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, according to Edison.
The US hedge fund intends to appoint its own founder and chief investment officer Boaz Weinstein as chair to several of these boards, as well as Saba’s principal executive officer Paul Kazarian.
This could be in direct breach of the FCA’s UK Corporate Governance Code, which stresses that “the chair should be independent on appointment”.
A chair is not deemed independent by the City watchdog if they “represent a significant shareholder” or have “a material business relationship with the company” – two factors that could make Saba’s candidates biased, considering it owns between 19% to 29% of the shares in each trust.
See also: AIC raises concerns over Saba with FCA
Saba made attempts to skirt around this issue, pledging that Weinstein and Kazarian would not vote on board decisions relating to Saba, but 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, noting in its governance code 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 ruling such as these in the UK 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.
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.
This article first appeared on PA Future’s sister site Portfolio Adviser
