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Octopus Eclipse VCT2 (OEC2)

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Friday 28 September, 2012

Octopus Eclipse VCT2

Octopus Eclipse VCT 2 plc : RECOMMENDED PROPOSA...

Octopus Eclipse VCT 2 plc : RECOMMENDED PROPOSALS TO MERGE THE COMPANIES, AN ENHANCED BUYBACK FACILITY AND RELATED MATTERS

JOINT ANNOUNCEMENT

28 SEPTEMBER 2012

OCTOPUS ECLIPSE VCT PLC ("ECLIPSE")
OCTOPUS ECLIPSE VCT 2 PLC ("ECLIPSE 2")
OCTOPUS ECLIPSE VCT 3 PLC ("ECLIPSE 3")
OCTOPUS ECLIPSE VCT 4 PLC ("ECLIPSE 4")
(TOGETHER THE "COMPANIES" AND ECLIPSE 2, ECLIPSE 3 AND ECLIPSE 4 TOGETHER THE "TARGET VCTS" AND EACH A "TARGET VCT")

RECOMMENDED PROPOSALS TO MERGE THE COMPANIES (TO BE COMPLETED PURSUANT TO SCHEMES OF RECONSTRUCTION UNDER SECTION 110 OF THE INSOLVENCY ACT 1986), AN ENHANCED BUYBACK FACILITY AND RELATED MATTERS

SUMMARY

The boards of the Companies ("Boards") announced on 16 August 2012 that they had agreed terms in principle to merge the four companies. The Boards are pleased to advise that discussions have now concluded and that they are today writing to set out the merger proposals to their respective shareholders for consideration. Each of the Companies is managed by Octopus Investments Limited ("Octopus").

The merger will be effected by the Target VCTs each being placed into members' voluntary liquidation pursuant to schemes of reconstruction under Section 110 of the Insolvency Act 1986 ("Schemes" and each a "Scheme"). Shareholders should note that the merger by way of the Schemes will be outside the provisions of the City Code on Takeovers and Mergers.

The merger will be completed on a relative net asset basis and the benefits shared by each set of shareholders, with the costs being split proportionately based on the merger net asset values. Each Scheme requires the approval of resolutions by the relevant Target VCT's shareholders and Eclipse shareholders. However, each Scheme is not conditional on the other Schemes and will proceed independently and irrespective of the other Schemes.  

The proposed merger follows discussions with Octopus concerning the future direction and performance of the Companies. The proposed merger will, if effected, result in an enlarged company ("Enlarged Company") with net assets of approximately £40 million. Based on the estimated costs of the proposed merger (being £387,500) and the expected annual costs savings for the Enlarged Company (being £284,000), the Boards believe that the costs of the proposed merger would be recovered within 17 months. Equally important to the tangible benefit of cost savings and improved administrative efficiency, the proposed merger is also intended to bring a number of other strategic benefits to all sets of shareholders and a greater focus to the Enlarged Company's objective of improving, in the longer run, the investment performance.

The Boards have each declared special dividends ("Special Dividends"), subject to their respective Schemes (or in the case of Eclipse any one Scheme) becoming effective.

Eclipse also proposes to provide shareholders with the ability to participate in an enhanced buyback facility ("Enhanced Buyback Facility"). Implementation of the Enhanced Buyback Facility requires the approval of Eclipse shareholders to enable Eclipse to purchase existing shares and issue new shares under the Companies Act 2006. The Enhanced Buyback Facility is not conditional on the Schemes becoming effective. The Schemes are not conditional on the Enhanced Buyback Facility.

In addition, Eclipse intends to take the opportunity to renew allotment, disapplication of pre-emption rights and share purchase authorities, approve amendments to its articles of association and approve the cancellation of share premium and capital redemption reserves.

Further, Eclipse is seeking the approval of its shareholders to enter into a related party transaction with Octopus in connection with the fees payable to it pursuant to the Enhanced Buyback Facility.

