KINGS ARMS YARD VCT PLC ("KAY")
KINGS ARMS YARD VCT 2 PLC ("KAY 2")
25 AUGUST 2011
RECOMMENDED PROPOSALS TO MERGE KAY AND KAY 2 (TO BE COMPLETED PURSUANT TO
SECTION 110 OF THE INSOLVENCY ACT 1986
The boards of KAY and KAY 2 announced on 16 May 2011 that they were in
preliminary discussions on terms for a merger of the two companies. Both boards
are pleased to advise that discussions have now concluded and they are today
writing to set out the merger proposals to their respective shareholders for
consideration. Both companies are managed by Albion Partners LLP ("Albion").
The merger will, if effected, result in an enlarged company ("Enlarged Company")
with net assets of over £33.7 million.
The merger will be effected by KAY 2 being placed into members' voluntary
liquidation pursuant to a scheme of reconstruction under Section 110 of the
Insolvency Act 1986 ("Scheme"). Shareholders should note that the merger by way
of the Scheme will be outside the provisions of the City Code on Takeovers and
Mergers. The merger will be completed on a relative net asset basis (unaudited
net assets as at close of business on the day immediately preceding the
Effective Date (as defined below)) and the benefits shared by both sets of
shareholders, with the costs being split proportionately based on the merger net
asset values. The merger is conditional on the approval of the shareholders of
Further proposals will be put to KAY shareholders including resolutions to
enable the issuance of shares pursuant to the Scheme and to increase
distributable reserves. Further details of the proposed resolutions are set out
As an illustration, had the merger been completed on 30 June 2011, every share
in the capital of KAY 2 ("KAY 2 Share") in issue would effectively have been
exchanged for 1.3152 new shares in the capital of KAY ("New KAY Shares"). The
actual merger ratio will be calculated on the Calculation Date (as defined
below) in accordance with the merger terms, though the boards of KAY and KAY 2
do not expect this to be materially different, unless an unforeseen event (e.g.
an exit opportunity in respect of an investment) requires a revaluation of a
holding in KAY and/or KAY 2.
KAY is the result of the merger of three VCTs, namely Quester VCT PLC, Quester
VCT 2 PLC and Quester VCT 3 PLC (re-named SPARK VCT PLC) which were launched in
1996, 1998 and 2000 respectively.
KAY 2 is the result of the merger of SPARK VCT 2 PLC (formerly Quester VCT 4
PLC) and SPARK VCT 3 PLC (formerly Quester VCT 5 PLC) which were launched in
2000 and 2001 respectively.
In December 2010, the boards of KAY and KAY 2 announced that Albion had been
appointed as their new investment manager. Since that date both KAY and KAY 2
have adopted identically new investment policies approved by Shareholders on 10
February 2011, which over time is intended to re-balance the respective
portfolios such that approximately 50 per cent. comprises an asset-based
portfolio of lower risk, ungeared businesses principally operating in the
healthcare, environmental and leisure sectors. The balance of the portfolios,
other than funds retained for liquidity purposes, being invested in portfolios
of higher growth businesses across a variety of sectors in the UK economy.
As at 30 June 2011, KAY had unaudited net assets of £17.7 million (16.0 pence
per share) and, in aggregate, investments in 21 companies with a carrying value.
As at 30 June 2011, KAY 2 had unaudited net assets of £16.3 million (21.1 pence
per share) and, in aggregate, investments in 24 companies with a carrying value.
VCTs are required to be listed on the premium segment of the Official List,
which involves a significant level of listing costs as well as related fees to
ensure they comply with all relevant legislation. A larger VCT should be better
placed to spread such running costs across a larger asset base, facilitate
better liquidity management and, as a result, may be able to maximize investment
opportunities and pay a higher level of dividends to shareholders over its life.
In September 2004, regulations were introduced allowing VCTs to be acquired by,
or merge with, each other without prejudicing the VCT tax reliefs obtained by
their shareholders. A number of VCTs (including KAY and KAY 2 in the past) have
now taken advantage of these regulations to create larger VCTs for economic and
With the above in mind, the boards of KAY and KAY 2 entered into discussions to
consider a merger of the companies to create a single larger VCT (completing the
amalgamation of the original five Quester VCTs). The aim of the boards of KAY
and KAY 2 to achieve strategic benefits and reductions in the annual running
costs for both sets of shareholders and establish a platform from which the
revised investment mandate can be better operated.
