Last week, The Greater China Fund (GCH) announced its Board's approval of Aberdeen Asset Management Asia Limited as a new Investment Manager. The advisory agreement is subject to vote at a Special Shareholders Meeting on November 1, 2012. Approval in the absence of a large-scale liquidity event (announced or otherwise) would be shocking.
Yes, GCH is the Closed-End Fund whose prior Investment Management Agreement was terminated some four months ago by an absolute majority vote of shareholders. Its largest shareholder is City of London ("COL"), which in regards to GCH specifically has supported substantive recalibration of supply with demand to broadly benefit shareholder value in the face of an over-supply of China Region Funds. Ref: COL October 13, 2011 Filing 13-D, Exhibit A.
The conditional prospects for GCH's Advisory Agreement Vote require a look back at the root causes which necessitated a successful termination proposal's vote. GCH's last corporate action (20% tender offer) was insufficient to win the support of COL, which announced it would not tender in demonstration of resolve to serve shareholder value in greater scale. COL's voting power was extended through non-participation, now controlling more than 40% of all possible votes to cast.
The stage was set for the termination proposal to pass. No surprise, it did. So where now is the large scale liquidity event to serve shareholder value?
The Special Meeting Proxy does not make clear how (even in the condition of shareholder approval) the Board would serve the need for shareholder value and broad realignment of supply and demand for shares.
The proxy merely makes note as "Approval Process and Factors Considered by the Board of Directors in Approving the Proposed Agreement" that it met on June 29th with COL and "(The Fund) recognizes that COL is the Fund's largest stockholder… COLs views would be considered in determining an appropriate course of action for the Fund." Otherwise surprising, two incumbent directors were re-elected to three-year terms concurrent with the Advisory Termination vote.
COL among other shareholders have patiently waited for large-scale liquidity. Immediately following the June termination vote, the Fund provided Baring Asset Management (ASIA) Limited ("Baring," the prior Advisor) with notice of termination pursuant to the terms of its Advisory Agreement. That agreement actually terminated on August 27, 2012 but has been (without shareholder approval) extended into an interim agreement with Baring by the entrenched Board of Directors. It generally appears the Board extended the time in which the Fund could pay Baring. The primary issue for shareholder value has never been who specifically the Advisor is, nor Prudential Investments LLC's status as Administrator. The issue has always been shareholder value and the recalibration of supply and demand.
COL can (and presumably would) vote against the New Advisory Agreement if large-scale liquid shareholder value has not been resolved. Such a vote would force GCH's liquidation; achieving (indirectly) 100% liquidity at Net Asset Value ("NAV"). So, COL after sacrificing their clients' participation in a 20% tender offer to achieve its 40%+ voting power would be foolish not to demand a favorable larger-scale liquidity event to serve its clients' financial benefits.
Is Greater China Fund's Board moving forward with a responsible view to Corporate Governance? It would seem to favor all shareholders for the Greater China Fund to clearly announce how the Board is addressing the primary issues, particularly shareholder value and the recalibration of supply and demand in its shares. By making its plans public to all shareholders from "Mr. Jones" to COL, all shareholders would be enabled to vote for or against the New Advisory Agreement with their rational interests in mind. Clarity of the Board's intent is more relevant to improving observations of the Fund's culture than the choice of Aberdeen among possible managers for the Fund, if GCH continues to exist.
Absent a the sort of value creation which would earn COL and other shareholders' support for a new Advisor Agreement, liquidation seems like the most likely outcome. A filing group associated with Bulldog Investors and Phil Goldstein yesterday made a publically visible proposal (Exhibit A), which calls for a majority of the GCH Board of Directors to resign shall the Aberdeen Advisory Agreement not pass. This is a savvy filing group whose competencies include Activism.
Its hard to believe the Board could be so incompetent to not have a working plan to give COL among other shareholders cause to support the new Advisory Agreement its proposed. The current lack of visibility afforded to all shareholders by GCH about any such plan is surprising. COL's voting power has nullified the Board's prospects for soliciting proxies from inadequately informed shareholders. The Board did attempt some efforts to confuse and bewilder mom and pop shareholders in attempting to challenge the Termination Proposal. Specifically, the Board's proxy statement warned of specific further value destructive board behavior in response of a termination such that "Termination of the Investment Manager would create a period of uncertainty that could diminish the value of your investment and result in significant expense." Quite obviously, a responsible Board would have alternately liquidated the fund rather than impugning its shareholders.
I am long GCH in a number of accounts, with my portfolio data licensed to Covestor for its model portfolios. The shares attract me trading around 90 cents per dollar of NAV, particularly an experienced Activists in Bulldog Investors getting involved. I have added to my position recently and anticipate continuing to add to my position in the days ahead.