Further details of the proposals are set out below. The approval of resolutions in connection with these proposals will be proposed at general meetings of the Companies ("Meetings") being convened as set out in the expected timetable below.

BACKGROUND

Set out below is a summary of historical information of the Companies, together with the latest published NAVs (taken from the unaudited management accounts to 31 July 2012 for Eclipse, Eclipse 3 and Eclipse 4 and the unaudited half-yearly report for the six months ended 31 July 2012 for Eclipse 2), the number of venture capital investments within the portfolios of each company and the respective carrying value of these investments.

Date of launchFunds raised since launch (£)Unaudited net assets
(£)*
NAV per share
(p) *
Number of venture capital investments*Carrying value of the venture capital investments  (£)*
EclipseApril
2004
35.4 million15,866,36649.42510.5 million
Eclipse 2 January 200521.2 million9,934,31653.4206.5 million
Eclipse 3August 200529.2 million12,008,84347.2167.9 million
Eclipse 4August 200529.2 million12,019,06047.2167.9 million

The objective of each of the Companies is the same, to invest in a broad range of AIM-quoted and UK smaller companies which meet the relevant criteria for VCTs in order to generate income and capital growth over the long-term. The Companies also have the same investment policies to invest in a broad range of industry sectors and in companies at various stages of maturity in the corporate development cycle. The normal investment holding period is in the range from three to seven years. Each Company and Octopus have agreed that the investment focus going forward (in particular, for the Enlarged Company following the proposed merger) will be on the provision of growth and development capital to companies which are profitable or on a clear path to profitability, but there is no intention to change the investment policy of the Enlarged Company following completion of the proposed merger.

The separate 'Eclipse' named VCTs were originally established so as to provide the ability to access larger deals through co-investment. As a result, 93.9% of the aggregate portfolio across the Companies is represented by venture capital investments held by two or more of the Companies as at 31 July 2012 (this representing £30.8 million out of the aggregate £32.8 million of venture capital investments). As the portfolios of the Companies are now materially invested, and due to the changes made to the VCT investment limits and size tests (in particular, the removal of the £1 million investment limit per VCT), the benefit of 'sister' VCTs is now significantly reduced.

VCTs are required to be listed on the premium segment of the Official List, which involves a significant level of listing costs, as well as related fees to ensure they comply with all relevant legislation. A larger VCT should be better placed to spread such running costs across a larger asset base and facilitate better liquidity management and, as a result, may be able to maximise investment opportunities and sustain a higher level of dividends to shareholders over its life.

In September 2004, the Merger Regulations were introduced allowing VCTs to be acquired by, or merge with, each other without prejudicing the VCT tax reliefs obtained by their shareholders. A number of VCTs have taken advantage of these regulations to create larger VCTs for economic and administration efficiencies, as well as to improve portfolio diversification.

With the above in mind, the Board entered into discussions with the boards of the Target VCTs to merge the Companies to create a single, larger VCT. The aim is to achieve long-term strategic benefits and reductions in the annual running costs for all shareholders. In light of the proposals, the Company has extended its current accounting period to 30 September 2012 so as to avoid financial statements needing to be published part way through the merger process.

THE SCHEMES

The mechanism by which the proposed merger will be completed is as follows:

  • each Target VCT will be placed into members' voluntary liquidation pursuant to a scheme of reconstruction under Section 110 of IA 1986; and 

  • all of the assets and liabilities of each Target VCT will be transferred to the Company in consideration for the issue of new ordinary shares of 10p each in the capital of Eclipse ("New Eclipse Shares") (which will be issued directly to the shareholders of the relevant Target VCT). 

In respect of each Scheme, the New Eclipse Shares to be issued will be calculated on a relative net asset value basis. The relative net asset values will be the unaudited net asset values of the Companies as at the Calculation Date (this being 30 October 2012), adjusted to take into consideration each company's allocation of the estimated merger costs.

