Saba Capital Management is having a hell of a summer.
The industry’s most-feared closed-end fund activist is on the verge of another dramatic conquest.
After shocking the fund industry two years ago by taking over an entire Voya fund, Saba could be about to do the same to a $490m Franklin Templeton fund.
Its effort could fall short, however, if a federal judge rules that the secret, last-minute deal Saba used to lock up the winning proxy votes was not simply a venture into a legal gray area, but an impermissible effort to mislead shareholders, as Franklin Templeton charged in a lawsuit filed soon after the vote.
Win or lose, Saba’s exploits during the 2022 proxy season demonstrate not only its ambition, but also its commitment to clever tactics rather than simple aggression to pursue its goals.
In contrast to the direct conflict of its Franklin Templeton campaign, Saba backed off from confrontation with two other funds in exchange for solid payouts, and kept its options open with a third by negotiating a standstill agreement that could help it win control of the board later.
Fund boards and their allies view the diversification of Saba’s playbook with worry. Whereas most activists declare victory when funds pay them, Saba has shown with its Templeton and Voya campaigns that sometimes, it can no longer be paid to go away.
“That’s not the MO that I’ve experienced when I’ve worked for closed-end funds under attack by Saba. It was [previously always] about a liquidity event,” said one proxy solicitor. “I have to acknowledge that as I saw this Templeton fund situation going on, I was concerned that perhaps Saba was looking to do a different pattern.”
That is not to say Saba’s record has been perfect. The relatively small campaign it launched against the $44m New Ireland Fund fell short after shareholders rejected Saba’s effort to place a director of its choosing on the board.
Saba has been so successful overall this year, however, and has entangled itself with enough funds and firms, that Fund Directions found it difficult to find anyone familiar with Saba-related cases who was willing to speak on the record.
The reluctance of those involved in ongoing or imminent Saba-related situations was such that we had no choice but to allow the most knowledgeable sources to remain anonymous – though Fund Directions did confirm the facts and, where possible, the analysis and conclusions of those we were not able to name.
Saba did not respond to repeated requests for an interview through a spokesperson.
The crown jewel: Templeton Global Income Fund
Saba may be right on the edge of victory in the effort to take over the Templeton Global Income Fund, but it’s taken two years to get there, and the final blow may be delayed yet further.
The activist had already accomplished a similar feat in 2020 when it took over the board of the Voya Prime Rate Trust, which then had $675m in assets. The new board voted to install Saba as the fund’s manager, giving it control of the fund’s assets, which today are around $394m.
Saba entered this year’s proxy fight holding a big slice of the pie: four of the Templeton fund’s 11 board seats, which it won with a successful proxy campaign in 2021. If it could win four more seats this year the activist would wrest control of the $490m closed-end fund from Franklin Templeton Investments.
The Templeton fund’s shareholder election on June 6 appeared to show Saba’s nominees eking out the victory, but the fund quickly sued to void the election results, accusing Saba of effectively buying the winning votes without properly disclosing its dealings to shareholders.
In a complaint filed June 12 with the Southern District of New York, the fund alleged that Saba realized it was going to lose the election and cut a deal with an unnamed institutional shareholder the weekend before the vote. Under the terms of the deal, the activist allegedly promised to purchase the shareholder’s shares regardless of the outcome of the vote—but it also promised to make the deal even more lucrative if Saba’s nominees won their elections.
According to the lawsuit, after striking its deal on Saturday, June 4, Saba waited until Tuesday, June 7, to report that it had acquired new shares, which meant the info did not become public until after the election on Monday, June 6.
“The secret deal that Saba made with that shareholder, with its obvious significant incentives for that shareholder to switch its votes and support Saba’s nominees—along with any other secret deals struck by Saba—delivered the election to Saba,” the fund wrote in its lawsuit.
The fund argued that Saba’s failure to disclose the deal before the election rendered earlier proxy filings in which Saba said it had not entered into any arrangements regarding the fund’s securities within the past year “false and misleading,” and it asked the court to call for a new election.
Following the fund’s complaint, the court mediated a status quo agreement in which Saba agreed not to seat its nominees until the court had ruled on whether to void the election.
The court’s final decision will likely turn on whether it believes learning about Saba’s backroom deal could have changed shareholders’ decision-making.
How much subterfuge is too much?
Generally, any information that is deemed “material” to shareholders must be disclosed before a proxy election, but it is rare to encounter a dispute over disclosure so late in a voting process, according to the proxy solicitor.
In its complaint, the Templeton fund argued that the deal was crucial for shareholders to know about before they voted, because “among other things, shareholders were unaware of the secret, premium deals being arranged with only certain shareholders in order to deliver to Saba control of a majority of the Board.”
One lawyer who counsels closed-end funds agreed with the Templeton fund’s assessment that shareholder deserved to know about Saba’s deal, especially because it meant that their assets would come under new, unfamiliar management.
“It’s a change in the likely outcome of how the fund’s going to be bought, and how people may want their money invested,” the lawyer said. “It should be part of the mosaic of information available to shareholders when they’re casting their votes. And if they’ve already cast their votes, and it’s something that changes their vote, they ought to have time to change their vote.”
Others disagreed that the disclosure would have mattered, based on the facts that the deal only increased Saba’s ownership from 28.89% to 31.44% of outstanding shares, and that the activist had already informed shareholders of its intention to remove Franklin Templeton as the fund’s manager.
“Frankly, I would think a judge would say, ‘All shareholders know Saba is a huge holder, and I’m not sure how it would change how shareholders would vote,’” said one lawyer who has counselled activists.