THE MERGER PURSUANT TO THE SCHEME
Following detailed consideration of the portfolios and the financial position of
KAY and KAY 2, the boards of KAY and KAY 2 have reached agreement on the terms
on which to merge KAY and KAY 2. The mechanism by which the merger will be
completed is as follows:
* KAY 2 will be placed into members' voluntary liquidation pursuant to a
scheme of reconstruction under Section 110 IA 1986; and
* all of the assets and liabilities of KAY 2 will be transferred to KAY in
consideration for the issue of New KAY Shares (which will be issued
directly to KAY 2 shareholders).
The merger will be completed on a relative net asset value basis, which will be
calculated on the net asset values of each company as at 30 June 2011, adjusted
for portfolio valuation movements and other balance sheet movements up to 29
September 2011 and each company's allocation of the merger costs being split
proportionately based on the merger net asset values (ignoring merger costs).
The merger will result in the creation of an enlarged company and should result
in savings in running costs and simpler administration. As both companies have
the same investment policies, investment manager and other main advisers, this
is achievable without major additional cost or disruption to the companies and
their combined portfolio of investments.
The board of KAY and KAY 2 consider that this merger will bring a number of
benefits to both groups of shareholders through:
* a reduction in annual running costs for the Enlarged Company compared to the
total annual running costs of the separate companies;
* the creation of a single VCT of a more economically efficient size with a
greater capital base over which to spread administration, regulatory and
* participation in a larger VCT with the longer term potential for a more
diversified portfolio thereby spreading the portfolio risk across a broader
range of investments and allowing for further investment in the pursuit of
the new investment policy; and
* enhancing the ability of the Enlarged Company to raise new funds and pay
dividends in the future.
Normalised annual running costs, excluding investment management fees, for KAY
and KAY 2 are approximately £220,000 per VCT or £440,000 in total. These
annualised costs represent approximately 1.2 per cent. of KAY's unaudited net
asset value and 1.3 per cent. of KAY 2's unaudited net asset value, in each case
as at 30 June 2011. The boards of KAY and KAY 2 consider that the level of
continued administrative annual running costs can be reduced through the merger
resulting in benefits to both groups of shareholders.
The aggregate anticipated cost of undertaking the merger is approximately
£235,000, including VAT, legal and professional fees, stamp duty and the costs
of winding up KAY 2. The costs of the merger will be split proportionately
between KAY and KAY 2 by reference to their respective merger value and roll-
On the assumption that the net asset value of the Enlarged Company will remain
the same immediately after the merger, annual cost savings for the Enlarged
Company are estimated to be at least £80,000 per annum (taking into account the
3 per cent. cap on normal annual running expenses). This would represent 0.25
per cent. per annum of the expected net assets of the Enlarged Company. On this
basis, and assuming that no new funds are raised or investments realised to meet
annual costs, the boards of KAY and KAY 2 believe that the costs of the merger
would be recovered within three years.
The board of KAY and KAY 2 believe that the Scheme provides an efficient way of
merging the companies with a lower level of costs compared with other merger
routes. Although either of the companies could have acquired all of the assets
and liabilities of the other, KAY was selected as the acquirer because of its
larger tax losses available to offset against future profits.
INVESTMENT MANAGEMENT AND ADMINISTRATION ARRANGEMENTS
Albion is the investment manager of KAY and of KAY 2 and also provides
administration services to both companies.
In respect of KAY and KAY 2, Albion has agreed to waive its investment
management and administration fees until the end of December 2011. Thereafter,
Albion will be entitled to an annual investment management fee of an amount
equivalent to 2 per cent. of the net assets of each company (exclusive of VAT,
if any) and an annual administration fee of £50,000 (exclusive of VAT, if any)
from each company. The normal annual running costs of KAY and KAY 2 (including
investment management and administration fees due to Albion, directors'
remuneration, registrars' fees, stockbrokers' fees, company secretarial fees,
auditors' fees and irrecoverable VAT) will, for accounting periods after 31
December 2011, be capped at an amount equivalent to 3 per cent. of net asset
value of the respective company, with any excess being paid by Albion or
refunded by a reduction to Albion's management and administration fees.