Each Scheme is conditional upon certain conditions being satisfied as further set out in the circulars being posted to shareholders today, including resolutions to be proposed to shareholders of each of the Companies. Each Target VCT will apply to the UKLA for cancellation of the listing of its shares, upon the successful completion of its Scheme, such cancellation is anticipated to take place on 29 November 2012 (the cancellation requiring the approval of the relevant Target VCT's shareholders).

The proposed merger, if effected, will result in the creation of an enlarged company and should result in savings in running costs and simpler administration. As all of the Companies have the same investment policies, a number of common investments and are managed by Octopus, this is achievable without material disruption to the Companies and their combined portfolio of investments.

The Boards consider that the proposed merger will bring a number of benefits to all of the Companies' groups of shareholders through:

  • a reduction in annual running costs for the Enlarged Company compared to the aggregate annual running costs of the separate Companies; 

  • the creation of a single VCT of a more economically efficient size with a greater capital base over which to spread annual running costs; 

  • a greater focus to the objective of improving, the investment performance in the longer term, in particular, through the agreed investment strategy for the Enlarged Company; 

  • participation in a larger VCT with the longer term potential for a more diversified portfolio, thereby spreading the portfolio risk across a broader range of investments;  

  • increasing the ability to support follow-on investments and new investments in the future due to the increased size and reduced running costs of the Enlarged Company; and 

  • the potential to enhance the ability to pay dividends and buy back shares in the future due to the increased size and reduced running costs of the Enlarged Company, as well as improve liquidity in the secondary market, as it is hoped that a larger vehicle will attract increased interest. 

To the extent only one or more of the Schemes are completed, the benefits of the Enlarged Company may not be fully realised (in particular, the annual costs savings would be reduced accordingly).

The aggregate anticipated cost of undertaking the proposed merger is approximately £387,500, including VAT, legal and professional fees, stamp duty and the costs of winding up the Target VCTs. The costs of the merger will be split proportionately between the Companies by reference to their respective merger net assets (ignoring merger costs). Completion of the three Schemes at the same time results in the aggregate merger costs (and, therefore, each Company's estimated allocation of such costs) being lower than separate mergers being completed with the Companies or other single VCTs (i.e. there are economies of scale from merging four VCTs in one transaction). Each of the Companies will be responsible for its allocation of the estimated merger costs whether or not a particular Scheme is approved and becomes effective.

On the assumption that the net assets of the Enlarged Company will remain the same immediately after the proposed merger, the reduction in the annual running costs (ignoring annual management fees, performance incentive fees and exceptional items) for the Enlarged Company is estimated to be at least £284,000 per annum, in particular, through the reduction in directors' and advisers' fees, audit fees, secretarial fees, printing costs and listing fees, as well as other fixed costs. This reduction would represent approximately 0.71% per annum of the expected net assets of the Enlarged Company. On this basis, and assuming that no new funds were to be raised or investments realised to meet annual costs, the Boards believe that the costs of the proposed merger would be recovered within 17 months.

As an illustration, had the merger been completed on 31 July 2012 (which includes an adjustment for the Special Dividends), the number of New Eclipse Shares that would have been issued for each existing Target VCT share held are as follows:

Number of New Eclipse Shares
One Eclipse 2 share1.155092
One Eclipse 3 share1.020014
One Eclipse 4 share1.020493

SPECIAL DIVIDENDS

The Boards have each declared special dividends ("Special Dividends"), subject to their respective Schemes (or in the case of Eclipse any one Scheme) becoming effective. The amount of these Special Dividends is as follows:

Special dividend per share (p)
Eclipse11.00
Eclipse 29.00
Eclipse 38.00
Eclipse 48.00

The Special Dividends are, if they become payable, expected to be paid on 16 November 2012 to the shareholders on the register of the relevant company on 30 October 2012 (i.e. prior to the Schemes becoming effective).

ENHANCED BUYBACK FACILITY

The board of Eclipse has agreed to offer to its shareholders (including shareholders who will roll across to Eclipse as part of the merger process) the opportunity to participate in the Enhanced Buyback Facility. The terms of the Enhanced Buyback Facility are set out in the Eclipse prospectus ("Prospectus") which accompanies the circulars being sent out to the shareholders of the Companies today.

