Gresham House Strategic plc
(“GHS” or the “Company”)
29 November 2021
Recommended proposals for Managed Wind-Down of the Company, proposed initial return of capital, proposed return of capital by way of Future Tender Offers and Notice of Requisitioned General Meeting
The Board of GHS announces proposals to be made to Shareholders in respect of:
- a change of investment policy to facilitate a managed wind-down of GHS over 24 months;
- the proposed initial return of capital by way of a B Share Scheme and Tender Offer of up to £25 million in aggregate;
- the proposed return of capital by way of Future Tender Offers as the GHS portfolio is realised;
- a Notice of Requisitioned General Meeting convened for 15 December 2021; and
- Harwood Capital LLP (“Harwood”) committing to manage the GHS portfolio for no fees during the Managed Wind-Down period,
further details of which are set out in this announcement and in a circular (the “Circular”) to be published as soon as possible today.
1. Introduction and background to the Proposals
On 24 May 2021, the Company announced the commencement of the Strategic Review to determine the best course of action to provide growth in value for all Shareholders. The Strategic Review had been requested by Gresham House plc (“ GHE “) in a previous requisition of a general meeting of the Company.
The Independent Directors evaluated strategic options against the following key objectives: continuing strong investment performance; lowering the Company's cost base to be in line with market standards; increasing the scale of the Company in Net Asset Value (“NAV”) terms; and ensuring strong corporate governance arrangements between the Board and its investment manager.
After an extensive process during which the Board received a number of high quality proposals and after consultation with certain significant shareholders of GHS (other than GHE), the Independent Directors announced on 11 October 2021 the termination of Gresham House Asset Management Limited (“GHAM”) as its investment manager and the appointment of Harwood as its replacement investment manager. Harwood's appointment became unconditional on 6 November 2021. The Independent Directors believed the proposal from Harwood provided a highly attractive and cost-effective proposition for the future management of the Company's investments. As part of the Strategic Review, the Independent Directors considered other options, including a managed wind-down of the portfolio, and concluded that these alternatives were unlikely to be in the best interests of Shareholders as a whole, a position which was supported by analysis provided to the Company by Smith Square Partners LLP, its corporate advisors to the Strategic Review.
Following this announcement, as announced on 15 October 2021, the Board received the Notice of Requisition from Rock Nominees Limited (on behalf of GHE, the “Requisitionist”). GHE informed the Board that it had obtained irrevocable undertakings from Shareholders to vote in favour of resolutions which proposed the immediate return of cash on the Company's balance sheet and the complete realisation of the Company's assets and return of capital within 24 months. When taken together with GHE's own beneficial shareholding of approximately 23.4 per cent, these irrevocable undertakings accounted for approximately 46.8 per cent. of the issued share capital of the Company.
As announced on 5 November 2021, the Board recognises that, whilst some Shareholders who had been consulted during the Strategic Review had indicated their support for the continuation of the Company and the appointment of Harwood as investment manager, Shareholders accounting for a substantial proportion of the Company's issued share capital have now indicated support for the discontinuation of the Company's activities and the associated return of capital to Shareholders. Therefore, those resolutions are very likely to be approved and the conclusions of the Strategic Review supported by the Independent Directors at the time and described in detail in the Company's announcement on 11 October 2021 are very unlikely to be capable of full implementation.
The Board agreed with GHE to delay the posting of the circular to Shareholders convening the requisitioned meeting until no later than 26 November 2021, so that it could include further resolutions relating to a change of the Company's investing policy and a mechanism to return capital in a cost-effective and tax-efficient manner, which treats all Shareholders equally.
As announced on 5 November 2021, it was also agreed that Helen Sinclair, the Company's Interim Chair at the time, would resign. Charles Berry was appointed Interim Chair, pending the appointment of Simon Pyper, whereupon he would likewise stand down from the Board. Simon joined the Board on 22 November 2021 and Charles consequently stepped down. Simon has been appointed Interim Chair whilst the Board conducts a process to consider whether it should comprise three or four directors on an ongoing basis and has commenced a process to recruit an external independent non-executive director who may be appointed Chair.
As announced on 5 November 2021, the Requisitionist agreed to withdraw resolutions 3 to 6 in the Notice of Requisition following the occurrence of certain events, including the appointment of Simon Pyper as a director of the Company becoming effective. However, the Board is still required to convene a general meeting to propose resolutions 1 and 2 in the Notice of Requisition.
On 24 November 2021, the Company announced that it had been advised by its recently appointed investment manager, Harwood, that the realisation of the Augean Proceeds, which gave rise to a gain of £18.8 million, together with other recent profitable sales are expected to give rise to a tax liability which was not provided for in the NAV calculations and that as a result, its weekly net asset values have been incorrectly stated since 30 July 2021, the date on which an offer for Augean plc was formally announced.
The net impact of the overstatement was approximately £1.3 million (approximately 2 per cent. of NAV as at 19 November 2021, the date of the last NAV released by the Company prior to the publication of that announcement). The amount is made up of a tax provision of approximately £1.6 million less an overpayment of management and performance fees to GHAM (the Company's former investment manager) of approximately £0.3 million (inclusive of VAT). GHAM has offered to provide any support required to remedy the position and to fully reimburse the consequent over-payment of performance fees without any delay.
