Close-End Fund ASA Limited May Liquidate, But Small Shareholder Beware (CEF: ASA)

ASA (Bermuda) Limited (CEF: ASA) filed a proxy statement that includes the following shareholder proposal:

That the shareholders hereby recommend that the board of ASA (Bermuda) Limited allow its shareholders to realize net asset value by taking immediate action to eliminate the persistent discount at which ASA common stock trades to net asset value.

The proposal comes from HBK Investments, which holds 5.8% of the fund's outstanding shares. I think the proposal has a fairly good chance of passing because according to Yahoo Finance, over 20% of the fund's shares were owned by the top 5 institutional holders as of 9-30-2005, and the proposal only needs affirmative votes from a majority of the votes cast at the March 8th meeting to be approved. Since a lot of shareholders won't vote, assuming the percentage ownership hasn't changed much since 9/30, the 20% owned by these top 5 shareholders could represent much more than 20% of the votes cast at the meeting.

However, as a small shareholder I would be wary of buying shares in the hopes of a liquidation or open-ending. In a previous filing HBK Investments had this to say:

While Investments believes that extending a series of in-kind tender offers for the Issuer's shares at net asset value would be an effective method of reducing the discount, and produce the best returns for the largest number of shareholders, the stockholder proposal submitted by Investments does not require the Issuer to take this specific action. Under the stockholder proposal, the Issuer could extend such tender offers, open-end the fund, liquidate it, or take other action, so long as the Issuer's action is effective in eliminating the discount.

This leads me to believe that if the vote on this proposal is close or it passes, it is very possible that the fund's management and large shareholders will agree to have in-kind tender offers. This is good for management because they can say goodbye to dissident shareholders, good for the dissident shareholders because they will exit the fund at or near NAV, but bad for small shareholders who may not see any decrease in the fund's discount, and may be stuck with a fund with higher expenses due to the reduction in its asset base.

ASA 1-yr chart:

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