Proposed Conversion toUK-REIT

Primary Health Properties PLC 20 November 2006 20 November 2006 Primary Health Properties PLC ("PHP" or "the Company") Proposed Conversion to UK- REIT Highlights â€¢ PHP, the provider of modern primary healthcare facilities, announces that it has today written to shareholders requesting approval for conversion to REIT status â€¢ Conversion enables significant annual tax savings on income and eliminates capital gains tax paid on disposal of assets â€¢ Subject to shareholder approval, company could convert as early as 1 Jan 2007 â€¢ Company to pay minimum of 90% of the profits of the tax exempt business by way of dividends - in line with current dividend policy â€¢ Conversion expected to incur one-off charge of Â£4.5m, based on value of assets to form tax exempt business as at 30 June 2006 - PHP intends to elect to pay the conversion charge in four installments â€¢ Circular submitted to UK Listing Authority and to be posted today to shareholders â€¢ An Extraordinary General Meeting to be held on 18 December 2006 at 11 am in the Board Room, Ground Floor, Ryder Court, 14 Ryder Street, London SW1Y 6QB Further information detailing the Circular and the potential benefits to shareholders and background to UK-REIT conversion are below. Harry Hyman, Executive Managing Director of PHP, said: "We believe that conversion to a UK registered REIT is a highly attractive opportunity for investors in PHP. We have always adopted a policy of maximum possible distribution of after tax profits and REIT status allows us to enhance this policy. The gains we make on tax transparency will be passed directly to our shareholders, thereby maximising their returns - something that we have always believed in and adhered to since listing ten years ago." -ends- Enquiries: Bell Pottinger Corporate & Financial David Rydell/ Victoria Geoghegan Tel: 020 7861 3232 Primary Health Properties PLC Harry Hyman, Managing Director Tel: 01483 306912 Notice of Extraordinary General Meeting and Proposed Amendments to the Articles of Association for the Purposes of the Company Converting to a UK-REIT Letter from the Chairman Dear Shareholder UK-REIT conversion 1. Introduction I am writing to you to explain why the Board of PHP is recommending that the Company convert itself into a UK-REIT. After many years of lobbying by the property industry, primary UK-REIT legislation was enacted on 19 July 2006 with regulations published on 1 November 2006. This will facilitate the holding of property in a UK based corporate structure on a tax neutral basis. The Directors believe that its business, distribution policy and gearing levels are likely to allow PHP and its subsidiaries to qualify as a UK-REIT. The benefits of this to the Company are that all future capital gains will, so long as PHP continues to meet the relevant qualifying conditions accrue in a tax free environment and there will no longer be a requirement to provide for deferred taxation. In addition PHP will not have to pay taxation in respect of its net qualifying income. The deferred taxation provided in the Group's accounts at 30 June 2006 was Â£21m. The existing dividend policy under which PHP distributes substantially all of its distributable profits by way of dividend will not be altered and the Directors anticipate that this will enable the Company to satisfy the 90% test. The cost of conversion is an entry charge of 2% of the Group's net assets which can alternatively, by election, be paid in four instalments (where the rate is 2.19%). It is intended that the Company will elect for the instalment option. Assuming that conversion took place at 30 June 2006, the date of the Group's last available balance sheet, then the charge would be Â£4.5m. In order to facilitate the Company operating efficiently as a UK-REIT, certain changes are required to the Articles of Association. These changes take account of the UK-REIT legislation contained in Part 4 of the Finance Act 2006 and the regulations made thereunder (the "UK-REIT regime"), specifically the UK-REIT rules regarding the payment of dividends to Substantial Shareholders. I am writing to explain the background to the proposed changes to the Articles of Association which are being submitted for approval at the Extraordinary General Meeting and why the Board thinks that they are in the best interests of shareholders as a whole. Set out at the end of this document is a notice convening the Extraordinary General Meeting, which sets out the text of the proposed amendments to the Articles of Association. If approved by Shareholders, the proposed amendments to the Articles of Association will not take effect unless the Board elects for UK-REIT status. The Extraordinary General Meeting will be held at the Board Room, Ground Floor, Ryder Court, 14 Ryder Street, London SW1Y 6QB on 18 December 2006 at 11 a.m. There is also enclosed a Form of Proxy to enable you to vote on the resolution should you be unable to attend the meeting. This document provides you with details of the proposals and explains why the Board believes they are in the best interests of shareholders as a whole. In order to assist your consideration of these proposals this letter also includes: - background information on what a UK-REIT is; - details of the advantages, both for the Company and its shareholders, of becoming a UK-REIT and the anticipated costs of conversion; and - an explanation of why the Board believes it is in the best interests of shareholders for the Company to elect to convert into a UK-REIT. 2. Background to conversion to a UK-REIT a) What is a UK-REIT? A UK-REIT is a company that either itself owns and operates income-producing real estate investments, which can be commercial or residential, or comprises a group of companies which carries out these activities. Most of this income is distributed to shareholders and in return the company is exempt from corporation tax on profits and gains relating to its qualifying property rental business. Converting into a UK-REIT does not materially alter the group of companies' business or operations, but is merely a more tax-efficient structure. UK-REITs are intended to enable the income from rented property assets to be earned in a tax efficient way and to ensure that the return from investing in a property company is more aligned with direct property investment. A group of companies which elects for UK REIT status is permitted to carry on both tax-free property rental activities and other, taxable activities, subject to certain restrictions which are set out below. Electing for UK-REIT status does not change the legal status of the company or its share capital. b) A global trend Real estate investment trusts and similar structures have become a global trend, trading successfully in North America (USA and Canada), Australia, Asia-Pacific (Japan, Singapore, Hong Kong, Malaysia, Thailand, South Korea and Taiwan) and Europe (The Netherlands, Belgium, Greece and France). The UK-REIT regime commences from 1 January 2007 and Germany is currently considering introducing a German real estate investment Trust in the near future. c) Key conditions to become a UK-REIT In order to qualify as a UK-REIT, a group of companies will need to meet certain conditions. The key features are as follows: - the parent company must be a solely UK resident company whose ordinary shares are listed on a recognised stock exchange (which includes the Official List but does not include the AIM market) and not be an open-ended investment company; - the parent company must not be a "close company"; - the property rental business, whether Tax Exempt (within the UK) or overseas, should comprise at least 75% of the overall group's activities, measured by reference to both the value of its assets and its total profits; - a minimum of 90% of the UK-REIT's "profits" (calculated under UK tax principles after interest and capital allowances and excluding chargeable gains) from the Tax Exempt business must be distributed to investors. This distribution is referred to as a property income distribution or "PID"; and, - with some exceptions, the UK-REIT will be required to withhold basic rate tax on the payment of a PID (please refer to the additional tax information in Part III) of this document. PHP satisfies all the above conditions for conversion into a UK-REIT and the Board expects the Group to continue doing so in the future. The Group has been preparing for conversion for many months to ensure a smooth transition. In addition to the above conditions, as a UK-REIT, the Group needs to meet certain other conditions in order to maximise tax efficiency as follows: - the Group will be subject to a financing costs-cover test on the Tax-Exempt Business. This is a form of gearing test. The Group will need to be within the limits envisaged by the test to avoid an additional tax charge. - the Company would suffer a significant tax penalty in the event that distributions are made to any corporate shareholder who is beneficially entitled to 10% or more of the shares of the Company, or to 10% or more of dividends declared, or who controls 10% or more of the voting power. Further details are set out in k) below. The Group can protect itself against the risk of this tax penalty provided it can demonstrate it has taken reasonable steps to avoid paying distributions to such Substantial Shareholders. The proposed amendments to the Articles of Association should enable the Group to satisfy this requirement. d) Further Information on the UK-REIT regime Further information on the UK-REIT regime is set out in Part II of this document. e) Timing The legislation to enable the establishment of UK-REITs was contained in the Finance Act 2006 which became law on 19 July 2006. The detailed regulations that will govern the UK-REIT regime were published on 1 November 2006. HMRC are intending to publish guidance on certain areas although this is only available in draft form at the date this letter is written. The Board will review such guidance as is available prior to conversion into a UK-REIT and will not proceed with the conversion if there are, or are likely to be, material changes that the Board considers would be adverse for the Company or would affect the consequences of conversion for shareholders in a way that is materially different to that described in this document. This legislation provides that a company satisfying the conditions for UK-REIT status may elect to convert on, or after, 1 January 2007, provided that it has served notice to HMRC of its intention to convert prior to the conversion date. The Board, subject to the passing of the resolution at the EGM convened for 18 December 2006 and the review of any guidance published by the HMRC after the date of this letter as referred to above, intends to serve notice of conversion on or before 29 December 2006 in order to achieve UK-REIT status for the Group on 1 January 2007. f) Advantages of becoming a UK-REIT By converting to a UK-REIT, UK resident members of the Group will no longer pay corporation tax on the profits and gains from their qualifying property rental business in the UK provided that it meets certain conditions. This will effectively reduce the burden of taxation for most shareholders in respect of the Tax-Exempt Business and enable them to gain access to more flexible indirect property investments for their portfolios. Non-qualifying profits will continue to be subject to corporation tax as