Neither KAY nor KAY 2 has a performance or incentive fee arrangement. KAY and
KAY 2 has agreed with Albion that no performance or incentive fees will be
payable to Albion for any periods prior to 31 December 2012, and thereafter, the
boards of KAY and KAY 2 intend to discuss an appropriate incentive arrangement
with Albion, which would be subject to approval by their respective
Albion will continue to provide investment management and administration
services to the Enlarged Company following the merger on the same annual fee
basis as above (i.e. fees to 31 December 2011 for the Enlarged Company will
continue to be waived and thereafter, annual investment management fees will be
an amount equivalent to 2 per cent. of the net assets of the Enlarged Company
(exclusive of VAT, if any) and an annual administration fee of £50,000
(exclusive of VAT, if any) and the normal annual running costs will be capped as
set out above). No performance or incentive fees will be payable by the Enlarged
Company for any periods prior to 31 December 2012.
KAY and KAY 2's respective termination of the appointment of SPARK Venture
Management Limited as their investment manager took effect on 1 January 2011.
Under the termination agreement between KAY, KAY 2 and SPARK Venture Management
Limited, both KAY and KAY 2 have agreed to pay SPARK Venture Management Limited
its management and administration fee under its investment management agreement
for the period until 30 November 2011 (calculated by reference to the respective
net asset value of KAY and KAY 2 as at 31 December 2010, subject to appropriate
adjustments in respect of dividends or realisations made during the period until
30 November 2011). The Enlarged Company will continue to pay SPARK Venture
Management Limited on the same fee basis as above and will take on the
equivalent responsibility of KAY 2.
THE KAY BOARD
The KAY board of directors has three non-executive directors; Robin Field
(Chairman), Martin Fiennes and Patrick Reeve.
The board of KAY and KAY 2 have considered what the size and future composition
of the Enlarged Company's board should be following the merger and it has been
agreed that Patrick Reeve will step down as a director of KAY and that Thomas
Chambers and Alan Lamb (directors of KAY 2) will be appointed as directors of
KAY (proposed directors). This will result in reducing the aggregate number of
directors from six across both companies to four for the Enlarged Company
resulting, in aggregate, in an annual cost saving of over £20,000.
The directors of KAY 2 have (subject to the Scheme becoming effective) agreed to
waive directors' fees in respect of their appointments to KAY 2 from the
Effective Date. Patrick Reeve, being an unpaid director to the Company, has also
agreed to terminate his appointment without compensation.
KAY SHARE ISSUE AND BUY BACK AUTHORITIES
In order to implement the merger, the KAY board will need to be authorised to
issue New KAY Shares pursuant to the Scheme.
KAY also proposes at its general meeting on 23 September 2011 to renew and
increase its authorities to issue shares (having disapplied pre-emption rights)
for general purposes and make market purchases of shares reflecting the
increased share capital of KAY following the merger. These are general annual
authorities taken each year, though currently there is no intention to utilise
these with the exception of the dividend reinvestment scheme and small top up
offers which do not require a prospectus to be issued by KAY.
REDUCTION IN THE NOMINAL VALUE OF KAY SHARES THROUGH A CANCELLATION OF CAPITAL
AND CANCELLATION OF THE SHARE PREMIUM ACCOUNT, ANY MERGER RESERVE AND THE
CAPITAL REDEMPTION RESERVE
The KAY board considers it to be in the interest of shareholders to enhance the
KAY's ability to support the future payment of dividends by restructuring KAY's
balance sheet by means of the cancellation and extinction of 4 pence of the
amount paid up on its issued shares. In addition, the KAY Board considers it
prudent to take the opportunity also to seek approval of shareholders at the KAY
general meeting on 23 September 2011 of the cancellation the share premium
account and merger reserve and the capital redemption reserve, (subject to the
sanction of the Court).