  • Eclipse shall offer (pursuant to a tender offer) to all UK shareholders (including shareholders following the merger) on the register on 1 November 2012 to purchase up to 50% of the issued Eclipse share capital as at that date. 

  • Shareholders eligible to participate may tender some or all of their existing holding of Eclipse shares, such Eclipse shareholders: 

    • being entitled to sell up to a basic entitlement (this being up to 50% of their holding on the register on 1 November 2012, rounded down to the nearest whole Eclipse share); and 

    • being able to tender additional Eclipse shares that may be sold to the extent that other Eclipse shareholders do not participate up to the maximum available amount (any such excess to be allocated pro rata to the number of Eclipse shares tendered, rounded down to the nearest whole Eclipse share, subject to the discretion of the Eclipse Board). 

  • The purchase will be subject to the participating Eclipse shareholder agreeing to reinvest all of the proceeds of sale in the purchase of New Eclipse Shares. 

  • The purchase will be completed at a price equal to the most recently published net asset value per Eclipse share at the time of purchase. 

  • The reinvestment will be completed at a price equal to the most recently published net asset value per Eclipse share at the time of allotment, divided by 0.95 (to take into account the costs of providing the facility, referred to below). 

  • Allocations of New Eclipse Shares under the reinvestment will be rounded down and fractions will not be allotted. 

  • Financial intermediaries will receive a commission of an amount equal to 2.5% of their client's reinvestment (which may be waived and reinvested for additional New Eclipse Shares purchased on behalf of their client as part of the Enhanced Buyback Facility) and annual trail commission. 

Octopus will be paid an administration fee of 5% of the gross proceeds raised through the issue of New Eclipse Shares (ignoring reinvested commission) from which all costs and expenses will be paid, including initial intermediary commission, but excluding annual trail commission. Any costs above this, excluding annual trail commission, will be met by Octopus. There will, therefore, be a corresponding small reduction to the net assets of Eclipse, though the net asset value per Eclipse share is not expected to be affected, save for in relation to the payment of trail commission (which is payable by Eclipse).

The net effect for participating Eclipse shareholders is that they will 'substitute' 1,000 existing Eclipse shares with approximately 950 New Eclipse Shares (plus any New Eclipse Shares issued pursuant to reinvested commission), the small reduction in the value of the investment holding representing the costs of implementing the Enhanced Buyback Facility, with the reinvestment qualifying for upfront income tax relief of up to 30% of the amount reinvested for qualifying shareholders.

The Enhanced Buyback Facility is conditional on the approval of resolutions by Eclipse shareholders and the extent to which it will be implemented is further conditional on Eclipse having sufficient reserves to effect the purchase of shares pursuant to the Enhanced Buyback Facility.

The Enhanced Buyback Facility will open on 2 November 2012 (with, as mentioned above, an Enhanced Buyback Facility record date for participation of 1 November 2012, i.e. after the Schemes are expected to become effective and New Eclipse Shares have been issued to shareholders of the Target VCTs') and will close on 28 December 2012. The Eclipse Board may amend or extend (as applicable) these dates at their discretion. The Enhanced Buyback Facility is not, however, conditional on the proposed merger becoming effective.

INVESTMENT MANAGEMENT AND ADMINISTRATION ARRANGEMENTS

Octopus is the investment manager of all of the Companies and also provides administration and secretarial services to all of the Companies.

In respect of Eclipse, Octopus receives an annual investment management fee of an amount equal to 2% of the net assets of Eclipse at the end of the preceding accounting period (this being £417,162 for the 12 months to 31 July 2012), payable quarterly in advance (plus any applicable VAT). Octopus also receives an annual administration fee equal to 0.3% of the net assets of the Company at the end of the preceding accounting period (this being £62,574 for the 12 months to 31 July 2012), payable quarterly in advance (plus applicable VAT). These fee arrangements will continue to apply to the Enlarged Company, but will be across the enlarged net assets.

