Yesterday, Thursday 18 Jan, Hipgnosis Songs Fund - the London Stock Exchange-listed song rights investment company - circulated a proposal by its board to make a significant amendment to the legal articles that govern how the company operates.
At the heart of the announcement is the controversial “call option” that gives a private company, Hipgnosis Song Management Ltd, which is run by HSF founder Merck Mercuriadis and backed by private equity investment giants Blackstone, the option to purchase the copyrights owned by the stock market listed entity.
The notice, which was posted on the company’s website and sent to media as the London Stock Exchange opened trading on Thursday, asks for shareholders to endorse a proposal to give the company’s board of directors discretionary powers to pay fees up to a maximum of £20 million to “any prospective bidder(s) who approached the board seeking to make an acquisition of the assets of the company on terms recommendable by the board to shareholders”.
The board, says the announcement, thinks that this will “provide significant protection to prospective offerors against their due diligence and acquisition costs” and will help “ensure that they are not deterred from seeking to engage” with HSF should they wish to buy some or all of the fund’s assets.
In a statement HSF’s new Chair, Robert Naylor - formerly non-executive chair of LSE-listed Round Hill Music Royalty Fund, which was acquired by Concord for $468.8 million in September 2023 - said the company’s investors had previously “overwhelmingly voted for change” at the Annual General Meeting of Hipgnosis Songs Fund on 26 Oct 2023. He went on to say that “core to the requirement for change is addressing the call option held by our investment adviser, Hipgnosis Songs Management”. A week before that AGM the fund had announced a “strategic review” in an attempt to allay shareholder concerns.
It is this “call option” referred to in today’s announcement that is, apparently, causing problems. Addressing this, Naylor said that the call option “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”.
When Hipgnosis Songs Fund was established by Mercuriadis that company (HSF) appointed another company run by Mercuriadis - Hipgnosis Songs Management (HSM) - as “investment adviser”. As part of the contract between the two companies a “call option” was agreed, which means that if HSF terminates its contract with HSM then that company has the right to acquire the portfolio of music rights owned by the fund.
However, it’s not clear exactly why this call option would stop people from bidding for assets of the company, as this clause relates specifically to Hipgnosis Songs Fund being fired as investment adviser. However, in the event that Hipgnosis Songs Fund was taken over in its entirety, and an acquirer then terminated the agreement between the fund and Mercuriadis advisory company, then the call option may come into play.
Over the course of Thursday CMU spoke to a range of sources familiar with both sides of the current Hipgnosis war of words, and with a number of analysts and experienced City execs, seeking more clarity on the move to grant HSF’s board discretionary powers to offer potential bidders for its assets up to £20 million.
One of those sources said that - to use City parlance - a “bung” like this was “somewhat unprecedented”. Another analyst who spoke to CMU - Markuz Jaffe of investment bank Peel Hunt - said that the proposal was “unusual” and that it was “somewhat disappointing that shareholders are potentially on the hook for a substantial cost in order to attract potential bidders, and that there still appears to be potential for the current investment adviser to exercise its call option at a future date”.
More startlingly, CMU was able to establish - also later confirmed by the FT - that HSF may in fact be sitting on a proposal from HSM to remove the call option entirely.
A source familiar with the situation told CMU that this was, in fact, the case, adding “The investment adviser has been asked repeatedly to change the call options and to propose changes to the agreement. Very recently the investment adviser finally proposed some changes - but those changes are heavily caveated. These include the potential to make changes to the call option, but only in return for a new extended contract”.
That source went on to say that “a central part of the [HSF] strategic review is due diligence. That work remains ongoing and so the board would not be in any position to assess proposals for the future management of the company until that due diligence has been completed”.
One analyst CMU spoke to said that there were rumours circulating in the City that one part of that due diligence might be to look for ways to invalidate the call option due to “non-performance” of other contractual terms between HSF and HSM.
This means that HSF may be looking for a way to fire HSM for breach of contract that was significant enough to make the call option unenforceable. However, said the source, “no one wants to be drawn into some long drawn out litigation over this sort of thing - it’s generally sorted out behind closed doors, and this drip feed of information as and when both sides are compelled to communicate on a particular issue is not too unusual”.
This aside, it’s clear that there’s a fresh episode coming in the continuing Hipgnosis drama with an Extraordinary General Meeting that seems to have the support of key shareholders almost certain to take place.