Whilst the Company has significant brought forward capital losses, changes to the tax legislation which became effective on 1 April 2020 limit the use of capital losses against realised gains to £5 million per year. Thereafter, 50 per cent. of realised gains are subject to corporation tax. The net effect is that realised gains over £5 million per annum are currently taxed at 9.5 per cent. and not zero as was previously the case for the Company as gains could be fully offset against brought forward capital losses.
Whilst the realisation of the portfolio is expected to be spread over two years and, as a result, the Company expects to be able to use the £5 million annual allowance for utilising brought forward capital losses, the Board has been advised that if the entire GHS portfolio was liquidated at the market prices prevailing at today's date within the current financial year, there would be an additional corporation tax liability of approximately £1.3 million (approximately 2 per cent. of NAV as at 19 November 2021, the date of the last NAV released by the Company prior to the publication of that announcement).
The Company has today entered into amendments to the Harwood Agreements, conditional on the passing of Resolutions 2 and 3. A summary of the amendments to the Harwood Agreements is set out in paragraph 3 below.
The Circular sets out details of, and seeks Shareholder approval of, the proposals relating to:
• the approval of resolutions 1 and 2 as set out in the Notice of Requisition;
• the Managed Wind-Down of the Company and associated adoption of the New Investment Policy; and
• the return of capital to Shareholders pursuant to the Managed Wind-Down by:
– providing a mechanism to return capital to Shareholders by way of a proposed B Share Scheme by way of adoption of the New Articles;
– the immediate return of capital to Shareholders of up to £25.0 million in aggregate by way of the proposed adoption of the B Share Scheme and Tender Offer (“Initial Return of Capital”); and
– effecting the remaining return of capital to Shareholders pursuant to the Managed Wind-Down by way of further tender offers, and cancelling the capital redemption reserve and any remaining share premium reserve by way of the Capital Reduction to increase the Company's distributable reserves in order to do so,
(together the “Proposals”), as further summarised in paragraph 2 below.
The Proposals are subject to Shareholder approval and if approved, are expected to result in the realisation of all the Company's assets over a two year period and the subsequent return of capital to Shareholders. The Circular sets out in more detail the background to the Proposals and the reasons why the Board recommends that Shareholders vote in favour of the Resolutions to approve the Proposals.
Subject to the Proposals being approved at the General Meeting, the Board intends to change the name of the Company to Rockwood Realisation plc pursuant to the authority given to the Directors in article 168 of the Existing Articles for that purpose. A further announcement would be made in due course confirming when the name change will become effective.
Notice of the General Meeting to be held at the offices of finnCap, One Bartholomew Close, London, EC1A 7BL commencing at 2:00 p.m. on 15 December 2021 is set out in the Circular.
2. Summary of the Proposals
2.1 Requisitioned Resolutions
Resolution 1 is being proposed to effect the immediate return of cash on the Company's balance sheet, after taking into account cash required to meet ongoing expenses (including the proceeds arising from the disposal of its interest in Augean plc) to its existing Shareholders. If this resolution is passed, the Board expects to return the cash (net of cash required to meet ongoing expenses) on its balance sheet through the Initial Return of Capital (assuming the B Share Resolutions and the Tender Offer Resolution are also passed).
If none of the B Share Resolutions or the Tender Offer Resolution are also passed, the Board would expect to return the cash on its balance sheet (net of cash required to meet ongoing expenses) by way of a dividend and on market share purchases to the extent permitted. If either only the B Share Resolutions or the Tender Offer Resolution are also passed, then the Board would expect to implement the B Share Scheme or Tender Offer (as applicable) to immediately return capital to Shareholders, and to return any remaining cash on its balance sheet (net of cash required to meet ongoing expenses) utilising its existing authorities to buy back shares on market and by declaring a dividend.
Resolution 2 is being proposed to commence the complete realisation of the Company's assets for the benefit of all its Shareholders, with such realisation and return of capital to Shareholders to be completed within 24 months of the General Meeting.
2.2 Amendments to the Current Investment Policy
If Resolution 2 is passed, the Company proposes to (i) amend its Current Investment Policy to reflect a realisation strategy; and (ii) cease making any new investments except in very limited circumstances as detailed in Part 2 of the Circular. The proposed amendments to the Current Investment Policy are considered a material change, which requires the consent of Shareholders in accordance with the AIM Rules.
In seeking the full realisation of the Company's investments within 24 months of the General Meeting, the Directors will aim to achieve a balance between maximising their net value and progressively returning cash to Shareholders. In so doing, the Board will take account of the continued costs of operating the Company. The Company's admission to AIM and the capacity to trade in its Shares will be maintained for as long as the Directors believe it to be practicable and cost-effective during the Managed Wind-Down period. If the Managed Wind-Down is approved, the Board believes it may be appropriate from a cost perspective to de-list the Company's shares at the end of the two year run-off period, or once 85 per cent. of the value of the Company's assets (as at today's date) have been realised and returned to Shareholders and the Board will consult with Shareholders at that time accordingly.
