing the value of the company”.
The board has therefore proposed a pay-out of up to £20m for any prospective buyers looking to acquire one or more of the trust’s subsidiaries which own the company’s music assets – subject to the board’s discretion and “on terms recommendable by the board to shareholders”.
In a circular sent out today (23 January), the board said several of the company’s largest shareholders, who hold more than 35% of issued share capital between them, have all “indicated their support for the proposal” despite protests from HSM. An extraordinary general meeting has therefore been called where the solution will be voted for by shareholders, and will be held at 9am on 7 February at Bow Churchyard.
“[The board] considers that this payment of costs will reduce the deterrent of the call option to prospective offerors, who would be willing to propose offers for the company’s assets that are recommendable by the board to shareholders, by providing significant protection against their due diligence costs,” the board explained. “In doing so, the proposal will permit greater potential opportunities for shareholders to maximise value from their investment in the company.”
Continuation of the trust was previously voted against by 83% of shareholders at an annual general meeting and an EGM in October last year, which gave the trust’s then-board six months to put forward proposals for any changes.
Hipgnosis appointed Shot Tower Capital to conduct due diligence on the investment company’s assets in December last year, as part of an ongoing review.
Hipgnosis’s board continued: “The statements made by two independent research reports, which assert that the 29 catalogues proposed to be sold to Hipgnosis Songs Capital, a fund also managed by the investment adviser, which is majority owned by funds managed and/or advised by Blackstone, were growing at materially higher rates to the overall portfolio and were therefore “cherry picked” for sale to Hipgnosis Songs Capital.
“The [board] is investigating whether this is the case, and if so, whether this was properly and fully disclosed to the previous board in the investment papers, which included the recommendation provided by Hipgnosis Song Management, and therefore whether the previous board were provided with the relevant information to enable them to make a decision in the best interests of shareholders.”