Merger Update

QUESTER VCT PLC

20 May 2005

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20 May 2005

 

RECOMMENDED PROPOSALS FOR A MERGER BETWEEN QUESTER VCT PLC, QUESTER VCT 2 PLC
AND QUESTER VCT 3 PLC

 

Summary

The boards of Quester VCT plc ('Quester VCT'), Quester VCT 2 plc ('VCT2') and
Quester VCT 3 plc ('VCT3') announce agreement on recommended proposals for the
merger of Quester VCT, VCT2 and VCT3 on a formula asset value basis. The boards
of Quester VCT, VCT2 and VCT3 further announce that they are today writing to
their respective shareholders with full details of the proposed merger.

 

The merger will be effected by means of a Scheme of Arrangement of VCT2 and
VCT3 under section 425 of the Companies Act 1985.

 

The scheme will be conditional, among other things, on the approval of Quester
VCT Shareholders, VCT2 shareholders and VCT3 shareholders and the approval of
the Court and will result in Quester VCT, as the continuing company, being
substantially enlarged (the 'Enlarged Quester VCT').

 

Expected summary timetable:

 

Shareholder meeting of Quester VCT and Shareholder meetings

and court-convened meetings of VCT2 and VCT3 13 June 2005

 

Formula asset value calculation date 23 June 2005

 

Court hearing to consider sanctioning scheme 28 June 2005

 

Effective date of merger 29 June 2005

 

Dealings commence in the Enlarged Quester VCT shares 29 June 2005

 

Introduction

The boards of Quester VCT, VCT2 and VCT3 today announce that they have agreed
the terms and conditions of a proposed merger of Quester VCT, VCT2 and VCT3
(the 'Merger') to form the Enlarged Quester VCT, which is to be effected by way
of a Scheme of Arrangement under section 425 of the Companies Act 1985 ('the
Scheme'). The boards of Quester VCT, VCT2 and VCT3 have written to their
shareholders with full details of the proposals and to convene the necessary
shareholder and court meetings. The Merger is subject, amongst other
conditions, to the approval of the shareholders of Quester VCT, VCT2 and VCT3.

Quester VCT, VCT2 and VCT3 are all listed venture capital trusts, have similar
investment objectives with a substantial proportion of their portfolios
overlapping, and are each managed by Quester Capital Management Limited (the
'Manager'), who will continue to manage the Enlarged Quester VCT but on revised
terms that include a reduced investment management fee. The Manager has
indicated its support for the Merger.

The Merger will be effected on a formula asset value ('FAV') basis. Under the
terms of the Merger, VCT2 shareholders and VCT3 shareholders will receive new
shares in Quester VCT ('New VCT1 Shares'), the number of which will be
determined according to detailed calculations set out in the Scheme. In
essence, for every £1 worth of net asset value that VCT2 shareholders or VCT3
shareholders currently have in VCT2 shares or VCT3 shares, they will receive
New VCT1 shares with an equivalent net asset value, adjusted for the expenses
of the Merger.

Quester VCT will act as the continuing company following the Merger. It is
expected that, if all necessary conditions are met, the Merger will become
effective on 29 June 2005.

The boards of Quester VCT, VCT2 (with the exception of Tom Scruby who, as a
director of both Quester VCT and VCT2, has not participated in the
recommendations relating to the Merger of the board of VCT2) and VCT 3 are
pleased to recommend the Merger to their respective shareholders.

Benefits of the Merger

Upon completion of the Merger, it is expected that the net assets of the
Enlarged Quester VCT, after the costs of the Merger, will be £53.8 million.

The boards of Quester VCT, VCT2 and VCT3 consider that the principal benefits
of the Merger will be:

  * an increase in the range and diversity of the investment portfolio and an
    improved spread of risk and opportunity;
   
  * a reduction in the annual running costs as a percentage of net assets; and
   
  * the potential for a smoother flow of dividends as realisations are made
    from a wider portfolio.
   
