It is probably the UK Takeover Code’s best known rule. No one can buy more than 30 per cent of a publicly listed firm without making an offer for the whole of it to the other shareholders.
Introduced in 1968, it ensures that if control of a company changes, shareholders can sell their shares on equal terms, and it is a rule reflected in stock markets around the world. But the shareholder base of firms has changed a lot since then.
There’s been a proliferation of small investors using low-cost online share dealing platforms or passive tracker funds, such as exchange-traded funds, who are less engaged with the firms they invest in – and less likely to vote.
This has consequences. It means that an investor sitting on just under 30 per cent stake can effectively control a firm without having to make an offer for it.
Consequences: An investor like Saba Capital, headed by Boaz Weinstein (inset), sitting on just under 30 per cent stake can effectively take control, says Richard Stone (above)
This is because defeating its proposals requires more than 70 per cent of the other owners to vote against them to achieve a majority.
But the average voting turnout at investment trust annual meetings is 43 per cent.
And this issue is playing out in real time. Saba Capital, an activist investor that owns 29.99 per cent of Edinburgh Worldwide Investment Trust, has repeatedly put forward its own nominated directors to the board, seeking to ultimately install itself as the asset manager.
Though the trust’s shareholders have rejected this twice, Saba is putting them forward again at the annual meeting on Thursday. Edinburgh Worldwide’s most recent meeting saw a turnout from shareholders of just over 70 per cent – a record level. The activist was defeated – but only just – and is continuing to try to get its nominees elected.
The playing field is definitely not level when one shareholder has a big block vote and the rest of the shareholder register is so highly fragmented. Plans to change company law to compel investment platforms to provide information and voting rights to small shareholders are welcome.
However, I believe it is time for the 30 per cent threshold to be revisited. It no longer offers the protection to other shareholders envisaged nearly 60 years ago.
This is not to clip the wings of activists, who perform a vital role in maintaining efficient markets. It is to stop an investor exercising control in their own interest without offering an exit route to other shareholders.
Such shareholders need to be confident they will not be held hostage by a minority owner exerting undue influence.
They should be able to exit on fair terms if that shareholder builds their stake beyond a certain level.
That limit needs to be reduced and 20 per cent would be a good starting point.
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