The sums set free by the proposals above would create further distributable
reserves to fund distributions to shareholders and buybacks, to set off or write
off losses and for other corporate purposes of KAY. If KAY shareholders approve
the relevant resolution proposed at the KAY general meeting, the KAY board
intend to apply to Court to sanction the cancellations (which is not conditional
on the merger being completed). It is expected that the completion of the
cancellations would take place before the end of the year, though each such
cancellation might be undertaken independently.
KAY 2 First General Meeting 2.00 pm 23 September 2011
KAY General Meeting 4.00 pm 23 September 2011
KAY 2 register of members closed 29 September 2011
Calculation date for the Scheme 5.00 pm 29 September 2011
Suspension of listing of KAY 2 shares 7.30 am 30 September 2011
KAY 2 Second General Meeting 3.00 pm 30 September 2011
Effective Date for the transfer of assets and 30 September 2011
liabilities of KAY 2 to KAY and issue of New KAY
Announcement of results of the meetings and 30 September 2011
completion of the Scheme (if applicable)
Cancellation of the KAY 2 share listing after 8.00 am 3 October 2011
Admission of and dealings in the New KAY Shares 3 October 2011
issued pursuant to the Scheme to commence
Certificates for New KAY Shares dispatched 10 October 2011
DOCUMENTS AND APPROVALS
KAY shareholders will receive a copy of a circular convening the KAY general
meeting to be held on 23 September 2011 (together with the KAY prospectus and
KAY half-yearly report for the six month period ended 30 June 2011) at which KAY
shareholders will be invited to approve resolutions in connection with the
Scheme, the renewal and increase of the authority to issue and repurchase shares
and cancel capital and reserves.
KAY 2 shareholders will receive a circular convening the KAY 2 first general
meeting on 23 September 2011 and the KAY 2 second general meeting on 30
September 2011 (together with the KAY prospectus and KAY 2 half-yearly report
for the six month period ended 30 June 2011) at which KAY 2 shareholders will be
invited to approve resolutions in connection with the Scheme.
Copies of the KAY prospectus and the circulars for KAY and KAY 2 have been
submitted to the UK Listing Authority and will be shortly available for download
both from Albion's website (www.albion-ventures.co.uk) and the national storage
mechanism (www.hemscott/nsm.do). Copies of the companies' 30 June half yearly
reports can also be downloaded from the same sites.
Investment Manager, Administrator and Company Secretary for KAY and KAY 2
Albion Ventures LLP
Patrick Reeve/Robert Whitby-Smith
Telephone: 0207 601 1850
Solicitors to KAY and KAY 2
Telephone: 0800 763 2000
Sponsor to KAY
Brewin Dolphin Limited
Telephone: 0845 213 4726
The directors and proposed directors of KAY accept responsibility for the
information relating to KAY and its directors and proposed directors contained
in this announcement. To the best of the knowledge and belief of such directors
and proposed directors (who have taken all reasonable care to ensure that such
is the case), the information relating to KAY and its directors contained in
this announcement, for which they are solely responsible, is in accordance with
the facts and does not omit anything likely to affect the import of such
The directors of KAY 2 accept responsibility for the information relating to KAY
2 and its directors contained in this announcement. 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 KAY 2 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
Martineau are acting as legal advisers for KAY and KAY 2 and for no one else in
connection with the matters described herein and will not be responsible to
anyone other than KAY and KAY 2 for providing the protections afforded to
clients of Martineau or for providing advice in relation to the matters
Brewin Dolphin Limited, which is authorised and regulated in the United Kingdom
by the Financial Services Authority, is acting as sponsor for KAY and no one
else and will not be responsible to any other person for providing the
protections afforded to customers of Brewin Dolphin Limited or for providing
advice in relation to any matters referred to herein.
This announcement is distributed by Thomson Reuters on behalf of
Thomson Reuters clients. The owner of this announcement warrants that:
(i) the releases contained herein are protected by copyright and
other applicable laws; and
(ii) they are solely responsible for the content, accuracy and
originality of the information contained therein.
Source: Kings Arms Yard VCT PLC via Thomson Reuters ONE