Notice of General Meeting

Small Companies Dividend Trust PLC General Meeting convened to consider a ZDP Share issue by Small Companies ZDP PLC and related changes to Articles and investment policy For immediate release 1 August 2012 The Board of Small Companies Dividend Trust PLC ("SCD Trust" or the "Company") announced on 22 March 2012 that it was considering a potential issue of non-equity securities to replace SCD Trust's borrowing facilities and to increase its gross assets. Following consultation with SCD Trust's major shareholders, the Board is now pleased to announce its proposals for Small Companies ZDP PLC ("ZDPCo"), a new subsidiary of SCD Trust, to issue redeemable zero dividend preference shares ("ZDP Shares"), to raise £8.5 million. The ZDP Shares are redeemable in January 2018 together with the accumulated return to the ZDP Shareholders. A circular is today being posted to shareholders of SCD Trust, convening a General Meeting for 11.00 a.m. on 24 August 2012, to be held at the offices of Speechly Bircham LLP, 6 New Street Square, London EC4A 3LX to seek shareholders' approval for the issue of ZDP Shares, related changes to the Articles and a change to SCD Trust's investment policy ("the Proposals"). The Circular is available on-line at www.chelvertonam.com. A prospectus has been published in respect of the new ZDP Shares (the "Prospectus") and is available at www.chelvertonam.com. The Prospectus contains portfolio information about SCD Trust as at 30 July 2012 (being the "latest practicable date" prior to its publication). The net asset value per SCD Trust Ordinary Share as at close of business on 30 July 2012 was 103.45 pence. Copies of the Prospectus and the Circular have been submitted to the National Storage Mechanism and will shortly be available for inspection at http:// www.Hemscott.com/nsm.do. 1. Background to the Proposals As at 30 July 2012, SCD Trust's borrowings comprised a fixed loan of £4 million and in addition to which approximately £0.9 million of its current £2 million overdraft facility is drawn down. SCD Trust has been informed that its lenders will not renew SCD Trust's existing £4 million borrowing facility, which is due to expire on 1 May 2014, on the same terms. Following consultation with the majority of substantial shareholdersin SCD Trust and having considered the alternatives with SCD Trust's investment manager and other advisers, the Directors have decided to recommend to Ordinary Shareholders that SCD Trust raises £8.5 million cash by way of a placing of new ZDP Shares to be issued by ZDPCo. The proceeds of the Placing will be lent by ZDPCo to SCD Trust by way of a secured loan agreement, and will be used both to repay the existing fixed loan and to increase the capital available to SCD Trust for investment in its portfolio. Further information on the ZDP Shares and the Placing is set out in paragraph 2 below. SCD Trust's Articles of Association currently provide for a resolution to be put to shareholders on or about 30 April 2014, and thereafter at five yearly intervals, to approve the continuation of SCD Trust. If the Continuation Vote is not passed, the Board has to make arrangements for the return of capital to shareholders. The next Continuation Vote is due to be put to Ordinary Shareholders in April 2014. Accordingly the proposed ZDP Share issue is subject to Articles of Association being changed to make the timing of Continuation Votes more compatible with the use of ZDP Shares. A further proposed change to the Articles clarifies the definition of "borrowings" to exclude ZDP Shares. It is also proposed that SCD Trust's Investment Policy be amended to introduce a gearing policy in accordance with the current requirements of the Listing Rules. Currently, borrowings may not exceed 100% of net assets at the point at which borrowing is incurred or increased, but nevertheless gearing could increase without any set limit as a result of investments falling in value. Accordingly the proposed new gearing policy confirms that there is no set limit on SCD Trust's gearing. The Listing Rules require that changes to the Investment Policy are approved by shareholders in general meeting. The ZDP Share issue, the changes to the Articles of Association and the change in Investment Policy are conditional on the approval of Ordinary Shareholders at the General Meeting, notice of which is set out in the Circular. 