The Eclipse Board and Octopus have agreed that, subject to one or more of the Schemes becoming effective, the performance related incentive fee arrangement will be terminated. The Eclipse Board will consider implementing a new performance related incentive fee arrangement with Octopus once the overall assets of the Enlarged Company have improved.

THE ECLIPSE BOARD

The Boards have considered what the size and future composition of the Enlarged Company's board should be following the proposed merger and it has been agreed that (on the assumption that all of the Schemes become effective) David Lambert (an Eclipse 2 director) and Alex Hambro (chairman of Eclipse 4) will be appointed as additional directors of the Company. It is also proposed that Roger Penlington will step down as chairman of the Audit Committee and David Lambert will be appointed in his place.

In order to reflect the additional directors being appointed to the Eclipse Board (and on the assumption that all of the Schemes become effective), Eclipse is seeking shareholder approval to increase the cap on the directors' annual ordinary remuneration from £75,000 to £95,000.

ECLIPSE CHANGES TO ITS ARTICLES, RENEWAL OF SHARE ISSUE AND BUYBACK AUTHORITIES AND CANCELLATION OF SHARE CAPITAL AND RESERVES

Eclipse intends to renew and increase its authorities to issue shares (having disapplied pre-emption rights) for general purposes and make market purchases of shares reflecting the increased share capital of Eclipse following the proposed merger.

Eclipse also proposes to seek the approval of its shareholders to cancel further share premium and capital redemption reserves, subject to the sanction of the Court.

In addition, Eclipse proposes to seek the approval of its shareholders to amend its articles of association to (i) delete the statement of the authorised share capital of the Company as at the date the articles of association were adopted, (ii) provide for a new article permitting the name of Eclipse to be changed by way of a board resolution and (iii) amend the directors' ordinary remuneration cap (as detailed above).

RELATED PARTY TRANSACTION

In connection with the Enhanced Buyback Facility, Eclipse intends to enter into the Enhanced Buyback Facility related party transaction. Arrangements whereby the manager effectively underwrites the costs of the issue of shares, is conventional in the VCT industry and provides certainty as to the overall costs of the issue of new shares

Octopus is regarded as a related party pursuant to the Listing Rules of the UK Listing Authority by virtue of it being the investment manager of the Company. Shareholder approval is, therefore, required under the Listing Rules of the UK Listing Authority to enter into these transactions.

Octopus is one of the UK's leading fund management companies with more than £2.7 billion under management (as at 31 May 2012). Octopus has more than 200 Staff, including over 50 investment professionals, and has twice been voted as one of the 'Top 100 Small and Medium-Sized Companies to Work For' in the Sunday Times.

EXPECTED TIMETABLES

The Schemes

Eclipse General Meeting2.00 pm 23 October 2012
Eclipse 2 First General Meeting2.30 pm 23 October 2012
Eclipse 3 First General Meeting3.00 pm 23 October 2012
Eclipse 4 First General Meeting3.30 pm 23 October 2012
Target VCTs' register of members closed30 October 2012
Special Dividends record date30 October 2012
Calculation date for the Schemesafter 5.00 pm 30 October 2012
Suspension of listing of Target VCT' shares 7.30 am 31 October 2012
Eclipse 2 Second General Meeting1.00 pm 31 October 2012
Eclipse 3 Second General Meeting1.30 pm 31 October 2012
Eclipse 4 Second General Meeting2.00 pm 31 October 2012
Effective date for the transfer of assets and liabilities of the Target VCTs' to Eclipse and issue of New Eclipse Shares 31 October 2012
Announcement of results of the meetings and completion of the Schemes (as applicable)31 October 2012
Dealings in shares to take place ex Special Dividend1 November 2012
Admission of and dealings in the New Eclipse Shares issued pursuant to the Schemes to commence 1 November 2012
CREST accounts credited with New Eclipse Shares1 November 2012
Certificates for New Eclipse Shares dispatched5 November 2012
Payment of the Special Dividends16 November 2012
Cancellation of the Target VCTs' share listing (if applicable)8.00 am 29 November 2012