The Merger and its Financial Impact

The Merger is to be effected by means of a Scheme of Arrangement under Section
425 of the Companies Act 1985. As a result of the Merger, Quester VCT will act
as the survivor company and will acquire VCT2's and VCT3's portfolios of assets
pursuant to a transfer agreement to be entered into following the Merger.

The Scheme involves the cancellation of VCT2's and VCT3's issued share capital
(save for one VCT2 share and one VCT3 share to be issued to Quester VCT, which
will, for technical reasons, remain in issue throughout the process) and the
issue of new VCT2 shares and new VCT3 shares to Quester VCT in consideration
for which New VCT1 Shares will be issued to the former VCT2 shareholders and
the former VCT3 shareholders. VCT2 and VCT3 will become wholly-owned
subsidiaries of Quester VCT.

The actual FAVs are expected to be determined for the purpose of the Scheme on
or shortly following 23 June 2005, but before the Scheme becomes effective
(expected to be on 29 June 2005). It is therefore not possible until then to
specify the actual number of New VCT1 Shares to which the holders of VCT2
shares and VCT3 shares respectively will become entitled.

Costs of the Proposals

The costs of the proposals relating to the Merger are estimated to amount to
approximately £680,000 (inclusive of VAT). If the Merger is successful, the
costs of the Merger will be split between Quester VCT, VCT2 and VCT3 in
proportion to their respective net assets (before deduction of such costs). It
is expected that the costs associated with the Merger will be recouped by the
Enlarged Quester VCT from savings in annual running costs which, on an
annualised basis, are estimated to amount to approximately £500,000 (inclusive
of estimated savings in irrecoverable VAT).

If the Merger should, for any reason, not successfully complete, each of
Quester VCT, VCT2 and VCT3 would bear its abort costs in respect of the Merger.

Dividend Policy

Following the Merger, the board of the Enlarged Quester VCT intends to declare
an interim dividend of 1.0p per Quester VCT share as a special dividend in
September 2005 which will be paid out of surplus liquid assets in the Enlarged
Quester VCT following the Merger.

Thereafter, the directors of the Enlarged Quester VCT intend to resume the
payment of dividends where possible, reflecting the progress of the venture
capital portfolio. In pursuing this policy, the directors will take account of
a number of factors including the realisation of investments, the availability
of distributable reserves, the movement in net asset value per share and the
requirements for investment in fresh venture capital opportunities and for
reserving for follow-on investments. Subject to balancing these considerations,
it is the intention to distribute a significant proportion of any gains on
investment realisations.

The New VCT1 Shares issued as part of the Merger will rank pari passu in all
respects with existing shares of Quester VCT and will be entitled to any future
dividends payable on the shares of Enlarged Quester VCT, including the special
dividend referred to above.

This is an estimate of dividends only and is not intended to be, nor should it
be taken as, a forecast of profits.

 

Changes to the Boards

It has been agreed that if the Merger becomes effective, Tom Scruby will remain
as initial Chairman and Tom Sooke will continue to be a Director. Following the
Merger, the chairman of VCT2, Jock Birney, and the chairman of VCT3, David
Quysner, will be appointed as directors of Quester VCT. It is proposed that if
the Merger becomes effective the fees payable to the Directors will be set at £
15,000 per annum (£20,000 for the current Chairman) as compared with the
current £12,000 per annum (£15,000 for the Chairman). A search is under way to
identify and recruit a new director for the Enlarged Quester VCT so as to add a
fresh aspect to the Board.

Following the Merger, Simon Bakewell has agreed to retire from the Board of
Quester VCT, Howard Rudebeck, Tom Scruby and Peter Roberts will retire from the
board of VCT2 and George Hayter and Michael Brooke will retire from the board
of VCT3. Jock Birney will remain on the board of VCT2 with a representative of
the Manager and David Quysner will remain on the board of VCT3 with a
representative of the Manager for administrative purposes.

