Hipgnosis Songs Fund Board Tees Up Special Resolution Amid Shareholder Pushback Against Investment Adviser ‘Call Option’

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Hipgnosis songs fund

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Photo Credit: Hipgnosis Songs Fund

The showdown between Hipgnosis Songs Fund (HSF) investors and management is continuing to heat up, as HSF’s revamped board is proposing a change, designed to encourage possible buyers to engage in related talks, to the company’s articles.

HSF’s board, led by former Round Hill Music Royalty Fund chair Robert Naylor, only recently announced the proposed articles pivot. For a bit of quick background – the highly complex Hipgnosis Songs Fund meltdown renders inverted-pyramid writing a distinct challenge – late October saw investors reject both the company’s continuation and a massive catalogs selloff.

The latter deal, proceeds from which would have ostensibly been used to pay down HSF’s debt and buy back shares, specifically involved the suggested sale of 29 catalogs to Hipgnosis Songs Capital (HSC), or a “partnership” between Blackstone-powered Hipgnosis Song Management (HSM) and Blackstone funds.

HSM and HSC alike are also partially owned by HSF founder Merck Mercuriadis, and HSM has long served as the publicly traded Hipgnosis counterpart’s “investment adviser.” Even before shooting down the $440 million would-be transaction, HSF shareholders took issue with the sale price at hand and, significantly, maintained that an arduous offer process had dissuaded third parties from submitting competing bids.

More pressing yet, simply nixing the far-from-ideal Hipgnosis Song Management investment-advisory agreement, it came to light soon thereafter, would rather astonishingly enable HSM to exercise a “call option” and purchase HSF’s IP.

Predictably, Hipgnosis Songs Fund stockholders firmly oppose this call option. In late December, Naylor acknowledged investors’ frustration with “the terms of the Investment Advisory Agreement with Hipgnosis Song Management,” further describing the dilemma as “harder to address” than financial-reporting shortcomings but underscoring that the board would nevertheless “seek to do so in the coming months.”

Now, one component of the possible solution has arrived in the form of the initially mentioned proposed change to Hipgnosis Songs Fund’s articles.

While HSF is set to publish a more in-depth circular pertaining to the move and the underlying special resolution, in short, the board is attempting to incentivize viable purchase offers.

Said incentivization refers particularly to a total of £20 million that the board could, at its discretion, forward to any prospective bidder(s) that seek “to make an acquisition of the assets” in question, in whole or in part, “on terms recommendable” to shareholders, the announcement summary indicates.

Another £20 million would be made available for distribution to third parties looking to buy “the entire issued share capital of” the songs fund on terms that the board deems beneficial to shareholders, according to the document.

As the board sees things, affording it the ability to make the outlined payments would lay the groundwork for “significant protection to prospective offerors against their due diligence and acquisition costs” – thereby encouraging bids and boosting value for shareholders. Currently, those possessing a total of 35 percent of the company’s stock are said to have expressed support for the measure.

“The Strategic Review is ongoing, and the Board is not actively seeking one or more potential offers for the Company,” HSF added for good measure.

“From our shareholder consultation, core to the requirement for change is addressing the Call Option held by our Investment Adviser, Hipgnosis Songs Management (sic),” Robert Naylor spelled out in part.

“This not only acts as a structural conflict between the interests of our shareholders and the Investment Adviser, but also creates a significant deterrent to potential bidders for the Company’s assets thereby depressing the value of the Company.

“It is against this backdrop that we are proposing to change our Articles to allow potential bidders to put forward their proposals for the Company’s assets, with significant cost protection, if supported by a Board recommendation to shareholders,” he proceeded.

“We are pleased, having discussed this proposal with many of our largest shareholders, that they are supportive of the Board’s efforts to unlock the full value from the Company’s assets.”

When the market closed, Hipgnosis Songs Fund shares were worth 71 pence apiece, up about one percent on the day. Last week, Sylvia Coleman departed the troubled company’s board.