normal. For PHP, this will mean significant annual tax savings on its property income and the elimination of tax which would otherwise arise in respect of capital gains realised on the disposal of assets. This will lead to the eradication of the contingent tax liability of Â£21.2 million, representing the deferred tax liability provided in the Group's accounts as at 30 June 2006. The elimination of this potential tax exposure (which will also apply to any future gains in the value of the Group's qualifying property investment assets) means that the Group will have more flexibility, post UK-REIT conversion, with regard to its investment assets as it can dispose of them without incurring a tax charge. Furthermore, as the Group will not suffer corporation tax on income and gains relating to its UK investment assets, it should be able to return more to shareholders. g) The cost of conversion to UK-REIT status The entry cost of conversion to UK-REIT status has been set by the UK Treasury at 2% of the market value of the assets within the Tax Exempt Business immediately prior to entry into the UK-REIT regime (2.19% if the option to pay in instalments is taken). PHP intends to elect to pay the conversion charge in four instalments so, in PHP's case, this would mean a conversion charge of Â£4.5 million, based on the value of the assets that will form the Tax Exempt Business as at 30 June 2006. The actual conversion charge will depend on the value of the assets as at 31 December 2006. See page 17 of this document for further detail. h) Dividend policy The Company intends to employ the same dividend policy following UK-REIT conversion as it does now and the Board expects that this will comfortably exceed the required PID distribution. Following UK-REIT conversion, distributions from the Company may comprise PIDs, ordinary corporate dividends or a combination of the two. The Company will be required to distribute to shareholders (by way of dividend), on or before the filing date of the Company's tax return for the accounting period in question, at least 90% of the income profits of the Tax-Exempt Business (broadly, calculated using normal tax rules) of the UK-resident members of the Group in respect of their Tax-Exempt Business and of the non-UK resident members of the Group insofar as they derive from their UK qualifying property rental business arising in each accounting period. Subject to certain exceptions, these PIDs will be subject to withholding tax at the basic rate of income tax (currently 22%). Companies may decide to distribute additional amounts over and above the minimum PID, in which case such amounts will be treated as ordinary corporate dividends or as a PID, dependent on their source. For further detail, please see Part II of this document. In order to pay a PID without withholding tax, the Company will need to be satisfied that the shareholder concerned is entitled to that treatment. For that purpose, the Company will require such shareholders to submit a valid claim form (copies of which may be obtained on request) from the Company's Registrars, Capita Registrars). The precise proportion of recurring property rental income that the Group distributes may vary between years and will be flexed as appropriate, according to the needs of the business. Ordinarily, however, the Board would expect to distribute a high proportion (including the mandatory PID element) of recurring property rental earnings, on the basis of adjusted earnings per share as reported under IFRS. A proportion of trading property profits and other income from non-property activities may also be distributed, to the extent the Board regards those earnings as sustainable. Capital gains arising on the disposal of investment properties will, ordinarily, be retained/recycled within the business to support future growth. Had the Group previously been operating as a UK-REIT and the profit and distribution levels remain unchanged, the PID element of those distributions made in previous financial years would not have been significant, as illustrated in the table below. 2003 2004 2005 2006 (audited) (audited) (audited) (audited) Details from accounts Profit before tax UK GAAP 2,179,000 2,472,000 3,030,000 n/a IFRS 1 n/a n/a 19,387,000 18,403,000 Actual dividend paid 1,740,000 1,995,000 2,658,000 3,062,000 Theoretical PID if REIT conversion had been available in earlier periods Estimated Taxable profits 2 78,074 Nil 60,900 624,217 3 Notional PID 4 70,267 Nil 54,810 561,795 1 The PBT under IFRS is substantially higher than under UK GAAP as it includes the revaluation of properties. 2.The taxable profits for 2003 have been agreed with HM Revenue & Customs (HMRC). However, the corporation tax return for the 2004 and 2005 year ends are still open to enquiry by HMRC and the 2006 year end return is yet to be submitted and is therefore an estimate. 3 The significant estimated taxable profit seen in the year ended 30 June 2006 is due to the chargeable gains arising on the sale of two investment properties. Had these disposals not taken place, the taxable profits for the year would have been nil, and therefore no PID would have been required. 4 Under the REIT legislation the PID must be 90% of taxable profits of the property rental business. Since, substantially all of the profits relate to the property rental business, for the purposes of this table, we have calculated the PID as 90% of total taxable profits. i) Tax position of the Company's shareholders The comments in this section are provided for general guidance only. Shareholders who are in any doubt concerning the taxation implications of any matters reflected here should consult their professional advisers. As discussed in h) above, distributions from the Company may comprise PIDs, ordinary corporate dividends or a combination of the two. If, as described above, capital gains are recycled, only distributions of profits after interest deductions and capital allowances will constitute PIDs. Other dividends will be taxed as normal in the hands of Shareholders. Further detail in respect of the attribution of distributions is included in Part II of this document. Broadly, PIDs are treated for UK tax purposes in the hands of the shareholders as property rental income rather than dividends. They may be subject to withholding at source, at the basic rate of UK income tax of 22%. Additional UK taxes may be payable. Certain shareholders may have their liability to tax reduced, for example through the operation of a double tax treaty. A general guide to the treatment for the principal classes of shareholders is set out in Part III of this document. j) The 10% rule Under the UK-REIT regime, a tax charge may be levied on the Company if the Company makes a distribution to a Substantial Shareholder unless the Company has taken reasonable steps to avoid such a distribution being paid. Shareholders should note that this restriction only applies to shareholders that are bodies corporate and to certain entities which are deemed to be bodies corporate. It does not apply to nominees. The background to the charge recognises that in certain circumstances such shareholders resident in jurisdictions with favourable double tax agreements with the UK can reclaim all or part of the UK income tax payable by them on the dividend. The charge seeks to collect from the Company an amount of corporation tax equivalent to the basic rate income tax liability on the dividend irrespective of the tax treatment of the shareholder. A tax charge may be imposed only if a UK-REIT pays a dividend in respect of a Substantial Shareholding and the dividend is paid to a person who is a Substantial Shareholder. The charge is not triggered merely because a shareholder has a stake in the company of 10% or more. Neither is the tax charge triggered if the person beneficially entitled to the dividend is not also a Substantial Shareholder. The amount is calculated by reference to the dividend that is paid to the Substantial Shareholder and is NOT restricted to the excess over 10%. The tax charge imposes an amount of corporation tax payable by the Company equivalent to income tax at the basic rate on the dividend paid to the Substantial Shareholder. 3. Proposed changes to the Articles of Association Whilst the Company has not identified any Substantial Shareholding to which the 10% rule would apply, the Board considers it appropriate that the Company should put in place the mechanisms anticipated by the guidance issued by HMRC so that the Company can avoid the imposition of such a tax charge. The changes proposed to be made to the Articles of Association will give the Board the powers it needs to demonstrate to HMRC that such "reasonable steps" have been taken. These proposals are consistent with the draft guidance published by HMRC. The proposed amendments to the Articles of Association are set out in the notice convening a Extraordinary General Meeting of the Company appearing on pages 31 to 39 of this document and a description of those amendments is set out in Part IV of this circular: - a right for the Board to require information in relation to any shares in order to determine whether the shares form part of a Substantial Shareholding; - that dividends will not be paid on shares forming part of a Substantial Shareholding if the Board is not satisfied that ownership of dividends has been disposed of ; - that dividends will not be paid on shares where there has been a failure to provide information requested in order to determine if a shareholding is a Substantial Shareholding; - that dividends will not be paid on shares in any other case, if the Board believes the shares may form part of a Substantial Shareholding; - that dividends not paid may be released if certain information is supplied or certification given that the dividend will not belong to a person with a Substantial Shareholding; - that trust arrangements may be put in place to prevent a person with a possible Substantial Shareholding being entitled to that dividend; - a right to require that shares forming part of a Substantial Shareholding are disposed of where a shareholder does not provide information about beneficial ownership of the shares on request from the Board or fails to transfer the entitlement to the dividend to a person who is not a Substantial Shareholder or fails to take action or provide information so that any dividend withheld or held on trust is so transferred. The Articles of Association may be amended by special resolution passed by the shareholders of the Company in the future, including to give powers to the Directors to ensure that the Company can comply with the close company condition described in Part II of this document, which powers may include the ability to arrange for the sale of shares on behalf of shareholders. 