Nikhil Rathi, the chief executive of the Financial Conduct Authority (FCA), has issued a notable directive to investment trust boards, advising them to consider legal avenues to repel 'corporate raiders' if they have legitimate concerns about their actions. This guidance suggests a more proactive approach from the regulator in situations where activist investors might be perceived as acting against the long-term interests of a trust.
The comments were made in the context of increased activity from hedge funds, such as Saba Capital, founded by Boaz Weinstein, which have been known to take significant stakes in investment trusts and push for changes, often focusing on narrowing discounts to net asset value (NAV). While shareholder activism is a long-standing feature of financial markets, Rathi's intervention highlights a potential shift in how the FCA views the balance between shareholder rights and the stability and governance of investment vehicles.
Investment trusts are a significant part of the UK financial landscape, offering a closed-ended structure that invests in a diversified portfolio of assets and is popular with both retail and institutional investors. They collectively manage billions of pounds on behalf of UK savers. The structure means their shares trade on a stock exchange, and their share price can differ from the underlying value of their assets, leading to discounts or premiums to NAV.
Rathi's advice to use the courts implies that the FCA believes there are circumstances where the actions of activist investors could cross a line, potentially leading to detrimental outcomes for other shareholders or the trust itself. Legal battles can be expensive and time-consuming, but the suggestion is that such measures might be necessary to protect the integrity and long-term value of these investment vehicles from short-term pressures or perceived opportunistic behaviour.
This intervention could empower boards that feel besieged by activist campaigns, providing regulatory backing for a more robust defence strategy. It also signals to activist funds that their tactics will be scrutinised, and the FCA is prepared to support boards in challenging actions deemed inappropriate or harmful. The implications for corporate governance and shareholder engagement in the investment trust sector could be substantial.
Source: Financial Conduct Authority