The outcome of the case is still up in the air, but the implications of what has become public about this proxy campaign are already reverberating around the industry.
Saba’s last-minute deal has drawn the attention of closed-end fund observers who said they could not recall seeing anything like it.
“It’s a very unusual purchase and possibly unprecedented,” the activist lawyer said.
“It’s one thing to talk about one party to a proxy solicitation reaching out to other investors to ask them to vote,” the proxy solicitor said. “It’s a little different here, in terms of thinking about somebody reaching out to kind of say, ‘If you effectively switch your vote, we’re going to buy your shares [at a premium].’”
If the Templeton fund wins its case, it may signal that litigation is one of the only ways for closed-end funds to defend themselves against Saba’s increasingly novel maneuvers.
“I think this just is showing that we don’t know where the outer bounds are of what [Saba] may be willing to do,” the closed-end fund lawyer said. “I don’t know that you can say there’s a common understanding of where the edge is at this point.”
A spokesperson for the Templeton Global Income Fund declined to comment.
Tender offers and dividends: Delaware and Salient
While the Templeton Global Income Fund and its nearly half a billion dollars in assets would be the crown jewel of its 2022 campaigns, Saba has also found success this year with a more traditional approach of using the threat of a proxy contest to extract cash prizes from funds.
Two such campaigns have played out so far this year at the Delaware Investments National Municipal Income Fund and the Salient Midstream & MLP Fund.
On July 22, the $285m Delaware Investments National Municipal Income Fund announced a tender offer for 50% of outstanding shares at 99% of net asset value (NAV).
In exchange for the tender offer, Saba agreed to tender all of its shares and withdraw its nominees for nine of the board’s 13 seats from the fund’s upcoming meeting on Sept. 11.
At the time of the standstill agreement, Saba owned 3,413,649 shares, or 16.29% of the fund.
Shares of the fund, which is managed by Macquarie Asset Management, traded at 1.69% below NAV as of Aug. 30 but were at 7.04% below NAV at the end of 2021, around when Saba started accumulating its shares.
On August 3, the $216m Salient Midstream & MLP Fund announced it had agreed to pay shareholders a special dividend in return for Saba’s voting in favor of the board’s proposal to merge the fund with the open-end Salient MLP & Energy Infrastructure Fund. Additionally, Saba agreed to withdraw its nominees for two of the fund’s six board seats.
The special dividend, payable August 30 at $0.0169 per share, represented an aggregate transfer of $300,000 from fund adviser Salient Partners directly to shareholders. Saba reported owning 23.8% of the fund’s shares as of August 3.
In both of these campaigns, Saba benefited from its reputation as a fierce proxy adversary.
The Delaware campaign in particular also highlighted how Saba uses fund discounts as a pretext to launch an attack, at which point it can decide to settle for a tender offer or go in for a bigger kill by challenging for control of the board.
For fund boards, this means that a discount is the first vulnerability to address.
“It always comes back to the discount,” said one closed-end fund director. “The bigger the discount, the more room they have to play with. Do what you can to minimize fund discounts.”
By pressuring fund boards to focus on closing discounts and making tender offers, Saba and other activists can force directors to elevate the interests of short-term shareholders over long-term shareholders.
This mindset can be frustrating to closed-end fund boards, which have argued that most non-activist shareholders prefer to prioritize yield and performance rather than share price.
“The thing that always disturbs me about Saba is it’s not [about] fund performance. It’s arbitrage,” the director said. “They are clearly in it for their own self-interest, not for the benefit of shareholders.”
Representatives from Macquarie Asset Management and Salient Partners did not respond to requests for comment.
Wait and see: Center Coast Brookfield MLP & Energy Infrastructure Fund
Lastly, Saba’s summer campaign against the Center Coast Brookfield MLP & Energy Infrastructure Fund laid the groundwork for the fund to become either a potential future takeover target like the Templeton fund or a candidate for a smaller payout like the Delaware and Salient funds.
On August 11, Saba and the fund announced a standstill agreement in which Saba promised not to pursue a proxy campaign against the $106m fund this year, while the fund agreed to allow Saba to contest two classes of directors—constituting three of the board’s five members—in 2023 if it chose to.
The agreement allows both parties to defer a proxy fight for one year and offers Saba the opportunity to seize control of the fund in one fell swoop if it were to contest and win both classes next year.
Normally closed-end funds use classified director structures to discourage would-be insurgents, forcing them to spread their efforts across multiple campaigns.
The Brookfield fund, however, may have observed Saba’s willingness to come back year after year against the Templeton Global Income Fund and decided that one winner-take-all election would be preferable to a war of attrition that could last years.
The ability to keep all the eggs in one basket will be valuable to both sides, according to the closed-end fund lawyer.
“The [Brookfield] fund still has the same board going forward, so you don’t have questions about the need for separate board meetings, or anything else, and Saba doesn’t have to have nominees on the board during that period,” the lawyer said.
The fund is unlikely to stand pat during the standstill period. Its adviser, Brookfield Public Securities Group, said August 1 it was exploring “strategic options” that would “advance or maximize shareholder value,” including a potential reorganization.
A reorganization, such as a merger with a Brookfield open-end fund, could protect the fund’s assets from future activist attacks, but it would likely require the support of Saba, which owns 24% of the fund’s shares.
Convincing Saba to approve a reorganization could require Brookfield to give up a tender offer or other incentives, but it may have no choice when the alternative is Saba exercising its option to launch a climactic battle for the fund’s board.
A Brookfield representative did not respond to a request for comment.
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