The excessive drama surrounding Hipgnosis Songs Fund (HSF) is showing few signs of abating, as a date has officially been set for an extraordinary general meeting where investors will vote on a major change to the company’s articles.
HSF’s revamped board first announced the planned articles pivot last week, indicating at the time that the change’s specifics would soon be detailed in a more comprehensive circular. That circular has now been released, and investors are specifically expected to vote on the measure at the mentioned extraordinary general meeting on February 7th.
As we previously reported, the special resolution proposes allowing up to £20 million in payments to compensate board-approved third parties who approach Hipgnosis Songs Fund “seeking to make an acquisition of” some or all of its song rights “on terms recommendable to shareholders.”
The sizable sum, HSF’s board has spelled out, is designed to provide “significant protection against” these potential purchasers’ due diligence costs. The move stems from the controversial and highly complex “call option” that HSF’s Hipgnosis Song Management (HSM) investment adviser possesses as part of its agreement with the publicly traded fund.
In brief, this agreement describes several situations – including but not limited to when HSF terminates the investment advisory deal or when HSM decides to do so if the fund is liquidated or wound up – where HSM would be able to exercise the call option.
That would effectively allow the Blackstone-powered entity to swoop in and buy the IP – an outcome that shareholders have made clear they’d prefer to avoid.
The sale price at hand in such an instance would be the larger of the IP’s “fair market value” as determined by an “independent valuer,” HSF’s market capitalization (i.e., a massive discount to the rights’ appraised value), or, after the advisory agreement terminates but before the call option is actually exercised, “any price offered in good faith on an unsolicited basis by a credible third party together with evidence of availability of funds to merit the purchase price of the Termination Portfolio on an arms’ length basis.”
Regarding the latter, Hipgnosis shareholders voiced far-reaching concerns about the sale process employed when management attempted to offload $440 million worth of catalogs to Hipgnosis Songs Capital (which had the right to match any superior offer) last year.
Also affiliated with Blackstone and Merck Mercuriadis, the would-be purchaser – investors overwhelmingly shot down the transaction in a vote – allegedly benefited from a process that dissuaded others from exploring the purchase of, let alone making a bid for, the 29 catalogs in question.
Time will tell whether the £20 million tranche (the special resolution for which will presumably be approved) assuages buyers’ call-option concerns and prompts them to come to the table.
HSM says it’s offered to nix the call-option clause altogether, but only as part of negotiations for a fresh investment advisory pact; HSF’s board and investors appear decidedly uninterested in agreeing to a renewed deal.
Besides setting a date for the extraordinary general meeting, HSF has noted that the “statements made by two independent research reports” have found that the above-noted 29 catalogs had been “cherry picked” because of their strong revenue growth relative to the rest of the portfolio.
Hipgnosis Songs Fund’s current board “is investigating whether this is the case,” reads the ominous assessment of the situation, “and if so, whether this was properly and fully disclosed to the previous Board in the investment papers, which included the recommendation provided by Hipgnosis Song Management, and therefore whether the previous Board were provided with the relevant information to enable them to make a decision in the best interests of shareholders.”