2. Proposed issue of ZDP Shares A ZDP Share is not an equity share and does not entitle the holder to any dividends, but is redeemable on a fixed redemption date at a higher price than the initial subscription price, giving the holder a fixed return. The amount due to holders of ZDP Shares, which accrues over time, is accounted for as a liability rather than as share capital. The ZDP Shares are expected to have a life of approximately five years and four months. Application has been made for the standard listing of the ZDP Shares on the Official List and for them to be admitted to trading on London Stock Exchange plc's main market for listed securities. It is expected that admission will be effective and dealings will commence on 28 August 2012. The ZDP Shares do not entitle the holder to any dividends or, save in certain circumstances, to vote at general meetings of ZDPCo; however SCD Trust may not (save in certain circumstances), without the prior approval of ZDP Shareholders (inter alia): (i) take on any bank borrowings (save for short term borrowings in the ordinary course of business such as to settle share trades or borrowings to finance the redemption of the ZDP Shares) until the ZDP Repayment Date; (ii) pay any dividends out of capital reserves; (iii) pass a resolution releasing the Directors from their obligation to redeem the ZDP Shares on the ZDP Repayment Date; (iv) issue any securities or shares which rank pari passu with or in priority to the ZDP Shares; (v) make any material change to SCD Trust's investment policy which, at the time of making such change, appears likely in the reasonable opinion of the Directors to be materially prejudicial to the holders of the ZDP Shares; (vi) make any material change to the basis on which SCD Trust charges expenses to its revenue and capital accounts; or (vii) pass any resolution to vary, modify or abrogate any of the special rights attached to the ZDP Shares. Key information about the ZDP Shares Expected admission date 28 August 2012 Redemption date 8 January 2018 Issue price per ZDP Share 100 pence Final Capital Entitlement per ZDP Share 136.7 pence Redemption Yield at the Placing Price 6.0 per cent. per annum Initial Cover 2.07 times Hurdle rate to receive the Final -12.7 per cent. per annum Capital Entitlement Hurdle rate to receive the initial - 17.6 per cent. per subscription price annum ISIN: GB00B8FJ5797 SEDOL Code: B8FJ579 Ticker: SDVZ Use of proceeds The estimated net proceeds £8.3 million will be applied to repay all SCD Trust's £4.0 million loan and repay any of the overdraft which is outstanding at the relevant time, with the balance being added to SCD Trust's Portfolio to be managed in accordance with its existing investment policy. Rationale for the creation and issue of ZDP Shares The Directors and a majority of the substantial shareholders who were consulted considered the ZDP shares to be the most appropriate form of gearing having regard to the following points: · Light covenants: bank covenants damaged shareholder returns in 2008/9 when the market suffered a major setback and investments had to be sold at an inopportune time. · Term: the capital from a ZDP issue is available for a longer period (five years and four months in this case) than bank facilities, which in current credit markets are difficult to arrange for this type of asset class for a term of more than two or three years. As discounts can widen when there is doubt about gearing renewal, the less frequent ZDP renewals give ZDP shares an advantage over bank debt. · Fees: although the initial costs of the ZDP issue exceed bank arrangement fees, the latter would fall due more than once during the proposed five years and four months life of the ZDP Shares. To address any concern about the additional initial costs, Chelverton has agreed to contribute £100,000 towards the costs of the Proposals, subject to the Admission of the new ZDP Shares. · Lower market price discount to NAV due to higher dividends (as no income is applied to pay interest or a running yield on ZDP Shares). · Reduced net income required for dividends if no interest is paid on bank debt, permits the portfolio income target to be reduced while increasing dividends. This enables the Manager to place greater emphasis on capital return while meeting income targets. · An advantage of debt, if available on a revolving credit basis, is that it permits the temporary degearing of the fund without exposing SCD Trust to paying more for its longer term funding than it receives on uninvested funds. Any such advantage of debt funding would, however, be eroded by any non-utilisation fees applicable to the revolving credit facility. · Exposure to interest rate movements: the return to holders of ZDP Shares is fixed and does not fluctuate with changes in interest rates. As there is more scope for interest rates to increase from their present historically low level than for them to decrease, the refinancing of SCD Trust's bank debt with ZDP Shares eliminates SCD Trust's exposure to increases in financing costs without incurring the expense of hedging. Overall whilst the cost of the ZDP shares (comprising the 6 per cent. gross redemption yield and the initial costs of the issue) are slightly higher than the indicated increased costs of a bank facility in the short term, the Directors are