Foresight 3 VCT PLC : RECOMMENDED PROPOSALS FOR A MERGER

JOINT ANNOUNCEMENT

19 May 2017

FORESIGHT 3 VCT PLC ("F3")
FORESIGHT 4 VCT PLC ("F4")
(together the "Companies" and each a "Company")

TIDM: FTD and FTF

RECOMMENDED PROPOSALS FOR:

• A MERGER BETWEEN F3 AND F4 TO BE COMPLETED BY WAY OF A SCHEME OF RECONSTRUCTION UNDER SECTION 110 OF THE INSOLVENCY ACT 1986; AND
   
• OFFER FOR SUBSCRIPTION BY F4 TO RAISE FURTHER FUNDS

SUMMARY

On 12 September 2016, the board of the Companies (together the "Boards" and each a "Board") announced that they had entered into discussions regarding the merger of the Companies ("Merger"). Both Companies are managed by Foresight Group CI Limited ("Foresight"). In light of comments received by the F4 Board from certain of its shareholders, it was decided to first seek views from shareholders of both Companies through an on-line advisory vote.

The results of the advisory vote in each Company were materially in favour of proceeding with the Merger (97% to 98% of those who responded in each Company). Each Board has continued to consider a number of options and, in particular taking into account the advisory vote, remain of the view that a Merger remains the preferred option.

The Boards are, therefore, pleased to announce that they have reached agreement on recommended proposals for the Merger to create a single enlarged VCT. The Merger is conditional upon certain conditions (including the approval of each Company's shareholders) being satisfied as further set out in the circulars being posted to the Companies' respective shareholders today ("Circulars") alongside a prospectus published by F4 in connection with, amongst other things, the Merger (the "Prospectus").

The Merger will be effected by F3 being placed into members' voluntary liquidation pursuant to a scheme of reconstruction under section 110 of the Insolvency Act 1986 ("Scheme").  The assets and liabilities of F3 will then be transferred to F4 in exchange for the issue of new F4 shares to existing F3 shareholders ("F4 Consideration Shares"). The Merger will be effected on a relative net asset basis and is expected to become effective on 22 June 2017.

The Merger is expected to deliver cost savings and other benefits to both sets of shareholders which each Board believes is in line with the strategy to expand the size of its Company and be better positioned to improve shareholder value. The Boards also believe that there will be other benefits for shareholders arising from participating in a larger company with an increased net asset base, including the ability to sustain a significantly wider spread of investments which will facilitate risk management and a reduced need to maintain liquid assets allowing the enlarged entity to consider making additional returns to shareholders.

As a result, the F4 Board is pleased to advise that it has declared a special dividend of 4.0p per F4 share, conditional on the Merger becoming effective ("F4 Special Dividend"). In addition, the F4 Board intends to make available a tender offer of up to £5 million if the Merger becomes effective ("Tender Offer").

The F4 Board are also taking the opportunity to make available an offer for subscription ("F4 Offer") to raise up to £50 million (with an over-allotment facility to raise a further £50 million) through the issue of new F4 shares ("F4 Offer Shares"). As part of the Offer arrangements, Foresight Group Limited ("Foresight Group") will be paid a promoter's fee, which constitutes a related party transaction and requires the approval of F4 shareholders.

The approval of resolutions in connection with the Merger, the F4 Offer and related proposals will be proposed at a general meeting of F4 to be held on 14 June 2017 ("F4 Meeting"). The approval of resolutions in connection with the Merger will be proposed at general meetings of F3 to be held on 14 June 2017 and 22 June 2017 ("F3 Meetings").

Further details of the Merger, the F4 Offer and related proposals are set out below.

THE MERGER

Benefits and features

Each Board reviews the costs of managing its respective Company on a regular basis. A larger company is able to spread the fixed elements of running costs across a wider asset base and, as a result, can reduce these costs as a percentage of net assets.

