As a shareholder, what can you do when you think that directors have let you down? That was the dilemma at Edge Performance VCT (EDGI), where determined shareholders formed an action group to do something about it.
Edge is a venture capital trust (VCT) that specialises in investing in media, leisure and events companies. Over the years, it created several separate funds, and shareholders were invited to invest on the basis that each fund, described as being “medium-low risk”, would be wound up after five years. However, their investments failed to perform as hoped, and so in 2016 shareholders agreed to have all these funds merged into a new single class, called “planned exit” I shares. In addition, Edge had an “evergreen” fund (with no time limit), which it called H shares.
However, its poor investment record continued, and so did its high costs. The members of the action group were aggrieved in 2019 when directors removed by shareholders were reappointed by the board and nothing was done about the high management fees.
In its interim financial report on 31 August 2021, the directors said: “The Investment Manager’s investment strategy for the H share class is proving very successful,” and that “according to the Association of Investment Companies’ data the H share class was the best-performing amongst all VCTs in 2020, its share price growing by 221 per cent”. The net asset value (NAV) total return, they said, had grown by “11.2 per cent during the period under review”.
That’s not how the action group, which is backed by shareholder organisation ShareSoc, sees it. It says that “the I Class is the worst-performing VCT class in recent history and its shareholders have lost over half their money since inception”; and that the investment manager appointed by the directors has earned fees of nearly £4m since 2017 when this share class was originally supposed to end. It considers this to be exorbitant for “primarily overseeing a single unquoted asset”.
As for the 11m “evergreen” H shares, it says that “only two years ago, H shares were the second-worst-performing VCT” but acknowledges that since then, one of the companies that Edge had invested in has soared in value. Most of this investment has now been sold, but, it says, no dividends were paid to H class shareholders from the proceeds – unusually, the distributable reserves created were used to pay the final I class dividend instead, so enabling the 73m I shares to be cancelled, several years later than originally promised.
The action group has other concerns about how the VCT is run. It says that Edge “only got its accounts out in the required timeframe by claiming a two-month Covid extension, the only VCT to have to do so”. This delayed the annual general meeting (AGM) on 31 August, with a promise to hold it “as soon as possible”.
In the group’s opinion, Edge is now too small to be economic with its current cost structure and continuation could trigger performance fees for its manager that would be out of proportion to its size. It argues that its main asset has been sold and few remain, so the VCT should now be wound up and the assets divided amongst its shareholders. By contrast, the current directors are set on reinvesting the cash and raising further funds, although the past record of poor corporate governance could make this difficult.
So where do shareholders’ best interests lie? The action group, representing over a tenth of Edge’s shareholders, have exercised their rights under the Companies Act to requisition an extraordinary general meeting. The current three directors include Sir Peter Bazalgette, who chairs ITV, and Sir Aubrey Brocklebank, who is a director of several other VCTs, but the action group is asking shareholders to replace them with two experienced VCT directors nominated by themselves. It believes that only this would ensure that Edge will sell all its assets and return its funds to shareholders, so that the VCT can be closed completely.
The group says that most of Edge’s money is now in cash and can be returned quickly to shareholders in full, and that the liquidator will be able to dispose of the two small remaining unquoted assets within three years. This is a well-trodden path, it says, that has recently been followed by several VCTs, such as Chrysalis, Artemis, Ventus, Gresham House Renewable and New Century Aim. Why should Edge be an exception?
After the group protested to the Financial Conduct Authority), the adjourned AGM and the requisitioned general meeting have now been promised, but not until 17 January. Cynics might wonder whether the long delay was to avoid the holders of the cancelled 'I' shares having a vote. On previous occasions, the directors have blocked a requisition on a technicality after taking counsel’s opinion, and ahead of another meeting, hired a proxy solicitation firm to lobby shareholders. Whatever the outcome this time, the action group has demonstrated how pressure from individual shareholders can make a difference, especially in small companies.