concerned that the replacement of the bank debt with new loans could, over time, lead to higher interest costs and bank charges, which would reduce the amount of future dividends and which, they believe, may result in the Ordinary Shares trading at a wider discount to NAV. Interest rates are at a historically low level and there is more scope for them to increase than decrease over the next few years. While recognising that longer term interest rates are higher than current 'spot' rates, it is possible that fixing the cost of borrowings for five years and four months by way of the ZDP Share issue may turn out to be preferable to the alternative of exposing SCD Trust to possible higher rates when any replacement debt falls due for renewal in two or three years' time. As the holders of ZDP Shares will not receive dividends, all the portfolio income (net of expenses charged to revenue) should be available to pay dividends on the Ordinary Shares. In addition to the expected increase in net income as a result of the cessation of interest payments on the bank debt, the increase in the size of the investment portfolio is intended to deliver additional dividend and interest income. Any Ordinary Share dividend uplift will not be immediate, as the first of the quarterly dividends following the ZDP Share issue will reflect the net income received under the present capital structure. Ordinary Shareholders should note that although the proposed issue of ZDP Shares is intended to result in enhanced dividend income, over time the ZDP Shares' accruing redemption liability will reduce the net assets attributable to the Ordinary Shares. Therefore, the Ordinary Shareholders may get increased income (although there can be no guarantee that the Proposals will lead to the payment of increased dividends) but on a return of capital the final capital entitlement of the ZDP Shareholders will rank in priority to the capital entitlement of the Ordinary Shareholders and Ordinary Shareholders may, subject to the performance of the underlying assets, receive reduced capital as compared to the present arrangements. Effect of the issue of ZDP Shares on gearing ZDP Shares are accounted for as debt under IFRS. As at 30 April 2012, being the date of SCD Trust's most recent audited financial statements, SCD Trust had assets excluding debt (cash and portfolio investments, less certain creditors) of £22.13 million, £4.95 million of debt and net assets of £17.18 million i.e. a ratio of debt to assets of 22 per cent. If SCD Trust raises £8.5 million through the issue of ZDP Shares, after repayment of the bank debt and the payment of approximately £237,000 estimated net issue costs, the ratio of debt to assets would be 33 per cent. The higher gearing which would result from the ZDP Share issue would normally be expected to result in an increase in the exposure of Ordinary Shareholders to movements in the underlying asset values. A 10 per cent. increase or decrease in the gross asset value of a fund with a gearing ratio of debt to gross assets of 22 per cent. would result in an increase or decrease in net asset value of approximately 13 per cent. By comparison, a 10 per cent. increase or decrease in the gross asset value of a fund with a gearing ratio of debt to gross assets of 33 per cent. would result in an increase or decrease in net asset value of approximately 15 per cent. The arrangements for the proposed ZDP Share issue will prohibit the incurrence of any bank borrowings by SCD Trust while the ZDP Shares are in issue (save for any short term bank borrowings in the ordinary course of business, such as to settle share trades, or borrowings to finance the redemption of the ZDP Shares), unless such borrowings are approved by holders of ZDP Shares (by special resolution). 3. Risks associated with the Proposals Ordinary Shareholders should have regard to the following risk factors when considering the Proposed ZDP Share issue: ●The ZDP Shares' accruing redemption liability will reduce the net assets attributable to the Ordinary Shares. On a return of capital the final capital entitlement of the ZDP Shareholders will rank in priority to the capital entitlement of the Ordinary Shareholders and Ordinary Shareholders may, subject to the performance of the underlying assets, receive reduced capital as compared to the present arrangements. ●The higher gearing which would result from the ZDP Share issue may result in an increase in the exposure of Ordinary Shareholders to movements in the underlying asset values. Further detail on the impact of higher gearing is set out in paragraph 2 above. ●There can be no guarantee that SCD Trust will achieve its investment objective or that dividends will be increased as a result of the proposed Placing and change in capital structure. ●The proposed issue of ZDP Shares is intended to assist in limiting the size of