The sad and sorry saga of Contango MicroCap Ltd is taking another turn with the effective takeover of the company for no premium. Indeed, the 6000 mostly small shareholders will pay handsomely for being locked into a tyro funds manager charging the sort of fees enjoyed by the industry's stars. What's more, the mob grabbing control of CTN (Contango's ASX ticker code) is not even bothering to wait for shareholder approval at Tuesday's annual general meeting before radically changing the company, selling off much of the existing portfolio and moving from a 10 per cent cash holding to 42.25 per cent in less than a month. CTN with a market cap of $156 million may seem to matter very little in the general scheme of things, but the use of minority shareholders is a timely reminder of darker side of the LIC (listed investment company) crop - vehicles that can represent the best and the worst of funds management. LICs are the Hotel California of funds management - once money is in, it can't leave unless the company is wound up. This can be a good thing: in a downturn, there's no risk of investor withdrawals forcing untimely selling; good management can make longer-term investments. It can also be a bad thing: it's possible for dud or average funds managers to gain effective control of an LIC and lock in fees out of the captive capital. The purest of the LICs are the "old school" firms such as AFIC, Argo, Milton et al that are internally managed, have miniscule management expense ratios and consistently outperform the market. They are excellent alternatives to retail funds and "new school" LICs charging investors 10 to 20 times more, often for worse performance. \nNew school The "new school" LICs employ external managers who charge fees ranging from reasonable to very rich. The stars, such as Magellan and Wilson, have the performance records to justify the fees. The dogs do not. It is a symptom of the overall market doing well that we're seeing another crop of "new school" LICs, generally launched with the aim of locking in that Hotel California income for the managers. Enter the sorry CTN story. Disclosure upfront: The Pascoe family super fund has long held CTN and, more embarrassingly, I had recommended it to friends. Back when the company was well managed, it was a convenient enough way of gaining some portfolio diversification with the microcap sector. For several years it has had a policy of paying an annual dividend equal to 6 per cent of the company's net tangible assets. Unfortunately, CTN stopped being well managed. Personnel changes turned the company managing the portfolio, Contango Asset Management (which is also listed on the ASX under the ticker code CGA), into a dud. Attempts to fix the funds management by three of the "old" CTN directors saw them kicked off the board in a coup earlier this year backed by Adelaide stockbroker Taylor Collison and parties largely related to CGA. And then matters got worse. The effort by the "old" directors to instil some competitive tension with a better-performing fund manager running part of the portfolio was unwound to the apparent benefit of CGA, which itself looked like it was running out of money and not performing. The irony is that despite its miserable performance, CGA was successful in being something of a darling of parts of the financial media. \nShowing NAOS Enter a relatively young private company, NAOS Asset Management, keen to expand its LIC management business it started five years ago. NAOS floated two "new school" high-conviction LICs and used one of them to build up a 14.6 per cent stake in CGA, making CGA NAOS' biggest single bet and NAOS entities CGA's biggest shareholder - despite NAOS' professed stock selection criterion of avoiding companies that were running out of money. The CGA stake has done no favours for the performance of NAOS' LICs. Last month, CGA sold the business of managing CTN to NAOS for $12.5 million - $2 million down straight away and the rest over five years. Overnight, NAOS more than doubled the size of its LIC funds management empire. Under the management agreement, CTN can merely say yes or no to the sale of the management rights. CTN shareholders get to vote on that at the AGM on November 28 but, hey presto, the post-coup board, the defenders of CGA, have already welcomed the chairman and managing director/CIO of NAOS - father-and-son team Warwick and Sebastian Evans - onto the CTN board and NAOS' company secretary is now co-company secretary of CTN with a view to the sole title after the AGM. Warwick Evans is a former Macquarie executive. Macquarie pretty much wrote the book on how to charge management fees. Evans senior is perhaps best known as a chairman of what was the Newcastle Stock Exchange which became the NSX with Warwick as CEO until 2011. Sebastian Evans has worked at for 10 years. Not content with NAOS merely taking over the CGA management agreement, the latest incarnation of the CTN board is presenting shareholders with three motions to change the company's name, scrap the existing management agreement and replace it with a much more advantageous one. Advantageous for NAOS, that is. Instead of CGA's five-year term - a term that was coming up for a performance review in 2019 - NAOS wanted 10 years during which it couldn't be sacked even if it is underperforming, plus another five years during which it can be terminated but only with its fees being paid out. \nLate switch On Friday, just two working days before the AGM, the ASX showed it wasn't completely asleep by refusing to grant CTN a waiver from the relevant listing rule to allow the 10-year management lockup. Instead, the initial term will be for five years. The agreement proposes reducing the base fee from CGA's 1.25 per cent of the portfolio to 1.15 per cent - but it adds a performance fee of 20 per cent of whatever the portfolio outperforms the Small Ordinaries Accumulation index by. Just avoiding the worst of the dogs at the bottom end of the market should give a semi-competent funds manager outperformance. An investment professional tells me 6 per cent outperformance over time in small caps would be standard, in which case NAOS' fees would be 2.25 per cent. NAOS also intends to completely change the nature of CTN, ditching the microcaps and turning it into a high-conviction bet on 10 to 15 "smallcap" stocks ranging in size from $100 million to $1 billion and unlisted securities, something a little different from its two other LICs. The company would no longer be the microcap investment vehicle its shareholders had chosen to invest in. But NAOS isn't waiting for the November 28 AGM. An investment report and NTA update from NAOS on November 9 proudly declared the former 6 per cent dividend policy had been dropped, the 83 stocks in the portfolio at the start of October had been slashed to 48 by November 7 and the cash increased from 10 per cent to 42.25 per cent. In my opinion, such behaviour - totally changing the nature of the company without any shareholder approval and treating the AGM resolutions as foregone conclusions - smacks of incredible arrogance. And all this while NAOS principles own just a fraction of a per cent of the target company. \n'Trust us' Because NAOS takes big positions in relatively small companies, it chooses not to disclose its holdings for market sensitivity reasons. That also means there is a huge element of "just trust us" in its pitch. In presentations to CTN shareholders, NAOS also stresses desire to be aligned with LIC shareholders, taking substantial positions in its existing LICs and the intention to do the same in CTN. "Alignment" is one way of looking at it. "Control" is another. A couple of board seats, a stake of about 15 per cent and the inability to be sacked for a decade or so tends to mean an investment manager is very hard to dislodge indeed. In its Sydney presentation to CTN shareholders, NAOS seemed to be justifying its position with reference to the likes of Magellan and Wilson. In my opinion, that's rather like Hyundai claiming: "We make cars. Mercedes and BMW make cars. So we're just like them and can charge as much for our product." Geoff Wilson's LICs have built up substantial shareholdings in CTN. He told me he had supported the "old" CTN board at the EGM earlier this year - he had been on the losing side. Wilson told me he thought NAOS would do better than CGA. The Wilson Asset Management group had too much on with other LIC plays at present to fix CTN itself, so at this stage he would support the NAOS takeover, hoping NAOS could get the CTN share price back up to its net tangible asset backing. Such is the situation the CTN board has left shareholders in - an apparent choice between a failed manager and a largely unknown quantity out to lock in at least 15 years of rich fees. The three directors ousted in the March coup - Ian Ferres, David Stevens and Glenn Fowles - last week emailed CTN shareholders to recommend voting "no" to all motions at Tuesday's AGM. In their view, the current board has mismanaged the company, costing shareholders about 25 cents a share of net tangible asset value. If the "no" vote is successful, the trio propose that they be appointed to embark on a due-diligence based investment manager search on better terms the NAOS is proposing for CTN.