Irrespective of whether or not the Board seeks to de-list the Shares, once all, or substantially all, of the Company's investments have been realised, the Company will, at an appropriate time, seek Shareholders' approval for it to be placed into members' voluntary liquidation.
The appendix to this announcement sets out the New Investment Policy in full.
2.3 Mechanics for returning cash to Shareholders
The Board has carefully considered the potential mechanics for returning capital to Shareholders as part of the Managed Wind-Down and the Company's ability to do so.
Having considered the various options for returning cash to Shareholders, the Board believes that the following proposals would be the fairest and most cost-effective and tax efficient ways to effect returns of capital:
- An initial return of capital to Shareholders of up to £25.0 million in aggregate using the B Share Scheme and the Tender Offer. It is proposed certain changes to the Existing Articles are made by the adoption of the New Articles in order to enable to Company to use the B Share Scheme mechanism, as set out in further detail at paragraph 2.4 below.
- Subsequent returns of capital pursuant to the Managed Wind-Down at the appropriate times at the Board's discretion by utilising further tender offers.
The Company reserves the right to use alternative mechanisms to return cash to Shareholders from time to time if the Board believes any such mechanisms to be in the best interests of Shareholders as a whole or if any of the B Share Resolutions, the Tender Offer Resolution or the Future Tender Offer Resolution are not passed.
Further details of each of the proposed methods of returning capital to Shareholders is set out below.
(a) B Share Scheme
The Board proposes to adopt a B Share Scheme whereby the Company will issue redeemable B Shares with an aggregate paid up nominal share capital equal to the amount of cash available for this purpose of approximately £10.4 million, with such B Shares then immediately being redeemed for cash without further action being required by Shareholders.
It is intended that the Initial Return of Capital pursuant to the B Share Scheme, together with the Tender Offer as detailed in the next paragraph, will be used to effect a return of the Augean Proceeds to Shareholders. The Board is unlikely to use the B Share Scheme to effect further Returns of Capital to Shareholders, as it is likely that the use of the B Share Scheme as part of the Initial Return of Capital will substantially erode the amount which the Company can return to Shareholders as capital for UK tax purposes. Further details of the B Share Scheme and the proposed amendments to the Existing Articles to effect the B Share Scheme are set out in Parts 3 and 4 of the Circular.
How will cash be returned via the B Shares?
Subject to the B Share Resolutions being passed, the Company will have a mechanism to enable it to return cash to Shareholders at such times as the Board may, in its absolute discretion, determine by capitalising part of the amount standing to the credit of the Company's share premium account and then applying the resulting amount for the purpose of paying up the nominal value of the appropriate number of B Shares. Such B Shares would then be issued to Shareholders pro rata to their holding of Shares at the time of issue of the B Shares and, shortly thereafter, be redeemed and cancelled in accordance with their terms for an amount not exceeding the amount treated as paid up on the issue of the B Shares. The Company will not allot any fractions of B Shares and entitlements will be rounded down to the nearest whole B Share.
Following the redemption and cancellation of the B Shares, the redemption proceeds would be sent to Shareholders, either through CREST to uncertificated Shareholders or via cheque to certificated Shareholders. Each issue and redemption would be announced via Regulatory Information Services and each Shareholder would also be notified via email by the Company's Registrar.
Further details of the B Share Scheme are set out in Parts 3 and 4 of the Circular.
The structure of a B Share Scheme should result in UK Shareholders receiving their cash proceeds on redemption of the B Shares as capital for UK tax purposes. Shareholders attention is drawn to Part 8 of the Circular which sets out a summary guide to certain potential tax consequences in the UK.
Advantages of returning cash via B Shares
The advantages of returning capital via the B Share Scheme rather than via a tender offer are as follows.
(i) All Shareholders would automatically participate in the redemption process and they would be treated equally.
(ii) Subject to the B Share Resolutions being passed at the General Meeting, Shareholders should not be required to take any further action to give effect to the Return of Capital pursuant to the B Share Scheme.
(iii) This provides greater certainty for the Company regarding the rate of return of capital to Shareholders (unlike tender offers, capital returns under the B Share Scheme would be mandatory and would apply to all Shareholders on a pro rata basis).
However, for some Shareholders, there may be some disadvantages in returning capital via the B Share Scheme relating to the timing and mandatory nature of the scheme. Unlike a tender offer, Shareholders would not be given a choice as to whether or not to participate in the Initial Return of Capital and, for those Shareholders who hold Shares through a number of different vehicles, they would not be given the choice as to which of their vehicles should participate in the Initial Return of Capital. This could potentially lead to adverse tax consequences for Shareholders as they may not be able to structure their returns in the most tax efficient manner.
Taxation of the B Share Scheme
Based on current United Kingdom tax law, it is expected that the redemption of B Shares pursuant to the Initial Return of Capital should be treated as a disposal by the Shareholder of their B Shares for United Kingdom tax purposes. This may, subject to the Shareholder's individual circumstances and any available exemption or relief, give rise to a chargeable gain (or allowable loss) for the purposes of United Kingdom taxation of chargeable gains.
For further information regarding taxation on redemptions of B Shares please see Part 8 of the Circular.