4. Exit from the UK-REIT regime The Company can give notice to HMRC that it wants the Group to leave the UK-REIT regime at any time. The Board retains the right to decide to exit the UK-REIT regime at any time in the future without shareholder consent if it considers this to be in the best interests of the Group. If the Group voluntarily leaves the UK-REIT regime within ten years of joining and disposes of any property that was involved in its Tax-Exempt Business within two years of leaving, any uplift in the base cost of the property as a result of the deemed disposal on entry into the UK-REIT regime is disregarded in calculating the gain or loss on the disposal. However, there is no repayment of the entry charge in these circumstances. It is important to note that the Company cannot guarantee continued compliance with all of the UK-REIT conditions and that the UK-REIT regime may cease to apply in some circumstances. HMRC may require the Group to exit the UK-REIT regime if: â€¢ it regards a breach of the conditions or failure to satisfy the conditions relating to the Tax-Exempt Business, or an attempt to avoid tax, as sufficiently serious; â€¢ if the Company has committed a certain number of minor or inadvertent breaches in a specified period; or â€¢ if HMRC has given the Company at least two notices in relation to the avoidance of tax within a ten year period. In addition, if the conditions for UK-REIT status relating to the share capital of the Company and the prohibition on entering into loans with abnormal returns are breached or the Company ceases to be UK resident, becomes dual resident or an open ended investment company, the Group will automatically lose UK-REIT status (for further details regarding these conditions, see Part II). Shareholders should note that it is possible that the Company could lose its status as a REIT as a result of actions by third parties, for example, in the event of a successful takeover by a company that is not a REIT or due to a breach of the close company condition if it is unable to remedy the breach within a specified timeframe. Where the Group is required to leave the UK-REIT regime within ten years of joining, HMRC has wide powers to direct how it is to be taxed, including in relation to the date on which the Group is treated as exiting the UK-REIT regime. 5. Extraordinary General Meeting Set out on pages 31 to 39 of this document is the notice convening an Extraordinary General Meeting to be held at The Board Room, Ground Floor, Ryder Court, 14 Ryder Street, London SW1Y 6QB at 11 a.m. on 18 December 2006. At this EGM a special resolution will be proposed to approve the proposed amendments to the Articles of Association. 6. Actions to be taken A Form of Proxy for use by members, who alone are entitled to attend and vote at the Extraordinary General Meeting, is enclosed. You are requested to complete the Form of Proxy in accordance with the instructions thereon and return it so that it is received by the Company's Registrars, Capita Registrars, not later than 11 a.m. on 16 December 2006, being 48 hours before the time appointed for holding the Extraordinary General Meeting. If you complete and return the Form of Proxy, you can still attend and vote at the Extraordinary General Meeting in person, if you wish. 7. Recommendation For the reasons stated above, the Board believes the conversion of the Company into a UK-REIT to be in the best interests of the shareholders as a whole. Accordingly, it expects to elect to become a UK-REIT with effect from 1 January 2007, subject to the approval of the shareholders to the proposed amendments to the Articles of Association and review of any HMRC guidance available. The Directors wish to facilitate such process by making the amendments to the Articles of Association described in this document which will only come into force if the Company becomes a UK-REIT. The Board considers that the special resolution to be proposed at the Extraordinary General Meeting, is in the best interests of the shareholders as a whole and recommends you vote in favour of it. Directors who hold Ordinary Shares in the Company intend to vote in favour of this resolution in respect of their own beneficial holdings of 65,195 Ordinary Shares in aggregate, representing approximately 0.27% of the issued Ordinary Shares (as at 17 November 2006) being the last business day before the date of this document. Yours sincerely, Graeme A Elliot Chairman PART II THE UK-REIT REGIME TC "PART II - THE UK-REIT REGIME" /l 9 /* MERGEFORMAT The UK-REIT regime The following paragraphs are intended as a general guide only and constitute a high-level summary of the Company's understanding of current UK law and HMRC practice, each of which are subject to change, possibly with retrospective effect. They are not advice. As at the date of this document, the guidance to be published by HMRC has not yet been finalised (although it has been published in draft form) and are therefore subject to change. Changes in the draft guidance as made compared to the drafts currently available could change the position described below. Overview The UK-REIT regime introduced in the Finance Act 2006 is intended to encourage greater investment in the UK property market and follows similar legislation in other European countries, as well as the long-established regimes in the United States, Australia and the Netherlands. Currently, investing in property through a corporate investment vehicle (such as the Company) has the disadvantage that, in comparison to a direct investment in property assets, some categories of shareholders (but not UK companies) effectively suffer tax twice on the same income - first, indirectly, when members of the Group pay UK direct tax on their profits, and secondly, directly (but with the benefit of a tax credit) when the shareholder receives a dividend. Non-tax paying entities, such as UK pension funds, suffer tax indirectly when investing through a corporate vehicle that is not a UK-REIT in a manner they do not suffer if they were to invest directly in the property assets. As a UK-REIT, UK resident companies within the Group and non-UK resident companies within the Group with a UK qualifying property rental business would no longer pay UK direct taxes on their income and capital gains from the Tax-Exempt Business, provided that certain conditions are satisfied. Instead, distributions in respect of the Tax-Exempt Business will be treated for UK tax purposes as property income in the hands of shareholders (Part III of this document contains further detail on the UK tax treatment of shareholders after entry into the UK-REIT regime). However, corporation tax and overseas taxation will still be payable in the normal way in respect of income and gains from the Group's business (generally including any property trading business, overseas property rental business and certain other non property activities and investments) not included in the Tax-Exempt Business (the "Residual Business"). While within the UK-REIT regime, the Tax-Exempt Business will be treated as a separate business for corporation tax purposes to the Residual Business and a loss incurred by the Tax-Exempt Business cannot be set off against profits of the Residual Business (and vice versa). As a UK-REIT, the Company will be required to distribute to shareholders (by way of dividend) on or before the filing date for the UK-REIT's tax return for the accounting period in question at least 90% of the income profits (broadly, calculated using normal tax rules) of the UK-resident members of the Group in respect of the Tax-Exempt Business and of the non-UK resident members of the Group as they derive from their UK qualifying property rental business arising in each accounting period. Failure to meet this requirement will result in a tax charge calculated by reference to the extent of the failure, although this charge can be avoided if an additional dividend is paid within a specified period which brings the amount of profits distributed up to the required level. In this document, references to a company's accounting period are to its accounting period for tax purposes. This period can differ from a company's accounting period for other purposes. The treatment of a dividend paid by the Company in the first year after it becomes a UK-REIT should depend on whether it is paid out of profits that existed before or after the Group became a UK-REIT. For example, if the Company converts into a UK-REIT on 1 January 2007 and has before that date announced an intention to pay an interim dividend for payment after that date, that dividend would be paid entirely out of profits earned before the Group became a UK-REIT and should therefore be a Non-PID dividend. A dividend later in 2007 may be paid partly out of profits earned prior to the Group becoming a UK-REIT and partly out of profits earned subsequently and would therefore comprise partly a PID and partly a Non-PID dividend. The Company will provide shareholders with a certificate setting out how much of their dividend is a PID and how much is a Non-PID dividend. Subject to certain exceptions, PIDs will be subject to withholding tax at the basic rate of income tax (currently 22%). As referred to above, further details of the UK tax treatment of shareholders after entry into the UK-REIT regime are contained in Part III of this document. Qualification as a UK-REIT The Group will become a UK-REIT by the Company (as the principal company of the Group) serving notice on HMRC before the beginning of the first accounting period during which it wishes the Group to become a UK-REIT. In order to qualify as a UK-REIT, the Group must satisfy certain conditions set out in the Finance Act 2006. A non-exhaustive summary of the material conditions is set out below. Broadly, the Company must satisfy the conditions set out in paragraphs (A), (B), (C) and (D) below and the Group companies must satisfy the conditions set out in paragraph (E). (A) Company conditions The Company must be a solely UK-resident company (other than an open-ended investment company) whose ordinary shares are listed on a recognised stock exchange, such as the London Stock Exchange. The Company must also not (apart from in one exceptional circumstance) be a "close company" (as defined in section 414 of the Income and Corporation Taxes Act 1988) - as amended by section 106(6) of the Finance Act 2006 (the "close company condition"). In summary, the close company condition amounts to a requirement that not less than 35% of the UK-REIT's shares are beneficially held by the public and for this purpose the "public" excludes directors or the UK-REIT and certain of their associates, and shareholders who, alone or together with certain associates, control more than 5% of the UK-REIT's share capital. (B) Share capital restrictions The Company must have only one class of ordinary share in issue and the only other shares it may issue are non-voting fixed rate preference shares. (C) Interest restrictions The Company must not be party to any loan in respect of which the lender is entitled to interest which exceeds a reasonable commercial return on the consideration lent or where the interest depends to any extent on the results of any of its business or on the value of any of its assets. In addition, the amount repayable must either not exceed the amount lent or must be reasonably comparable with the amount generally repayable (in respect of an equal amount of consideration) under the terms of issue of securities listed on a recognised stock exchange. (D) Financial Statements The Company must prepare financial statements in accordance with statutory requirements ("Financial Statements") and submit these to HMRC. The financial statements must contain the information about the Tax Exempt Business and the Residual Business separately. The UK-REIT regime specifies the information to be included and the basis of the preparation of their financial statements. (E) Conditions for the Tax Exempt Business The Tax Exempt Business must satisfy the conditions summarised below in respect of each accounting