I recently wrote about why a November 1, 2012, Special Shareholders Meeting to approve an Advisory Agreement with Aberdeen Asset Management Asia Limited would be an exercise in futility, absent a liquidity event in Greater China Fund (GCH) shares.
"The filing persons intend to do everything they can that is legal and ethical to permit them to sell their shares of GCH at or close to NAV …"
Suffice to say, GCH is a hot topic. While the 40% City of London ("COL") voting block in GCH is broadly perceived to be ethical and rational, there is great uncertainty how the GCH situation will resolve (ie: liquidation, open-ending, large scale tender, merger). COL appears to have preferences, but COL does not control the process at GCH. Further JFC is not giving GCH's board cause to consent to any merger.
In assessing the plausibility of each possible outcome, I believe it is important to consider the positions and interests of several parties, some of whom hold more power than others.
The GCH Board
The GCH board has shown itself disinterested in a merger into a smaller fund at NAV. In approving Aberdeen as the new advisor (subject to shareholder vote), the board would appear now at terms with a large-scale liquidity event. The shareholder base justifies such a conclusion. This is consistent with the uniquely narrow 7.38 market discount to Net Asset Value ("NAV") as of October 1st.
Previously, the GCH board failed to anticipate that COL would eschew a prior minimalist 20% tender offer. Such spawned by products. COL's non-participation left the small tender to afford noteworthy liquidity for small shareholders. And neither COL or the GCH board endeared themselves to one another.
The board should be tasked with creating value from here for GCH shareholders. Even the 40% GCH block, which did not tender last time, favors liquidity (in sufficient scale). Numerous options appear well founded. Tender offers (cash or in-kind), liquidation, and attractive merger terms each appeared equally plausible before the board announced its choice of Aberdeen to manage the Fund's asset base.
The presence of the Aberdeen announcement implies that GCH's board is intent to use its process control to force a larger scale tender offer(s) as the foundation of any shareholder resolve. I do not believe the board could expect to look minimally prudent going forth with a meeting absent the pairing of a liquidity event. Spending shareholders' money to conduct a special meeting which has zero chance to put a new advisory agreement in place (absent a liquidity event) would appear to embody incompetence, if not harmful malice toward COL.
The JFC Board
JFC has COLs favor, but appears to view the GCH assets under management ("AUM") as a precursor to providing liquidity to its own shareholders (more than one-third of JFC shares are held by COL). JFC has not influenced the GCH board to merge its assets into JFC. This may explain why JFC (who wants to conduct a 50% post merger tender) trades at a significantly wider discount (12.03% as of October 1st).
JFC may be run by very good people. But JFC's hope to essentially acquire GCH absent any valuation rationale (vis-à-vis the market discount discrepancy) appears to be proving unrealistic. It's true that GCH has no advisor under a traditional contract. But neither JFC nor COL controls the process of GCH's resolve. GCH's board appears intent to force the application of large scale tender(s). Absent favorable terms, GCH would probably even go a route of liquidation before merging (absent favorable terms).
JFC's governance and investing style very well may be wonderful. However, if JFC's board needs the GCH asset base to achieve sufficient scale to serve shareholder value, its board would appear appropriate to propose sufficient price terms to justify that merger to GCH's board. Such is warranted. JFC's conditional liquidity plans suggest that its (post-merger) shareholders' value would rapidly be served. Further, the votes are in place for JFC (and GCH) to pass it in a shareholder vote.
City of London
Some may argue that COL still wants to set a precedent here. I disagree because it already did. COL earned a savvy reputation with closed-end fund boards everywhere in eschewing the (limited) benefits of a GCH's (first) 20% tender. COL retained more than 40% voting power by not tendering. The entrenched advisor has been factually ousted. COL's 40% voting power is now the gatekeeper for the GCH board's resolve process. COL has long been perceived positively for their model of corporate governance in the CEF space.
COL's "precedent risk" is that its ideal for a merger with JFC could preclude liquidity at GCH (a new adverse precedent). JFC's semi-annual report refers to COL as "a significant stockholder in both companies." COL holds about 36% of JFC's shares outstanding.
Because of JFC's current scale challenges and its stated intent to conduct a 50% post-merger tender, COL's JFC stake would benefit tremendously from a potential GCH merger into JFC. The prospect for "double-dipping" in a post-merger liquidity event is uniquely attractive to COL among GCH shareholders.
COL is not an "activist." COL has voting power but is reactionary, absent control of the GCH board's process. While COL's positions and interests may be apparent, Maryland law governing GCH may actually preclude COL from making specific demands to the GCH board. If JFC wants a merger, the onus is on JFC to justify the merger to GCH. If GCH plans its own large scale tender offer, a post-merger tender by JFC would not appear superior.
Bulldog Investors' Filing Group
Bulldog appears to be an opportunistic investor here. In the event that either GCH fails to provide liquidity or that COL precludes GCH's independent liquidity, Bulldog's competency in CEF activism may prove relevant.
I certainly would not suggest that a merger would be bad for GCH, JFC, or the closed end fund space. But, a merger does not appear to be in the cards. The most important takeaways here are 1) COL cannot control the GCH board's process, and 2) JFC does not appear intent to make a merger proposal which would create more value than tenders GCH could conduct itself. Unless the GCH board fails to announce a liquidity remedy in advance of the Aberdeen meeting, GCH is unlikely to be merged into JFC. "Mr. Market" seems to be reflecting the same.
I am long GCH in a number of accounts, with my portfolio data licensed to Covestor for its model portfolios.