Enhanced Buyback Facility
Enhanced Buyback Facility Record Date 5.00 pm on 1 November 2012
Enhanced Buyback Facility opens2 November 2012
Enhanced Buyback Facility closesnoon on 28 December 2012
Purchase of existing shares and issue of New Eclipse Shares pursuant to the Enhanced Buyback Facility14 January 2013
Announcement of the results of the Enhanced Buyback14 January 2013
Admission of and dealings in New Eclipse Shares issued pursuant to the Enhanced Buyback Facility commence 15 January 2013
Certificates for New Eclipse Shares issued pursuant to the Enhanced Buyback Facility dispatched22 January 2013

DOCUMENTS AND APPROVALS

Eclipse shareholders will receive a copy of a circular convening the Eclipse general meeting to be held on 23 October 2012 (together with the Eclipse Prospectus) at which Eclipse shareholders will be invited to approve resolutions in connection with the proposals.

Target VCTs' shareholders will receive a joint circular convening the Target VCTs' first general meetings on 23 October 2012 and the Target VCTs' second general meetings on 31 October 2012 (together with the Eclipse Prospectus) at which Target VCTs' shareholders will be invited to approve resolutions in connection with their relevant Scheme.

Copies of the Eclipse Prospectus, the Eclipse circular and the joint Target VCTs' circular have been submitted to the UK Listing Authority and will be shortly available for download both from Octopus' website (www.octopusinvestments.com) and the national storage mechanism (www.morningstar.co.uk/uk/NSM).

For further information, please contact:

Investment Manager and Administrator for the Companies
Octopus Investments Limited
Paul Daniells/Patricia Standaloft
Telephone: 0800 316 2295

Solicitors to the Companies
SGH Martineau LLP
Kavita Patel/Robert Newman
Telephone: 0800 763 2000

Sponsor to Eclipse
Matrix Corporate Capital LLP
Jonathan Becher
Telephone: 0203 206 7000

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

The directors of Eclipse 2 accept responsibility for the information relating to Eclipse 2 and its directors contained in this announcement. To the best of the knowledge and belief of such directors (who have taken all reasonable care to ensure that such is the case), the information relating to Eclipse 2and its directors contained in this document, for which they are solely responsible, is in accordance with the facts and does not omit anything likely to affect the import of such information.

The directors of Eclipse 3 accept responsibility for the information relating to Eclipse 3and its directors contained in this announcement. To the best of the knowledge and belief of such directors (who have taken all reasonable care to ensure that such is the case), the information relating to Eclipse 3and its directors contained in this document, for which they are solely responsible, is in accordance with the facts and does not omit anything likely to affect the import of such information.

The directors of Eclipse 4 accept responsibility for the information relating to Eclipse 4 and its directors contained in this announcement. To the best of the knowledge and belief of such directors (who have taken all reasonable care to ensure that such is the case), the information relating to Eclipse 4 and its directors contained in this document, for which they are solely responsible, is in accordance with the facts and does not omit anything likely to affect the import of such information.

SGH Martineau LLP are acting as legal advisers for the Companies and for no one else in connection with the matters described herein and will not be responsible to anyone other than the Companies for providing the protections afforded to clients of SGH Martineau LLP or for providing advice in relation to the matters described herein.

Matrix Corporate Capital LLP, which is authorised and regulated in the United Kingdom by the Financial Services Authority, is acting as sponsor for Eclipse and no one else and will not be responsible to any other person for providing the protections afforded to customers of Matrix Corporate Capital LLP or for providing advice in relation to any matters referred to herein.




This announcement is distributed by Thomson Reuters on behalf of Thomson Reuters clients.

The owner of this announcement warrants that:
(i) the releases contained herein are protected by copyright and other applicable laws; and
(ii) they are solely responsible for the content, accuracy and originality of the
information contained therein.

Source: Octopus Eclipse VCT 2 plc via Thomson Reuters ONE

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