period during which it is to be treated as a UK-REIT: I. the Tax Exempt Business must throughout the accounting period involve at least three properties; II. throughout the accounting period no one property may represent more than 40% of the total value of the properties involved in the Tax Exempt Business. Assets must be valued at fair value and in accordance with International Accounting Standards ("IAS") and at fair value when the IAS offers a choice between a cost basis and a fair value basis; III. treating all members of the Group as a single company, the Tax Exempt Business must not include any property which is classified as owner-occupied in accordance with generally accepted accounting practice; and IV. at least 90% of the amounts shown in the Financial Statements of the Group companies as income profits (broadly calculated using the normal tax rules) of the UK resident members of the Group arising in respect of the Tax Exempt Business in the accounting period, and the income profits of the non-UK resident members of the Group insofar as they arise in respect of such members' UK qualifying property rental business in the accounting period, must be distributed by the Company in the form of a dividend (a PID) on or before the filing date for the Company's tax return for the accounting period (the "90% distribution test"). For the purpose of satisfying the 90% distribution test, any dividend withheld in order to comply with the 10% rule will be treated as having been paid; V. the profits arising from the qualifying property rental business must represent at least 75% of the Group's total profits for the accounting period (the "75% profits test"). Profits for this purpose means profits before deduction of tax and excludes realised and unrealised gains and losses on the disposal of property, calculated in accordance with IAS; and VI. at the beginning of the accounting period the value of the assets in the qualifying property rental business must represent at least 75% of the total value of assets held by the Group (the "75% assets test"). Assets must be valued in accordance with IAS and at fair value where IAS offers a choice of valuation between cost basis and fair value and in applying this test no account is to be taken of liabilities secured against or otherwise relating to assets (whether generally or specifically). Effect of becoming a UK-REIT (A) Entry charge Each UK resident member of the Group that carried on a qualifying property rental business in the UK or overseas and any non-UK resident member of the Group that carries on a qualifying property rental business in the UK will be liable to pay an entry charge broadly equal to 2% of the aggregate market value of the properties and other assets involved in that business. This can be paid at the same time as corporation tax is payable in respect of the first accounting period following entry into the UK-REIT regime, or in instalments over a four year period. If the instalment option is taken, as the Board intends to do, the actual amount payable will be paid in the following percentages with the first instalment payable as above and the remaining instalments on the anniversary of that date: First instalment 0.50% Second instalment 0.53% Third instalment 0.56% Fourth instalment 0.60% There is no equivalent entry charge if a member of the Group buys a property following entering into the UK-REIT regime. However, if the Group were to acquire a company that is not a UK-REIT, a 2% entry charge will apply in respect of the property owned by the acquired company. See also paragraph (K) (Acquisitions and Takeovers below). (B) Tax savings As a UK-REIT, the Group will not pay UK-direct tax on profits and gains from the Tax Exempt Business. Corporation tax will still apply in the normal way in respect of the Residual Business which includes certain trading activities, incidental letting in relation to property trades, intra-group letting of property, letting of administrative property which is temporarily surplus to requirements and certain income such as dividends and interest from members of the Group carrying on non-UK activities. Corporation tax could also be payable were a member of the Group (as opposed to property involved in the UK qualifying property rental business) to be sold. The Group would also continue to pay indirect taxes such as VAT, stamp duty, land tax and stamp duty and payroll taxes (such as national insurance) in the normal way. (C) Attribution of Dividends Distributions by the Company will be attributed in the following order: I. In satisfaction of the obligation to distribute 90% of the profits of the Tax Exempt Business, calculated under tax principles and excluding chargeable gains, which arise in the accounting period - paid, under deduction of income tax at 22%, where appropriate as a PID. II. At the discretion of the Company, a distribution of all or any of the following: - profits earned by the Residual (taxable) Business in the period; - reserves of the Residual Business including brought forward reserves;, - profits representing the difference between the accounting distributable profits and profits calculated for tax purposes of the Tax Exempt Business (the difference principally results from the effect of claiming notional capital allowances in calculating the profits of the Tax Exempt Business). This distribution is treated as a normal dividend (to which a tax credit may be attached) and no tax is withheld by the Company. III. Distribution of the remaining 10% of the Tax Exempt Business income (calculated under tax principles and excluding chargeable gains) paid - under deduction of basic rate income tax at 22%, where appropriate as a PID. IV. Distribution of gains relating to the Tax Exempt Business - paid under deduction of 22% basic rate income tax, where appropriated as a PID. V. Distribution of any other amount - treated as a normal dividend (to which a tax credit may be attached) and no tax is withheld by the Company. (D) Financial statements As mentioned above, a UK-REIT will be required to submit Financial Statements to HMRC. (E) Interest cover ratio A tax charge will arise if, in respect of any accounting period, the ratio of the income profits (before capital allowances) of the UK resident members of the Group plus the UK income profits of any non-UK resident member of the Group, in each case, in respect of its Tax Exempt Business plus the financing costs incurred in respect of the Tax Exempt Business financing costs incurred in respect of the Tax Exempt Business, excluding certain intra-group financing costs, is less than 1.25. This ratio is calculated by reference to the Financial Statements, apportioning costs relating partly to the Tax Exempt Business and partly to the Residual Business reasonably. The amount (if any) by which the financing costs exceeds the amount of those costs which would cause that ratio to equal 1.25 is chargeable to corporation tax. (F) Property development and property trading by a UK-REIT A property development by a UK resident member of the Group can be within the Tax-Exempt Business provided certain conditions are met. However, if the costs of the development exceed 30% of the fair value of the asset at the later of (a) the date on which the Company becomes a UK-REIT, and (b) the date of the acquisition of the development property, and the UK-REIT sells the development property within three years of completion, the property will be treated as never having been within the Tax-Exempt Business. If a UK resident member of the Group disposes of a property (whether or not a development property) in the course of a trade, the property will be treated as never having been within the Tax-Exempt Business. (G) Certain tax avoidance arrangements If HMRC believes that a member of the Group has been involved in certain tax avoidance arrangements, it may cancel the tax advantage obtained and, in addition, impose a tax charge equal to the amount of the tax advantage. These rules apply to both the Residual Business and the Tax-Exempt Business. (H) Movement of assets in and out of the Tax Exempt Business In general, where an asset owned by a UK-resident member of the Group and used for the Tax Exempt Business begins to be used for the Residual Business, there will be a capital gain tax-free step up in the base cost of the property. Where an asset owned by a UK-resident member of the Group and used for the Residual Business begins to be used for the Tax Exempt Business, this will generally constitute a taxable market value disposal of the asset, except for capital allowances purposes. Special rules apply to disposals by way of a trade and to development property. (I) Funds awaiting reinvestment Where an asset used exclusively in the Tax Exempt Business is sold, the legislation provides for the sale proceeds to be treated as assets of the Tax Exempt Business for the purposes of the 75% profits test and the 75% assets test for two years following the disposal, provided that they are held as cash or cash equivalents. However, any interest earned on that cash is treated as part of the Residual Business and therefore taxable. (J) Joint ventures If one or more members of the Group are beneficially entitled, in the aggregate, to at least 40% of the profits available for distribution to equity holders in a joint venture company and at least 40% of the assets of the joint venture company available to equity holders in the event of a winding-up, that joint venture company is carrying on a qualifying property rental business which satisfies the 75% profits test and the 75% assets test (the "JV company") and certain other conditions are satisfied, the Company and the JV Company, may by giving notice to HMRC elect for the assets and income of the JV company to be included in the Tax-Exempt Business for tax purposes. In such circumstances, the income and assets of the JV company will count towards the 90% distribution test, the 75% profits test and the 75% assets test to the extent of the Group's interest in the JV company. As at the date of this document, the regulation in relation to joint ventures and UK-REITs does not specifically apply to any subsidiaries of a JV company, although it is currently expected that guidance or other further information to clarify the position will be provided by HMRC. (K) Acquisitions and Takeovers If a member of the Group acquires another UK-REIT, no entry charge will be payable. However, if a company which is not a UK-REIT joins the Group, the entry charge will be payable on the value of the properties owned by the qualifying property rental business of the target company. If a UK-REIT is taken over by another UK-REIT, the acquired UK-REIT does not necessarily cease to be a UK-REIT and will, provided the auditions are met, continue to enjoy Tax-Exemptions in respect of the profits of its Tax-Exempt Business and capital gains on disposal of properties in the Tax-Exempt Business. There is no entry charge as a result of the acquired UK-REIT joining the acquiror's group and the properties of the acquired UK-REIT are not treated as having been sold and reacquired at market value. The position is different where a UK-REIT is taken over by an acquiror which is not a UK-REIT. In these circumstances, the acquired UK-REIT is likely in most cases to fail to meet the requirements for being a UK-REIT and will therefore be treated as leaving the UK-REIT regime at the end of its accounting period