Downing Strategic Micro-Cap requisitioned by Milkwood Capital

Downing Strategic Micro-Cap (DSM) has announced that, on 17 June 2024, its board of directors of DSM received a letter from Vidacos Nominees Limited acting as nominee of Milkwood Capital Limited (Milkwood), seeking to requisition a general meeting of DSM. DSM’s board has said that it is in the process of reviewing the legal validity of the requisition with its advisers and that it will make further announcements regarding the convening of a general meeting in due course. It says that shareholders should take no action at this time.

DSM’s board – Milkwood’s requisition is wholly self-interested and disruptive

DSM’s board has also said that it considers that Milkwood’s decision to lodge the requisition is wholly self-interested and disruptive when it and DSM’s investment manager are focused on returning cash to shareholders. It is therefore urging DSM 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”.

What’s in Milkwood’s requisition?

DSM says that, in summary, the requisition from Milkwood proposes that shareholders are asked to consider the following:

• ordinary resolutions to: (i) remove Hugh Aldous and Robert Legget (and any person appointed as a director of DSM subsequent to the date of the letter and before the requisitioned general meeting) as directors of DSM; and (ii) appoint Rhys Summerton, Andre Tonkin and Paul Shackleton as directors of DSM; and
• a special resolution to direct that the Board does not declare any dividend, return of capital or other distribution on or prior to the requisitioned general meeting of DSM, and that the second special interim dividend of 12 pence per share declared on 28 May 2024 by DSM (the “Second Special Interim Dividend”) and any dividend, return of capital or other distribution declared or announced but not paid or made immediately prior to the requisitioned general meeting be cancelled (the “Special Resolution”).

What is Milkwood trying to achieve?

DSM’s board has previously said that it is aware that Milkwood is attempting to get control of the board of DSM without making a bid for DSM. DSM’s board says that Milkwood is attempting to secure the future management of DSM’s portfolio for itself and, to this end, has built up an approximately 28% shareholding in DSM.

Milkwood’s advances are not new news and DSM’s board says that it has repeatedly advised Milkwood that, if it wants to take control of DSM and run it in its own specific interests, then it should table a realistic offer that is fair to all shareholders. DSM’s board says that it will give such an offer due consideration.

Milkwood has previously blocked a tax efficient return of capital to shareholders

DSM’s board says that it was Milkwood’s shareholding that allowed it to block the implementation of DSM’s proposed B share scheme in April 2024 which would have allowed DSM to make a tax efficient capital return to all shareholders at next to NAV. The board’s conclusion is that Milkwood’s shareholding has, therefore, allowed it to compromise the position of DSM’s other shareholders who had voted in favour of DSM’s managed wind-down in February 2024, but to whom Milkwood has not offered a cash exit.

(QD comment: We think DSM’s board has a valid point here. If Milkwood’s goal is indeed to secure the future management of DSM’s portfolio for itself, then using its shareholding to lock in other shareholders who could have otherwise got out at close to NAV is not acting in good faith and is not the kind of conduct you would want from a manager or fellow shareholders. We think the board is right to give consideration to those shareholders who want to cash out.

In reality, DSM’s performance has been poor. It has provided a total return of -0.42% per annum over the last five years, placing it close to the bottom of its peer group, and so something needs to be done, particularly as it is also sub-scale. A return of cash where everyone gets out at close to NAV seems the right thing at this point and if Milkwood can offer all shareholders something better, then it seems reasonable that they should set this out formally and let shareholders decide. If Milkwood is not prepared to do this, the board’s assertion that Milkwood is trying to grab the assets on the cheap has greater credibility and this is something shareholders will probably want to consider).

DSM’s board committed to acting in all shareholders’ best interest

DSM’s board says that it remains committed to doing the right thing for all shareholders, and is mindful of the other shareholders’ vote at the general meeting of DSM held in February 2024 that overwhelmingly wished a return of cash proceeds. DSM’s board says that, to this end, on 18 June 2023, it declared a third special interim dividend of 17.5 pence per share, equivalent to, in aggregate, £8.0m. This will be paid to shareholders on 18 July 2024, taking the total aggregate of the dividends paid or declared by DSM since it entered into managed wind-down to 59.5p per share, being equivalent to 90.2% of DSM’s NAV as at 28 February 2024.

Third special dividend looks to be unaffected by Milkwood’s requisition

DSM’s board says that, in the event that Milkwood’s requisition is deemed to be valid, and in accordance with the requirements of the Companies Act 2006 and DSM’s articles of association, DSM expects to hold the requisitioned general meeting in late July – early August 2024. The board says that, notwithstanding the terms of the special resolution, it does not expect that the Second Special Interim Dividend or Third Special Interim Dividend will be affected by the Requisition if it is deemed valid.

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 fast as practicable, which is precisely what we have done. To date we have returned 30 pence per share, on 21 June 2024 will return another 12 pence per share, and on 18 July 2024 a further 17.5 pence per share will be distributed. That works out at a return of actual cash, which investors can dispose of as they wish, of £27.4m. 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, will only provide a further distraction for the Board and impose additional unnecessary costs and hassle on shareholders.

“As we have said to Milkwood repeatedly, if they want to take control of DSM 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.”