Further information on the B Shares
No share certificates would be issued in relation to the B Shares and the B Shares will not be listed or admitted to trading on AIM or on any other securities or investment exchange or trading platform.
The B Shares would be non-transferable and will have limited rights, including a right to a very small dividend at a fixed rate. Any dividend would not be payable through CREST but by cheque or BACS only.
Given the very short period of time for which any B Share would be in issue, it is unlikely that any dividends would become payable on the B Shares. The rights and restrictions attached to the B Shares are set out more fully in Part 4 of the Circular.
Proposed Initial Return of Capital pursuant to the B Share Scheme
Subject to the passing of the B Share Resolutions at the General Meeting, the Board intends to return approximately £10.4 million to Shareholders via an issue of B Shares. B Shares of £1 each will be paid up from capital and issued to all Shareholders by way of a bonus issue pro rata to their holding of Shares on the basis of three B Shares for every one Share held at the Record Date of 6:00 p.m. on 15 December 2021. The B Shares are expected to be issued on 16 December 2021 and immediately redeemed at £1 per B Share. The Redemption Date in respect of the Initial Return of Capital is 16 December 2021. The proceeds from the redemption of the B Shares, which is equivalent to 100 pence per Share, will be sent to Shareholders through CREST to uncertificated Shareholders or via cheque to certificated Shareholders. The Initial Return of Capital pursuant to the B Share Scheme will represent approximately 16.0 per cent. of the Company's Net Asset Value as at 19 November 2021, being the latest published Net Asset Value prior to the publication of the Circular.
(b) Tender Offer
As the B Share Scheme will not effect a full return of the Augean Proceeds and other cash available, the Board proposes to supplement the B Share Scheme with the Tender Offer, in order to return the balance of the free cash of approximately £14.6 million to Shareholders. Further details of the Tender Offer are set out in Part 5 of the Circular.
Benefits of the Tender Offer
The Board considered the various options for returning cash to Shareholders and determined that, in conjunction with the B Share Scheme, the Tender Offer would be the most appropriate means of returning cash to Shareholders. In particular, the Tender Offer:
• provides Qualifying Shareholders with the choice of whether or not they wish to tender all or part of their respective Individual Basic Entitlements; and
• enables those Qualifying Shareholders who do not wish to receive cash at this time to maintain their full investment in the Company.
Structure of the Tender Offer
The Tender Offer will be implemented on the basis of finnCap acquiring, as principal, the successfully tendered Shares at the Tender Price. Following completion of those purchases, finnCap will then sell all the tendered Shares back to the Company at the same price pursuant to the Repurchase Agreement by way of an on-market transaction on AIM. Details of the Repurchase Agreement are set out in paragraph 4 of Part 9 of the Circular . The Company intends to cancel any repurchased Shares. The repurchase of Shares by the Company under the Repurchase Agreement will be financed using the Company's distributable reserves.
Under the terms of the Tender Offer, which is being made by finnCap, Shareholders (other than Restricted Shareholders and certain Overseas Shareholders) will be entitled to tender up to their Individual Basic Entitlement, rounded down to the nearest whole Sha re. Shareholders may also tender additional Shares, but any such excess tenders above the Individual Basic Entitlement will only be satisfied, on a pro rata basis, to the extent that other Shareholders tender less than their aggregate Individual Basic Entitlement.
The Tender Price and the Individual Basic Entitlement will be announced on 13 December 2021, alongside the Company's NAV per Share as at 9 December 2021, together with the potential impact of tax on the Company's NAV on the assumption that the portfolio were fully liquidated in the current financial year, providing an Adjusted Post Tax NAV per Share. The Tender Price will be calculated in accordance with paragraph 7 of Part 5 of the Circular and will represent a 2.0 per cent. discount to the Adjusted Post Tax NAV per Share as at 9 December 2021. The Individual Basic Entitlement will be calculated by dividing £14.6 million by the Tender Price to give the maximum number of Shares that will be purchased under the Tender Offer. The Individual Basic Entitlement will equal the percentage of the Company's issued share capital that the aggregate number of Shares to be purchased under the Tender Offer represents.
Qualifying Shareholders can decide whether they want to tender all, some or none of their Individual Basic Entitlement in the Tender Offer at the Tender Price.
Shareholders may tender Shares in excess of their Individual Basic Entitlement where other Shareholders tender less than their Individual Basic Entitlement and subject to the scaling back of tenders, as set out in paragraph 2.4 of Part 5 of the Circular.
All valid tenders made by a Qualifying Shareholder of a number of Shares less than or equal to its Individual Basic Entitlement, will be satisfied in full (subject to the Tender Offer not being withdrawn prior to its completion and satisfaction in full of the other terms and conditions set out in Part 5 of the Circular and (where relevant) the Tender Form).
The Tender Offer will close at 1:00 p.m. on 17 December 2021 and tenders received after that time will not be accepted (unless the Tender Offer is extended).
Number of Shares to be purchased
Successfully tendered Shares will be purchased by finnCap free of commission and dealing charges.
Any Shares repurchased by the Company from finnCap following the purchase by finnCap will be cancelled. Any rights of Shareholders who do not participate in the Tender Offer will be unaffected by the Tender Offer.