preceding the takeover and ceasing from the end of this accounting period to benefit from Tax-Exemptions on the profits of its Tax-Exempt Business and capital gains on disposal of property forming part of its Tax-Exempt Business. The properties in the Tax-Exempt Business are treated as having been sold and reacquired at market value for the purposes of corporation tax on chargeable gains immediately before the end of the preceding accounting period. These disposals should be tax free as they are deemed to have been made at a time when the Company was still in the UK-REIT regime and future capital gains on the relevant assets will therefore be calculated by reference to a base cost equivalent to this market value. If the Company ends its accounting period immediately prior to the takeover becoming unconditional in all respects, dividends paid as PIDs before that date should not be recharacterised retrospectively as normal dividends. PART III UNITED KINGDOM TAX TREATMENT OF SHAREHOLDERS AFTER ENTRY INTO THE UK-REIT REGIME TC "PART III - UNITED KINGDOM TAX TREATMENT OF SHAREHOLDERS AFTER ENTRY INTO THE UK-REIT REGIME" /l 9 /* MERGEFORMAT INTRODUCTION The following paragraphs are intended as a general guide only and are based on the Company's understanding of current UK tax law and HMRC practice, each of which is subject to change, possibly with retrospective effect. They are not advice. As at the date of this document, the detailed guidance to be provided by HMRC has not yet been finalised (although it has been published in draft form) and are therefore subject to change. Changes in the guidance as made compared to the draft currently available could change the position described below The following paragraphs relate only to certain limited aspects of the United Kingdom taxation treatment of PIDs and Non-PID Dividends paid by the Company, and to disposals of shares in the Company, in each case, after the Company has elected into the UK-REIT regime. Except where otherwise indicated, they apply only to shareholders who are both resident and ordinarily resident for tax purposes solely in the United Kingdom. They apply only to shareholders who are the absolute beneficial owners of both their PIDs and their shares in the Company and who hold their shares as investments. They do not apply to Substantial Shareholders. They do not apply to certain categories of shareholders, such as dealers in securities or distributions, persons who have or are deemed to have acquired their shares by reason of their or another's employment, persons who hold their shares as part of hedging or conversion transactions, or persons who hold shares in connection with a UK branch, agency or permanent establishment. Except where otherwise indicated at B(iv) (Withholding tax) below, they do not apply to persons holding shares in the company by virtue of an interest in any partnership, insurance companies, life insurance companies, mutual companies, collective investment schemes, charities, trustees, local authorities, or pension scheme administrators. Shareholders who are in any doubt about their tax position, or who are subject to tax in a jurisdiction other than the United Kingdom, should consult their own appropriate independent professional adviser without delay, particularly concerning their tax liabilities on PIDs, whether they are entitled to claim any repayment of tax, and, if so, the procedure for doing so. A. UK TAXATION OF NON-PID DIVIDENDS Non-PID Dividends paid by the Company will be taxed in the same way as dividends paid by the Company prior to entry into the UK-REIT regime, whether in the hands of individual or corporate shareholders and regardless of whether the shareholder is resident for tax purposes in the UK. B. UK TAXATION OF PIDS i. UK taxation of shareholders who are UK resident individuals Subject to certain exceptions, a PID will generally be treated in the hands of shareholders who are individuals as the profit of a single UK property business (as defined in section 264 of the Income Tax (Trading and Other Income) Act 2005). A PID is, together with any property income distribution from any other company to which Part 4 of the Finance Act 2006 applies, treated as a separate UK property business from any other UK property business (a "different UK property business") carried on by the relevant shareholder. This means that surplus expenses from a shareholder's different UK property business cannot be off-set against a PID as part of a single calculation of the profits of the shareholder's UK property business. Please see also section B(iv) (Withholding tax), below. ii. UK taxation of UK resident corporate shareholders Subject to certain exceptions, a PID will generally be treated in the hands of shareholders who are within the charge to corporation tax as profits of a Schedule A business (as defined in section 15 of the Income and Corporation Taxes Act 1988). This means that, subject to the availability of any exemptions or reliefs, such shareholders should be liable to corporation tax on income on the entire amount of their PID. A PID is, together with any property income distribution from any other company to which Part 4 of the Finance Act 2006 applies, treated as a separate Schedule A business from any other Schedule A business (a "different Schedule A business") carried on by the relevant shareholder. This means that any surplus expenses from a shareholder's different Schedule A business cannot be off-set against a PID as part of a single calculation of the shareholder's Schedule A profits. Please see also section B(iv) (Withholding tax), below. iii. UK taxation of all shareholders who are not resident for tax purposes in the UK Where a shareholder who is resident outside the UK receives a PID, the PID will generally be chargeable to UK income tax as profit of a UK property business and this tax will generally be collected by way of a withholding. Please see also section B(iv) (Withholding tax), below. iv. Withholding tax (a) General Subject to certain exceptions summarised at paragraph (d) below, the Company is required to withhold income tax at source at the basic rate (currently 22%) from its PIDs. The Company will provide shareholders with a certificate setting out the amount of tax withheld. (b) Shareholders solely resident and ordinarily resident in the UK Where income tax has been withheld at source, shareholders who are individuals may, depending on their individual circumstances, either be liable to further tax on their PID at their applicable marginal rate, or be entitled to claim repayment of some or all of the tax withheld on their PID. Shareholders who are corporates may, depending on their individual circumstances, be liable to pay corporation tax on their PID but they should note that, where income tax is withheld at source, the tax withheld can be set against the shareholder's liability to corporation tax in the accounting period in which the PID is received. (c) Shareholders who are not resident for tax purposes in the UK It is not possible for a shareholder to make a claim under a double taxation treaty for a PID to be paid by the Company gross or at a reduced rate. The right of a shareholder to claim repayment of any part of the tax withheld from a PID will depend on the existence and terms of any double tax convention between the UK and the country in which the shareholder is resident. (d) Exceptions to requirement to withhold income tax Shareholders should note that in certain circumstances the Company may not withhold income tax at source from a PID. These include where the Company reasonably believes that the person beneficially entitled to the PID is: a company resident for tax purposes in the UK and where the person beneficially entitled to a PID is a charity, a body mentioned in section 507(1) ICTA which is allowed the same exemption from tax as charities, the scheme administrator of a registered pension scheme, or the sub-scheme administrator of a pension sub-scheme or a person entitled to receive the income of a fund entitled to exemption under section 614(3) ICTA. Payments made to the manager of an individual savings account or a personal equity plan may also be made gross. The Company will also not be required to withhold income tax at source from a PID where the Company reasonably believes that the body beneficially entitled to the PID is a partnership each member of which is either a body described in the paragraph above or the European Investment Fund. In order to pay a PID without withholding tax, the Company will need to be satisfied that the shareholder concerned is entitled to that treatment. For that purpose, the Company will require such shareholders to submit a valid claim form (copies of which may be obtained on request) from the Company's Registrars, Capita Registrars. A summary in tabular form of the UK tax position of distributions made by the Company for certain groups of shareholders is shown below. 1. UK Resident Individual PID Dividend â€¢ Tax withheld at 22%. â€¢ No tax withheld by UK-REIT. â€¢ Taxed at his/her marginal rate. â€¢ Treated as dividend income grossed up by 100/90 to include in the individual's income tax â€¢ Credit is given for the tax withheld by the calculation. UK-REIT. Therefore, to the extent that the individual is a lower or higher rate tax payer, â€¢ Taxed as top slice of income. a repayment or further tax may be due. â€¢ Notional tax credit of 10% is available. Therefore, only if the individual is a higher rate tax payer will further tax be due. 2. UK Resident Company PID Dividend â€¢ No tax withheld by UK-REIT. â€¢ No tax withheld by UK-REIT. â€¢ Subject to Corporation Tax at 30%. â€¢ Treated as a normal dividend -exempt from tax. 3. Non UK Resident Company PID Dividend â€¢ Tax withheld by UK-REIT on the distribution â€¢ No tax withheld by UK-REIT. â€¢ May reclaim the difference between 22% withholding â€¢ Not subject to UK tax. and the relevant dividend withholding tax rate agreed under the relevant double tax treaty (if applicable) (typically to 15%). â€¢ No further UK tax. 4. UK Tax Exempt shareholder PID Dividend â€¢ No tax withheld by UK-REIT. â€¢ No tax withheld by UK-REIT. â€¢ Not taxable in the hands of the shareholder. â€¢ No UK tax. C. UK TAXATION OF CHARGEABLE GAINS, STAMP DUTY AND STAMP DUTY RESERVE TAX IN RESPECT OF SHARES IN THE COMPANY Subject to the paragraph headed "Introduction", above, the following comments apply to both individual and corporate shareholders, regardless of whether such shareholders are resident for tax purposes in the UK. i. UK taxation of chargeable gains Chargeable gains arising on the disposal of shares in the Company following entry into the UK-REIT regime should be taxed in the same way as chargeable gains arising on the disposal of shares in the Company prior to entry into the UK-REIT regime. The entry of the Group into the UK-REIT regime will not constitute a disposal of shares in the Company by shareholders for UK chargeable gains purposes. ii. UK stamp duty and UK stamp duty reserve tax ("SDRT") A conveyance or transfer on sale or other disposal of shares in the Company following entry into the UK-REIT regime will be subject to UK stamp duty or UK SDRT in the same way as it would have been prior to entry into the UK-REIT regime. PART iV FURTHER INFORMATION ON THE PROPOSED AMENDMENTS TO THE ARTICLES TC "PART IV - FURTHER INFORMATION ON THE PROPOSED AMENDMENTS TO THE ARTICLES" /l 9 /* MERGEFORMAT As explained