Investment Management Agreement

The Enlarged Quester VCT will continue to be managed by the Manager. An amended
and restated management agreement has been entered into between Quester VCT and
the Manager which will, conditional upon the Merger becoming effective, amend
the existing management agreement principally as follows:

• the annual management fee will be reduced by 0.5% to 2.0% of net assets; and

• a new performance incentive arrangement will be put in place such that, if
the Enlarged Quester VCT achieves an average annual dividend payout of 5% per
annum over four years (the percentage being calculated by reference to the
opening net asset value of the Enlarged Quester VCT at the effective date of
the Merger), the Manager will receive a performance fee equivalent to 0.5% per
annum of the opening net asset value (plus VAT if applicable) for such four
year period, and if an average annual dividend payout of 10% per annum of the
opening net asset value over four years is achieved, the Manager will receive
an additional performance fee equivalent to 0.25% per annum (plus VAT if
applicable) for such four year period, such performance fee in either event to
be paid in cash once the performance target has been met.

The agreement will continue to be terminable by Enlarged Quester VCT or the
Manager on 12 months' notice given at any time.

The Manager has agreed with VCT2 and VCT3 that, upon the Merger becoming
effective, its investment management and secretarial agreements with VCT2 and
VCT3 will terminate without compensation.

Transfer Agreement

Following the Merger becoming effective, Quester VCT, VCT2 and VCT3 will enter
into a transfer agreement pursuant to which Quester VCT will agree to acquire
and VCT2 and VCT3 will agree to transfer their investment portfolio interests
and any other net assets (including cash), subject to any necessary consents,
waivers of pre-emption rights and other requisite documents being entered into
or obtained. Transfers of individual investments or assets to Quester VCT may
take place as and when such consents, waivers and other requisite documents in
relation to those investments or assets have been entered into or obtained.
Transfers under the transfer agreement may be made by means of a distribution
in specie by VCT2 and VCT3 to Quester VCT or for cash. Any cash consideration
for the assets acquired by Quester VCT is intended to be left outstanding as an
inter-company loan. No part of this consideration for these transactions will
be payable to shareholders of the Enlarged Quester VCT.

Shareholder meetings

General meetings of Quester VCT, VCT2 and VCT3 shareholders and court convened
meetings of VCT2 and VCT3 shareholders will be held on 13 June 2005 in order
for shareholders to consider resolutions to approve the Merger. The Merger
requires the approval of the shareholders of all three companies at the
relevant meetings.

Illustrative Merger Terms

The actual FAVs are expected to be determined for the purpose of the Scheme on
or shortly following 23 June 2005, but before the Scheme becomes effective
(expected to be on 29 June 2005). It is therefore not possible until then to
specify the actual number of New VCT1 Shares to which the holders of VCT2
shares and VCT3 shares will become entitled.

Using the figures in the audited accounts for the financial year ended 28
February 2005 Quester VCT's FAV would be 43.54p per Share, VCT2's FAV would be
45.16p per VCT2 Share and VCT3's FAV would be 43.03p per VCT3 Share. For
illustrative purposes only, based on these FAVs, a VCT2 shareholder would
receive 1,037 New VCT1 Shares for every 1,000 VCT2 Shares held and a VCT3
shareholder would receive 988 New VCT1 Shares for every 1,000 VCT3 shares held.
The total net assets of the Enlarged Quester VCT would be approximately £53.8
million. The aggregate value of the New VCT1 Shares to be issued to VCT2
shareholders and VCT3 shareholders (if the Merger was being effected in
monetary terms) would be approximately £39.3 million. The actual number of New
VCT1 Shares issued will depend on the value of assets and liabilities of
Quester VCT, VCT2 and VCT3 as at 28 February 2005 adjusted as provided in the
Scheme. 

Conditions and approvals

The conditions which need to be satisfied (or waived, if applicable) for the
Scheme and the Merger to be implemented are set out below:

 1. The Merger is conditional upon the Scheme becoming unconditional and
    becoming effective by not later than 31 December 2005 or such later date as
    Quester VCT, VCT2 and VCT3 and the Court may agree.
   
