Splitting the Baby: ISS Recommendations in Saba’s Contest Against BlackRock’s Closed-End Funds

THE FACTS
Saba Capital Management has intensified its activist campaign to elect its own nominees to the boards of three BlackRock closed-end funds: BlackRock Innovation & Growth Term Trust, BlackRock ESG Capital Allocation Term Trust, and BlackRock California Municipal Income Trust. According to proxy filings, Saba argues that the funds’ trading discounts to their net asset values (NAVs) are partially a result of governance failures that, in its view, inhibit shareholder rights and entrench existing trustees.

Saba has proposed four candidates for the first two trusts and three for the BlackRock California Municipal Income Trust arguing that BlackRock’s public commitment to good corporate governance and investor stewardship is not genuine. BlackRock asserts that Saba is aiming to maximize short-term profits at the expense of long-term shareholders and the stability of the funds.

Institutional Shareholder Services (ISS), the leading proxy advisory firm, released its voting recommendations last week regarding the proxy battle. ISS supports all three of Saba's nominees for BlackRock Corporate High Yield Fund. For BlackRock ESG Capital Allocation Term Trust, ISS endorses just one of Saba’s candidates, Ilya Gurevich. Regarding BlackRock California Municipal Income Trust, ISS recommends shareholders withhold votes from one of the incumbent directors but does not recommend a dissident director.

OUR TAKE
These moves by ISS indicate that it sees some merit in Saba's arguments and is urging shareholders to consider alternative perspectives on governance without overhauling the board of any of these CEFs.

While some of Saba’s concerns regarding governance might have merit, ISS seems to be acknowledging that any changes should be balanced and in the best interests of long-term shareholders, rather than serving the agenda of one holder with other motivations. The ISS recommendations could sway shareholder votes, and CEF managers and boards should consider this as part of their communication strategies and preparation for shareholder meetings. Without knowing the specific shareholder makeup of these three CEFs, we can’t say how influential the ISS recommendation will be on the outcome of the contest on July 11.

For CEF managers and boards, a thorough understanding of their shareholder base and preparedness for potential activist campaigns are essential. The outcome of this proxy battle will be a telling gauge of the state of governance in the closed-end fund sector and the importance of ISS in the outcomes of these proposals. In this evolving landscape, staying informed and adaptable is key to navigating the challenges and opportunities that lie ahead.

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