in the letter from the Chairman, it is proposed that the Articles of Association should be amended in order to enable the Company to demonstrate to HMRC that it has taken reasonable steps to avoid paying a dividend (or making any other distribution) to a Substantial Shareholder. For these purposes "Company" includes any body corporate and certain entities which are deemed to be bodies corporate for the purposes of overseas jurisdictions with which the UK has a double taxation agreement or for the purposes of such double tax agreements. If a distribution is paid to a Substantial Shareholder and the Company has not taken reasonable steps to avoid doing so, the Company would become subject to a tax charge. The proposed amendments to the Articles will include the insertion of a new Article (the "new Article"). The text of the new Article is set out in the notice convening the EGM that is set out at the end of this circular. The new Article: (A) provides directors with powers to identify Substantial Shareholders; (B) prohibits the payment of dividends on shares that form part of a Substantial Shareholding, unless certain conditions are met; (C) allows dividends to be paid on shares that form part of a Substantial Shareholding where the shareholder has disposed of its rights to dividends on its shares; and (D) seeks to ensure that if a dividend is paid on shares that form part of a Substantial Shareholding and arrangements of the kind referred to in (C) are not met, the Substantial Shareholder concerned does not become beneficially entitled to that dividend. References in this Part to dividends include any other distributions. The effect of the new Article is explained in more detail below: (A) Identification of Substantial Shareholders The share register of the Company records the legal owner and the number of shares they own in the Company but does not identify the persons who are beneficial owners of the shares or are entitled to control the voting rights attached to the shares or are beneficially entitled to dividends. While the requirements for the notification of interests in shares provided in Part VI of the Companies Act 1985 (the "Act") and the Board's rights to require disclosure of such interests (pursuant to Section 212 of the Act and Article 9 of the Articles) should assist in the identification of Substantial Shareholders, if those provisions are not on their own sufficient. Accordingly, the new Article would require a Substantial Shareholder and any registered shareholder holding shares on behalf of a Substantial Shareholder to notify the Company if his shares form part of a Substantial Shareholding. Such a notice must be given within two business days. If a person is a Substantial Shareholder at the date the new Article is adopted, that Substantial Shareholder (and any registered shareholder holding shares on its behalf) must give such a notice within two business days after the date the new Article is adopted. The new Article gives the Board the right to require any person to provide information in relation to any shares in order to determine whether the shares form part of a Substantial Shareholding. If the required information is not provided within the time specified (which would be seven days after a request is made or such other period as the Board may decide), the Board would be entitled to impose sanctions, including withholding dividends (as described in paragraph (B) below) and/or requiring the transfer of the shares to another person who is not, and does not thereby become, a Substantial Shareholder (as described in paragraph (E) below). (B) Preventing payment of a dividend to a Substantial Shareholder The new Article provides that a dividend will not be paid on any shares that the Board believes may form part of a Substantial Shareholding unless the Board is satisfied that the Substantial Shareholder is not beneficially entitled to the dividend. If in these circumstances payment of a dividend is withheld, the dividend will be paid subsequently if the Board is satisfied that: â€¢ the Substantial Shareholder concerned is not beneficially entitled to the dividends (see also (C) below); â€¢ the shareholding is not part of a Substantial Shareholding; â€¢ all or some of the shares and the right to the dividend have been transferred to a person who is not, and does not thereby become, a Substantial Shareholder (in which case the dividends would be paid to the transferee); or â€¢ sufficient shares have been transferred (together with the right to the dividends) such that the shares retained are no longer part of a Substantial Shareholding (in which case the dividends would be paid on the retained shares). For this purpose references to the "transfer" of a share include the disposal (by any means) of beneficial ownership of, control of voting rights in respect of and beneficial entitlement to dividends in respect of, that share. (C) Payment of a dividend where rights to it have been transferred The new Article provides that dividends may be paid on shares that form part of a Substantial Shareholding if the Board is satisfied that the right to the dividend has been transferred to a person who is not, and does not thereby become, a Substantial Shareholder and the Board may be satisfied that the right to the dividend has been transferred if it receives a certificate containing appropriate confirmations and assurances from the Substantial Shareholder. Such a certificate may apply to a particular dividend or to all future dividends in respect of shares forming part of a specified Substantial Shareholding, until notice rescinding the certificate is received by the Company. A certificate that deals with future dividends will include undertakings by the person providing the certificate: (a) to ensure that the entitlement to future dividends will be disposed of; and (b) to inform the Company immediately of any circumstances which would render the certificate no longer accurate. The Directors may require that any such certificate is copied or provided to such persons as they may determine, including HMRC. If the Board believes a certificate given in these circumstances is or has become inaccurate, then it will be able to withhold payment of future dividends (as described in paragraph (B) above). In addition, the Board may require a Substantial Shareholder to pay to the Company the amount of any tax payable (and other costs incurred) as a result of a dividend having been paid to a Substantial Shareholder in reliance on the inaccurate certificate (as described in paragraph (E) below). The Board may require a sale of the relevant shares and retain the amount claimed from the proceeds. Certificates provided in the circumstances described above will be of considerable importance to the Company in determining whether dividends can be paid. If the Company suffers loss as a result of any misrepresentation or breach of undertaking given in such a certificate, it may seek to recover damages directly from the person who has provided it. Any such tax may also be recovered out of dividends to which the Substantial Shareholder concerned may become entitled in the future. The effect of these provisions is that there is no restriction on a person becoming or remaining a Substantial Shareholder provided that the person who does so makes appropriate arrangements to divest itself of the entitlement to dividends. (D) Trust arrangements where rights to dividends have not been disposed of by Substantial Shareholder The new Article provides that if a dividend is in fact paid on shares forming part of a Substantial Shareholding (which might occur, for example, if a Substantial Shareholding is split among a number of nominees and is not notified to the Company prior to a dividend payment date) the dividends so paid are to be held on trust by the recipient for any person (who is not a Substantial Shareholder) nominated by the Substantial Shareholder concerned. The person nominated as the beneficiary could be the purchaser of the shares if the Substantial Shareholder is in the process of selling down their holding so as not to cause the Company to breach the Substantial Shareholder rule. If the Substantial Shareholder does not nominate anyone within 12 years, the dividend concerned will be held on trust for the Company. If the recipient of the dividend passes it on to another without being aware that the shares in respect of which the dividend was paid were part of a Substantial Shareholding, the recipient will have no liability as a result. However, the Substantial Shareholder who receives the dividend should do so subject to the terms of the trust and as a result may not claim to be beneficially entitled to those dividends. (E) Mandatory sale of Substantial Shareholdings The new Article also allows the Board to require the disposal of shares forming part of a Substantial Shareholding if: â€¢ if a Substantial Shareholder has been identified and a dividend has been announced or declared and the Board has not been satisfied that the Substantial Shareholder has transferred the right to the dividend (or otherwise is not beneficially entitled to it); â€¢ there has been a failure to provide information requested by the Board; or â€¢ any information provided by any person proves materially inaccurate or misleading. In these circumstances, if the Company incurs a charge to tax as a result of one of these events, the Board may, instead of requiring the shareholder to dispose of the shares, arrange for the sale of the relevant shares and for the Company to retain from the sale proceeds an amount equal to any tax so payable. The new Article has been discussed with HMRC which has confirmed that they constitute "reasonable steps" to avoid paying a dividend to a Substantial Shareholder for the purposes of the legislation. (F) Takeovers The new Article does not prevent a person from acquiring control of the Company through a takeover or otherwise, although as explained above, such an event may cause the Group to cease to qualify as a REIT. (G) Other The new Article also gives the Company power to require any shareholder who applies to be paid dividends without any tax withheld to provide such certificate as the Board may require to establish the shareholder's entitlement to that treatment. PART V PRIMARY HEALTH PROPERTIES PLC Notice of Extraordinary General Meeting TC "PART V NOTICE OF EXTRAORDINARY GENERAL MEETING" /l 9 /* MERGEFORMAT Notice is hereby given that an Extraordinary General Meeting of Primary Health Properties PLC (the "Company") will be held in The Board Room, Ground Floor, Ryder Court, Ryder Street London SW1Y 6QB, on 18 December 2006 at 11 a.m. to consider and, if thought fit, to pass the following resolution as a Special Resolution: SPECIAL RESOLUTION THAT, with effect from (and including) the first day of the calendar year following the date of this resolution in respect of which the Company has given a valid notice under section 109 of the Finance Act 2006, the Articles of Association be and they are hereby amended by the insertion of the following as new Articles 161 to 167: 161 Real Estate Investment Trust Cardinal principle 161.1 It is a cardinal principle that, for so long as the Company is the principal company in a real estate investment trust ("REIT") for the purposes of Part 4 of the Finance Act 2006, as such Part may be modified, supplemented or replaced from time to time, no member of the Group should be liable to pay tax under Regulation 10 of the Real Estate Investment Trusts (Breach of Conditions) Regulations 2006 (as such regulations may be modified, supplemented or replaced from time to time) on or in connection with the making of a Distribution. 