Circumstances in which the Tender Offer may not proceed
The Tender Offer is conditional on, among other things, the passing of the Tender Offer Resolution as set out in the Notice of Requisitioned General Meeting and on satisfaction of the other conditions specified in Part 5 of the Circular.
The Tender Offer is also conditional on there not arising any material adverse change or certain other force majeure events prior to the closing of the Tender Offer. Further details of these conditions are set out in paragraph 2.1 of Part 5 of the Circular.
Full terms and conditions of the Tender Offer
Full details of the Tender Offer, including the terms and Tender Conditions on which it is made, are set out in Part 5 of the Circular. Some questions and answers related to the Tender Offer are set out in Part 6 of the Circular.
Existing Share buy-back authority
The Company's authority to repurchase its own Shares, which was granted at the last annual general meeting of the Company held on 26 July 2021, in respect of up to 521,785 Shares, will remain in force and be unaffected by the Tender Offer.
To the extent that the Tender Offer is not taken up in full (including by way of excess tender applications), the Board intends to utilise the existing buy-back authority to conduct on-market buy-backs of Shares to return the full amount of the Tender Offer as soon as possible.
Costs and expenses of the Tender Offer
The costs and expenses relating to the Tender Offer will be reflected in the Tender Price and so will be borne by the Shares tendered. Such costs and expenses are not expected to exceed £186,000 (excluding portfolio realisation costs but including VAT).
Taxation in respect of the Tender Offer
Shareholders should be aware that there will be tax considerations that they should take into account when deciding whether or not to participate in the Tender Offer. Summary details of certain UK taxation considerations are set out in Part 8 of the Circular.
(c) Further returns of capital pursuant to the Managed Wind-Down
To enable the Company to effect further returns of capital to Shareholders to complete the proposed Managed Wind-Down over the next 24 months following the date of the General Meeting, the Board is also proposing a resolution to approve Future Tender Offers to enable the return of the further capital in the Company without further action being required by Shareholders until a replacement authority is sought at the Company's next annual general meeting. As noted above, the Board does not expect to use the B Share Scheme to effect further Returns of Capital to Shareholders, as the amount expected to be returned under the B Share Scheme as part of the Initial Return of Capital, is expected to substantially erode the amount which the Company can return to Shareholders as capital for UK tax purposes.
In order to effect further tender offers the Company will need to increase its distributable reserves and therefore also proposes a resolution to authorise the cancellation of the whole of its capital redemption reserve, together with any remaining share premium reserve after the B Shares are issued pursuant to the B Share Scheme in respect of the Initial Return of Capital, so that the Company may seek a court-approved capital reduction for this purpose. Further details of the cancellation of the capital redemption reserve and remaining share premium reserve are set out in paragraph 2.5 . It is the Board's intention that Future Tender Offers will be conducted at prices per share which represent the lowest discount at which it can be shown that those participating in the relevant tender offer carry the costs of such tender without detriment to other Shareholders who may not be able to participate in any event at a discount of no more than 2.5 per cent. to the Adjusted Post Tax NAV per Share at the time of such future tender.
In line with the Company's proposed New Investment Policy, the Board will aim to conduct an orderly realisation of the Company's assets in a manner that seeks to achieve a balance between maximising the value of the Company's investments and progressively returning cash to Shareholders. The quantum and timing of a Return of Capital to Shareholders following receipt by the Company of the net proceeds of realisations of investments will be dependent on the Company's liabilities and general working capital requirements.
Accordingly, the quantum and timing of any Return of Capital will be at the discretion of the Board, which will announce details of each Return of Capital through an RIS announcement.
2.4 Adoption of the New Articles
It is proposed that the rights attaching to the B Shares be included as new article 169 of the New Articles. Such rights set out when and how the B Shares may be issued and redeemed and are necessary for the implementation of the B Share Scheme. Please refer to Part 4 of the Circular for a summary of the rights attaching to the B Shares.
As there are no longer any of the historic B shares or C shares in the capital of the Company in existence, it is also proposed that existing articles 165 (in respect of the historic B shares) and 166 (in respect of the historic C shares) of the Existing Articles be deleted in accordance with the provisions of existing articles 165.6 and 166.6, together with any consequential amendments that may be required to the rest of the Existing Articles.
A copy of the Existing articles and the New Articles marked to show the changes will be available during normal business hours (Saturdays, Sunday and public holidays excepted) at the Company's registered office from the date of the Circular up to and including close of business on 15 December 2021 and the venue of the General Meeting for at least 15 minutes prior to the start of the meeting and up until the close of the meeting. A copy of the New Articles will also be placed for review on the Company's Website.
2.5 Court approved Capital Reduction
When carrying out any Future Tender Offers, the Company will be limited to the amount of its distributable reserves available at the time. To give the Board more flexibility, the Board proposes to carry out the Capital Reduction to increase its distributable reserves by the amount by which its capital redemption reserve and share premium account are reduced.
