End of Gresham House Strategic saga nears as board announces managed wind-down – Gresham House Strategic (GHS) has announced recommended proposals for managed wind-down of the company, proposed an initial return of capital and a return of capital by way of future tender offers and issued a notice for a requisitioned general meeting. This comes after Harwood said the company’s NAV had been incorrectly overstated since July 2021 as a result of the sale of one of its holdings, Augean Proceeds, which we covered here.
The board recommends the following to shareholders:
- 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 committing to manage the GHS portfolio for no fees during the Managed Wind-Down period.
All of these events are the result of the strategic review which was implemented on 24 May 2021 to determine the best course of action to provide growth in value for all shareholders, before the board announced on 11 October 2021 that it would be terminating its contract with Gresham House AM and appointing Harwood as replacement investment manager.
Following this announcement, the board received the Notice of Requisition from Rock Nominees Limited (on behalf of Gresham House), who 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 its assets and return of capital within 24 months.
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 its 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 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 notes that GHS’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. It 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 also expects to lower the company’s cost base over the coming months. The goal will be to achieve a balance between maximising the value received from those assets and making timely returns of capital to shareholders.
GHS 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, GHS 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.
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.
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.
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.
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 Share. 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.
- 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.
(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.
GHS : End of Gresham House Strategic saga nears as board announces managed wind-down