161 .2 This Article supports such cardinal principle by, among other things, imposing restrictions and obligations on the shareholders of the Company and, indirectly, certain other Persons who may have an interest in the Company, and shall be construed accordingly so as to give effect to such cardinal principle. 162 Definitions and interpretation 162.1 For the purposes of this Article, the following words and expressions shall bear the following meanings: â€¢ "business day" means a day (not being a Saturday or Sunday) on which banks are normally open for business in London; â€¢ "Distribution" means any dividend or other distribution on or in respect of the shares of the Company and references to a Distribution being paid include a distribution not involving a cash payment being made; â€¢ "Distribution Transfer" means a disposal or transfer (however effected) by a Person of his rights to a Distribution from the Company such that he is not beneficially entitled (directly or indirectly) to such a Distribution and no Person who is so entitled subsequent to such disposal or transfer (whether the immediate transferee or not) is (whether as a result of the transfer or not) a Substantial Shareholder; â€¢ "Distribution Transfer Certificate" means a certificate in such form as the Directors may specify from time to time to the effect that the relevant Person has made a Distribution Transfer, which certificate may be required by the Directors to satisfy them that a Substantial Shareholder is not beneficially entitled (directly or indirectly) to a Distribution; â€¢ "Excess Charge" means, in relation to a Distribution which is paid or payable to a Person, all tax or other amounts which the Directors consider may become payable by the Company or any other member of the Group under Regulation 10 of the Real Estate Investment Trusts (Breach of Conditions) Regulations 2006 (as such regulation may be modified, supplemented or replaced from time to time) and any interest, penalties, fines or surcharge attributable to such tax as a result of such Distribution being paid to or in respect of that Person; â€¢ "Group" means the Company and the other companies in its group for the purposes of section 134 of the Finance Act 2006 (as such section may be modified, supplemented or replaced from time to time); â€¢ "HMRC" means HM Revenue & Customs; â€¢ "interest in the Company" includes, without limitation, an interest in a Distribution made or to be made by the Company; â€¢ "Person" includes a body of Persons, corporate or unincorporated, wherever domiciled; â€¢ "Relevant Registered Shareholder" means a shareholder who holds all or some of the shares in the Company that comprise a Substantial Shareholding (whether or not a Substantial Shareholder); â€¢ "Reporting Obligation" means any obligation from time to time of the Company to provide information or reports to HMRC as a result of or in connection with the Company's status as a REIT; â€¢ "Substantial Shareholding" means the shares in the Company in relation to which or by virtue of which (in whole or in part) a Person is a Substantial Shareholder; â€¢ "Substantial Shareholder" means any person whose interest in the Company, whether legal or beneficial, direct or indirect, may cause any member of the Group to be liable to pay tax under Regulation 10 of the Real Estate Investment Trusts (Breach of Conditions) Regulations 2006 (as such regulations may be modified, supplemented or replaced from time to time) on or in connection with the making of a Distribution to or in respect of such Person including, at the date of adoption of this Article, any holder of excessive rights as defined in the Real Estate Investment Trusts (Breach of Conditions) Regulations 2006; 162.2 Where under this Article any certificate or declaration may be or is required to be provided by any Person (including, without limitation, a Distribution Transfer Certificate), such certificate or declaration may be required by the Directors (without limitation): â€¢ to be addressed to the Company, the Directors or such other Persons as the Directors may determine (including HMRC); â€¢ to include such information as the Directors consider is required for the Company to comply with any Reporting Obligation; â€¢ to contain such legally binding representations and obligations as the Directors may determine; â€¢ to include an undertaking to notify the Company if the information in the certificate or declaration becomes incorrect, including prior to such change; â€¢ to be copied or provided to such Persons as the Directors may determine (including HMRC); and â€¢ to be executed in such form (including as a deed or deed poll) as the Directors may determine. 162.3This Article shall apply notwithstanding any provisions to the contrary in any other Article (including, without limitation, Articles 129 to 138 (Dividends)). 163 Notification of Substantial Shareholder and other status 163.1 Each shareholder and any other relevant Person shall serve notice in writing on the Company at the Registered Office on: (a) him becoming a Substantial Shareholder or him being a Substantial Shareholder on the date this Article comes into effect (together with the percentage of voting rights, share capital or dividends he controls or is beneficially entitled to, details of the identity of the shareholder(s) who hold(s) the relevant Substantial Shareholding and such other information, certificates or declarations as the Directors may require from time to time); (b) him becoming a Relevant Registered Shareholder or being a Relevant Registered Shareholder on the date this Article comes into effect (together with such details of the relevant Substantial Shareholder and such other information, certificates or declarations as the Directors may require from time to time); and (c) any change to the particulars contained in any such notice, including on the relevant Person ceasing to be a Substantial Shareholder or a Relevant Registered Shareholder. Any such notice shall be delivered by the end of the second business day after the day on which the Person becomes a Substantial Shareholder or a Relevant Registered Shareholder (or the date this Article comes into effect, as the case may be) or the change in relevant particulars or within such shorter or longer period as the Directors may specify from time to time. 163.2 The Directors may at any time give notice in writing to any Person requiring him, within such period as may be specified in the notice (being seven days from the date of service of the notice or such shorter or longer period as the Directors may specify in the notice), to deliver to the Company at the Registered Office such information, certificates and declarations as the Directors may require to establish whether or not he is a Substantial Shareholder or a Relevant Registered Shareholder or to comply with any Reporting Obligation. Each such Person shall deliver such information, certificates and declarations within the period specified in such notice. 164 Distributions in respect of Substantial Shareholdings 164.1 In respect of any Distribution, the Directors may, if the Directors determine that the condition set out in Article 161.9 is satisfied in relation to any shares in the Company, withhold payment of such Distribution on or in respect of such shares. Any Distribution so withheld shall be paid as provided in Article 161.10 and until such payment the Persons who would otherwise be entitled to the Distribution shall have no right to the Distribution or its payment. 164.2 The condition referred to in Article 161.8 is that, in relation to any shares in the Company and any Distribution to be paid or made on and in respect of such shares: (a) the Directors believe that such shares comprise all or part of a Substantial Shareholding of a Substantial Shareholder; and (b) the Directors are not satisfied that such Substantial Shareholder would not be beneficially entitled to the Distribution if it was paid, and, for the avoidance of doubt, if the shares comprise all or part of a Substantial Shareholding in respect of more than one Substantial Shareholder this condition is not satisfied unless it is satisfied in respect of all such Substantial Shareholders. 164.3 If a Distribution has been withheld on or in respect of any shares in the Company in accordance with Article 161.8, it shall be paid as follows: (c) if it is established to the satisfaction of the Directors that the condition in Article 161.9 is not satisfied in relation to such shares, in which case the whole amount of the Distribution withheld shall be paid; and (d) if the Directors are satisfied that sufficient interests in all or some of the shares concerned have been transferred to a third party so that such transferred shares no longer form part of the Substantial Shareholding, in which case the Distribution attributable to such shares shall be paid (provided the Directors are satisfied that following such transfer such shares concerned do not form part of a Substantial Shareholding); and (e) if the Directors are satisfied that as a result of a transfer of interests in shares referred to in (b) above the remaining shares no longer form part of a Substantial Shareholding, in which case the Distribution attributable to such shares shall be paid. In this Article 161.10, references to the "transfer" of a share include the disposal (by any means) of beneficial ownership of, control of voting rights in respect of and beneficial entitlement to dividends in respect of, that share. 164.4 A Substantial Shareholder may satisfy the Directors that he is not beneficially entitled to a Distribution by providing a Distribution Transfer Certificate. The Directors shall be entitled to (but shall not be bound to) accept a Distribution Transfer Certificate as evidence of the matters therein stated and the Directors shall be entitled to require such other information, certifications or declarations as they think fit. 164.5 The Directors may withhold payment of a Distribution on or in respect of any shares in the Company if any notice given by the Directors pursuant to Article 161.7 in relation to such shares shall not have been complied with to the satisfaction of the Directors within the period specified in such notice. Any Distribution so withheld will be paid when the notice is complied with to the satisfaction of the Directors unless the Directors withhold payment pursuant to Article 161.8 and until such payment the Persons who would otherwise be entitled to the Distribution shall have no right to the Distribution or its payment. 164.6 If the Directors decide that payment of a Distribution should be withheld under Articles 161.8 or 161.12, they shall within five business days give notice in writing of that decision to the Relevant Registered Shareholder. 164.7 If any Distribution shall be paid on a Substantial Shareholding and an Excess Charge becomes payable, the Substantial Shareholder shall pay the amount of such Excess Charge and all costs and expenses incurred by the Company in connection with the recovery of such amount to the Company on demand by the Company. Without prejudice to the right of the Company to claim such amount from the Substantial Shareholder, such recovery may be made out of the proceeds of any disposal pursuant to Article 161.21 or out of any subsequent Distribution in respect of the shares to such Person or to the shareholders of all shares in relation to or by virtue of which the Directors believe that Person has an interest in the Company (whether that Person is at that time a Substantial Shareholder or not). 