(a) Capital Redemption Reserve & Share Premium Reduction
The Companies Act treats a capital redemption reserve as if it were part of the Company's paid up share capital. The Company therefore only has two options for dealing with the capital redemption reserve. It may either (a) apply it in paying up unissued shares of the Company to be allotted to members of the Company as fully paid bonus shares; or (b) reduce it pursuant to the Companies Act provisions in the same way as it may reduce its share capital generally. The Board is recommending that any amount standing to the credit of the Company's capital redemption reserve be cancelled so that the total amount standing to the credit of the Company's capital redemption reserve following such reduction will be £nil.
In addition, the Companies Act requires that, if a company issues shares at a premium to the nominal value of those shares, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums must be transferred to the company's share premium account. A share premium account can only be used in very limited circumstances. The Board is recommending that any amount standing to the credit of the Company's share premium reserve after the B Shares are issued pursuant to the B Share Scheme in respect of the Initial Return of Capital be cancelled so that the total amount standing to the credit of the Company's share premium account following such reduction will be £nil.
The Board intends to use the reserves created pursuant to the Capital Reduction to carry out the Future Tender Offers.
(b) Shareholder and Court Approval
Shareholder approval is being sought to carry out the Capital Reduction pursuant to Resolution 8 set out in the Notice of Requisitioned General Meeting. In addition to approval by the Shareholders, the Capital Reduction requires the confirmation of the Court. Accordingly, following approval of the Capital Reduction by Shareholders, an application will be made to the Court in order to confirm and approve the Capital Reduction.
In confirming the Capital Reduction, the Court may need to be satisfied that there is no real likelihood of any creditor of the Company remaining unpaid by reason of the Capital Reduction. The Company anticipates being able to satisfy the Court in that regard and will put into place such form of creditor protection as it considers appropriate in the circumstances. The Board has undertaken a thorough and extensive review of the Company's liabilities (including contingent liabilities) and considers that the Company will be able to satisfy the Court that, as at the date on which the Court Order relating to the Capital Reduction and the statement of capital in respect of the Capital Reduction have both been registered by the Registrar of Companies at Companies House and the Capital Reduction therefore becomes effective, the Company's creditors will be sufficiently protected.
The Court approval process will involve an initial directions hearing and a subsequent final hearing by the Court to confirm the Capital Reduction and the Capital Reduction becoming effective as soon as possible thereafter, following the necessary registration of, amongst other things, the order of the Court confirming the Capital Reduction at Companies House. Based on current guidance from Companies House, it is anticipated that Companies House will take at least 14 calendar days from the date of the Court Order to register the Court Order and related documents.
The Board reserves the right to abandon or to discontinue (in whole or in part) the application to the Court in the event that the Board considers that the terms on which the Capital Reduction would be (or would be likely to be) confirmed by the Court would not be in the best interests of the Company and/or the Shareholders as a whole.
3. Related party transaction – Amendments to the Harwood Agreements
In connection with Harwood's appointment as investment manager of the Company, the Company and Harwood are party to the following agreements (together, the “Harwood Agreements”):
• an investment management agreement dated 10 October 2021 (“ExistingIMA”);
• a conditional subscription letter relating to the proposed subscription of shares in the Company by Harwood dated 10 October 2021 (“Subscription Letter”);
• a side letter to the Existing IMA relating to, among other things, financial commitments by Harwood to the Company's marketing budget (“Side Letter”); and
• a conditional relationship agreement to regulate the relationship between the Company and Harwood dated 10 October 2021 (“Relationship Agreement”).
On 29 November 2021, the Company and Harwood entered into a conditional amendment and restatement agreement of the Existing IMA (“New IMA”), to reflect the impact the proposed Managed Wind-Down will have on Harwood's role as investment manager. The New IMA is conditional on Shareholder approval of Resolutions 2 and 3.
With effect from the passing of Resolutions 2 and 3, the key amendments to the Existing IMA are as follows:
• Harwood's appointment as investment manager is no longer for a minimum of one year, such that it could be terminated on six months' notice at any time;
• Harwood shall not be entitled to a management fee or performance fee (if applicable) unless the New IMA is terminated by the Company without cause, in which case Harwood will be entitled to the management fees and performance fees it would have received under the Existing IMA up to the date of termination of the New IMA. Any termination payment will be no greater than that which would have been payable under the Existing IMA. The fees payable under the Existing IMA would be:
– 1.25 per cent. of NAV up to £25 million and 1.0 per cent. of NAV thereafter per annum; and
– a performance fee equal to 10 per cent. of outperformance over the higher of a 6 per cent. per annum total return hurdle and the high watermark;
• the services of Harwood as investment manager have been amended to reflect that it will be managing the Company in accordance with the New Investment Policy; and
• Richard Staveley is expected to act as a consultant to Harwood and Christopher Mills will act as lead fund manager.
As GHE rejected Harwood's offer to purchase its entire holding in the Company, the Subscription Letter and Relationship Agreement have not become unconditional, so the Company and Harwood have entered into a side letter confirming the Subscription Letter and Relationship Agreement have terminated and no longer have any effect. In addition, subject to shareholder approval of Resolutions 2 and 3, the Company and Harwood have agreed to amend the Side Letter by deleting Harwood's contractual commitment to make certain financial contributions to the Company's marketing budget, as this will not be necessary in a Managed Wind-Down.
