Circ re.Proposed Related Party Transaction

Downing Strategic Micro-Cap Investment Trust PLC (the "Company") LEI Number: 213800QMYPUW4POFFX69 Related Party Transaction, Publication of Circular and Notice of General Meeting 9 June 2023
Introduction
Further to the general meeting of the Company held on 20 February 2023, the Company announces that it has today published a circular (the "Circular") and is convening a general meeting of the Company (the "General Meeting") in order to propose a special resolution, which will, if passed, put all potentially affected parties so far as possible in the position in which they were always intended to be had the previously identified technical legal issue with the Company's share capital structure not occurred.
Background
As explained in the circular published by the Company on 24 January 2023, the Company identified a technical legal issue with its share capital structure whereby all the Company's issued shares were redeemable (it being a requirement of the Companies Act 2006 (the "Companies Act") that the Company must have at least one non-redeemable share in issue). On 20 February 2023, Shareholders approved the Board's recommended proposals to rectify the technical breach of the Companies Act from that date.
The Board notes that while the technical breach has been rectified in respect of the Company's operations from 20 February 2023, there are potential liabilities subsisting in respect of the historic technical breach which the Board would like to address now. These potential liabilities relate to (i) the repurchases of Ordinary Shares by the Company undertaken between 1 March 2019 and 18 January 2023 (the "Ordinary Share Buy-backs"), (ii) the redemption by the Company of all 50,000 Management Shares on 9 May 2017 (the "Management Share Redemption") (the Ordinary Share Buy-backs and the Management Share Redemption together being the "Relevant Share Buy-backs"), and (iii) the issue of 55,600,000 Ordinary Shares by the Company on 9 May 2017 (the "Relevant Share Issue").
Following from the requirement that a UK incorporated company have at least one non-redeemable share in issue, under the Companies Act a public limited company is prohibited from purchasing or redeeming any of its shares if as a result it would only have redeemable shares in issue. In addition, the Companies Act provides that a limited company may not issue redeemable shares at a time when there are no issued shares of the company that are not redeemable. Accordingly, each of the Relevant Share Buy-backs and the Relevant Share Issue were, regrettably, made by the Company otherwise than in accordance with the requirements of the Companies Act.
In order to address this issue, the Board is convening the General Meeting in order to propose a special resolution (the "Resolution"), which will, if passed, give the Board authority to enter into a deed of release with the current and former directors of the Company (the "Directors' Deed of Release") and the buy-back deeds described in Part 2 of the Circular (the "Buy-back Deeds"), and put all potentially affected parties so far as possible in the position in which they were always intended to be had the Relevant Share Buy-backs and the Relevant Share Issue been made in accordance with the requirements of the Companies Act.
The matters addressed in the Circular, including the abovementioned potential liabilities, arise from a technical error by the Company's advisers at the time of the Company's initial public offering. Whilst the intention at the time of the Company's initial public offering was that all Ordinary Shares issued should be redeemable, unfortunately all of the Company's share capital, including its Management Shares, were issued as redeemable.
For the avoidance of doubt, the matters addressed in the Circular are of an historic nature and have not resulted in any change to the financial position of the Company. The proposals to correct such matters do not affect the Company's assets or current distributable reserves in any material respect, nor its capacity to buy-back or issue shares going forward. For the avoidance of doubt, none of the proposals described in this announcement or the Circular will have an impact on the Company's 2024 cash exit proposal as previously announced.
Proposals and Resolution
The Company has been advised that, as a consequence of each of the Relevant Share Buy-backs and the Relevant Share Issue having been made otherwise than in accordance with the requirements of the Companies Act, it may have claims against persons who were directors of the Company at the time of entry into each of the Relevant Share Buy-backs and at the time of the Relevant Share Issue (the "Relevant Directors"). Therefore, it is proposed that the Company enter into the Directors’ Deed of Release. The consequence of the entry into of that deed by the Company is that the Company will be unable to make any claims against the Relevant Directors in respect of the Relevant Share Buy-backs and the Relevant Share Issue, in each case in respect of such purchases, redemptions or issues being made, effected or liability being incurred otherwise than in accordance with the Companies Act.
In addition, the Company is proposing to enter into the Buy-back Deeds with each of Shore Capital, finnCap and Downing Corporate Finance Limited ("DCFL"). The purpose of the entry into of the Buy-back Deeds is, inter alia, to effect the lawful transfer of the Ordinary Shares and Management Shares (as applicable) that are the subject of the Relevant Share Buy-backs in accordance with the Companies Act, thereby transferring legal and equitable title in the Ordinary Shares (from the relevant Broker) and the Management Shares (from DCFL) to the Company. Further details of these specific share purchases are set out in paragraph 6 of Part 2 of the Circular.
The Resolution being proposed at the General Meeting will (i) give the Board authority for the appropriation of the relevant distributable profits of the Company to the payment of each of the Ordinary Share Buy-backs; (ii) give the Board authority to enter into the Directors' Deed of Release and approve this as a related party transaction under the Listing Rules; (iii) give the Board authority to enter into the Buy-back Deeds; and (iv) provide for Shareholder ratification, confirmation and adoption of the Relevant Share Issue. This will, if passed, put all potentially affected parties so far as possible in the position in which they were always intended to be had the Relevant Share Buy-backs and the Relevant Share Issue been made in accordance with the requirements of the Companies Act.
Related Party Transaction
The entry by the Company into the Directors’ Deed of Release constitutes a related party transaction for the purposes of the Listing Rules of the Financial Conduct Authority as Hugh Aldous, Linda Bell, William Dawkins and Robert Legget, who will receive the benefit of the waivers of claim under the Directors' Deed of Release, are deemed to be related parties of the Company under the Listing Rules. Therefore, the Resolution will also seek the specific approval of independent Shareholders to the entry into of the Directors’ Deed of Release as a related party transaction, in accordance with the requirements of the Listing Rules. For the avoidance of doubt, no consideration will be paid by the Company to any of the Relevant Directors under the Directors' Deed of Release.
General Meeting
The General Meeting at which the Resolution will be considered will be held at St Magnus House, 3 Lower Thames Street, London EC3R 6HD on 6 July 2023 at 12.30 p.m.
General
A copy of the Circular will shortly be available to view at www.downing.co.uk/assets/dsm-circular and on the Company's website at www.downingstrategic.co.uk and on the National Storage Mechanism at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
Defined terms in this announcement have the same meaning as set out in the Circular unless the context requires otherwise.
Enquiries:
Hugh Aldous Chairman 020 7416 7780	Grant Whitehouse Company Secretary 020 7630 4333