the discount at which the Ordinary Shares trade to the underlying NAV per Ordinary Share. However, there can be no guarantee that such an effect will occur either immediately or in the future. ●If the Proposals are approved and the ZDP Shares are issued, then certain actions of SCD Trust will be subject to prior approval by the holders of ZDP Shares by special resolution. These actions include, without limitation, the issue of new shares (in certain circumstances); a reduction of capital (including, in certain circumstances, a buy back of shares); any change to SCD Trust's investment policy which is likely to be materially prejudicial to the holders of ZDP Shares; the incurrence of any bank borrowings (save for any short term bank borrowings in the ordinary course of business such as to settle share trades or borrowings to finance the redemption of the ZDP Shares) and payment of dividends (in certain circumstances) out of SCD Trust's capital reserves. The requirement for SCD Trust to obtain the consent of ZDP Shareholders in certain circumstances may result in SCD Trust being prevented from taking certain actions which would otherwise be in the interests of Ordinary Shareholders. ●The different rights and expectations of the Ordinary Shareholders and the ZDP Shareholders may give rise to conflicts of interest between them. ZDP Shareholders can be expected to have little or no interest in the revenue produced by the Portfolio, save to the extent that SCD Trust's operating costs exceed that revenue. ZDP Shareholders can be expected to want the capital value of the Portfolio to be sufficient to repay the final capital entitlement of the ZDP Shares on the ZDP Repayment Date, but can be expected to have little or no interest in any growth in capital in excess of that amount. Conversely, Ordinary Shareholders can be expected to be interested in both the revenue that the Portfolio produces (and hence the level of dividends which will be capable of being paid on Ordinary Shares) and increases in the capital value of the Portfolio in the period to the ZDP Repayment Date, in excess of the final capital entitlement of the ZDP Shares. In certain circumstances, such as a major fall in the capital value of the Portfolio such that the final capital entitlement of the ZDP Shares is significantly uncovered but where the Portfolio is still generating revenue, the interests of ZDP Shareholders and the Ordinary Shareholders may conflict. The ZDP Shareholders may wish the Portfolio to be re-balanced or more revenue to be retained in order to meet their final capital entitlement whilst the Ordinary Shareholders may recognise that they then have little prospect of a sizeable capital return and so may be more concerned with maximising dividends in the period to the ZDP Repayment Date. In such circumstances, the Directors may find it impossible to meet fully both sets of expectations and so will need to act in a manner which they consider to be fair and equitable to both Ordinary Shareholders and ZDP Shareholders, but having regard to the entitlements of each class of shares. 4. Changes to the Articles of Association The proposed ZDP Share issue will have a life of approximately five years and four months, which is incompatible with the currently required Continuation Vote in April 2014. Accordingly, it is proposed that the Articles be changed (by special resolution) to alter the date of the Continuation Vote to a date which is shortly before the redemption of the ZDP Shares. This would facilitate roll-over provisions for ZDP Shareholders being published in the knowledge that the Continuation Vote had been passed. A resolution is to be proposed at the General Meeting to change Article 166 to remove the current requirement for a Continuation Vote in April 2014 and at intervals of five years thereafter and to replace it with a requirement for a Continuation Vote in October 2017 and at up to seven year intervals thereafter, but giving the Board power to vary the date of the Vote to a date four months earlier or four months later so as to align the vote with any timetable for a further ZDP Share issue or to save costs by holding the Continuation Vote at the Annual General Meeting or some other general meeting. Article 121 limits SCD Trust's borrowings to an aggregate amount at any one time of a sum equal to 100 per cent. of the value of the net assets of SCD Trust at the time at which the borrowing is incurred or increased. An amendment is proposed to the definition of "borrowings" to exclude liabilities in respect of zero dividend preference shares, whether issued by SCD Trust or wholly-owned subsidiaries. 