 2. The Scheme will be conditional upon:
   
 3.
     a. approval of the Scheme by a majority in number representing at least
        three-fourths in value of the holders of the VCT2 Shares present and
        voting, either in person or by proxy, at the VCT2 Court convened
        meeting;
       
     b. approval of the Scheme by a majority in number representing at least
        three-fourths in value of the holders of VCT3 Shares present and
        voting, either in person or by proxy, at the VCT3 Court convened
        meeting;
       
     c. the resolution required to implement the Scheme and the associated
        reduction of capital being passed at the VCT2 extraordinary general
        meeting;
       
     d. the resolution required to implement the Scheme and the associated
        reduction of capital being passed at the VCT3 extraordinary general
        meeting;
       
     e. the resolution to approve the Merger and to authorise the allotment of
        New VCT1 Shares pursuant to the Scheme being passed at the Quester VCT
        annual general meeting;
       
     f. (i) the admission to the Offical List of the New VCT1 Shares becoming
        effective in accordance with the Listing Rules or the UK Listing
        Authority agreeing to admit such shares to the Offical List and (ii)
        the admission to trading of the New VCT1 Shares becoming effective in
        accordance with the rules of the London Stock Exchange or the London
        Stock Exchange agreeing to admit such shares to trading;
       
     g. no notice having been received by Quester VCT before close of business
        on the Scheme Record Date from the Inland Revenue which indicates that
        VCT2 and VCT3 may not remain approved as venture capital trusts
        pursuant to the VCT Rules (as defined); or
       
     h. the sanction (with or without modification) of the Scheme and
        confirmation of the reductions of capital involved therein by the
        Court, an office copy of the Court order being delivered for
        registration to the Registrar of Companies in England and Wales and
        registration of the Court order confirming the reductions of capital
        involved in the Scheme with the Register of Companies in England and
        Wales.
       
 3. Subject as stated in 4 below, the Merger will be conditional upon, and
    accordingly the necessary action to make the Scheme effective will not be
    taken, unless the following conditions are satisfied or waived on or prior
    to the Scheme Record Date (as defined in the Scheme) as referred to below:
   
 4.
     a. no notification having been received by any of Quester VCT, VCT2 and
        VCT3 from the Office of Fair Trading in the United Kingdom indicating
        that it is the intention of the Secretary of State for Trade and
        Industry to refer the proposed Merger or any matter arising therefrom
        or related thereto to the Competition Commission;
       
     b. no governmental authority, regulatory body, court or other person
        having instituted or threatened any action, proceedings or
        investigation, or enacted or proposed any statute, regulation or order,
        which would or might make the implementation of the Scheme and the
        other steps involved in the Merger void or illegal, or restrict or
        prohibit the implementation of the Merger, or impose material
        additional conditions in relation to that implementation, or otherwise
        adversely affect in any material respect the business of Quester VCT,
        VCT2 or VCT3;
       
     c. since 28 February 2005, being the date to which the latest audited
        report and accounts of Quester VCT, VCT2 and VCT3 were made up, or as
        disclosed in the latest audited report and accounts of Quester VCT,
        VCT2 or VCT3 (as the case may be):
       
 a. there being no material pending or threatened litigation, arbitration
    proceedings, prosecution or other legal proceedings against Quester VCT,
    VCT2 or VCT3; and
   
 b.
     i. there having been no material adverse change in the business, financial
        or trading position or prospects or profits of Quester VCT, VCT2 or
        VCT3,
       
in either case, which cannot be accounted for through an adjustment to the
relevant FAV pursuant to the Scheme.

 4. Quester VCT, VCT2 and VCT3 acting together, may waive all or any of the
    conditions contained in 3(a), (b) and (c) in whole or in part on or before
    the Scheme Record Date (as defined in the Scheme).
   
