In the complex ecosystem of corporate governance, the principle of shareholder democracy is often held as a cornerstone, yet its resilience is being tested by a new wave of highly aggressive and well-funded activism. A striking example of this challenge is unfolding within the UK’s investment trust sector, where the U.S. hedge fund manager Saba Capital has launched a persistent campaign that pits its singular agenda against the overwhelming consensus of thousands of other investors. This situation has ignited a critical debate, forcing boards to navigate a treacherous path between their legal duty to engage with a significant shareholder and their fiduciary responsibility to protect the interests of the entire shareholder base. The resulting conflict creates a fundamental dilemmwhen a minority voice is amplified by immense resources and tactical prowess, can a company’s leadership effectively defend the will of the silent majority without being drawn into a costly and distracting battle of attrition that ultimately serves no one?
An Activist Campaign and a Unified Rejection
Saba Capital has systematically acquired substantial stakes in over 30 UK investment trusts, in some instances nearing the 30% ownership level that would necessitate a formal takeover bid under UK regulations. The fund’s primary strategy involves leveraging its position to requisition general meetings with the explicit goal of removing incumbent boards and replacing them with its own handpicked nominees. Despite the relentless nature of this approach, it has been met with a consistent and resounding lack of success. A clear illustration of this pattern was observed at Edinburgh Worldwide, where Saba’s proposals were defeated for the eighth consecutive time, with a staggering 93% of independent shareholders voting against the activist’s motions. This widespread rejection from a diverse group of investors, many of whom are individual retail shareholders, directly contradicts the common narrative of activists acting as champions for the overlooked investor, revealing instead a deep chasm between Saba’s objectives and the desires of the broader shareholder community.
The shareholder response to these campaigns has been anything but apathetic, offering a powerful counter-narrative to Saba’s agenda. Typically, shareholder meetings see a turnout of around 43%, but the meetings requisitioned by Saba have drawn participation rates between 60% and 80%. This exceptionally high level of engagement signifies a deeply motivated and mobilized investor base actively defending the existing governance structures of their investments. The sheer volume of opposition undermines any claim that the activist is acting in the best interests of all shareholders. Instead, it paints a picture of a well-resourced minority attempting to impose its will on an unwilling majority. This dynamic has placed boards in an asymmetric conflict, where they must contend with an aggressive, well-funded adversary while operating under strict legal and regulatory constraints, all while spending significant time and resources to rally the very shareholders who already support them.
A Governance Conundrum and Strategic Responses
The core of the issue lies in a governance framework that, while designed to protect shareholder rights, can be exploited in ways that create significant instability. Under UK company law, any shareholder holding a stake of just 5% can compel a company to call a general meeting, a provision that makes it legally impossible for boards to simply ignore an activist’s demands. This forces boards into a difficult position: they must treat the activist as a major and legitimate shareholder, yet doing so lends weight to a voice that is demonstrably at odds with the vast majority of other investors. The ambiguity surrounding Saba’s ultimate intentions—whether to merely capitalize on share price discounts or to pursue full control of a trust—further complicates matters. This uncertainty, combined with unpredictable tactics like calling multiple meetings just before a major holiday, keeps boards on a constant defensive footing, diverting their focus from long-term value creation.
In the face of this sustained pressure, investment trust boards have begun to explore a variety of strategic avenues to resolve these conflicts and restore stability. Some have pursued a direct route; Montanaro UK Smaller Companies, for instance, opted to buy back Saba’s entire stake, effectively removing the activist from its shareholder register and ending the immediate threat. Others are implementing more intricate structural solutions designed to address the underlying tension. Herald Investment Trust and Impax Environmental Markets have proposed conditional tender offers, which serve a dual purpose: they provide an exit opportunity for any shareholders who are unsettled by the ongoing conflict, while simultaneously creating a mechanism to remove the activist from the equation. However, the success of such strategies often hinges on a level of cooperation that is not always forthcoming, leaving many boards to seek broader, more systemic solutions to what they see as a flaw in the regulatory environment.
The Search for a Balanced Framework
The persistent and disruptive tactics employed in these activist campaigns brought to light potential vulnerabilities within the UK’s established regulatory framework. It became clear that while shareholder activism was a legitimate and often healthy component of public markets, the existing rules could create an imbalance that favored a single, powerful activist at the expense of the collective shareholder body. This realization prompted a growing consensus among industry leaders and governance experts that the system needed recalibration. The challenge was to empower boards to effectively safeguard the interests of all their investors, not just the one with the loudest and most aggressive voice. This sentiment led to calls for a thoughtful review of corporate governance policies to ensure they could withstand such focused and sustained pressure without undermining the long-term stability and strategy of the company. In response, industry bodies like the Association of Investment Companies (AIC) began advocating for meaningful policy reforms, which included new legislation aimed at simplifying and expanding access to shareholder voting mechanisms. These proposed changes were designed to level the playing field, making it easier for the broader, often dispersed, retail investor base to make their voices heard and reaffirming the principle that corporate governance should ultimately serve the collective interest of all stakeholders.
