Hipgnosis Song Fund’s board of directors wants a workaround to the call option that gives the investment advisor, the Merck Mercuriadis-led Hipgnosis Song Management, the ability to purchase the company’s music catalogs if its contract is ended.
After consulting with shareholders who own more than 60% of outstanding shares, Hipgnosis Songs Fund’s board of directors explained in a regulatory filing on Thursday (Jan. 18) that Mercuriadis’ call option was “one of the key themes” of concern. Shareholders believe the call option deters third parties from making bids for the company’s music assets and “depresses the potential value” of Hipgnosis Songs Fund, limiting its ability to create value for shareholders.
Soliciting feedback from shareholders is part of Hipgnosis Songs Fund’s strategic review following the vote against continuation at a general meeting in October. During that meeting, shareholders also voted against a proposed sale of 29 music catalogs for $440 million to Hipgnosis Songs Capital, a joint venture of the investment advisor and investment giant Blackstone.
To address shareholders’ concerns about the call option, the board proposed a special resolution to amend the company’s articles to create the payment of a fee of up to 20 million pounds ($25.4 million), at the board’s discretion, to a prospective buyer. The fee is meant to reduce the risk of making an offer for Hipgnosis Songs Fund’s music catalogs. The board believes the proposed fees “will provide significant protection to prospective offerors against their due diligence and acquisition costs” and also “will provide greater potential opportunities to maximise value for Shareholders,” according to the filing. The board says it has received support for the proposed fee from shareholders representing more than 35% of issued shares.
“Investors in Hipgnosis Songs Fund overwhelmingly voted for change when they rejected the continuation of the Company and the proposed sale of certain music assets,” chairman Robert Naylor said in a statement. “From our shareholder consultation, core to the requirement for change is addressing the call option held by our Investment Adviser, Hipgnosis Songs Management. This not only acts as a structural conflict between the interests of our shareholders and the Investment Adviser, but also creates a significant deterrent to potential bidders for the Company’s assets thereby depressing the value of the Company.”
Shareholders will vote on the amendment at an extraordinary general meeting at a date not yet announced.