It is anticipated that the Scheme will become effective on 29 June 2005. If it
has not become effective by 31 December 2005 (or such later date as the Court
may allow and each of Quester VCT, VCT2 and VCT3 may agree), the Merger
proposals will lapse, the Merger will not take place, and VCT2 shareholders and
VCT3 shareholders will remain shareholders in VCT2 and VCT3 respectively, which
would then continue as independent listed companies.

On 1 July 2005, new listing rules published by the UK Listing Authority (the
'New Listing Rules') will come into effect, which will apply in respect of all
admissions to the Official List of the UK Listing Authority with effect from 1
July 2005. If the effective date of the Scheme and admission of the New VCT1
Shares does not occur before 1 July 2005, admission of the New VCT1 Shares will
be delayed while Quester VCT prepares listing particulars relating to the
admission of the New VCT1 Shares which comply with the requirements of the New
Listing Rules.

Documents and Approvals

VCT2 and VCT3 shareholders will receive a circular in relation to the scheme of
arrangement under section 425 of the Companies Act 1985, together with Listing
Particulars in respect of the New VCT1 Shares to be issued in connection with
the Merger.

The approval of VCT2 Shareholders will be sought at a court-convened meeting
and an extraordinary general meeting, each of which will be held on 13 June
2005.

The approval of VCT3 Shareholders will be sought at a court-convened meeting
and an extraordinary general meeting, each of which will be held on 13 June
2005.

Quester VCT shareholders will also receive the Listing Particulars and a
circular convening an annual general meeting to be held on 13 June 2005 at
which Quester VCT shareholders will be invited to approve the Merger proposals,
together with the usual business to be conducted at an annual general meeting
of Quester VCT.

Copies of the Listing Particulars and the circular of Quester VCT have been
submitted to the UK Listing Authority and will shortly be available for
inspection at the UK Listing Authority's Document Viewing Facility, which is
situated at:

Financial Services Authority

25 The North Colonnade

Canary Wharf

London E14 5HS

(Telephone number 020 7066 1000)

Enquiries

Quester Capital Management Limited John Spooner            020 7222 5472       
                                                                               
                                   Andrew Holmes                               
                                                                               
                                   Martin Williams                             

Nabarro Wells & Co. Limited        Robert Lo               020 7710 7400       
                                                                               
                                   Nigel Atkinson                              
                                                                               
AGM Corporate Finance LLP          John Ayton              01223 422 390       
                                                                               
                                   Allan Treacy                                
                                                                               
Noble & Company Limited            Ben Thomson             0131 225 9677       
                                                                               
                                   John Philipsz           020 7763 2200       
                                                                               

 

The directors of Quester VCT accept responsibility for the information relating
to Quester VCT and its directors contained in this document. To the best of the
knowledge and belief of such directors (who have taken all reasonable care to
ensure that such is the case), the information relating to Quester VCT and its
directors contained in this document, for which they are solely responsible, is
in accordance with the facts and does not omit anything likely to affect the
import of such information.

The directors of VCT2 accept responsibility for the information relating to
VCT2 and its directors contained in this document. To the best of the knowledge
and belief of such directors (who have taken all reasonable care to ensure that
such is the case), the information relating to VCT2 and its directors contained
in this document, for which they are solely responsible, is in accordance with
the facts and does not omit anything likely to affect the import of such
information.

The directors of VCT3 accept responsibility for the information relating to
VCT3 and its directors contained in this document. To the best of the knowledge
and belief of such directors (who have taken all reasonable care to ensure that
such is the case), the information relating to VCT3 and its directors contained
in this document, for which they are solely responsible, is in accordance with
the facts and does not omit anything likely to affect the import of such
information.

Noble & Company Limited, Nabarro Wells & Co. Limited and AGM Corporate Finance
LLP are acting exclusively for Quester VCT, VCT2 and VCT3 respectively and for
no one else in connection with the matters described herein and will not be
responsible to anyone other than Quester VCT, VCT2 and VCT3 respectively for
providing the protections afforded to clients of Noble & Company Limited,
Nabarro Wells & Co. Limited and AGM Corporate Finance LLP, nor for providing
advice in relation to the matters described herein.

END

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