In recommending the Merger, the principal benefits and features that the Boards have taken into account are set out below:

• an enlarged entity ("Enlarged Company") with assets immediately post Merger of approximately £72.78 million taking into account the Special Dividend (£115.03 million assuming full subscription under the Offer, but ignoring the over-allotment facility, and taking into account the Tender Offer);
• A portfolio of over 25 companies, many of which are making good progress and are profitable and which have delivered the recent improvements in NAV of both F3 and F4.
• A payback period of under 12 months based on the estimated Merger costs and annual cost savings post Merger.
• A reduction in the aggregate number of directors.
• A reduction in Foresight's annual investment management fee from 2.25% of net assets to 2% of net assets.
• A reduction in the annual expenses cap from 3.5% of net assets to 2.95% of net assets.
• An enlarged entity better positioned to raise further funds and continue with the current investment strategy.
• The ability to consider investment realisations and create liquidity events for Shareholders and support dividend payments.

Merger and cost savings

The estimated total Merger costs are £400,000 (including professional fees, UKLA fees, stamp duty, VAT and the costs of winding up F3). The costs of the Merger will be split proportionately between the Companies by reference to their respective Merger net assets (ignoring the Merger costs).

The projected annual running costs (these being normal expenses and ignoring exceptional items, performance incentive fees and trail commission) of the Enlarged Company are estimated to be £2.04 million (2.80% of the expected net assets of the Enlarged Company of £72.78 million immediately post Merger and taking into account the Special Dividend, but ignoring the Offer and the Tender Offer). This compares to £2.52 million in aggregate for the Companies (3.4% of their aggregate unaudited net assets as at 31 December 2016) based on the unaudited annual running costs for the 12 month period ended 31 December 2016 for each of the Companies.

The reduction in Foresight's annual investment management fee from an amount equal to 2.25% of net assets to 2% of net assets will reduce its fee by approximately £182,000 per annum across the Companies. As the Foresight's annual administration fees for the Enlarged Company will remain the same as currently for the Company, this will result in a further reduction of £129,000 per annum in its fees. Foresight will also make an additional cash contribution to the Merger costs of £100,000. This will effectively enable the Merger to take place entirely at Foresight's expense within one year as the total Foresight annual cost savings and the additional contribution of approximately £411,000 are expected to be greater than the estimated Merger costs of £400,000.

On the basis of the expected annual cost savings of approximately £480,000 and the Foresight contribution of £100,000, the estimated Merger costs of £400,000 would be recovered in just over eight months.

The Scheme

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

• F3 will be placed into members' voluntary liquidation pursuant to a scheme of reconstruction under section 110 of the Insolvency Act 1986;
   
• all of the assets and liability of F3 will be transferred to F4 in consideration for the issue of new shares in F4 directly to the shareholders of F3; and
   
• F3 will subsequently be wound up.

Implementation of the Merger will require resolutions being approved by each Company's shareholders.

Whilst there will only be one general meeting of F4, at which shareholders will be invited to consider and vote in favour of the Merger and authorise the issue of new shares pursuant to the Merger, there will be two general meetings for F3. At F3's first general meeting, the shareholders will be invited to approve the Merger and authorise the liquidators to implement the Scheme and, at the second general meeting, the shareholders will be invited to pass a special resolution to wind up F3 and cancel the listing of the F3 shares.

If a shareholder in F3 does not vote in favour of the Merger and expresses his dissent in writing then he may require the liquidators to purchase his shares at their break-value price (this being an estimate of the amount he would receive in an ordinary winding up of F3 if all of the assets had to be realised). The break-value price is expected to be significantly below the net asset value of F3.

In addition to the approval of shareholders being sought at the F4 Meeting and the F3 Meetings, the Scheme is conditional upon:

• notice of dissent not being received from shareholders of F3 who hold more than 10% in nominal value of the issued share capital of F3;
   
• F4 confirming to F3 and F3 confirming to F4 that, in each case, it has not received any notice of any claims, proceedings or actions of whatever nature threatened or commenced, as relevant, against F4 which the F3 Board regard as material or against F3 which the F4 Board regard as material; and
   
• the Companies maintaining their VCT status.