5. Change to Investment Policy The Listing Rules currently contain a requirement that an investment company's published investment policy includes a policy towards maximum gearing exposures. SCD Trust's investment policy, which was adopted prior to the current version of the Listing Rules being implemented, contains no reference to gearing policy. In order to protect the interests of ZDP Shareholders, the arrangements for the issue include a loan agreement containing a restriction on the Group incurring any other borrowings (other than short term indebtedness in the normal course of business, such as when settling share transactions) except where such borrowings are for the purpose of paying the Final Capital Entitlement due to holders of ZDP Shares. However, this will not prevent gearing increasing as a result of investments falling in value. There are no set gearing limits. A resolution is to be proposed at the General Meeting to amend SCD Trust's Investment Policy to confirm that there is no set limit on SCD Trust's gearing. The amended investment policy as it will be after the passing of the relevant resolution at the General Meeting is as follows: · The investment objective of SCD Trust is to provide Ordinary Shareholders with a high income and opportunity for capital growth. · SCD Trust's assets comprise investments in equities in order to achieve its investment objectives. It is the aim of SCD Trust to provide both income and capital growth predominantly through investment in smaller capitalised United Kingdom companies admitted to the Official List of the United Kingdom Listing Authority and traded on the London Stock Exchange' Main Market or traded on AIM. · The Company will not invest in preference shares, loan stock or notes, convertible securities or fixed interest securities or any similar securities convertible into shares; nor will it invest in the securities of other investment trusts or in unquoted companies. · There is no set limit on SCD Trust's gearing 6.Recommendation The Board, which has been so advised by Fairfax, considers the Proposals to be in the best interests of SCD Trust and Ordinary Shareholders as a whole. Accordingly, the Board unanimously recommends that Ordinary Shareholders vote in favour of the Resolutions to be proposed at the General Meeting, as they intend to do in respect of their own beneficial holdings of Ordinary Shares representing approximately 0.9 per cent. of SCD Trust's issued shares. Enquiries: Chelverton Asset Management Investment Manager David Horner: Tel: 01225 483030 Fairfax I.S. PLC Financial adviser and broker James King, John Korwin-Szymanowski, David Floyd: Tel: 020 7598 5368 Fairfax I.S. PLC ("Fairfax"), which is authorised and regulated by the Financial Services Authority, has given and has not withdrawn its written consent to the publication of this document containing references to its name in the form and context in which they appear. Fairfax is acting exclusively for Acorn Income Fund and not for any other person in relation to the matters referred to in this document and will not be responsible to any other person for providing the protections afforded to customers of Fairfax in relation to the matters referred to herein. This announcement does not constitute an offer or invitation to subscribe for securities. Definitions The following terms and expressions have the following meanings when used in this document unless the context requires otherwise: "Admission" the admission of the ZDP Shares to listing on the Official List and to trading on London Stock Exchange plc's main market for listed securities "Articles of Association" or "Articles" the articles of association of SCD Trust "Chelverton" or "Manager" Chelverton Asset Management Limited, SCD Trust's investment manager "Circular" the circular dated 1 August 2012 containing the notice of the General Meeting "Company" or "SCD Trust" Small Companies Dividend Trust PLC "Continuation Vote" vote by Ordinary Shareholders on the continuation of SCD Trust "Directors" or "Board" the directors of SCD Trust "Fairfax" Fairfax I.S. PLC, the financial adviser and broker to SCD Trust "Form of Proxy" the form of proxy to vote at the General Meeting, which accompanies this document "Investment Policy" SCD Trust's investment policy, as approved by Shareholders from time to time "General Meeting" or "GM" the general meeting convened to consider the Proposals "Ordinary Shares" ordinary shares of 25 pence each in the capital of SCD Trust "Ordinary Shareholder(s)" holder(s) of Ordinary Shares "Placing" the placing of ZDP Shares with investors "Portfolio" the portfolio of investments of SCD Trust "Proposals" the proposed issue of ZDP Shares, changes to the Articles of Association and change to Investment Policy "Shareholder(s)" holder(s) of Ordinary Shares "ZDP Repayment Date" the date on which the ZDP Shares are to be redeemed "ZDP Shareholder(s)" holder(s) of ZDP Shares "ZDP Shares" redeemable zero dividend preference shares proposed to be issued by a new subsidiary of SCD Trust
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