165 Distribution Trust 165.1 If a Distribution is paid on or in respect of a Substantial Shareholding Distribution paid in circumstances where the Substantial Shareholder is not beneficially entitled to the Distribution), the Distribution and any income arising from it shall be held by the payee or other recipient to whom the Distribution is transferred by the payee on trust absolutely for the Persons nominated by the relevant Substantial Shareholder under Article 161.16 in such proportions as the relevant Substantial Shareholder shall in the nomination direct or, subject to and in default of such nomination being validly made within 12 years after the date the Distribution is made, for the Company as may be nominated by the Directors from time to time. 165.2 The relevant Substantial Shareholder of shares of the Company in respect of which a Distribution is paid shall be entitled to nominate in writing any two or more Persons (not being Substantial Shareholders) to be the beneficiaries of the trust on which the Distribution is held under Article 161.15 and the Substantial Shareholder may in any such nomination state the proportions in which the Distribution is to be held on trust for the nominated Persons, failing which the Distribution shall be held on trust for the nominated Persons in equal proportions. No Person may be nominated under this Article 161 who is or would, on becoming a beneficiary in accordance with the nomination, become a Substantial Shareholder. If the Substantial Shareholder making the nomination is not by virtue of Article 161.15 the trustee of the trust, the nomination shall not take effect until it is delivered to the Person who is the trustee. 165.3 Any income arising from a Distribution which is held on trust under Article 161.15 shall until the earlier of (i) the making of a valid nomination under Article 161.16 and (ii) the expiry of the period of 12 years from the date when the Distribution is paid be accumulated as an accretion to the Distribution. Income shall be treated as arising when payable, so that no apportionment shall take place. 165.4 No Person who by virtue of Article 161.15 holds a Distribution on trust shall be under any obligation to invest the Distribution or to deposit it in an interest-bearing account. 165.5 No Person who by virtue of Article 161.15 holds a Distribution on trust shall be liable for any breach of trust unless due to his own wilful fraud or wrongdoing or, in the case of an incorporated Person, the fraud or wilful wrongdoing of its directors, officers or employees. 166 Obligation to dispose 166.1 If at any time, the Directors believe that: (f) in respect of any Distribution declared or announced, the condition set out in Article 161.9 is satisfied in respect of any shares in the Company in relation to that Distribution; (g) a notice given by the Directors pursuant to Article 161.7 in relation to any shares in the Company has not been complied with to the satisfaction of the Directors within the period specified in such notice; or (h) any information, certificate or declaration provided by a Person in relation to any shares in the Company for the purposes of the preceding provisions of this Article 161 was materially inaccurate or misleading, the Directors may give notice in writing (a "Disposal Notice") to any Persons they believe are Relevant Registered Shareholders in respect of the relevant shares requiring such Relevant Registered Shareholders within 21 days of the date of service of the notice (or such longer or shorter time as the Directors consider to be appropriate in the circumstances) to dispose of such number of shares the Directors may in such notice specify or to take such other steps as will cause the condition set out in Article 161.9 no longer to be satisfied. The Directors may, if they think fit, withdraw a Disposal Notice. 166.2 If: (i) the requirements of a Disposal Notice are not complied with to the satisfaction of the Directors within the period specified in the relevant notice and the relevant Disposal Notice is not withdrawn; or (ii) a Distribution is paid on a Substantial Shareholding and an Excess Charge becomes payable; the Directors may arrange for the Company to sell all or some of the shares to which the Disposal Notice relates or, as the case may be, that form part of the Substantial Shareholding concerned. For this purpose, the Directors may make such arrangements as they deem appropriate. In particular, without limitation, they may authorise any officer or employee of the Company to execute any transfer or other document on behalf of the holder or holders of the relevant share and, in the case of a share in uncertificated form, may make such arrangements as they think fit on behalf of the relevant holder or holders to transfer title to the relevant share through a relevant system. 166.3 Any sale pursuant to Article 161.21 above shall be at the price which the Directors consider is the best price reasonably obtainable and the Directors shall not be liable to the holder or holders of the relevant share for any alleged deficiency in the amount of the sale proceeds or any other matter relating to the sale. 166.4 The net proceeds of the sale of any share under Article 161.21 (less any amount to be retained pursuant to Article 161.14 and the expenses of sale) shall be paid over by the Company to the former holder or holders of the relevant share upon surrender of any certificate or other evidence of title relating to it, without interest. The receipt of the Company shall be a good discharge for the purchase money. 166.5 The title of any transferee of shares shall not be affected by an irregularity or invalidity of any actions purportedly taken pursuant to this Article 161. 167 General 167.1 The Directors shall be entitled to presume without enquiry, unless any Director has reason to believe otherwise, that a Person is not a Substantial Shareholder or a Relevant Registered Shareholder. 167.2 The Directors shall not be required to give any reasons for any decision or determination (including any decision or determination not to take action in respect of a particular Person) pursuant to this Article 161 and any such determination or decision shall be final and binding on all Persons unless and until it is revoked or changed by the Directors. Any disposal or transfer made or other thing done by or on behalf of the Board or any Director pursuant to this Article 161 shall be binding on all Persons and shall not be open to challenge on any ground whatsoever. 167.3 Without limiting their liability to the Company, the Directors shall be under no liability to any other Person, and the Company shall be under no liability to any shareholder or any other Person, for identifying or failing to identify any Person as a Substantial Shareholder or a Relevant Registered Shareholder. 167.4 The Directors shall not be obliged to serve any notice required under this Article 161 upon any Person if they do not know either his identity or his address. The absence of service of such a notice in such circumstances or any accidental error in or failure to give any notice to any Person upon whom notice is required to be served under this Article 161 shall not prevent the implementation of or invalidate any procedure under this Article 161. 167.5 The provisions of Articles 151 to 158 shall apply to the service upon any Person of any notice required by this Article. Any notice required by this Article 161 to be served upon a Person who is not a shareholder or upon a Person who is a shareholder but whose address is not within the United Kingdom and who has failed to supply to the company an address within the United Kingdom pursuant to Article 153, shall be deemed validly served if such notice is sent through the post in a pre-paid cover addressed to that Person or shareholder at the address if any, at which the Directors believe him to be resident or carrying on business or, in the case of a holder of depository receipts or similar securities, to the address, if any, in the register of holders of the relevant securities. Service shall, in such a case be deemed to be effected on the day of posting and it shall be sufficient proof of service if that notice was properly addressed, stamped and posted. 167.6 Any notice required or permitted to be given pursuant to this Article may relate to more than one share and shall specify the share or shares to which it relates. 167.7 The Directors may require from time to time any Person who is or claims to be a Person to whom a Distribution may be paid without deduction of tax under Regulation 7 of the Real Estate Investment Trusts (Assessment, Collection and Recovery of Tax) Regulations 2006 to provide such certificates or declarations as they may require from time to time. 167.8 These Articles may be amended by special resolution from time to time, including to give powers to the Directors to take such steps as they may require in order to ensure that the Company can satisfy Condition 4 of Section 106 of the Finance Act 2006 (as such section may be modified, supplemented or replaced from time to time) which relates to close company status, which powers may include the ability to arrange for the sale of shares on behalf of shareholders. By order of the Board Registered Office J O Hambro Capital Management Limited Secretary Ground Floor Ground Floor Ryder Court Ryder Court 14 Ryder Street 14 Ryder Street London London SW1Y 6QB SW1Y 6QB 20 November 2006 Notes: 1. A member entitled to attend and vote at the meeting may appoint one or more proxies to attend and, on a poll, vote instead of him or her. A proxy does not need to be a member of the Company. A proxy may not speak at the meeting except with the permission of the Chairman of the meeting and may only vote on a poll (not on a show of hands). 2. A reply paid form of proxy is enclosed. To be valid, the form of proxy and the original (or a certified true copy) of any power of attorney or other authority under which the form of proxy is signed must be deposited at the office of the Company's Registrars, whose address is shown on the form of proxy, no later than 11a.m. on 16 December 2006 (or, in the event of an adjournment, the time which is 48 hours before the adjourned meeting). Completion of the form of proxy will not affect the right of a Shareholder to attend and vote at this meeting. 3. Under regulation 41 of the Uncertificated Securities Regulations 2001, only persons included in the register of members of the Company at 6.00 p.m. on 16 December 2006 (or, in the event of any adjournment, 6.00 p.m. on the date which is two days before time of the adjourned meeting) are entitled to attend or vote at the meeting in respect of the shares registered in their names at that time. Changes to entries on the register after the relevant deadline shall be disregarded in determining the rights of any person to attend or vote at the meeting (or adjourned meeting). This information is provided by RNS The company news service from the London Stock Exchange

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