Subject to the above, the Scheme shall proceed and become effective immediately after the passing of the special resolution for the winding up of F3 to be proposed at the F3 second general meeting and will be binding on all F3 shareholders, including dissenting F3 shareholders, and all persons claiming through or under them.

If the conditions have not been fulfilled by 31 July 2017, the Scheme will not proceed.

The Enlarged Company board

The Boards have considered the size and composition of the Enlarged Company board and it has been agreed that, subject to completion of the Merger, Peter Dicks will step down as a director of F4 and Raymond Abbott will be appointed as a director to the Enlarged Company board. Raymond Abbott will also, on Merger, take over as chairman of the Enlarged Company. The Enlarged Company board will then comprise Raymond Abbott, Simon Jamieson and Michael Gray.

Merger illustration

In terms of the proposed number of consideration shares to be issued if the Merger proceeds, this will be calculated based on a relative net assets basis, by reference to the formulas contained in the Circulars.

Had the Merger been completed on the basis of the Scheme examples set out in the Circulars (which are based on the unaudited net assets of the Companies as at 31 December 2016, but adjusting for the recent F3 top up offer for subscription), the number of consideration shares which would be issued for each existing F3 share would be 0.8674, representing approximately 45.4% of the Enlarged Company.

Special Dividend

The Boards believe that a larger VCT would provide the ability to consider realisations and the creation of liquidity events for shareholders. The Boards have discussed the expected position of the Enlarged Company and believe that the Merger would reduce the need to retain certain investments and liquid assets.

The F4 Board has, therefore, declared the Special Dividend of 4.0p per F4 share conditional on the Merger becoming effective and payable to F4 shareholders on the register on 30 June 2017 (this being after the date on which the F4 Consideration Shares are expected to be issued pursuant to the Merger thereby allowing the F3 shareholders to participate in the dividend). The Special Dividend, if it becomes payable, will be paid on 17 July 2017.

F4 OFFER

The F4 board has decided to take the opportunity to raise further funds through the Offer. This will provide shareholders and new investors with the opportunity to invest in F4 and benefit from the tax reliefs available to qualifying investors. The Offer is conditional on the approval of F4 shareholders being sought at the F4 Meeting, but is not conditional on the Merger.

Foresight Group is acting as the promoter to the Offer and will be paid a fee equal to 2.5% (as reduced by any relevant discounts) of the amount subscribed by Retail Client Investors, Professional Client Investors and Execution-Only Investors (as each term in defined in the F4 Circular) and 5.5% (as reduced by any relevant discounts) of the amount subscribed by Direct Investors (as defined in the F4 Circular) ("Promoter's Fee Arrangement"). In consideration of the promoter's fee, Foresight Group has agreed to meet all costs, expenses and charges of, or incidental to, the Offer (other than intermediary commissions and adviser charges). All up-front costs and intermediary charges and commissions will be borne by the investor through the price which the investor pays for the offer shares as more particularly described in the Prospectus. The F4 Board considers the Promoter's Fee Arrangement to be in line with market practice.

Foresight Group, as a subsidiary undertaking of Foresight (the investment manager to the Company), is a related party of the Company for the purposes of the Listing Rules. The Promoter's Fee Arrangement is, therefore, a related party transaction for the purposes of the Listing Rules. Assuming full subscription under the Offer utilising the over-allotment facility (i.e. raising £100 million) and assuming that all investors are Direct Investors and no discounts apply, the maximum Promoter's Fee Arrangement would be £5.5 million. It is likely that the majority of the investors will be Retail Client Investors, Professional Client Investors and Execution-Only Investors and, as a result, the actual fee to Foresight Group is expected to be much lower (in particular taking into account the discounts being made available by Foresight Group for early investment and shareholder loyalty as set out in the Prospectus). The Listing Rules, however, require the maximum possible fee amount to be taken into account when assessing related party transaction requirements and, as a result, the approval of shareholders is required for the Promoter's Fee Arrangement. Should the F4 shareholders not approve the Promoters Fee Arrangement at the F4 Meeting, the aggregate fee payable to Foresight Group under this agreement will be limited to £1.6 million, which will constitute a smaller related party transaction for the purposes of the Listing Rules.

