Downing Strategic Micro-Cap (DSM) updates on EGM requisition

On 18 June 2024, the board of Downing Strategic Micro-Cap (DSM) announced that it had received a request to requisition a general meeting from Vidacos Nominees Limited, acting as nominee of Milkwood Capital Limited (Milkwood) – click here to see our coverage. As it said at that time, DSM’s board considers that Milkwood’s decision to lodge the requisition is wholly self-interested and disruptive at a time when the board and the manager are focused on returning cash to shareholders now that the trust is in managed wind-down. DSM has published a circular and notice of for the requisitioned general meeting and the makes it clear that it unanimously recommends that shareholders vote against each of the requisitioned resolutions.

At the general meeting, shareholders will be asked to consider the following ordinary resolutions:

• to appoint Rhys Drennan Summerton, André Charles Tonkin and Paul Shackleton as new directors of the company (the “Proposed Directors”);
• to remove two of the company’s current and experienced directors, being Hugh Aldous and Robert Legget; and
• remove any person appointed as a director of the company between 17 June 2024 (being the date on which the requisition was received) and immediately prior to the requisitioned general meeting.

Shareholders will also be asked to consider the following special resolutions:

• that the current board does not declare any dividend, return of capital or other distribution on or prior to the requisitioned general meeting; and

The second special interim dividend of 12 pence per share declared on 28 May 2024 and any other dividend, return of capital or other distribution declared or announced but not paid or made between the date of the requisition and immediately prior to the requisitioned general meeting be cancelled and of no effect.

DSM’s board says that, notwithstanding the terms of the special requisitioned resolution, shareholders should note that it will have no impact upon the special dividends declared by DSM on 3 April 2024, 28 May 2024 and 17 June 2024.

As noted above, DSM’s board urges shareholders to vote on all the requisitioned resolutions.

Why the board thinks shareholders should vote against the resolutions

The board says that it has worked with the manager in order to return realisation proceeds to shareholders in accordance with the managed wind-down (which shareholders overwhelmingly voted for at the First General Meeting on 28 February 2024) and, to this end, following the payment of the third special dividend will have returned to shareholders a cash amount, of, in aggregate, approximately £27.4m, which equates to approximately 90.2 per cent. of DSM’s NAV as at 28 February 2024. The board expects to make further returns to shareholders, and if the requisitioned resolutions are passed, such returns may be jeopardised.

In the board’s view, Milkwood has requisitioned the general meeting in order to attempt to gain control of the board in an attempt by Milkwood to acquire the company’s assets on the cheap by avoiding making an offer for the entire company at a price which appropriately values the company’s remaining assets.

DSM’s board says that, were shareholders to vote in favour of the Requisitioned Resolutions (or not vote against in sufficient numbers), it may result in shareholders being locked into a continuing vehicle that would be managed by individuals on whom shareholders will have little-to-no information from a performance perspective, and the relative illiquidity in DSM’s shares may constrain shareholders’ ability to sell down their position in DSM should they not wish to continue to invest in it under Milkwood’s control.

The board also says that, if the requisitioned resolutions were passed, the majority of the board would be made up of directors nominated by Milkwood, and the current board believes this outcome would lead to the resulting board being unable to effectively exercise independent judgement on behalf of all shareholders.

Comments from Hugh Aldous, chairman of Downing Strategic Micro-Cap

“The shareholders in our company have overwhelmingly voted to wind down the trust, and return capital as efficiently as practicable, which is precisely what we have done. To date we have returned 42 pence per share and will return a further 17.5p distribution in July 2024. That works out at a return of actual cash, which investors can dispose of as they wish, of £27.4 million. So far, all Milkwood has done is to try and thwart the process that shareholders have voted for. Calling for a general meeting in order to attempt to gain control of the board, so soon after losing their previous attempt to frustrate shareholders wishes, has only proven to be a further distraction for the Board and has imposed additional unnecessary costs and hassle on shareholders.

“As we have said to Milkwood repeatedly, if they want to take control of the Company and run it in their own specific interests, then they should table a realistic offer that is fair to all shareholders and it will receive due consideration. In the meantime, we urge shareholders to ensure they protect their own interests by rejecting this unwarranted further attempt by Milkwood to acquire control of your Company and its assets on the cheap.”