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Board Declassification Proposals: Saba Turning Up the Heat

Board Declassification Proposals: Saba Turning Up the Heat

20 April 2023

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THE FACTS
A common tactic used by closed-end fund (CEF) activists in seeking to leverage CEF boards is to declassify the election of fund directors to the board. Declassifying the election of directors means electing all directors at once rather than staggering the election. With a declassified board, an activist can issue a more credible threat to fund directors that they could potentially take over control of a board or force the board to initiate an offering to encourage the activist to go away.

Since the beginning of 2023, Saba Capital Management, the leading hedge fund specializing in CEF activism, has submitted nine board declassification proposals. This represents a substantial upswing from only one declassification proposal submitted in each of the years 2020 and 2021 and none in 2022.

OUR TAKE
Compared to the previous high of 11 proposals submitted by Saba in 2019, the current trend suggests that 2023 could set a new record for the firm regarding shareholder proposal submissions pertaining to board declassification. At this stage in 2019, Saba had only submitted five declassification proposals to various CEFs.

A key player in CEF board governance is Institutional Shareholder Services (ISS). They issue recommendations on nearly all CEF shareholder proposals, and many institutional investors and financial advisory firms with managed account programs follow ISS’s recommendations when deciding how to vote on fund proposals similar to corporate proposals. When Saba submits a proposal to declassify a board, the directors can choose whether to make the results of that vote binding on the board. Saba understands that ISS will recommend voting against any director at the next shareholder meeting if shareholders approve the declassification proposal and the CEF board does not follow through with implementing the proposal.

While ISS evaluates board responsiveness to shareholder proposals on a case-by-case basis, failure to act on majority-supported proposals often results in ISS recommending against directors in subsequent shareholder meetings.

This all suggests that Saba is playing a longer and more strategic game against CEF boards. Even if the board refuses to follow through on a non-binding approval, Saba is hedging their bets and laying the groundwork for their next challenge to the board in one or two years knowing that ISS may be more supportive the second time around. Saba's activist campaigns against CEFs have increasingly spanned over two years, providing ample opportunity for the firm to capitalize on weakened board positions resulting from negative ISS recommendations.

Morrow Sodali Fund Solutions will continue to monitor Saba’s activity and assess the implications of their strategic approach on the landscape of CEF governance.

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