The price at which the offer shares are being made available is the net asset value of an F4 share at the time of allotment plus associated Offer costs directly or indirectly incurred by an investor (including the Foresight Group promoter's fee). As a result, the Offer is not expected to have any material dilution effect on existing Shareholders. Full details of the Offer are set out in the Prospectus. The Offer opens today and will close on 30 April 2018 (unless closed earlier or extended by the F4 Board). The offer shares will rank pari passu with the existing F4 shares from issue.

F4 TENDER OFFER

Alongside the Special Dividend, the Boards believe that the Enlarged Company should be in the position to provide a partial or full exit event for shareholders by way of the F4 Tender Offer of up £5 million. The Tender Offer will only be made if the Merger becomes effective, F4 has the ability to implement the Tender Offer and the F4 Board continues to believe it to be in the best interests of F4.

A summary of the expected terms of the F4 Tender Offer is set out below (subject to further consideration and agreement by the F4 Board):

• F4 ender Offer period - mid-July 2017 to mid-September 2017.
• F4 Tender Offer price - NAV per F4 share less 7.5% (to take into account the costs of making the F4 Tender Offer and what the F4 Board believes to be an appropriate discount).
• Availability - all F4 shareholders (other than certain overseas shareholders).
• F4 Tender Offer record date - occurring after the Merger and the payment of the F4 Special Dividend, but before the first allotment of offer shares.
• F4 shares will be purchased on-market through F4's broker, Panmure Gordon (UK) Limited.

F4 shares purchased by F4 under the F4 Tender Offer will be cancelled and not re-issued.

The actual number of Shares to be purchased will depend on the level of take-up and on the NAV per Share at the time of implementation of the Tender Offer. For illustrative purposes only, based on a NAV per Share of 69.2p (this being the example Merger Value per Share of 73.2p) reduced by the Special Dividend, which would give a Tender Offer price of 64.01p, the maximum number of Shares which would be purchased is approximately 7.8 million if fully subscribed.

Details of the Tender Offer (including application forms for participation) will be provided to F4 shareholders in separate documentation following the Merger in mid-July 2017 (i.e after the Merger is expected to become effective allowing F3 shareholders to participate).

EXPECTED TIMETABLE

DOCUMENTS AND APPROVALS

F4 shareholders will receive the F4 Circular convening the F4 Meeting to be held on 14 June 2017, at which F4 shareholders will be invited to approve various resolutions in connection with the Merger, the Offer and the Tender Offer.

F3 shareholders will receive the F3 Circular convening the F3 Meetings on 14 June 2017 and 22 June 2017 at which F3 shareholders will be invited to approve the various resolutions in connection with the Merger.

Copies of the F3 Circular, the F4 Circular and the F4 Prospectus have been submitted to the UK Listing Authority and shall shortly be available for download from the Foresight website (www.foresightgroup.eu) and the national storage mechanism (www.morningstar.co.uk/uk/NSM).

FURTHER INFORMATION

For further information, please contact:

Company Secretary
Foresight Fund Managers Limited
Contact: Gary Fraser Tel: 0203 667 8100

Solicitors to F3 and F4
Shakespeare Martineau LLP
Contact: Kavita Patel Tel: 0121 214 0000

The directors of F4 accept responsibility for the information relating to F4 and its directors and proposed director contained in this announcement.  To the best of the knowledge and belief of such directors and proposed director (who have taken all reasonable care to ensure that such is the case), the information relating to F4 and its directors and proposed director 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 F3 accept responsibility for the information relating to F3 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 F3 and its directors and proposed director 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.

Shakespeare Martineau LLP is acting as joint legal advisers for F3 and F4 and for no one else in connection with the matters described herein and will not be responsible to anyone other than F3 and F4 for providing the protections afforded to clients of Shakespeare Martineau LLP or for providing advice in relation to the matters described herein.

BDO LLP, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting as sponsor for F4 and no one else and will note be responsible to any other person for providing the protections afforded to clients of BDO LLP or for providing advice in relation to the matters described herein.

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