24th January 2025
Standing Still? Or going backwards?
We learnt a new term this week. And like many others (we suspect) we started throwing it around as if we knew what a “standstill agreement” was all along. A combination of search engines and AI informs us that a “standstill agreement” is a contract that temporarily prevents certain actions from being taken by the parties involved. On Wednesday morning, the latest bombshell to hit the investment trust community landed with the simultaneous announcement by four trusts – all of whom have appointed BlackRock as the manager of the portfolios – of an agreement they each independently reached with Saba Capital. The RNS from each of the 4 trusts contained the same text detailing the agreement, which I briefly summarise below (please check the RNSs for exact detail):
Until the earlier of the Company’s 2027 AGM or end of August 2027
- Saba will not look to change the composition of the Board or vote against it
- Saba will not look to control or influence the Board or the Fund
- Saba will not short sell the Company’s shares
- Saba will not submit a takeover offer for the Company unless recommended by the Board
- Saba will not requestion any resolution or general meeting or put any proposals to shareholders
We understand that BlackRock settled a dispute with Saba in the US over some of the listed closed ended funds that BlackRock manage and Saba has shareholdings in and BlackRock felt inclined to offer the same “standstill agreement” to the Boards of the trusts where it has been appointed manager in the UK.
The agreements do not prevent Saba from buying stock in any of these trusts before August 2027 (or the 2027 AGMs), and the agreements are with the Boards (so in theory, we understand that if BlackRock were sacked as manager by one of these Boards, the agreement stays in place regardless of who takes over the investment management contract).
We have managed to speak to the Boards of two BlackRock trusts: one who signed an agreement and one who did not.
Before giving our views on this situation, it’s important to point out the following. Regardless of one’s views about Saba’s activism (good or bad), the Boards of the companies involved (and even of those not directly involved) have been placed into an unenviable position. Many have worked long hours, over and through the Christmas period and it has placed a significant tax on their personal resources in terms of time and stress. Board members have fixed compensation (unlike some of their advisors who will be paid for additional work) and it is not particularly high. There is a human element here and it should not be forgotten. Even if one believes (as we do) that Saba is only taking advantage of a potentially preventable opportunity, we know that many Boards have responded with alacrity and with good intentions.
However…….
The exam question on the standstill agreements has to be: “why would a Board sign this agreement and is it in the interests of shareholders?”
We believe that signing this agreement amounts to barring a trust from the most significant source of demand for investment trust shares in years – a source of demand that, no matter what your views on Saba’s intentions, has significantly narrowed the discount on the trusts they have targeted. This has enabled shareholders to sell their holdings at higher prices and at narrower discounts than they might otherwise have been able to. Indeed, Saba had to buy its shares from someone, and some parts of the commentariat should reflect on why such a huge part of some investment trust registers were inclined to sell their shares in the first place. To argue that Saba technically can still buy shares in those trusts party to the agreements is potentially disingenuous. No activist will buy shares in a company where they are forced to vote alongside the Board. Perhaps Saba might build a stake over the next 2.5 years….but surely they’d prefer to focus their fire power on trusts where no such standstill had been signed?
We were pleased to learn that some Board directors shared our views. Further, the best Boards know that the best form of defence against activism is preventative: enact efficient capital allocation and shareholder engagement initiatives before an activist appears on the register.
The arguments in favour of signing the agreement appear to be twofold:
- There are considerable expenses incurred in fighting off an activist. We have enquired on the quantum involved. In the main, the largest expenses appear to be legal fees, additional corporate advisory fees, and administrative fees (e.g. in enacting section 793 requests to obtain the names and addresses of underlying shareholders from platforms and then writing to them to ask inform them what’s happening and ask them to vote). But for a large trust, these fees may be large in absolute terms, but as a percentage of NAV are not significant.
- Opportunity cost. When an activist targets a trust, and it is known that the intention may be to change the mandate and remove the incumbent manager, the natural reaction from that manager may be to pursue new investment opportunities with less-than-optimal vigour. This cost is hard to quantify, but one can understand the distraction and uncertainty that is generated and that may indeed harm prospective returns for shareholders.
We have more sympathy with this second argument.
Regardless, we still hold that the best defence against an activist is to prevent the conditions that foster their interest from appearing in the first place. A standstill agreement reduces potential demand at a time when demand for investment trust shares is falling at an alarming rate and is no replacement for pre-emptive shareholder friendly measures. We are sure that the Boards of the trusts that entered into these agreements had good intentions, but ultimately it sends completely the wrong message. Why would a Board need to sign this agreement if the Directors were confident that the trust was relevant and had a shareholder base keen to maintain its existence?
Activists have a vital role in a capitalist shareholder democracy. Entering into agreements with them such as these standstills reduces the likelihood of them exerting their discipline on a trust’s Board. On balance, this harms shareholders’ interests in our view.
Ultimately, we need to focus less on Saba and more on the health of the ecosystem. Noone should be cheering from the rooftops when Saba is defeated. The sector continues to be in crisis. New sources of long-term demand need to be found, measures to reduce supply need to be enacted, far greater shareholder engagement needs to occur, and far more shareholder-friendly corporate governance and capital allocation needs to emerge.
Ben Conway – Head of Fund Management
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