Harwood is treated as a related party for the purposes of the AIM Rules for Companies. Accordingly, the proposed changes to the Harwood Agreements as set out above constitute a related party transaction in accordance with rule 13 of the AIM Rules for Companies. The Directors, having consulted with finnCap, in its capacity as nominated adviser to the Company, consider the terms of the proposed changes to the Harwood Agreements to be fair and reasonable insofar as the Shareholders are concerned.
4. Company outlook
The Board notes that the Company's interim results for the six month period to 30 September 2021 are expected to be published in December 2021. Shareholders are advised to review that announcement to receive an update on the Company's financial position.
The Board expects the Managed Wind-Down will likely take up to 24 months to execute with the objective of delivering investors total proceeds which maximise the value of investments in the wind-down period less expenses required in the process.
The Board expects to lower the Company's cost base over the coming months. The goal in the Managed Wind-Down will be to achieve a balance between maximising the value received from those assets and making timely returns of capital to Shareholders.
5. Dividends
The Company paid a final dividend of 15.36 pence to Shareholders for the financial year ended 31 March 2021. Since then, no other dividends have been paid. As part of the Managed Wind-Down, the Company will continue to accumulate cash enabling it to continue returning cash to Shareholders in an orderly manner. However, the Board does not expect to declare any dividends in respect of the financial year to 31 March 2022, as its accumulated cash is expected to be used to return cash by way of a Return of Capital.
6. Risk factors
Shareholders' attention is drawn to the risk factors set out in Part 7 of the Circular. Shareholders should review the risk factors which set out certain factors that should be considered by Shareholders when deciding what action to take in relation to the Proposals.
With regards to taxation, Shareholders who are in any doubt as to what their tax position would be should the Proposals be adopted, are encouraged to consult an appropriate professional adviser.
7. Overseas Shareholders
The attention of Shareholders who are not resident in the United Kingdom is drawn to paragraph 5 of Part 3 of the Circular (in respect of the B Share Scheme) and paragraph 6 of Part 5 of the Circular (in respect of the Tender Offer).
8. Takeover Code
Shareholders' attention is drawn to important information set out in paragraph 5 of Part 9 of the Circular relating to certain provisions of the Takeover Code which will be relevant to purchases of Shares after the date of the Circular.
9. Details of the General Meeting
Location, Date and Time
The Proposals are subject to Shareholder approval. Set out in the Circular is the Notice of Requisitioned General Meeting to be held at the offices of finnCap, One Bartholomew Close, London, EC1A 7BL at 2:00 p.m. on 15 December 2021, where the following resolutions will be proposed:
Resolutions
Resolutions 1 to 5 are proposed as ordinary resolutions and Resolutions 6 to 9, as special resolutions.
If passed, the B Share Resolutions will allow the Company to return capital to Shareholders through a bonus issue of B Shares. Shortly after their date of issue, the B Shares would be redeemed at the option of the Company and cancelled in accordance with their terms. The redemption proceeds would then be sent to Shareholders, as set out more fully in Parts 3 and 4 of the Circular. Subject to the B Share Resolutions being passed, the Initial Return of Capital would be implemented at the discretion of the Company.
• Resolution 1 is proposed as an ordinary resolution to effect the immediate return of cash on the Company's balance sheet (including the proceeds arising from the disposal of its interest in Augean plc) to its existing Shareholders.
• Resolution 2 is proposed as an ordinary resolution which authorises the Directors to commence the complete realisation of the Company's assets to maximise the value of its assets for the benefit of all its Shareholders, with such realisation and return of capital to Shareholders to be completed within 24 months of the General Meeting.
• Resolution 3 is proposed as an ordinary resolution (conditional on Resolution 2 being passed) which authorises the Directors to adopt the New Investment Policy, as set out at Part 2 of the Circular, in substitution for the Current Investment Policy.
• Resolution 4 is proposed as an ordinary resolution (conditional on Resolutions 1 and 6 being approved) which authorises the Directors to capitalise the sums standing to the credit of certain of the Company's reserves and to apply such sums in paying up in full up to 10,442,652 B Shares for the purpose of the Initial Return of Capital.
• Resolution 5 is proposed as an ordinary resolution (conditional on Resolutions 1, 4 and 6 being approved) which authorises the Directors to issue B Shares from time to time up to an aggregate nominal amount of £10,442,652 on a pro rata basis to the holders of Shares by way of bonus issues. If approved, this authority to allot and issue B Shares will expire and, if the Directors consider appropriate, be proposed for renewal, at the next annual general meeting of the Company in 2022 and at each annual general meeting thereafter.
• Resolution 6 is proposed as a special resolution (conditional on Resolution 1 being approved) and relates to the adoption of the New Articles which set out the rights of the B Shares as described in Part 4 of the Circular and enable the Directors to capitalise reserves from time to time for the purposes of the B Share Scheme with the authority which will be sought pursuant to Resolutions 4 and 5.
• Resolution 7 is proposed as a special resolution (conditional on Resolution 1 being approved) and relates to the approval of the Tender Offer, further details of which are set out in Parts 5 and 6 of the Circular and will enable the Directors to make market purchases of ordinary shares for the purposes of the Tender Offer.
