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Rights and Issues wants lose its split capital structure

Rights and Issues Investment Trust has announced proposals for the conversion of Capital Shares to Income Shares and amendments to the Company’s articles of association.

The company has issued a Circular to shareholders setting out the proposals which will be put to shareholders for approval in general meeting and at class meetings of the holders of Capital Shares and Income Shares to be held on 2 June 2016.

Rights and Issues currently has 1,640,000 Capital Shares and 2,460,000 Income Shares in issue. During the last five years, despite good performance, both the Capital Shares and the Income Shares have consistently traded at a discount of over 20 per cent. to their respective net asset values.  The split capital structure of the Company, and in particular, the structural tension that is created by the differing rights of the holders of Capital Shares and Income
Shares, creates opacity and inflexibility in the Company, which may itself be a reason contributing to the high level of the discount. More importantly this significantly impairs the ability of the Company to effectively employ a discount management policy with a view to limiting the discount. As such, in certain circumstances the dual capital structure and the rights of the Capital Shares may limit the Company’s flexibility in pursuing its corporate objectives and the best interests of its shareholders as a whole.

The unique feature of the supplementary capital dividend has historically allowed Capital Shareholders to participate in the revenue growth of the Company without disadvantaging Income Shareholders. This may not be possible in the future as current sub-normal levels of interest rates threaten this relationship and, potentially, future sizeable increases in the supplementary capital dividend may have an adverse effect on Income Shareholders.

The Proposals seek to convert the Company’s Capital Shares to Income Shares on terms which are fair and reasonable so far as the holders of both classes of Share are concerned.  In assessing the terms on which the conversion should be effected, the Board has taken account of the relative rights of the Capital Shares and Income Shares to participate in capital and income and to the ratios in which they participate in capital and income.  Taking account of these rights the Board has concluded that as a result of the Conversion, the holders of Capital Shares should become holders of 4 Income Shares for each Capital Share currently held. Accordingly, as part of the Conversion process, in addition to the Income Share arising through the conversion of each Capital Share, the Board is proposing a bonus issue of three further New Income Shares to Capital Shareholders to create the aggregate of 4 Income Shares for each Capital Share currently held.  Such bonus issue will be made free of charge and the shares will be paid up out of the Company’s Share Premium Account and Capital Reserve.

Subject to Conversion becoming unconditional no dividend will be declared or paid on the Capital Shares in respect of the period from 1 January 2016 to the time at which Conversion becomes effective, but the Board is proposing Special Dividend payments to Qualifying Shareholders of 22.5p per Capital Share and 22.5p per Income Share to be paid on 10 June 2016 to holders on the register at 27 May 2016 (ex-dividend 26 May 2016).

The Proposals are not intended to change the Company’s investment policy and following Conversion the Company’s investment policy will remain the same.

New Dividend Policy

After the conversion of Capital Shares, there will be 9,020,000 Income Shares in issue. It is the Board’s intention to rebase the level of dividends at 30p per Income Share in respect of 2016 comprising an interim dividend of 10p per
Income Share payable in September and a final dividend of 20p per Income Share.

Discount Management Policy

The Board intends that the Company will after Conversion implement annual share buy-back arrangements to encourage the level of discount to be not more than 10 per cent. The Board intends to use the authority granted by the Special Resolution to make market purchases of the Income Shares for this purpose. Accordingly, the Special Resolution will seek authority for the Company to purchase up to 1,352,098 of Income Shares, representing 14.99 per cent of the Income Shares in Issue following Admission. However, shareholders should note that the Board does not intend to purchase more than 10 per cent. of the Income Shares in issue following Admission in the period to 31 December 2016.

The Special Resolution will specify the minimum and maximum prices which may be paid for any Income Shares purchased under this authority. The authority will expire at the conclusion of the Company’s 2017 annual general meeting at which point the Board intends to renew the authority on appropriate terms.

The Company may either cancel any Income Shares it purchases under this authority or transfer them into treasury.

Additionally, it is proposed that the Company’s Articles of Association be amended to provide for periodic tender offers by the Company to repurchase at least 10 per cent. of the issued share capital of the Company then in issue at
an offer price of at least 90 per cent. of the net asset value per Income Share. The first such offer will be made within 30 days after the publication of the Company’s audited financial statements for the accounting period ending 31 December 2018 and further tender offers will be made for each accounting period ending on the third anniversary of the accounting reference date by reference to which the most recent Tender offer shall have been made by the Company in accordance with the Articles (as described below).

However, the Company shall not be required to make tender offers as provided above, if:

  1. the average bid price for an Income Share in the relevant accounting period is at least 90% of the net asset value per Income Share (calculated by reference to the bid price for an Income Share and the net asset value per Income Share on the last Business Day of each calendar month during that accounting period); or
  2. the average bid price for an Income Share in the last 3 months of the relevant accounting period is at least 95 per cent. of the net asset value per Income Share (calculated by reference to the bid price for an Income Share and the net asset value per Income Share on the last Business Day of each calendar month in the last 3 months of that accounting period); or
  3. the tender offer has not been authorised in accordance with section 701 of the Companies Act 2006.

In the event that the number of Income Shares in respect of which a tender offer is accepted exceeds the number of Income Shares in respect of which such offer was made (which shall be determined by the Directors but shall be not less than 10 per cent. of the number of Income Shares then in issue) by more than 5 per cent. of the number of Income Shares in issue at the date of the tender offer, the Company will be required to make a further tender offer within 30 days after the publication of the Company’s next audited financial statements.

Effects of the Proposal on Income and Capital Shareholders

Each class will both gain and lose as a result of the Proposal in a manner which the Board considers is overall fair to both.

The mathematical effect of the Proposal on the Income Shareholders and Capital Shareholders would be as follows:

  • Income Shareholders would see a reduction of 16.7% in their proportion of income for 2016 balanced by a gain of 2.4% in their proportion of capital.
  • Capital Shareholders would see a rise of 10.8% in their proportion of income for 2016 balanced by a loss of 0.9% in their proportion of capital.

The Company considers that the effects of these changes over the next five years for both classes will be broadly neutral; and shareholders will benefit from the new discount management policy.

RIIC / RIII : Rights and Issues wants lose its split capital structure

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