• Resolution 8 is proposed as a special resolution (conditional on Resolution 2 being approved) and relates to the cancellation of the Company's capital redemption reserve together with any remaining share premium reserve after the B Shares are issued pursuant to the B Share Scheme in respect of the Initial Return of Capital, to be effected by way of the Capital Reduction to create further distributable reserves from which the Directors may make further tender offers for ordinary shares for the purposes of further returns of capital pursuant to the Managed Wind-Down.
• Resolution 9 is proposed as a special resolution (conditional on Resolution 2 being approved) and relates to the approval of further tender offers which may be announced at the Directors' discretion, to enable the Directors to make market purchases of ordinary shares for the purposes of further returns of capital pursuant to the Managed Wind-Down.
Voting and attendance
The Resolutions will be conducted on a poll. An ordinary resolution will require more than 50 per cent. of the votes cast (whether in person or by proxy) to be in favour in order for it to be passed. A special resolution requires at least 75 per cent. of the votes cast (whether in person or by proxy) to be in favour in order for it to be passed.
All Shareholders are entitled to attend and vote at the General Meeting.
In accordance with the Existing Articles, all Shareholders entitled to vote and be present in person or by proxy at the General Meeting shall upon a poll have one vote in respect of each Share held. In order to ensure that a quorum is present at the General Meeting, it is necessary for two or more Shareholders to be present in person or by proxy (or, if a corporation, by representative).
Voting at the General Meeting / Form of Proxy
All Shareholders are encouraged to vote in favour of the Resolutions to be proposed at the General Meeting and if the Shares not held directly, to arrange for their nominee to vote on their behalf.
Participation in the Tender Offer
Only Shareholders whose names appear on the Register on the Tender Offer Record Date, being 6:00 p.m. on 17 December 2021, are able to participate in the Tender Offer in respect of the Shares held as at that time.
The results of the General Meeting will be announced through a Regulatory Information Service and the Company's Website as soon as possible once known. It is expected that this will be on 15 December 2021.
10. Intentions of GHE and the Directors relating to the Tender Offer
The Company has received an irrevocable undertaking from GHE to:
• accept the Tender Offer in respect of not less than such number of Shares held by GHE so as to ensure that, assuming that the Tender Offer is taken up in full (including by way of excess tender applications) at the Tender Price calculated and announced in accordance with the terms of the Tender Offer, and on the basis of 3,480,884 ordinary shares in issue before the Tender Offer, GHE's interest in the Shares, when aggregated with the interests of Shares of those shareholders in the Company (“Other CP Members”) who have been deemed by the Panel on Takeovers and Mergers to be acting in concert with GHE for the purposes of the Takeover Code, (such aggregate currently amounting to 24.92% of the issued ordinary shares of the Company (867,491 ordinary shares), will amount to 29.9% of the ordinary shares of the Company following the Tender Offer, assuming, purely for the purposes of this calculation, that no Other CP Member accepts the Tender Offer ; and
• vote in favour of all of the Resolutions in respect of the 812,913 Shares in which GHE holds an interest.
Further details of this irrevocable undertaking are set out in paragraph 3 of Part 9 of the Circular.
In addition, those Directors who hold Shares intend to tender at least their full Individual Basic Entitlements under the Tender Offer, comprising 32,373 Shares in aggregate (representing approximately 0.93 per cent. of the issued ordinary share capital of the Company as at 26 November 2021 (being the latest practicable date prior to the publication of the Circular)).
11. Recommendation
The Board believes, having taken into account the views of a range of major Shareholders who have expressed their intention to support Resolutions 1 and 2, that the Proposals are in the interests of the Company and its Shareholders as a whole, and should yield the following principal benefits:
• implementing the Managed Wind-Down is expected to achieve a balance between maximising the net value received from those investments and making timely returns to Shareholders; and
• the Proposals will allow cash to be returned to Shareholders in a cost-effective, tax-efficient and timely manner through the proposed B Share Scheme, Tender Offer and Future Tender Offers (or by way of such other mechanisms which the Directors consider, in their discretion, are in the best interests of Shareholders from time to time).
Accordingly, the Board recommends that Shareholders vote in favour of the Resolutions to be proposed at the General Meeting. Graham Bird intends to vote in favour of all of the Resolutions in respect of his own beneficial holdings amounting to 26,543 Shares representing 0.76 per cent. of the issued share capital of the Company as at 26 November 2021 (being the latest practicable date prior to the publication of the Circular). Kenneth Lever, being the only independent non-executive director present at the time of the conclusion of the Strategic Review, does not intend to support Resolutions 1 and 2 but will support the remaining resolutions on the basis that they are necessary to implement Resolutions 1 and 2 which are very likely to be passed as a result of the support of GHE and certain other Shareholders.
The Board makes no recommendation to Shareholders as to whether or not they should tender all or any of their Shares in the Tender Offer. Whether or not Shareholders decide to tender their Shares will depend, amongst other factors, on their view of the Company's prospects and their own individual circumstances, including their own tax position. If you are in any doubt as to the action you should take, you are recommended to seek your own independent advice.